Hovnanian Enterprises, Inc. (HOV) Q4 2015 Earnings Report, Transcript and Summary

Good morning and thank you for joining us today for Hovnanian Enterprises Fiscal 2015 Fourth Quarter and Year End Earnings Conference Call. An archive of the webcast will be available after the completion of the call and run for 12 months. 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 fourth quarter results and then open up the line for questions. The Company will also be webcasting a slide presentation along with the opening comments from management. Those slides are available on the Investors' page of the Company's Web site at www.khov.com. Those listeners who would like to follow along should log on to the Web site at this time. Before we begin, I would like to turn the call over to Jeff O'Keefe, Vice President-Investor Relations. Jeff, please go ahead.

Thank you, operator, and thank you all for participating in this morning's call to review the results of our fourth quarter and year ended October 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. Such forward-looking statements include but are not limited to the statements related to the Company's goals and expectations with respect to its financial results for the current or future period, including total revenues and adjusted pre-tax profit. Although we believe that our plans, intentions and expectations reflected in or suggested by such forward-looking statements are reasonable, we can give no assurance that such plans, intentions or expectations will be achieved. By their nature, forward-looking statements speak only as of the date they’re made, are not guarantees of future performance or results and are subject to risks, uncertainties and assumptions that are difficult to predict or quantify. Therefore, actual results could differ materially and adversely from those forward looking statements as a result of a variety of factors. Such risks, uncertainties and 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 the 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 tax laws affecting the after-tax cost of owning a home, operations through joint ventures with third-parties, government regulation 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 in terms of financing to the Company; successful identification and integration of acquisitions; significant influence of the Company's controlling stockholders; availability of net operating loss carryforwards; 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, change in circumstances or any other views. 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 Bachstetter, Vice President-Finance, and Treasurer. I'll now turn the call over to Ara Hovnanian. Ara, go ahead.

