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Executives

J. Larry Sorsby – Executive Vice President & Chief Financial Officer

Hovnanian Enterprises, Inc. (HOV) Citi 2012 North American Credit Conference Call November 14, 2012 10:50 AM ET

Unidentified Analyst

Go through just give brief slides to update you a little bit on what’s going on the industry and then some of our most recent results and then we’ll leave the vast majority of the time for fireside chart.

We certainly believe that the housing markets recent overall strength and significant improved sales pace. This year indicates if the market for new homes has bounced off the bottom and is already in a period of recovery, I don’t think there is any question that the homebuilding industry is finally in a period of recovery after the worst downturn the industry has ever seen.

That’s kind of evidenced on this slide; you could see here U.S. housing starts since kind of the struggle for World War II. And what’s interesting as you look across this as we’ve circled in red kind of the recent troughs, that’s been the most recent trough that’s gives me peak and compared to previous peaks very similar. No real difference there. As you look at the troughs that we saw in the 70s, 80s and 90s, they were a little more than a million starts per year. The trough this time dramatically different at about 500,000, twice as bad then what we’ve seen before. And then we had a couple of years a very modest recoveries really relatively flat $520,000, $550,000 kind of starts a year again, the worst kind of trough that we had ever seen. And this year seasonally adjusted about $872,000 starts per year to brought per share. It feels wonderful but to put it in perspective to ignore the previous three years, this year was wonderful year that everyone is really excited about. Certainly, we’re excited about and we’re seeing a lot of benefits from is the worst year in housing in the last 70 years.

That’s really what I want to put in perspective. We got a lot more upside and downside at this point with the very early stages of the recovery. We’re still in a pretty horrible housing market in spite of the fact that it’s dramatically better than it’s been the last three years and our results certainly reflect that. So you’re going to continue to see when did the back of this industry for sometime. Again put it in a historical perspective as you look at these green hash marked here on horizontal basis about $1.4 million starts every decade for the past six, seven decades other than in the 70s that was actually $1.75 million, even in the most recent decade $1.43 million starts.

So if we did overbuild in the first half of the last 10 years would certainly we probably did. We’ve more than under built and the last half of the decade were on average were kind at the same level we’ve been and to keep that in perspective 70 years ago, 132 million U.S. population today 308 million U.S. population. So this industry is not going away and is going to grow, the experts are saying that we should have $1.6 million to $1.9 million starts each year for the next 10 years.

We don’t necessarily subscribe to the experts numbers. We’d be happy if we just went from 370,000 up to million or 1.1 million something like that. Ultimately, we’re going to get back to that 1.4 million kind of average. We think a modest recovery because we don’t think the infrastructure is in place in this industry to gear backup from a labor perspective to do a rocket ship kind of recovery, we think would not be sustainable for the industry.

So we actually like the idea of a little more modest kind of pace to the recovery. What’s been happening in terms of affordability, one of the things that certainly in pacing people out of the rental market and into the home buying market is the affordability. That this slide shows as an index of affordability, basically medium place of home and the medium income and higher is better and it’s the highest it’s ever been that 185 kind of number. The combination of lower home prices and this downturn combined with historically low interest rates make homeownership extremely affordable.

So that’s really good and people are recognizing that. And building kind of with their pocketbook, everybody wants to know what’s going on with foreclosures and delinquencies, the red line here is the delinquency rates. And you can see for the last few years the trend has been down on delinquency rates, ultimately that will lead to a downturn in the foreclosure rate, which is the gray line here, which has been relatively stable for the past several years. We certainly don’t expect it to increase. We expect overtime to see a decrease because delinquencies have been declining, the reasons have been stable is the global signing, the judicial foreclosure state that just delayed being able to be foreclosures. But we do not see this as an increasing problem and we think it’s a decreasing issue for the industry.

So I’m going to transition a little bit to Hovnanian specific data now, this map shows you the 17 states where we operate is color coated by our market segments. We build a very broad product array and we don’t focus just on entry level we do, first time move up, second time move up, we do active adult age restricted. We do an attach, we do a detach, we do urban redevelopment, we do luxury, sort of very broad demographics in terms of where we build. And this breaks out revenues in the top right hand quadrant by market segment and home sites controlled in the lower right hand quadrant.

