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Hovnanian Enterprises, Inc. (NYSE:HOV)

DbAccess Global Industrials and Basic Materials Conference

June 13, 2013 5:20 pm ET

Executives

Brad G. O'Connor - Chief Accounting Officer, Vice President and Controller

Jeffrey T. O'Keefe - Director of Investor Relations

Analysts

Nishu Sood - Deutsche Bank AG, Research Division

Nishu Sood - Deutsche Bank AG, Research Division

All right, so let's get started with the next session. I'm Nishu Sood, the Building and Product Analyst at Deutsche Bank. So this is the last homebuilder that will be presenting at the conference -- oh, no. I'm sorry, there's one more tomorrow -- and Hovnanian presented -- they released their earnings recently. So looking forward to hearing them talk about the progress that they've been making in terms of their gross margins and orders and just recovery into the -- just growth into the housing recovery. So, Brad O'Connor, who is the Chief Accounting Officer and Corporate Controller, will be presenting; and Jeff O'Keefe, who's in Investor Relations and other roles will be sitting up here as well. And with that, I'll turn it over to Brad.

Brad G. O'Connor

Thank you for giving us the opportunity today. You should say we're going to -- I'm going to talk briefly about our view of the homebuilding market and then I'll talk about our recent results in the second quarter.

So, to start with, the housing market is recovering. I think you all heard that from the other builders that have been here today as well. And I'd like to start with the slide that shows housing starts, annually, since 1940 through now, and you can see the significant volatility that occurs in our industry. But, of note, here, if you look at the red circles, you can see the recent peaks in the market, and the most recent was in 2005. And note that the peak in 2005 wasn't any greater than what it had been in the previous 3 years, very similar. But, conversely, the trough which came shortly thereafter, in the previous downturns, was around 1 million starts, and this time it fell all the way to 500,000 starts. So a significant -- significantly lower trough, and we've been in that trough. Although, we're still not back to kind of the 1 million starts which is the low-end previously. And also on this slide, you can see the annual average starts by decade, on the horizontal green lines. In each decade, it tends to run, on average, around the 1.4 million range, a little over 1.4 million. We had -- the 70s was a little higher but generally in the 1.4 million range. And even in 2000, when we had the very high runup around 2005, the average for the first decade, the 2000s, ended up being, again, around the 1.4 million. So that downturn used up the excess from early in the decade.

In fact, on the next slide, what we've done is taken the excess from the beginning of the 2000 and layer that into the trough, and you can see that we're still not at the kind of the decade run rate average of 1.4 million. So, that, along with the fact that a Harvard study and other economists, [indiscernible] are expecting that we need 1.6 million to 1.9 million housing starts to keep up with population growth, and housing creation shows that we still have a fair amount of pent-up demand and an ongoing recovery to the housing market that we're just in the beginning of that recovery.

The Case-Shiller 10-City Index shows, what I think all of us have heard in the press, that pricing has increased. This index shows 10.2% increase across these 10 cities. We've seen increases in our prices as well, very market-dependent. Arizona and California have had much better price increases versus places like New Jersey or the Midwest, but all have had some increases over the same timeframe that's shown here. The good -- one of the benefits, besides getting higher revenues and margins, from price increases for us is it seems to be getting people off the sidelines that were waiting for the market to bottom, and now getting off the sidelines and buying as they feel like prices are going to start to increase and they're hearing that in the press.