Thanks, Jeff. We’re pleased that we’ve exceeded our guidance for gross margin, SG&A ratios and pretax profit for the fourth quarter of fiscal ’15, it is a great ending to the year and a precursor of better performance ahead. I’d like to review a few of the key metrics for the quarter and let me get started with net contracts which can be found on Slide number 3. On the left hand side we show the dollar amount of net contracts including unconsolidated joint ventures increased 29% while the number of net contracts we signed increased 21%. If you look at consolidated net contracts without the joint ventures as we’ve done on the right hand side, we had a 22% increase in dollars and 18% increase in the number of net contracts. On Slide 4, our net contracts per community including our unconsolidated joint ventures increased from 6.4 to 7.1 during the fourth quarter up 11% while consolidated net contracts per community increased 8%. On top of that, our community count increased by 9% during the fourth quarter. Combination of more communities selling at a better pace yielded from solid results for us. Slide 5, shows on the left side, that the dollar amount of our contract backlog including unconsolidated joint ventures increased 49% to $1.35 billion while the number of homes in backlog increased 33%. Consolidated net contract backlog shown on the right increased 42% to $1.2 billion at the end of the fourth quarter compared to $856 million at quarter end last year. At the end of fourth quarter our consolidated backlog units increased from 2,229 to 2,905, up 30% year-over-year. This 42% increase in consolidated backlog dollars combined with the recent strength in sales trends bodes well for expected revenues and profitability growth during 2016. Turning to Slide 6, in the top left hand quadrant, we show that our total revenues declined by 1% to $693 million during the fourth quarter. This decrease was primarily due to a 2% year-over-year decline in deliveries offset by 1% year-over-year increase in average sales price of our homes delivered. Larry will discuss revenues a little more fully in just a moment. The upper right portion of the slide shows that the gross margins for the fourth quarter were 18%, down 130 basis points from last year but up 20 basis points from the third quarter and 40 basis points higher than our guidance. While the increases were small this was our second consecutive quarter of sequential gross margin increases. Moving to the lower left quadrant, we see that our total SG&A as a percentage of total revenues decreased 7.1%. SG&A expenses during the fourth quarter included a $15 million benefit related to a reduction of our construction defect reserves. Without this benefit our SG&A ratio for the fourth quarter of fiscal 2015 would have been 9.3% which is the same as last year’s fourth quarter and a significant improvement from the 12.6% SG&A ratio in the third quarter of 2015. Finally, in the lower right hand portion you see that for the fourth quarter of fiscal ’15 we reported a pretax profit excluding land related charges and gains or losses from the extinguishment of debt of $42 million versus our $22 million guidance. Even if you ignore the $15 million benefit from reducing construction debt defect reserves, our pretax profit of $27 million exceeded our $22 million guidance for the fourth quarter. Let me go into a little more detail about our gross margin, on Slide 7, on the left hand side of the slide, we show our quarterly gross margin for all of 2015. As we’ve discussed during our second and third quarter analyst calls, our gross margin during the second quarter in particular was negatively impacted by lower than normal gross margins on spec homes which we defined as started and unsold homes. It’s not unusual for spec homes to be sold with lower gross margins than to be built homes, but the increased incentive we offered on second quarter spec deliveries were atypical. Much of the improvement in gross margins we saw during the third and fourth quarter was due to both reducing the number of spec homes that we offered for sale and the steps we took to lower the levels of incentives and concessions offered on spec homes. Additionally, we’re seeing a little pricing power in a few geographies around the country. The percentage of deliveries from spec homes decreased from 52% during the second quarter to 48% in the third quarter and reduced even further to 41% in this year's fourth quarter. On the right hand portion of the slide we show our annual gross margin percentages from 2011 to 2015, in both '13 and '14, we've reported annual gross margins of approximately 20%, a level that we consider to be in the normal range. However in 2015 we saw that number dip to 17.6%. The year-over-year decline is primarily due to cost pressures on labor and material, higher price land purchases from 2013 when the market seemed a little stronger and a little slowing in the market in the beginning of the year causing greater incentives. Additionally, our gross margin was also adversely impacted by our spec sales strategy during the first half of the year. Finally, the elongated cycle times are increasing construction supervision for home which is a part of gross margin costs. The increased we've seen on the labor cost are primarily due to labor shortages in certain markets where we're seeing increased demand. We're feeling the same thing that many of our peers have been talking about these labor shortages are causing cycle times to increase. We're not seeing labor shortages in all of our markets, some markets are worse than others. For us, cycle times have increased the modes in the Dallas Fort [ph] worth market, in Dallas we've seen construction cycle time go from five to six months to about seven to eight months. This is a significant increase in cycle times obviously and markets where we've been experiencing longer build time we're proactively managing our home buyer's expectations about their expected delivery dates. We're not the only builder that has felt the pressure on its gross margins this past year. Turning to Slide 8, we show a comparison of our gross margins in blue for the most recent quarter and in yellow for 13 of our public peers. At the top of each bar is an arrow which indicates the year-over-year change in gross margin for each of the builders. 12 of the 14 builders reported year-over-year declines in gross margin, one reported a slight increase and one was flat. Eight of the builders that had margin decline -- excuse me, eight of the builders had margin decline in excess of 100 basis points. Although it doesn't make us feel better about our year-over-year decline in gross margin, it's clear that this was an industry wide phenomenon that impacted the best majority of our peers as well. Let me update you on the progress of reducing our specs on Slide 9, you can see that for the past consecutive four quarters, we've reduced the number of spec homes per community. They have fallen from 4.7 at the end of the fourth quarter of '14 to 3.7 at the end of '15's fourth quarter. Turning to Slide 10. We show our total annual SG&A expense as a percentage of total revenues going back to 2001, which can be seen on the left hand part of the slide. We consider 10% in normalized SG&A ratio. As we do every year in our fourth quarter, we enlisted an actuarial firm to conduct the study to estimate reserves necessary to cover outstanding exposure for reserve related to construction defects. Any increases or decreases of these reserves impact our SG&A expenses. As a result of improvements in our construction defect claims over the past two years, the impact of those improvements on the actuarial analysis of our total reserves. We've reported a $13 million reduction in our construction defect reserves during the fourth quarter of '15. If you exclude this benefit, our SG&A level for 2015 were similar to last year. On the right hand portion of the slide you see that our fourth quarter SG&A ration including the $15 million benefit from reducing our construction reserves declined to 7.1%, which is shown in the dark blue. If you exclude the $15 million benefit, it would have been 9.3% which is consistent with the prior year's fourth quarter. As we move forward, we expect our increases in deliveries and revenues to grow much faster than the incremental increases to our SG&A expense and as such, we anticipate our SG&A ration will approach our normalized 10% level for our fiscal 2016 year. I'll now turn it over to Larry Sorsby, our executive Vice President and Chief Financial Officer.