This just shows you our statistics for our third quarter and in terms of net contracts say we’re up 31% year-over-year. Our community count that’s in dollar amount and actually net contracts number amount it was 18.8%, community count actually declined 4% or by four communities from about 4% I guess 202 down to 194, primarily because we’re building through faster than we anticipated. This increase in sales pace per community, we sold through communities faster than we had anticipated in spite of what we’re doing on the land acquisition side. Contracts per community increased during the quarter, 23.4%, deliveries were up 24%, backlog up 41%, revenues up 35% and land related charges only a $1 million pretty insignificant, gross margins improved almost 300 basis points to 18.3%.

SG&A declined almost 400 basis points down to 12.4%, primarily because revenues are growing and we’re not increasing anything in terms of SG&A. Our pre-tax, we had a modest loss of $2 million due to some tax reversals of some reserves on tax issues to get resolve, we actually had net income of $35 million for the quarter.

So kind of what is a trends revenues had been growing, you can see first, second and third quarter trends here, what does that done in terms of our operating performance. Well the first one really impacted by revenue growth which you can see that our gross margins steady improvement each in the past couple of quarters up to 18.2 in the third quarter. Total SG&A were we really do not leaving kind of dollar amount fixed and because revenue growth we saw the percent of revenues declined down to 12.4% from 17.1% in the first quarter.

Interest expenses the same kind of downward trend form 12.8% down to 10%, in our loss before income taxes excluding land related charges in cost associated with debt exchanges and debt extinguishment, we have been entering a way back up through profitability.

So that kind of gives you a perspective of what we’ve been doing operating life, trends are improving, we’ve also done some things to kind of improve our liquidity. We pushed up the maturity is about $800 million of debt that was during 2016 up 2020 and 2021 respectively saving about $18 million of interest per year. We did that in our fourth quarter there is going to be a debt extinguishment charge related to that transaction and saving that almost $20 million a year and interest of $87 million come through in our fourth quarter, which we put out a press release a couple of weeks ago about. As well as those involved in the issuance. So we have variable of debt maturing over the next several years we have a long runway in front of us, and we just been investing the new land to kind of grow the company.

So with that we’ll turn to the fireside chat person of the presentation thank you.

Unidentified Analyst

So just lets start out from broad topics people always like talk about M&A in the space and just what your view no M&A is between public to public or public, borrowing a private you think it’s possible right now, and you think there is certain impairments throughout the current.

J. Larry Sorsby

Yeah, I think from a public to public perspective they are dramatic impairments in the way most of the public builders have the deferred tax asset valuation allowance on their books and they would not want to lose that by, been acquired for us 900 million plus dollar of balance sheet asset item that someone acquired us or vice versa, we acquired some of the had a significant one, you lose that, truthful way and evaporates and I think that’s a huge entrance and I don’t think you’re going to see too many public-to-public if any acquisitions or maybe is the social issues of we might find someone that were interested and buying but they probably have a CEO that isn’t ready to give up the lines and controls of this company.

So you’re always have those social issues in a way and then probably the third major in settlement to public-to-public M&A activity is that there are provision in any of the non-investment grade debt issues out there the basically say there is changing control, the debt immediately do enterable will be and pretty attractive low interest rate debt on the balance sheet that they wouldn’t want to have to necessarily go out refinance. So that plus of the reason and few others, I don’t think there is going to be public-to-public.

In terms of public-to-private, I think homebuilder are interested in acquiring land and to the extent that they could acquire land at market values buying the company, as about your land in the right location you might see that, but I think what they are really interested in is the land position rather than the private builder.

Unidentified Analyst

And in terms of private builders, public builders have historically average of competitive advantage of access the capital markets versus the private. Do you think that being the case now that it’s really showing up to the public that you have access in the privates don’t could that lead to some of those companies that a private clients maybe selling themselves?