Another index that we pay attention to is the affordability index. The way this is measured is it takes the median income, home income in the U.S., compared to the income needed to purchase the median home price. And what this chart shows is, right now, we're in an all-time high affordability on the affordability index, at 191.7. If you look back and look prior to the recent downturn, the highest affordability index was just around the 130 mark. So we're well above those peaks. And one of the things that people are talking about now is what happens if rates go up or prices continue to go up, what that's going to do on the market. And what we've shown here, on the top left, is what happens if rates were to go up 275 basis points, prices stay the same as you are today, you'd still be at 138.6, still at the highest peak going backwards. Same thing with home prices, if you kept the rates the same and home prices went up 35%, you'd be at 140. And then we did another calculation, obviously, the combination of the 238 basis point increase in mortgage rates and home prices up 18%, and you're still at that high affordability index. So what this shows is there's still room to grow on both the price side and mortgage rate side before we think there'd be an affordability issue impacting the market. And what's happening today is people can buy more expensive houses than they've been able to buy. They can buy more options, bigger houses, et cetera.

We also look at foreclosure and delinquency rates. I heard the question, to Ryland earlier, about the overhang. And I would agree with his comments, I don't think that this is really an issue for us any longer. You can see the delinquency rates have come down, foreclosure rates are following and I don't -- they're really not direct competitors with our communities anymore. We don't feel like that that's an issue that we have to worry about.

Now I'll go in to our second quarter results for our quarter ended April 30, and a brief business overview on us. We're the sixth largest publicly traded homebuilder based on deliveries. We were founded by Kevork Hovnanian in 1959. His son, Ara Hovnanian, is now our Chairman, CEO and President. We have 190 active selling communities across the country. We're in 37 markets in 16 states. Those states are represented here on -- in the chart, in different colors, based on the publicly reported segments that we report. And the percentages that are shown in the chart give you an idea of the percentage of revenue that are coming from each of those public segments, to give you an idea of the size of each our segments.

Some of our competitors focus on specific product types, whether that's first-time buyers or luxury buyers. We have always targeted a broad product array and try to take advantage of the different business cycles, homebuilding cycle. In 2012, as an example, we had 1/3 of our deliveries between first-time buyers and 1/3 for move-up, 21% for luxury and 13% for active adult. And we've found that, that being in a number of the product types has helped us when markets changed as they do, due to cycles.

With respect to our actual results for the second quarter, this chart touches on a few of the metrics that we want to share, and what we've provided here, to show the improvement over a 2-year period is -- in the gray bars, the second quarter of 2011; the blue bars -- sorry, the yellow bars are the second quarter of '12; and the blue bars are the most recent quarter, second quarter of '13. And so you can see what's happened with revenues over that timeframe, it's grown 66%, from 2 years ago, to second quarter, with both volume increase as well as our average prices has been increasing. Gross margin has steadily improved up to 18.9% in the most recent quarter. That's happening partly from price increases but it's also happening, in large part, due to mix. We're getting more and more of our deliveries from the newer communities where we acquired land at the bottom of the market. So we're getting better margins now, out of some of those communities, and less deliveries are coming from the older communities that we had prior to the downturn.

The top line growth has helped us, significantly, on leveraging our relatively fixed SG&A cost and interest cost. So you can see what's happened to those. As a percentage of revenue, SG&A went from 20.3% in 2Q of '11, down to 12.2% in the most recent second quarter. And interest, similarly, has come down significantly as a percentage of revenue. So as we focus on continuing to grow our top line and leverage those costs, interest costs should stay relatively constant. And SG&A, while there are some variable costs in there as you add communities, it's relatively fixed. So we should be able to hold those costs down while growing the top line and have the percentage of revenue improve, the leverage improve.

The net result of all that, for the second quarter of '13, was we actually were $1 million of pretax profit before land charges. Land charges were a couple of million dollars in the quarter compared to $21 million loss the year before, a $55 million loss the year before that. So definitely feel like we're turning the corner. We've talked about, in our most recent call, that we can project to be profitable for the full fiscal year '13. So we think we're on the road here to sustain profitability.

With respect to our sales, trends in the second quarter, you can see what's happened with our net contract dollars in each of the periods, again, presented. Net contract dollars have actually doubled from 2 years ago, the second quarter. The number of contracts hasn't doubled as we're getting higher prices, but it's still growing. We have about 5% fewer communities this year than last year, but we are growing our net contracts per community, and we're getting more dollars because of the average price, which obviously helps the top line grow and leverage SG&A and interest cost. And as a result of all of that, contract backlog is now over $1 billion at the end of April, and has showing very good growth.