Thanks, Ara. We were pleased that we exceeded our fourth quarter guidance for gross margin profitability and lower SG&A expense ratio. However our total revenues fell a bit short of our guidance. This was driven by two factors, a 3% miss and the miss of actual deliveries been skewed more towards lower priced homes than we expected. Similar to the comments you've heard from some of our peers, the delivery miss was caused by construction delays in several of our markets. This resulted in our fourth quarter total revenues being $52 million less than our guidance of $745 million. Turning now to Slide 11. We show that dollar amount of our net contract including unconsolidated joint ventures per month for each of the past 12 months. Most recent month is shown in blue, the same for the previous year is shown in yellow and we use green arrows pointed up to indicate an increase and down red arrows to indicate a decrease. Our recent sales trends have been strong, 11 of the past 12 months have increased. More recently the results have been even stronger. The dollar value of our net contracts for the past eight months increased 27% year-over-year when you include unconsolidated joint ventures and increased 20% year-over-year on a consolidated basis. The year-over-year increases in our sales results should lead to dramatically improving revenue in fiscal 2016. While Slide 11 shows the dollar amount of net contracts, Slide 12 shows the number of monthly net contracts per unit. For seven of the last eight months our year-over-year monthly comparisons have been positive. On Slide 13 we show our net contract results restacked as if we had a September quarter end so that we could compare our results to nine of our public peers who report a September quarter end. The year-over-year results range from a decline of 0.3% to an increase of 18.8%. We were up 18.8% and tied for the highest year-over-year increase. Our positive sales momentum carried over into October and November. During October we saw the number of net contracts including unconsolidated joint ventures increased 30% and the number of consolidated net contracts increased 24%. In November including unconsolidated joint ventures we had a 23% increase in the number of contracts and a 27% increase in the dollar amount of net contracts. On a consolidated basis the number of net contracts reached 17% while the dollar amount of net contracts increased 16%. On Slide 14 we tried to put the current sales situation into perspective with a longer term view. The dark blue bar on the far left shows that we averaged 44 net contracts per community per year from 1997 to 2002 a period of neither boom nor robust times [ph]. Then in yellow we showed average net contracts for community bottoming at 21.3 per year in 2011, followed by two years of improvement in 2012 and '13 at 28.1 and 30.7 per year respectively. Surprisingly, we along with the entire home building industry took a step backwards in sales space per community in 2014, 28.4 net contracts per year. Looking at the gray bar, this shows the net contracts per community for all of fiscal 2015 was 30. This is now approaching the 30.7 contracts per community level we saw in fiscal 2013. One big difference between 2015 and 2013 is that we ended 2015 with an improving trend. If you look at the last quarter 2013, '14 and '15 which we show on the right hand side of the slide you can see that the fourth quarter net contracts per community have increased year-over-year in both '14 and '15. This improvement in sales pace per community in fiscal '15 is certainly a step in the right direction and we hope it is a positive trend that will continue into fiscal 2016. Houston remains a hot topic within our industry, so I want to provide a brief update on what we're seeing in the net market. With an average sales price of 302,000 in Houston compared to our company average sales price of 396,000 our primary focus in Houston is on entry level and first time move up product. After strong sales results during the month of July we saw declines in our sales results during the fourth quarter. Turning to Slide 15 you can see our quarterly net contracts per community in Houston for '13, '14, and '15. During the fourth quarter of 2015 the net contracts per community decreased to 5, compared to 5.6 in the fourth quarter of 2014. We also saw the absolute number of net contracts in Houston decrease by 9% year-over-year during the fourth quarter. Reversing the trends we saw in the fourth quarter, our first quarter net contract results for Houston have started on a positive note. For the month of November the number of net contracts in Houston were around 13% and the net contracts per community increased 9% versus last year. Our focus on lower average price points, not building in highly competitive master plan communities and less exposure to the energy corridor have allowed us to continue to outperform the overall new home market in Houston. Turning to Slide 16, it shows some other details of our Houston operations. For all of fiscal 2015 Houston accounted for 16% of our home building revenues. At the end of the year our inventory in Houston was only 10% of our total home building inventory. So even though 16% of our full year home revenues were from Houston we don't have much capital tied up in that market. Houston is primarily a market where we control land through option contracts with quarterly finished lot takedowns and therefore it is not as capital intensive as some of our other markets. To further illustrate this point as of October 31st 2015 we controlled 3,023 lots in Houston, almost 50% of those lots are currently optioned with our deposits totaling only $4.7 million. This represents an average option deposit of about $3,000 per lot in Houston, compared with our company average of approximately $5,000 per lot. 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 17 months’ supply. The 17 months’ supply in Houston compares to our countrywide average supply excluding mothballed lots of 32 months of owned lots in the remainder of our markets. At the end of the fourth quarter of fiscal 2015, we had 52 active selling communities in Houston and another 11 communities in planning. Slide 17 shows an analysis that John Burns Real Estate Consulting did back in September on the distribution of communities for us and several of our peers in the Houston market. They split the market into two broad geographies West-North corridor which contains what is commonly called the energy corridor which is shown in blue and the East-South corridor which is shown in red, what they found was that we had much less exposure to the West-North or energy corridor that our peers. We think this coupled with our strategy of focusing on lower priced homes and not building in master planned communities in Houston has served us as well. In summary, after 12 months of significantly lower oil prices, our margins and profitability level in Houston remain very strong. In 2016, our dependence on Houston from both a profitability and volume perspective is expected to decrease as other parts of our operations are expected to grow while Houston is expected to level off. Despite another solidly profitable year for our Houston operations we remain cautious about the impact of lower oil prices on the Houston economy. We continue to keep a close eye on the market and will take appropriate actions should any further developments arise. Moving back to overall Company on Slide 18, it shows that our consolidated community count has grown steadily over the past two years. There's a lot of activity that goes into an increase of 18 communities that we saw in the last year. During the last 12 months, we opened 101 new communities and close-out of 83 older communities, growing our community count from 201 to 219. We expect to see continued community count growth during 2016. Turning to Slide 19, you'll see our owned and optioned land position broken out by our publicly reported market segments. Our investment in land optioned deposits was $83 million invested in predevelopment expenses. Subsequent to the end of the fourth quarter, we finalized and funded our joint venture for a 14-story building along the white hot Hudson River Waterfront in West New York, New Jersey. We are very excited on unmothballed and to start construction on the 278 home communities. It should result in profits with minimal additional capital investments for us. In fact $26 million of cash that we had already invested in this community was paid back to us in November when we signed the joint venture agreement. We also opened the first of our recently unmothballed communities in Natomas in Northern California to strong sales and above average margins, in total we have 632 lots to be delivered in Natomas including several other new Natomas communities opening later in fiscal 2016. Looking at all of our consolidated communities in the aggregate including mothballed communities, we have an inventory book value of $1.6 billion net of $540 million of impairments. We've recorded those impairments on 72 of our communities, for the properties that have been impaired we're carrying [ph] them at 23% 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 of fiscal 2014, we reversed $285 million of our deferred tax asset valuation allowance. We should reverse the remaining valuation allowance when we begin generating higher levels of sustained profitability. At the end of fiscal 2015, our valuation allowance in the aggregate was $635 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 future pre-tax earnings. On Slide 20, we ended the fourth quarter with a total shareholders' deficit of $128 million. If you add back the remaining valuation allowance, as we've done on this slide, then our shareholders' equity would be a positive $507 million. If you look at this on a per share basis, it is $3.45 per share, which means that yesterday’s closing stock price of $1.71 per share, our stock is trading at a 50% discount to our adjusted tangible book value per share. 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 any time soon. As seen on Slide 21, after spending $192 million on land and land development and paying off $61 million of debt that matured on October 15th during our fourth quarter, we still ended the year with $250 million of liquidity. We once again ended the quarter in excess of our target liquidity range of $170 million to $245 million. Keep in mind that the two land banking arrangements totaling $300 million were first quarter 2016 event and did not increase our cash position at yearend. Now turning to our debt maturity ladder which can be found on Slide 22. Looking ahead we have $173 million that comes due January 15, 2016 and another $87 million that comes due on May 15th. Recently the high yield market for CCC credit companies including Hovnanian has been difficult, while our preference is to refinance these near term maturities as they come due, we will chose to pay them off with cash if we are not receptive to the prevailing high yield rates where the market for CCC issuers is not open. We have already taken steps primarily with two land banking transactions to ensure we have sufficient liquidity to both payoff these near-term maturities as well continue to grow our company. Turning to Slide 23, on our last call I went into detail to explain some of liquidity levers we have available. Four levers listed on this slide are land banking, joint ventures, non-recourse project specific loans and model sale leasebacks. I will take a moment to highlight recent activity that we've had for each of these. The first lever is land bank, on October 8th, we announced the $125 million land banking arrangement with Domain Real Estate Partners, an affiliate of DW Partners and yesterday we announced a $175 million land banking arrangement with GSO, an affiliate of The Blackstone Group. After taking into account the inventory that will be included in both the DW and GSO land banking transactions, there remains over $500 million of inventory on our balance sheet today that is available for additional land banking, joint venture and project financing transactions. In addition to that the company also has the ability to utilize these same levers for all of our future land transactions. Second lever is Joint Ventures, as I mentioned earlier in November we entered into a new joint venture for a 278 unit mid-rise building in New Jersey that generated $26 million of cash proceeds back to Hovnanian. Since the beginning of fiscal 2015, we closed on two joint ventures including the mid-rise in New Jersey totaling over $300 million committed capital. Furthermore we continue to talk with potential partners about additional joint ventures. The market for joint ventures with us is active and vibrant. Our third lever is Non-recourse project loans, during the fourth quarter we entered into four new non-recourse project specific loans. For all of fiscal 2015, we've added loans that allow us to borrow up to a $131 million to fund land development and/or vertical construction at very competitive rate. At October 31, 2015 we had $144 million of non-recourse financing outstanding. We continue to close on additional non-recourse project financings, we expect to continue as far as on additional ones, non-recourse project financing in future quarters as well. Finally, we continue to utilize our model sale leasebacks. For all of fiscal 2015, we closed $43 million of model sale leasebacks, as we opened new communities during fiscal 2016, we intend to finance new model homes with our model sales leaseback program. Even though these alternative capital sources are more administratively burdensome, each of these levers provides us with additional liquidity and enhances our returns on capital. Keep in mind that these are the same levers we talked about in 2009 and successfully executed at a point in time when both Hovnanian and the housing markets were at a much tougher position than we find ourselves now. Let me reiterate, while we still prefer to access a high yield market to refinance our debt, we believe that we can continue to utilize the levers outlined above which will allow us to payoff near-term debt as it matures and allow us to continue the growth that our business plans contemplate. As you can see on the left hand side of Slide 24, we've been aggressively investing in the land over the last three years. We've gained control of about 9,700 more lots than we actually delivered homes on during that period of time and our land acquisition teams across the country continue to work hard to identify new land parcels to purchase today. Over the past three years we've grown inventories by 71% and we now expect that inventory growth will drive increase deliveries, revenues and profit in fiscal 2016. I'll now turn it back to Ara for some closing comments.