J. Larry Sorsby

Well keep in mind to begin with the most of the private builder are gone, that’s either when bankrupt or liquidated because we didn’t have access to capital. So the one that are left or I guess the way to put it. And some of them may just be of detailing with the inability to access capital, so it’s possible that will occur, and others half a doesn’t or does in a very well capitalized private homebuilders that have been able to put their balance sheets in get shape, some of them actually have gained to access to public that even other remain to private company. So I don’t think they’re going to change a view and all the side itself.

Unidentified Analyst

And you’ve mentioned the deferred tax asset earlier. In terms of potential tax changes in states? What kind of impact to that have on the deferred tax assets if there is a lower rate?

J. Larry Sorsby

You know, its an lower rates, it remains as we make money, we pay less taxes and because we have our deferred tax assets fully reserved, there is no P&L impact to us, whatsoever, so I think it’s a non event.

Unidentified Analyst

If things turned out opposites to our most people expect currently I expect and most humble with respect housing recovery than couple of years. But a sales actually slow the sales patients home sale. What’s - how would that impacts your strategy, and how you are thinking about doing your business from last couple of years?

J. Larry Sorsby

Well, I mean what immediately happened is that land would be cheaper to buy because its absorption slowdown. I mean the land is worthless. I mean, we underwrite to an IRR 25% plus IRR within current home prices, within current construction costs and then current absorption pace. So the absorption pace slows everything else remains a same lands worth less. So, we would buy land lesser at a price, price the plan was selling for 12 to 18 months ago. And we would adopt to grow our community count so that we could grow our top line is so good the same kind of benefits that I just showed you we were receiving this year. So, our strategy wouldn’t be terribly different from what it is today.

Unidentified Analyst

Currently, the people that you are selling through are they people that are listening, meaning, living and existing homes are ventures what would the breakout either in terms of.

J. Larry Sorsby

Again, we have a very broad products array, so I answer to that question maybe a little bit difference in some of our peers that are focused in one nature the other but since we build everything from entry level to luxury to act to the both and (inaudible) redevelopment everything and between, a demographics of our buyer is everything and anything in between as well. So there is any particular demographic so I would say that we have seen a trend this year of people moving out of apartments and into new homes.

And those are people that made a cautious decisions 4, 5, 6 years ago as they economy started to sell and homebuilding, home market they saw some price declines that said I am nerved about what’s going on the economy. I am nerves home price is going to decline, I am going to living in apartment even our really want to live in a single family home.

And now 5 or 6 years later maybe the young lady coupled with that had a baby five years ago he is now five years old and that baby have a (inaudible) of 2 or 3 years old they pulling the because there is not space in that apartment and are saying now starting to see home prices tick up and interest are still very achieved. So we are seeing people that have the cautiously delayed their home purchase come out of the apartment and buy. And that’s mainly on the first time homebuyer side out of the equation but we are also seeing that on move upside as well.

Unidentified Analyst

And with that be Type 2 the fact that they could potentially buy a house having more roughly paid it for house but equal achieve to equal to achieve.

Unidentified Company Representative

Still that the top of the market it would have been cultured to two times per hour

Unidentified Analyst

Exactly

J. Larry Sorsby

But we’re seeing the unbundled, we saw bundling of households whether it would be college kids graduating that we take live on their own, but couldn’t get a job that, they can type for an apartment living with their parents yeah I can raise my hand and an example of that and my son after a couple of years living their home is now in December moving out of his own unbundling from us. We’re seeing not all over the country and it couldn’t be not that it was a college kid, but that it was a adult child and maybe grand children moved back in with parents because the parent loss the job seeing not all over the country.

So we saw a decrease in household formation demographics are repeatable that unbundling is crane as are going to continue to occur and as the population of the U.S. continues to grow there is going to need for additional housing units, whether they be rental units, or whether they be for sale units still repeatable, but there is going to be a need for additional shelter units being build in America.

Unidentified Analyst

And part of the affordability that you highlight, in slide three whereas the little more (inaudible) we think the current mortgage market is able to sustain a million housing starts or do you think they we have to change requirements after losing, how is the time to what could potential will be coming down from the government in terms of modifying the mortgage it works.