One of the important things that we've had to do during the downturn was make sure we were in a position to be here for the recovery, and take advantage of the recovery and reload our land position at the bottom of the market. And we've tracked, since January 31 of '09, how many lots we've been able to control through purchasing our option, and we've control 26,200 lots in 450 communities. Now we've delivered some of those. As of April 30, we had 15,400 of those lots remaining and we're trying to add lots every day basically.

The next slide shows you what we've done more recently. In the last 4 quarters, you can see the deliveries in blue and the net additions to lots in yellow. So you can see that in every quarter we're able to control more lots than we deliver, which should help us, obviously, to be able to continue to grow.

The other significant challenge for us in the downturn is we were -- that we were very highly leveraged, we still are, but we've been able to pushout a number of the maturities, refinanced a number of the maturities, and pushed most of our debt out beyond 2020. We're in a good position now. What we've got left coming due in the near term, the red bars are the unsecured senior notes, all of which -- we're in a position we could refinance today but they don't have make-whole provisions that make that costly. So we have to monitor and decide when the right time to take that step would be. But the market to do that is there, our bonds were trading at $0.50 to $0.60 on the dollar a little over a year ago, these bonds are now trading over par. So the bond markets have seen what we've been able to do, both operationally and on our balance sheet, and we're prepared to take advantage of the improvement in the homebuilding market.

So, last but not least, it's not rocket science as the lot supply is constrained because of entitlement issues. It takes time to get lots and land through entitlements in certain jurisdictions, locations like New Jersey and California. To some extent Washington, D.C. You can take 3 to 5 years to get lots through approvals. A lot of that work was not being done during the downturn. People just didn't want to invest the money to do that. It wasn't appropriate timing. So we don't have lots, a lot of lots, ready on the ground. That's going to constrained supply in some of the markets. The number of builders has declined with private builders going out of business some publics going out of business. The foreclosure to supply, as we saw on the earlier slide, has definitely come down because of -- some of the investors have come in and snatched up some of the foreclosures. And on the other side of the coin, population continues to grow, consumer sentiment is improving, our consumer sentiment. Households are unbundling, creating the need for more house -- more houses, and rent -- the cost of rent is going up. So all of that increases the demand for homes, and we think we're ready and properly positioned to take advantage as the homebuilding market continues to recover as we expect.

With that, I'll take any questions.

Question-and-Answer Session

Unknown Analyst

Thank you Brad. We're doing a -- you might have heard, at the end of the [indiscernible] session, we're doing a little bit of a [indiscernible]. I'm sure you have not heard [indiscernible]. The reason behind the award is [indiscernible] -- 2 parts of the question. First of all, if there is continued payment shock, like we're seeing, [indiscernible]...

Unknown Analyst

We can't hear you very well.

Unknown Analyst

There we go, that probably helps. So hasn't been a big payment shock so far, it's only 7%. If this continues, are we more likely to see the impact on pricing or volumes or some combination of those? At what level do you assess there to be a sufficient payment shock to have some material impact on the housing market? We just hit a 4-handle on mortgage rates. Is it 5, 6, 7, 8, or 9, 10, 25, whatever. And then finally, in the recent weeks we have had enough time elapsed here now, since mortgage rates have started to rise, since it was right at the beginning of May. And I know, in the longer-term perspective, a couple of weeks isn't really anything, but have we seen anything, in recent weeks, that has indicated any impact from the rising rate? So, 3 parts to that.