Thanks, Larry. I was pleased we exceeded our fourth quarter guidance and profitability even without the extra boost from reserves. If you move on to liquidity, we're comfortable with our position at year end and given the steps that Larry outlined to enhanced our liquidity position, I'm confident that we can remain within our target range of cash even if we don’t refinance our bonds maturing in January and May of 2016. I want to elaborate on our inventory for a moment by taking a look at our longer term trends in our inventory levels. Slide 25 shows quarterly inventory levels going back to 2008. Because of the financial constraints that we had in the great recession, we had less capital to spend on land and therefore near the bottom of the cycle we were less aggressive on investing in land than some of our peers. As a result many of our peers have been able to recover much more quickly and achieved improved levels of profitability sooner than we have. This is apparent when you look at the lack of growth we had in our inventory from the fourth quarter '09 through the third quarter of 2012. During this time our inventory was relative stable as we didn't have sufficient capital to grow our inventory levels. That changed recently as you can see by the 71% increase in inventory on the right hand portion of the slide. If you turn to Slide 26, you can see that even more clearly. Since the fourth quarter of fiscal '12 we've increased from -- our inventories from $891 million to $1.5 billion, up 71%. Since much of our inventory investment is in raw land it takes time to obtain the final permits, grade the land, install the utilities and build the streets. That work is well underway and community growth that we’ve been working towards is now occurring. Additionally, our fourth quarter demonstrates some of the benefits of our growth in inventory. First as shown on Slide 27, we achieved a 29% increase in contract dollars including unconsolidated joint ventures and 22% year-over-year increase in consolidated net contract dollars during the fourth quarter. As indicated on Slide 28, we ended the year with 49% increase in the dollar amount of our contract backlog including unconsolidated joint ventures, 42% increase without the joint ventures. Increases of this magnitude give us the confidence in our ability to substantially increase revenues and profitability during 2016. This is solid evidence that the growth we have planned for ’16 and beyond is realistic. To utilize an analogy, our increased investment in inventories was like, a farmer planting his crops. It takes a while for the crops to grow and ripen so we can harvest them. Fiscal 2016 represents the beginning of our harvest. Due to financial constraints again we were a little late to the party compared to some of our peers, but we can now feel, see and touch the growth we expect to achieve in 2016 and beyond. I’d like to reiterate our expectations for all of fiscal ’16 assuming no changes in market conditions including the construction delays that we’ve already seen due to shortages of labor in our markets, we expect to report total revenues between $2.7 billion and $3.1 billion for all of fiscal ’16. We expect our gross margin for all of ’16 to be between 16.8% and 18%. We expect total SG&A as a percentage of our total revenues for all of ’16 to be between 9.8% and 10.2%, which as we mentioned earlier was approaching normal levels for us historically. Excluding any land related charges gains or losses from the extinguishment of debt or other non-recurring items, we expect pretax profit for all of fiscal ’16 to be between $40 million and $100 million. Over the past few years, we have aggressively invested in growing our inventory and we believe we’re now on the cusp of achieving meaningful growth in both revenues and profitability. Furthermore we recently made a number of changes to our management team, these additions are all seasoned and industry professional who’ll be instrumental in our future successes and they’re all integrating very well into our organization. We look forward to delivering specifically -- significantly improved results beginning with performance of our current first quarter and continuing through the remainder of 2016 and beyond. 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 a follow up. After which they will have to get back into the queue to ask another questions. At this time, we will open the call to questions [Operator Instructions]. Our first question comes from the line of Sam McGovern from Credit Suisse.