J. Larry Sorsby

What is really changed in terms of the mortgage market in this downturn is there is no longer Alt-A and subprime financing which I called further mere underwritten criteria further mere you could you can get a loan, it’s lower kind of 2002 to 2006 or 2007 that’s an exist part of that and we had sound underwriting criteria in place, pre-2002 that you had the document, you had a job, you had decent credit not perfect credit, you had the document that you had a modest down payment whether it would be FHA’s 3.5% or 5% or 10% on a conforming conventional. What’s really happen from a underwriting criteria’s we return to that and those are the same underwriting criteria’s that are in place for two or three decades before the advent of some time face, so the underwriting criteria with the couple of exceptions hasn’t really changes. What’s changed is the we put the consumers through.

You know we’ve to document everything and now the piles are 3 inches thick and its very painful from a consumer to put the documentation together, its not harder to qualify from an underwriting quality perspective ignoring is just harder to go through the paying of documented everything and re-documenting that right before you close that’s what really because, become much more difficult in the market. With respect to maybe what’s happening right now maybe referring to FHA specifically, yeah I don’t think Congress or the regulators are going to be motivated to do anything too terribly stupid that will cause this fragile having recovery to take a step backward.

So I don’t think anything dramatically occurred, they’ve already increased the mortgage insurance premium for FHA a year ago and the immediate affect of that as we saw our FHA component of our, we have a wholly owned mortgage company go from, I think it was 44% of our buyers in 2011, during our third quarter maybe 36%, yeah give and take a couple of percentage points that’s what it was and what’s happened is instead of get an FHA loan they got a conforming conventional loan because it was cheaper using private mortgage insurance that it was government mortgage insurance so if a FHA loans criteria changes in terms of the amount of insurance that have to be paid, I just think you’ll see a larger shift to private mortgage insurance on performing conventional loans rather than used FHA.

Unidentified Analyst

Another topic would be got frank and year end and you got a challenge in industry over the risk, is a lesser risk some people think.

Unidentified Company Representative

Well I don’t know how bigger risk some people think it is, but I don’t think it’s going to be again for the exact same reason that no ones going to want crush this precious housing recovery that I think it’s really going to be the generator that causes the U.S. economy they started getting back on track again, as we got more houses, you need more carpenters, more bricks layers, more electricians and that’s would positively the economic forward historically and a recovery.

And the beginning to see that right now, and you’re starting actually the cost go up because there is not enough up there when it go more of them. So I don’t think that either political party is going to want to and act something that causes not to occur. So, I would hope that common minds prevail as I said those regulations up, but who knows.

Unidentified Analyst

And last topic on regulations in terms of the mortgage interest tax deductions is that an issue it concerns you or do you think it’s not an issues guys, these papers might be contributable.

Unidentified Company Representative

Yeah, I think that it’s probably being borne out of proportion having said that I think that is currently a limit on homeowner’s interest deduction or $1 million mortgage robust. So I think we’re silently to happen rather than that deduction be eliminated in totality for everyone that’s a probably lower it from a $1 million to maybe it’s a $0.5 million limit well our average sales prices is like $300,000, our average mortgage is certainly lower that the $300,000. So if they lowered it to $500,000 I don’t think we have any affect on us whatsoever and I don’t think it have affect on most of the public builders whatsoever, but I would be surprised if political processes, we’re going to eliminate interest reductions for anyone, that happens it would be adverse to the industry.

Unidentified Analyst

And part of you, you’re fixing your balance sheet and explaining maturities has any – also a transition we found in GSO? If you could just sort of walk us through the basics of how that works? And how you benefit from it? How they benefit from it? Just keep it simple as we go into sort of graphs easily?