Brad G. O'Connor

I would say, if you go back to the affordability slide that I touched on, mortgage rates and prices right now have made houses extremely affordable. So, as we showed, if prices were to stay the same, 250-basis point increase in rates or roughly that, doesn't change. It still puts you at the highest peak of affordability in previous times. So I wouldn't expect that -- it had to be a pretty significant increase in rate, I think, to have a meaningful impact. I don't think that -- I think what happens in the short term is that the shock actually, maybe, gets people to move and actually get on before the rates go up further. I think that's going to happen. So I think maybe in the near term it's beneficial. Longer term, at some point, there's probably some impact but I think it's aways before that would happen. And what was the second part of your -- the...

Unknown Analyst

Just the threshold, the 250 basis points, I guess, is the threshold you're defining. So does that mean you've seen some people coming off the fence? Is that what...

Brad G. O'Connor

I mean it's hard to say. Let's put it this way, I don't think we've seen any significant change in our sales as a result of the rate changes, I'll put it that way -- upward, I don't think we've seen any. It may not have been long enough to see the impact yet, to your point, but I don't think we've seen anything that's cause for concern either way.

Unknown Analyst

And second question is on margins. A lot of folks at this conference are assessing margins that, for many sectors in the S&P 500, are historic highs. In fact, I think the entire S&P 500 margin is at a historic high. Can the same thing happen to builders? Obviously, our reference share is 2005. So a little bit reference point than for most sectors, in terms of the peak. You guys had 19% gross margins, your peak was 26% in 2005, you're at, call it 12-ish% on SG&A and your low was 10%. Where can we get to? And one of the context is Case-Shiller just went up 11% year-over-year. Well, that sounds great. I mean, we're hearing things like this is the highest number since 2007 or what-have-you. So where can we go in terms of the margin structure?

Brad G. O'Connor

Yes. I mean, I heard Ryland answer the question, we were in the room and I think he answered it pretty well. I don't expect -- the margins that you saw in 2005 were from the bubble, the extra buyers. A land appreciation and that margin that I don't think we'll see necessarily or not for very long if we do see it. Historically, we think our margin range is normal, at about 20% to 21%, and our SG&A range is right around the 10%, that you just said was our previous low. We think those are the right targets for us. And I'll just comment, I think those targets are very similar to what Ryland said. The difference, I think they said 23% in '12 or 23% in '13. And I think the difference is they put commissions in SG&A, we put commissions in gross margins. So if you do that adjustment, we're basically right at the same place. Which makes sense, I mean I think that that's about normal for homebuilding. And what happens is every time you deliver out of the community and you're going to buy the next land parcel, you're penciling that land parcel at the same IRR target that you did before and so the land value goes up and it maintains your margins back to what's normal for you, at 20-ish% or whatever that might be. So while you might see some peaks and valleys around that number and then in the long run I think you'd seen us at 20%, 21% and a 10-ish% for SG&A.

Unknown Analyst

Got it. Now that Case-Shiller -- you had shown a chart of it and the double-digit gains it's having. My question for you is, is that reflective of what sort of home price appreciation have made in the scene?

Brad G. O'Connor

No, I would say that it's very market dependent, and that was -- a little bit of what I was trying to get at is markets like Arizona and California have seen some. Some our communities have seen improvements like that, even greater than that at some communities, others not so much. And if you went a markets like New Jersey or the Midwest, I don't think we would see things anywhere near that kind of a number. So it's a very market-dependent question that you have to look at, and even community-specific within the markets. As an example, when we did our second quarter release, we showed, in Northern California, some of the -- I think the highest communities had a 15% increase over 6 months, maybe even 20%, I'm not sure.

Unknown Executive

22%

Brad G. O'Connor

22%. And then the -- right. So, just in that market, it gives you an idea, and then we also gave Arizona which I think was a 15 2 or 3%.[ph]. So you can see, even within those markets, some significant differences depending on the specifics for that community and their competitors and where they're located and all that kind of stuff.

Unknown Analyst

But on the whole, it sounds like you're saying that Case-Shiller may be a little bit higher than what you're seeing?

Brad G. O'Connor

I think that's probably right, based from our perspective, yes.