If we can go back to Slide 23, where you guys laid up liquidity levers. I was hoping you guys could discuss a little bit more about your plans going forward. I mean how much more additional land banking should we expect, whether that land banking are shifting in focus from raising liquidity towards investing in new lands and how much more additional JVs non-recourse [indiscernible] and model of sales lease back should we expect?

We currently have all those levels available and I think we’ve done the two significant transactions with DW as well as with GSO and that covers our needs pretty much through the May liquidity or the May bonds that are maturing. But as we look at new land transactions going forward, I think we will probably do more of that in the form of either getting project specific debt, getting land banking or getting joint ventures in place until such time as the high yield market for CCC issuer such as ourselves becomes available at a reasonable price.

Just want to add also one other comment and that’s, this huge growth in inventory levels that we’ve experienced, we’re not projecting to continue that kind of pace going forward. We really have digested the big growth, we’ve got a lot of land under development right now. So we expect a lot more modest growth in inventories as we reap what we’ve already invested and that means a lot less demand on our capital needs.

And then as we -- as you guys sort of see the effect of the two land banking transactions that you guys recently announced. If we look back at the slides from the last quarter where you guys laid out your expectations for the future and the upside, downside of base cases. Is it -- what should we expect the impact that it has, just lower inventory, lower debt and lower gross margins, what other impacts should we running through on our model?