J. Larry Sorsby

We’re happy to do so, I mean it’s a basic land banking transaction that the industry has done for decades, its just that a lot of land bankers that were there, this last cycle that put out of business. So there is not a whole lot of people that have been willing to do it, GSO is seeing an opportunity in my view to do land banking at the bottom of the cycle, so they have less downside risk. The way its structured, is how we structured the same way we structure land banking deals 10 years ago, 15 years ago, 20 years ago we put a deposits down on the loss and I can’t disclose precise amount but it’s not a typical deposit we put down with the typical land banker in the past, we give them a carry on the land that they cover or that the land banking arrangement covers that is the only return they get, they don’t get any participation and upside price appreciation or anything else. They just get a return on their capital and it return high enough that it makes sense for them and low enough that it make sense for us and that I’m able to actually increased my return on invested capital, because that’s still underwrite those deals to my 25 plus percent unlevered IRR as if I am [binded] all cash wholly-owned.

So I am going to pay GSO something dramatically less than the 25% return I will tell you that, so that my return on capital actually goes up dramatically, because my deposit is pretty modest. So I am able to spread my capital and do even more land deals because GSO is holding that land on their balance sheet and then in many cases its unimproved land, so they actually finish and deliver the lots to be on just-in-time basis, so that can increase my inventory returns fairly significantly on the deals that we do with them, that’s simple one.

Unidentified Analyst

At this point if there any questions from the audience? Okay, all right.

Question-and-Answer Session

Unidentified Analyst

You showed a big improvement in gross margin over the first three quarters for the year, can you talk about the main drivers of that improvement?

J. Larry Sorsby

Yeah. I would say that the biggest driver of that is our mix of deliveries coming from newly identified land parcels. Since January 2009, we have option to have purchased only get 19,500 elapse and 344 communities and 80% of our currently active selling communities are so, our communities that we controlled since January of 2009. So we just seeing better margins on that land, then we get on our legacy land.

So as we have high and high deliveries from our new identified land, we are going to migrate back towards our 20% to 21% kind of normalized historical Hovnanian gross margin. So that combined with the modest price increases is a real answer.

Unidentified Analyst

Those increasing and persistent state budget deficits in California, as well as the new higher state income tax give you any costs for concerned to be homebuilding in California?

J. Larry Sorsby

On the increasing tax is anywhere gives us cost per concerned, because ramping it’s healthy for the economy, but having said that we’ve been – we’ve look to that previously, we’re still amazed in California and some of the high impact costs. Whether would be state level of local municipality level is just crazy.

That the local governments did not modified those numbers downward. So that they would actually have activity and raise more revenue, but that cap extremely high to where it’s not economically to actually build in the local markets. So all of those things are incrementally adverse, but not something it’s cares just out of the state.

Unidentified Analyst

Just a two questions for me. The first one is can you kind of square I get to our 25% underwriting margin from IRR perspective, there is no access a lot of your competitors even better is underwriting at 15% to 20%. So how do you kind of square due together, and how can be competitive on purchases loss in our situation. And then the second is in terms of your growth in New Jersey, it’s up impacted all in terms of slower appraisals in prices because of the occur the reason storm sorry.

J. Larry Sorsby

Let me take the first question first and I think basically, which you are saying some of our appears have said that they have an IRR hurdle rates lower than hours, I think it’s probably been true previously, as it maybe true today, I can’t speak to how they do their underwriting I can just tell you that, our underwriting criteria hasn’t changed, it remains at 25% unlevered IRR and is fully loaded with all cost except corporate overhead.

So division and group overhead is in the number, but corporate overhead is not in the number and it’s an unlevered IR, and they use current home prices, current absorption paces and current construction cost, we make no exceptions that those numbers may go up or go down, but based on this concurrent as stated as 25% IRR and I can’t speak that how we do it, one of it squares it up, but that’s the best I can do. With respect to New Jersey, repeat your question please.

Unidentified Analyst

Sir, it looks like you have a number of communities coming online in New Jersey, if they are having already in particular, now it’s curious if you are seeing slower appraisals post storm and with the environment looking like particularly in New Jersey?

J. Larry Sorsby

I would say it’s, we’ve got appraisals post storm, but I can’t really comment on whether I think you said slower, not lower, right?

Unidentified Analyst

Slower.

J. Larry Sorsby

Slower, yeah so we haven’t gotten one that I am aware of, but I don’t expect there to be a delay in getting appraisals in New Jersey, which is probably more responsive to what your real question is.