Nishu Sood - Deutsche Bank AG, Research Division

Any questions from the audience? Let me move on to a big picture question. Obviously, you mentioned -- the high leverage was obviously challenged in 2009. I've heard many investors say that the financial team at Hovnanian should get than A+ grade for the job you folks have done in terms of navigating the downturn that was longer than we've seen, I think, since the '20s -- I mean, sorry, the '30s. And so where do we stand now? Is the capital position -- what's the view internally? Are there still levers that need to be pulled in order to enable the capital structure to allow the growth that the recovery is going to demand?

Brad G. O'Connor

Yes. I mean, well, first of all, thank you for those comments. The finance team did do a very good job of getting us through the downturn. I think now we're in a position where we feel really good about the runway we have in front of us and we've been identifying ways to add capital, not necessarily through the public markets. For example, I think most people know about the GSO land banking transaction that we put in place, that allowed us access to about $250 million in capital that way. We look at doing nonrecourse property project financing which allows us to finance specific communities. So, we're looking at other ways to find capital without having to access the public markets and add to our existing debt that way, and we've been successful in doing that. The other thing that those types of structures allow us to do is grow by increasing our inventory turnover rate. So our inventory turnover, right now, the trailing 12-month basis, about 1.6 And when it was that it's -- in 2011 I think it was 1.1. And if you go back to 2002, which is maybe more of a normal timeframe, we were at 2.1. And if you can get back to the twos, in term of inventory turn, it allows you to have that kind of growth without needing additional capital because you're getting that growth off the same capital base, and that's obviously what we need to continue to do because we don't have a lot ability to go out and raise debt other than some these financial transactions we've done with GSO. But we think we're in a good position in terms of being able to refinance the debt we have. It pushes out whenever we're ready to do so and continue to grow our top line, start getting into consistent positive earnings, and sometime down the road, work on fixing the capital structure.

Nishu Sood - Deutsche Bank AG, Research Division

Assuming that the nontraditional sources of capital, that you're describing here, like the GSO structure, demand a higher rate of return than public capital markets would, and that some of this would show up in terms of, let's say, lot transfer prices, let's say, like the GSO arrangement. Should we assume then, that a slice of returns -- the slice of margins that would ordinarily flow through to Hovnanian will be flowing through these non-traditional capital? Would that affect -- basically bottom line is should investors be concerned then, that your margin structure will be affected by -- will be dragged down by a little bit by these arrangements?

Brad G. O'Connor

I mean, the margin in theory does apples-to-apples, if you take that same community and then you land bank with GSO. Certainly, but the benefit is that we're underwriting those deals at 25% unlevered IRRs and we're not paying GSO 25%, we're paying something less. So by using their money at a lower number, we're increasing our return to our dollars. It's choosing the return. So from a return perspective it's still beneficial and it comes back to, again, the fact that you may be getting a little bit less profit but you're turning the inventory faster. And so, at the end of the day, your return on inventory is better. And it may take a little longer to grow the bottom line because you have to keep doing that but you can do it by increasing the pace.

Nishu Sood - Deutsche Bank AG, Research Division

Got it. Now, the 2 main metrics that investors are focused on, gross margins and community counts, you're leveraged to price and you're leveraged to the increase in starts. Gross margin trends have looked terrific but I think everyone's been very happy with that. Talk to us about the community count growth. There's a very wide array of community count outcomes for the different builders. Some are falling by 15%, 10% or 15%. Some are growing by -- like Ryland, 30% to 35%. Where is Hovnanian going to fall in that spectrum the next couple of years?