When we land bank an asset that we had already owned, which is what we pretty much announced with respect to DW and what our significant portion of the GSO land banking arrangement is, it doesn't flow through gross margins at all, it flows through -- the impact flows through interest expense. So that would be the first thing you need to think through. Obviously we've paid off as bunch of debt by not refinancing the debt that came due in October and the debt that's going to come due in January. If we don't refinance debt we'll be paying off a lot of debt, so we'll be getting rid of that interest expense and replacing it with interest expense with respect to these land banks. You had more to your question, so ask it again.

If there were other impacts on that model beyond those levels?

I mean, it would temporarily reduce numbers as we took that off of our balance sheet and then it comes back on our balance sheet on a just-in-time basis, we take down to finish a lot. So it's just a timing difference.

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

Thanks and following up on the implications to gross margin that's very helpful Larry, the description of that impact flowing through interest expense, as opposed to gross margins. Your guidance for '16 implies flattish gross margins against this year, given that the land banking is not going to be a drag on the gross margins, what's going into that assumption? Its sounds like from that the pricing trend and the lower spec and decent demand and it sounds like a conservative assumption given those favorable tailwind, so I was just wondering if you could walk us through why you are only forecasting a flat year-over-year given? And then I see the harvest analogy that Ara was using as well, why only flat given all those tailwinds?

I mean, the margin projection for all of '16 is not dissimilar with what we had for all of '15. It would be the first thing that I would point out and we still -- it’s built from bottoms up, we didn’t even take back community basis in each of our business units based on current absorption prices, current construction cost, current sales prices and that's kind of the range that we're comfortable with right now, if the market continues to improve, obviously there could be some upside to our margins.

And only other additional point is as Larry described, when we land bank existing assets, it flows through interest not gross margin, but on our normal basis as we do land banking and we do anticipate returning to our normal land banking process which is that we close simultaneous over the land banker, actually closes first, that does flow through gross margin and in general we'll do a little more land banking probably, if we don't refinance than we would have, so that's all factored into the gross margins as well.

Second question on the average selling prices, the ASP in the fourth quarter was a little lower than we would have expected given the selling ASP. Larry you mentioned that similar to other builders, higher priced homes with longer delivery cycles are the ones that have been more prone to delays. So, if that's the main driver for -- ASP is coming in a bit lower than expected, should we expect a [multiple speakers].

No, no, no, let me back you up. I made that comments specifically with respect to the Houston marketplace, not the overall markets that we're in.

Got it. Okay, then if you could help us understand the lag in ASPs versus your order prices and how we should expect that to flow as we head into 2016, please.

I mean, if you look at the average price and contract backlog at quarter end -- end of the year including joint ventures is $433,000 on a consolidated basis it’s $418,000. I mean that's probably your best indication of what's going to be happening to average sales prices in future quarters.

Thank you. And our next question comes from the line of Michael Rehaut from JP Morgan.

First question I had is just on the -- more of like I guess a modeling question, but related to Larry, your comments around through the more recent land banking arrangements. The interest expense amortization, I think this year came in fiscal '15 around 2.9 % of revenue. Given some of the perhaps changes in mix as it relates to the land banking, but also obviously you have revenue growth anticipated. Can you give us a sense of, from a range or from a dollar, absolute dollar perspective, what you expect the interest expense amortization to come in for ‘16?

I think right now the best assumption would be to just use what it's kind of been running at. That varies depending on the mix of communities that are delivering and how long those homes take to build, et cetera. So the best we can do is look at our historical run rate for cost of sales interest.

So, when you say what it's been running at are you talking about on a dollar basis or on a percent of revenue basis?

More on a percentage basis.

Okay, and then just on, going back to the gross margins for a moment and I know you were kind of been talking about this in the last question or two, but you know again just want to kind of make sure I'm understanding things at least from a conceptual standpoint. You mentioned that you know in the upcoming year you're going to be selling some communities out of Natomas which you mentioned were higher, above average margins. You also -- you know obviously highlighted the land that's starting to come through, that you're harvesting, that was more developed land owned which is also typically a higher gross margin type product. So with those types of positive mixes occurring, what's offsetting that -- you're still looking at the midpoint of the range pre interest for it to be a similar gross margin. Are there other areas of geography that are offsetting some of those benefits? Is it again the labor expense that continues to impact? Anything conceptually in terms of just, you know you've highlighted those positive drivers, but what's the offset to that?

Some of its just mix, Mike. Again we do a very diligent detailed bottoms up budgeting process community by community and you know the mix of geographies the mix of communities and product types within a geography can impact those types of things as, Ara mentioned as we do a little bit more land banking on a traditional basis that could have an impact. So there is a whole bunch of things that goes into it. We are encouraged with the market trends that we've seen recently, you can see it in our orders. We’re very pleased with what we've reported for the October quarter, we're pleased how we've stacked up against our peers when we restacked for September quarter and we were pleased with the November orders that we reported as well and again if that trend kind of continues, I think there might be the potential to also increase prices at a community level that could have some positive impact on margins and/or in construction cost and we gave you our best estimate of what those margins would be taking in [technical difficulty] current conditions into account.