Unidentified Analyst

Hi, given your business plan for 2013, how do you feel by you validity of per capital, do you believe the additional capital rate is in the 13 or how do you feel about that?

J. Larry Sorsby

Yeah, I think given what we’ve done in pushing that liquidity into the two step GSO transaction that we have more than sufficient capital to meet our targets in 2013 and frankly 2014 as well. So I don’t think there going to be anything driven from a perspective of we have to raise capital in order to kind of meet our business plan.

Unidentified Analyst

Okay. And in the GSO deal was this exactly the same structure is the first, is this plan your balance sheet or external land?

J. Larry Sorsby

None of what we did in this more recently announced transaction was then buying something that we currently own.

Unidentified Analyst

So it is different, okay. And I guess, forgive me if I forget anything. Have you guided to land spend for 2013 versus 2012?

J. Larry Sorsby

We have never provided any guidance ever on what our land spend really want to be other than to say that the accelerator break the spinning money on land is our liquidity targets, which get 170 to 245 is that the right number Joe?

Joseph Marengi

Yeah.

J. Larry Sorsby

So at quarter end how about in cash, we want to keep it between 170 to 245, we’re actually comfortable with the lower end even though we’ve been ending up above that target. We’re recently and so the real limiting factor has been our ability to fund sufficient deals to spend the money on that meet our other criteria. Yeah that’s been the limiting factor, not capital.

Unidentified Analyst

In that sense really the unrestricted cash balance, correct? That the unrestricted cash balance target…

J. Larry Sorsby

It’s the homebuilding cash target, yeah.

Unidentified Analyst

Okay. And in terms of new land deals you are seeing out there is it different this time around as more development work needed to get land to where you needed or is there more ready for like of their term land deals out there?

J. Larry Sorsby

I guess when you say different this time; you are talking about how it was three or four years ago.

Unidentified Analyst

Yeah.

J. Larry Sorsby

Versus 10 or 15 years ago. So various less and less supply of finished marks across the country because not a whole lot of people have been developing lots during that period of time and builders have been buying the finish lots. So it’s a diminishing supply to some degree though we keep saying banks, reaching to the OREO and bring out something that they won’t willing to sell a year ago, because it’s now worth more, because absorptions are higher, home prices are higher.

So it’s still some finish land that we have been able to acquire there recently. We’ve always been comfortable doing land development and previous entire since 2009 when we done the 19,000 lots much of it has been where we actually bought, the development always under road we didn’t care. All it really means is it takes four to six months longer to be able to build a house, because we have to be the, put the streets in underground utilities et cetera. So it’s just a delay as much as anything else, but I think it’s fair to say that in general, there is less supply of finished lots in the market, which was one other things that made us very excited about the GSO transactions, because we are able to find raw land GSO buys, its puts on their balance sheet, performs the land development work and delivers back to us the finished lot on just in time basis.

Unidentified Analyst

Last question, you mentioned that the lack of labor infrastructure to actually having a big boom and housing construction going forward the next years. So whatever that might be, could you say the same trend having to more up front development, we are also kind of limit the amount of land and therefore growth that can be put our lines in that.

J. Larry Sorsby

No, I don’t see those being related at all. Again I think most builders have the expertise to be able do the land development and it’s going to be the things that slows builders – the ability to build houses in land development side in a state likely Washington DC or California where there is a three to five year approval process. If you start running out of approved land that’s a different answer I think that will be a slowdown as those markets really kick back in the year, there is going to because no one has been taking step through the approval process to speak there will be a time that you’ve gone though most of the entitled blend in a particular location and there is no way to speed that process up.

Unidentified Analyst

In terms of the land on your balance sheet earlier you said that such and such percent was for 2009, is that active communities or is that the total…?

J. Larry Sorsby

Well we actually had the data to answer the question either way but I would try to do it from memory based on active selling community, and it’s probably 80 plus percent of active selling communities are newly identified land process as you look at our option land, everything that we have option regardless of whether it’s currently for sale or not, 74% yeah, 74% is newly identified and as you look at owned land excluding mothballs the answer is yes, 45% and if you add mothballs in it, it reduces to 26% interesting.