Brad G. O'Connor

Well, historically if you go back -- I mean, if you look at the last, whatever, 4 or 5 quarters for us, I think we've stayed relatively stagnant or flat. Now, we've done that in an increasing absorption pace environment. So we've been adding communities at we thought were a faster pace than we were going through but then absorption pace has increased. It So brought down our community count. So we've been, basically, treading water in terms of community count, but getting more absorption, so therefore growing our overall deliveries. If you go back to the one slide I showed, where we're still adding more lots every quarter that we've been delivering, that in theory whether it adds to -- community count is difficult because you can be adding lots in a large community, you could be adding small 25-lot communities and it just depends on the mix of communities that you're adding. So the community count itself is difficult for us to project because of the ins-and-outs of absorption pace. But, that said, what we're focused on is making sure that we're continuing to add lots at a faster pace than we're delivering, which would then ensure that we'd be able to grow.

Nishu Sood - Deutsche Bank AG, Research Division

You bring up a good point about the community count number and then sizes. And I think in Ryland's number, for example, as we just saw, sort of off the top of my head, their community count size has gotten smaller so they need more community to generate the same level of volumes. What are the trends for Hovnanian? Have the sizes of your communities -- if you think about them, are they average 150-lot deals or are they average 100-lot deals? How does that change since, call it, 2005 and 2009? Just rough figures I'm trying to...

Brad G. O'Connor

I don't think I have any data to even speculate, unfortunately, at that. I mean, Jeff, I don't know if you do.

Jeffrey T. O'Keefe

Yes. Recently, the new land that we've been acquiring, the average community is about 55 lots per community in those new communities. So we didn't look at average community sizes back in 2005, but it's likely that it's probably a little bit smaller than the average was back then, but I don't have specific numbers for 2005.

Nishu Sood - Deutsche Bank AG, Research Division

Right. 55, I would think that, that would be much smaller than it was in -- i thought the average would have been 100-plus on the...

Brad G. O'Connor

It depends, it depends on the market, it depends on the markets. In places like Houston, they're very small communities for us, and then in places like California or something, where they have big master plans, it could be very big community. It just depends on the mix, too, and where you're acquiring the lots.

Unknown Analyst

Steal your thunder. I had 2 questions. What is the profile of a purchaser today, relative to what they're putting down on a property? Are you aware of how they're funding it? And say pre -- let's say, back in '05, were they coming in with 1% down and [indiscernible] loans or 5% down? And what does that compare to today? So that's my first question.

Brad G. O'Connor

I don't know if we have the statistics. I don't know Jeff if you do but I would certainly say that it's much more down than it was in '05, with the subprime loans and all-day loans going away. I mean those are the loans that were no money down, 1%, 2%. And now, I think most of the lowest ones we're seeing were 3% and 5% in best case scenarios. So I would think that our averages has definitely gone up. I don't think we have that.

Jeffrey T. O'Keefe

Yes. Our average LTD today is about 87% compared to 75% in '05. So there's definitely putting more money down today.

Unknown Analyst

And my other question was in terms of the price point on an average square foot. What were you selling at in '05 and what are you selling at today? '05 was a base of 1.0. Are you at 0.85 right now?

Brad G. O'Connor

I don't have any -- we don't track that. I heard Ryland give that stat, actually, and I was curious how they calculate -- we don't calculate that. Sorry about that.

Unknown Analyst

[indiscernible].

Brad G. O'Connor

[indiscernible] quarter. Okay. Yes, we've never done that before, it's an interesting statistic. I haven't even done them.

Unknown Analyst

Since you have this debt maturity chart up here, I just thought I'd ask -- and, again, any debt folks in the room, please help me out. Poor equity guy. As we get to these maturities, there's that make-whole payments around them. So how are these going to be handled then, in the next few years, the unsecured notes?

Brad G. O'Connor

Well, I think at some point we'll decide to refinance them. Certainly, we could pay off some of them, but we'd rather not, because we want to have the cash continue to grow. And refinancing them, in the market today, wouldn't be a problem. The make-whole provisions go down every day. The closer you get to maturity, they decrease. So, there's some inflection point where it makes sense to do that, and we just have to continue to monitor that. Depends on what rates do and what rates -- so there's interest rate risk in theory. Don't want to be weighed if rates are going to runup. So we have to kind of compare those two and decide when the right time is.