Again you know we have seen construction costs increases as everyone has, so we’ve tried to factor that in, we have a different mix of land banking, we're trying to factor that in just a -- and new land purchases. So we're trying to factor all of those in and give you the best guidance we can at this early stage.

We appreciate that and those comments do make sense. I guess just lastly and I'm glad you brought up the October-November order trends which were obviously very-very solid. Any color around that in terms of and I apologize I don't have the slides right in front of me, I'm presuming that you had a solid improvement in sales pace, driving the overall order growth and so if I'm right on that assumption you know what do you feel that might be driving that, are there sort of regions that are doing a little bit better than let's say your fourth -- your fiscal fourth quarter, with [ph] already may be promotions or timing related to community opening, any sense of those stronger trends in the last couple of months?

Well, first of all the stronger trends are really pretty dispersed geographically. I can't say that we felt any particularly weak areas in terms of better sales pace. It’s been feeling pretty good and we didn't have any special promotions going on recent. So I’d attribute this is just a -- obviously we've got some new land positions and part of the growth as we mentioned was from growth in communities, part of it was from an increased pace for community, we've got some good locations, got some new designs out there and the market's getting -- feels like it’s getting a little bit better than it was in the first half of 2015.

And Mike to specifically answer your question on contracts per community. For each of the last five months through November they have been up year-over-year. So that's just an encouraging sign that the overall market, we're not in a fabulous time of the year for sales, but it's just an encouraging sign that maybe the spring selling [ph] market is going to be good too. Obviously we didn't factor any improvement in that into our projections, but it just feels a little bit better the last five months or so.

Thank you. And our next question comes from line of Alan Ratner from Zelman & Associates.

I was hoping that -- sorry, just one more question on the land bank here. So my understanding is the 300 million that you've got committed on the land bank, part of that is the land value that's on your books in terms of what you're committing and then part of that is future development cost of that land, so some of that's going to be coming cash on the door and some of that's more in the form of cash savings I guess if you will. So do you have the breakout of that in terms of the land that you're committing, how much cash is actually going to be coming in a door in the first quarter?

No, I don't have that handy.

Should we assume that's likely roughly 50/50 in terms of that breakout?

No, it's not.

Much higher in terms of cash in the door?

Yes.

Okay and then second question on the Houston improvement in November, would you say that that's a market wide trend or do you feel like that's more a function of the repositioning of your communities more towards the lower price points and the non-energy corridor?

Yes, I mean, that's not a repositioning, that's been our strategy all along in terms of lower price points and lack of focus on the -- as much focus as somewhere appears on energy course, so that’s not a shift. So we didn't do anything different in November than what we did in August, September and October. So hopefully it's a market wide phenomena but to be perfectly candid I don't know the answer to that. The answer seems to perceive what our peers are saying about the month of November. I mean it's very fresh news but we were pleased to see that trend kind of reverse what we saw in the previous three months.

Great that's encouraging, if I can just sneak in one more just on your typical cash flow seasonality, you have to go back to the last couple of years. Generally used up cash in the first half of the year you're building your backlog for the spring and then you generate some cash in the back half, so should we expect that seasonality to be any different given your debt maturities are front half loaded, are you going to kind of change your land spending to kind of more even flow that, to ensure that you've got enough liquidities for the year to build up that?

I think we're going to continue to bust [ph] the land parcels, we may do more of it via land banking, the new parcels not the stuff at home. So that when you look at it will appear from a factual perspective I guess as well that we're using less cash but we're controlling the same amount of land, is that makes sense to you?

Got it, that's help. I appreciate that. Thanks and good luck.

Thank you. And our next question comes from the line of Susan Berliner from JPMorgan.

Just following up on that last question, I guess with regard to the land spend for ’16, so Larry, it's clearly coming down from ’15 for what you guys own, any help there, how we could model that?

I am sorry it's coming down from what?

From the land spend that you did in 15, you said you're going to be doing a little bit more from land banking, so how we adjust our the model for land spend next year?

I don't know how to give you great granularity on that one, as Ara said we're not trying to grow inventories, so that's one of the issues that when we still growing inventory quite a bit, it's much more modest growth in order to hit our business plans and we gave you that in pretty granularity last quarterly call when we put out the illustrative scenarios. So you can kind of look back at that and just see that that inventory growth was slowing significantly and then kind of leveling off. But it's hard for me to tell you precisely what's going to happen in terms of land spending, it'll be a little bit lower because we're doing more in land banking and that's about the only thing I can tell you right now.

Okay and then I guess with regards to guidance for ’16, I guess, how are you thinking about the various markets, specifically what do you thinking for Houston for ’16 because a couple of your peers have definitely noticed some cautious comments regarding ’16, and then if you can just go over your other markets what you were seeing and you know your expectations for ’16?