Unidentified Analyst

And couple of minutes I have lost, if you’re going to discuss raw material versus labor versus land which is more challenging aspect you see in terms of the cost front right now?

J. Larry Sorsby

Right now? Well land is not just because I mean we still underwrite to a 25% IRR as land values go down or up, we’re still using the same hurdle rates, so it’s you know land availability being able to replenish land as fast as we’re selling homes has been a challenge but the cost wise it’s not really the concern there as just hitting our underwriting criteria. I think going forward as we see increased demand, we’re going to probably have a bigger problem on the labor front than we do on the material front. And the reason I would say that is, this industry went from rebuilding $2.1 million homes to building 500,000 homes and that’s a decline we’ve never seen before as an industry.

And it’s been a prolonged downturn, such that those people are waiting around, expecting the call to come back, and go to work, they’ve actually got another jobs, another professions or went to their home country or whatever the case may be so what I think it’s going to take time to train and gear up enough carpenters, electricians, plumbers, painters et cetera to build an ever increasing demand for houses.

I think that’s going to be the limiting factor in order to and price people to gear up, you are going to have to pay out more. So there is going to be an increasing costs from it as well, that I think an evitable to occur and now historically, we’ve been able to absorb increased costs by passing that along the increased home prices to the consumer. And it’s frankly we’ll be able to raise prices more than our increased costs have been historically. So not homeward, hopefully, that’s what happened in this cycle as well.

Unidentified Analyst

If the labor market tighter in any specific regions where you operate?

J. Larry Sorsby

That’s interesting and I can’t tell you, that I know precisely, but I’m hearing and pretty universally across the country, where we’ve seen increased activity that there is labor issues. Most recently last week, I just happened to be in our Southeast Florida operation, which is a fairly small operation for us.

We kind of regearing that backup, it’s a bigger operation for someone like [Lenore] and I forget the other builder that was mentioned to me at the time. I think it’s a local builder GeoHomes that there is quite large in that micro market. And I was told that, they have their fiscal year coming up year end December and they are paying performance bonuses an extra 10% if you hit these targets for us by December and they are taking our labor away by offering those kind of performance bonuses. So we’re seeing those kinds of things happen. We’ve actually done that in other markets, so it’s not [familiar] business and if you need to hit the Labor Day, actually finish the house; you have to do what you have to do.

Unidentified Analyst

Nice to hear something positive (inaudible).

J. Larry Sorsby

Yeah.

Unidentified Analyst

Just to wrap it up in terms of your risk times going into the downturn and what it is now, how do you look at lands [defy], two, three years out what would be your target?

J. Larry Sorsby

I would say from an ownership of land perspective, you know owning one to two years supply is what we would target today is probably what we had in mind targeting going into this downturn. It was just that it kind of look like you had 18, 24 months supply in this downturn that turned into six years the company the demand drop so specifically so there is probably lesser than that as we get to 1.04 million kind of start. We probably will shrink our target levels just in anticipation that it is getting a little bit over cut. So that’s probably the biggest lesson learned that we would adjust for.

Unidentified Analyst

And do you pursue more options (inaudible) going forward?

J. Larry Sorsby

Yeah we would get option, eight years but then with the modest deposit that I can walk away from. So I would have as much control by option as I possibly could.

Unidentified Analyst

Have you been encouraged by others regarding what you did with GSO for looking to do similar transition?

J. Larry Sorsby

You know we’ve talked to others about it; others that actually called us post-GSO transaction we will be interested in doing that. We’re in various stages of conversations with them but, there haven’t been I think there is one that is probably more serious than others, but I think it’s going to be a gradual process if people come back.

Unidentified Company Representative

It’s definitely something that’s constructive in general absolutely the industry.

Unidentified Analyst

Absolutely, just few seconds left, is there any other questions? I think we can wrap it up

J. Larry Sorsby

Thank you so much. I appreciate it very much.

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Source: Hovnanian Enterprises' Management Presents at Citi 2012 North American Credit Conference (Transcript)
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