Unknown Analyst

As your debt colleague, I'll try to help. So with the refinancing that you hope to do, do you think that you could do it on an unsecured basis or do you think you have to continue issue new secured debt? And would you consider using equity, at all, to term out the debt load?

Brad G. O'Connor

Yes, I haven't had the conversations with our finance guys about whether we would do it, unsecured or secured. I think that remains to be seen. But with respect to equity, I think at some point we would want to do that to improve our balance sheet, because just pushing out the debt doesn't change the fact that we are very highly leveraged. You have to get a lot of income to overcome the current levers that were in. So at some point it'll make sense, but certainly not yet because we're not earning, really, any money. So you've got to get the point where you're generating some level of earnings per share that issuing equity would make sense. And we don't have any need, today, to do that. We're not forced into position to do that. We can wait to raise the equity, hopefully, at a higher price. But, ultimately, that has to be part of the answer.

Nishu Sood - Deutsche Bank AG, Research Division

I think when people think of Hovnanian, they think about, your New Jersey headquarters, they think of the Hoboken business and they think of the Northeast, maybe even DC. But in our community counts, what we've noticed, our community count report is that Texas has become an increasingly important market for Hovnanian. So I'm wondering if you can just talk to us about that trend. What has driven that? Is that one of your better management teams down there in Houston, in particular? And what should we expect in terms of balance going forward?

Brad G. O'Connor

Well, I mean, I think I would say that the reason that has occurred is because Houston, and to some extent Dallas, but definitely Houston didn't go through the downturn that the rest of the markets went through. So, as a result, they've been able to kind of maintain their level and even, now more recently, grow it while everyone else fell pretty significantly. And you're right, Texas is definitely a bigger part of our market right now. We would hope that, that would trend back the other way. As the market rebounds and we start to get back into recoveries in California and the Northeast at some point, hopefully soon in Florida, et cetera. So we hope that be back to rebalancing itself. It isn't something that we, right now, are focusing on targeting, so to speak, in our land buys. Each division goes out and does their job to go find land deals, they bring them to the Corporate Land Committee. And if the deal makes sense, we improve the deal. And we're not focused right now, at least, on targeting more in this location versus that location.

Jeffrey T. O'Keefe

An issue before we go on. Let me clarify one of Brad's answers on that. If we were refinance the unsecured debt, we would do it on an unsecured basis.

Nishu Sood - Deutsche Bank AG, Research Division

Do capital constraints come into play on the land committee? If you're talking about lots in Texas, you can get them for $20,000, and -- well, maybe not $20,000, let's call it $35,000. And if you're in Irvine Ranch it's going to be $200,000. So does that affect, as your different divisional managers are bringing projects to you, the same is going to apply to deals and whether it's in -- New Jersey, obviously, very high price. So does that affect things?

Brad G. O'Connor

Well, the targets we use is an internal rate of return target which takes into account the pricing. So how quick, what kind of margin of return do you get on that investment. Obviously, those larger investments initially require better margins upon delivery compared to the Houston where you're buying at $20,000 a lot and you're buying them very quickly. So the margins can be lower because you're turning faster to get that IRR. So we use IRR to kind of balance out the benefit that Houston gets from buying cheaper lots more quickly than in California gets by having to pay more. Obviously, one of the things we have to look at is if markets have significant land purchases like an Irvine situation. Those are the times types of deal you might look to get a nonrecourse mortgage on. Get somebody else to help us project finance that, so we're not putting a lot of capital in one particular project.

Nishu Sood - Deutsche Bank AG, Research Division

Any further questions from the audience? We'll leave it at that. Thanks to you folks for presenting and thanks to everyone for attending.

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Source: Hovnanian Enterprises' Management Presents at DbAccess Global Industrials and Basic Materials Conference (Transcript)
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