I’ll tackle Houston and then I’ll turn it over to Ara to make some broader comments on the rest of our markets, but I mean Houston for us has been really hanging in there. We're not expecting Houston to grow in 2016, it might shrink a little bit and that's kind of what's factored into our numbers, but everywhere else is going to grow significantly more, so as a percentage of revenue, as a percentage of earnings Houston is going to be a much smaller percent in ’16 as compare to ’15 for us.

And just overall as I mentioned earlier, I think we're seeing pretty much across the board strength in our markets around the country, it’s clearly a little hotter in the Bay Area and maybe Southeast Florida is particularly hot as well, which is not a huge market for us, but the Bay area has been a particularly large market. I should mention we've got a number of new models and communities coming up in Southeast Florida so, while it historically has not been a big area, we anticipate it playing a much larger role for us. But overall the market has been just very-very solid, I guess maybe I'd add that we continue to see the DC market be just a little bit sluggish and my guess is that some of the sequestering is just having an impact on the job market there. So, we haven't seen the robust recovery there that we would have been expecting and that's within there in prior recoveries.

And if I could speak one other thing with the collateral coverage on the bonds, Larry, should we just assume it will be in your 10-Q this time?

It's actually another slider [ph] in the appendix. So, it'll be all there, they're all there.

Thank you. And our next question comes from the line of James Finnerty from Citi.

Just a couple of quick questions, on the liquidity front, historically you have the range of 170 million to 245 million and then your third quarter slides, I guess, you have modeled out that cash would somewhere north of 200 million by year end '16. Should we assume that would be the case for '16?

Well, I think our target range remains unchanged. So, that 200 million was just within the range is how we modeled it, when we put those numbers out last quarter.

Okay, and then in terms of the profit guidance for the full year, it's -- should we assume that you'll be profitable each quarter during the year or it's [multiple speakers].

We’ll not able to give the granularity quarter-by-quarters, it’s a significantly improved year overall. But we are not giving quarterly guidance at this time.

And then on the, just on the non-recourse funding, is there any limit to how much non-recourse funding you can do?

No.

Thank you. [Operator Instructions] Our next question comes from the line of Petr Grishchenko from Imperial Capital.

My questions have already been answered, but if you can just elaborate some more, I guess on the mechanics of the GSO and DW transactions, like what's the embedded cost of capital there?

I'm sorry can you repeat it?

Can you just elaborate on the GSO transactions, what's the embedded cost of capital, like? I'm not sure what's the cost of financing?

We're under confidentiality agreement both with GSO and DW and frankly on any of our land banking, so I can't share with you what that is.

Well any direction, I mean at least you're raising capital to, pay down your kind of finance maturities?

Higher -- it's higher than the debt we paid off.

And we've again baked in those costs into our guidance. It's still baked in.

Thank you. And our next question comes from the line of Alex Barron from Housing Research.

Was hoping you could share with us your thoughts on, it seems like the FED [ph] seems more ready to raise interest rates I guess potentially later this month. So just kind of your approach to, if that happens, what do you expect to happen and -- to mortgage rates and your approach to -- if rates start to go higher -- I guess, how you would approach that and whether you are expect to increase your exposure to the entry level as time goes by?

First of all, I think it's reasonable to assume any movement, it's not going to be draconian with interest rates and it's, frankly it's not clear how much the short term interest rate increase is going to affect long-term mortgage rates at the moment, but notwithstanding that point, obviously all of our communities offer a multitude of model types. Currently in this very -- and at different price points, currently in this environment customers are gravitating towards most of our larger models. My -- and on top of that we're seeing quite a bit of options and upgrades, I think it's reasonable to assume that as interest rates increase they might select a slightly smaller model than the largest model, which are very popular right now. We are pretty much gross margin neutral on most of our models. So, we make in terms of percentages a pretty similar and consistent gross margin on our smaller models and medium models and larger models. So, we don't think it will have a great impact. We do make a little better gross margin, not dramatically but a little better gross margin on our options and upgrades so perhaps there might be a slight impact if that’s disproportionately where the changes come from. But overall, at this time, we’re not expecting huge changes and therefore I wouldn’t expect to see a huge shift in either of those factors.

I would also say that the FED rate is a very short-term rate and the mortgage rates fluctuate up and down multiple times during the day much less over a month or six months. So I think the anticipated FED rate increase is probably already built into mortgage rates already. And frankly if the FED continues to increase rates which is probably more along, Alex where you’re comment maybe coming from, I think that’s going to be an indication that the U.S. economy is doing better and I think that will give consumers the confidence to go out and buy houses and so, although it’s incrementally harder to qualify them. If we had a lot more people wanting to buy house because that they’re doing better in their jobs and earning more and more confident in U.S. economy, I think that would really bode well for our industry and our company specifically.

Thank you. And that concludes our question-and-answer session for today. I would like to turn the conference back over to Ara Hovnanian for any closing comments.

Thank you. Again we’re pleased to report some good results and based on our backlog and the sales base, we certainly believe that our better results from this last quarter were just a precursor of better performance ahead, and we look forward to sharing those with you in upcoming quarters. Thank you very much.