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Hovnanian Enterprises Inc. (NYSE:HOV)

F2Q10 (Qtr End 04/30/10) Earnings Call

June 3, 2010 11:00 am ET

Executives

Ara Hovnanian – Chairman, President and CEO

Larry Sorsby – EVP and CFO

Analysts

Michael Rehaut – JP Morgan

Nishu Sood – Deutsche Bank

Jonathan Ellis – Banc of America/Merrill Lynch

Ivy Zelman – Zelman & Associates

Megan McGrath – Barclays Capital

David Goldberg – UBS

Alex Barron – Housing Research Center

Dan Oppenheim – Credit Suisse

Joel Locker – FBN Securities

Jim Wilson – JMP Securities

Susan Berliner – JP Morgan

Michael Kim – CRT

Jason Marcus [ph] – JP Morgan

Timothy Jones – Moloney Securities

Operator

Good morning and thank you for joining us today for Hovnanian Enterprises fiscal 2010 second quarter earnings conference call. An archive of the webcast will be available after the completion of the call and run for 12 months. This conference is being recorded for rebroadcast and all participants are currently in a listen-only mode. Management will make some opening remarks about the second quarter results and then open up the lines for questions. The company will also be webcasting a slide presentation along with the opening comments from management.

The slides are available on the Investor's page at the company's website at www.khov.com. Those listeners who would like to follow along should log onto the website at this time. Before we begin, I would like to remind everyone that the cautionary language about forward-looking statements contained in the press release also applies to any comments made during this conference call and to the information in the slide presentation. I would now like to turn over the conference call to Ara Hovnanian, Chairman, President and Chief Executive Officer of Hovnanian Enterprises. Ara, please go ahead.

Ara Hovnanian

Good morning and thank you for participating in today's call to review the results of our second quarter ended April 2010. Joining me today from the company are Larry Sorsby, Executive Vice President and CFO, Paul Buchanan, Senior Vice President and Chief Accounting Officer; Brad O'Connor, Vice President and Corporate Controller, David Valiaveedan, Vice President of Finance and Treasurer and Jeff O'Keefe, Director of Investor Relations.

On slide three, you can see a brief summary of our second quarter results. Our second quarter was in line with our expectations and better than last year's second quarter. Sequentially, it was also better than the first quarter from an operational perspective, absent a tax benefit we received in the first quarter. Slide four lists the three trends that we need to see continue in order for us to get back to profitability; increasing sales pace, improving margins and reloading our land position.

Second quarter net contracts were better than our internal plans but I'd be less than candid if I didn't say we were hoping for even better sales due to the impact of the home buyer tax credit. With respect to sales pace per community, instead of seeing steady year-over-year growth again, we seem to bounce along the bottom during the second quarter.

As seen on slide number five, our monthly net sales pace per community is increased in 15 of the last 18 months on a year-over-year basis. In February and March, our net sales per community were flat compared to the same month in the prior year. April sales were higher, likely due to home buyers trying to beat the deadline on the home buyer tax credit.

Slide six shows the sales trend on a quarterly basis. After five consecutive quarters of year-over-year increases in net contracts per active selling community, the pace in the second quarter of 2010 was unchanged when compared to the same period a year ago.

Slide seven puts these improvements into perspective. The seasonally adjusted annual absorption pace in the first half of 2010 was 25. That was better than the last two years but still significantly below our average of 44 homes per active selling community between ‘97 and ‘02, a period generally described as more normal times. We still have ways to go before sales absorption rates are back to normal levels.

In the month of May, our net contracts per community were 2.0 compared to 2.6 in May of ‘09. Clearly, the April expiration of the tax credit pulled some home sales into our second quarter, which was to be expected. Given the fact that the tax credit is no longer in place, this reduction in sales per community in May seems reasonable.

The jury is still out as to what the impact will be on the expiration of the credit on sales going forward. I will note that California reenacted a $10,000 tax credit and the New Jersey Assembly passed a $15,000 tax credit with an upcoming Senate vote expected next week.

We've seen stability in the selling pace per community, notwithstanding the understandable decline right after the expiration of the tax credit. This is probably a good segue to the second component of our returning to profitability, improving margins.

Let me start with gross margins. Slide eight illustrates the trends that we have seen in our gross margins over the last year and a half. Our gross margin has increased sequentially for the sixth quarter in a row to 17.3% in the second quarter of 2010.

The improvements in gross margin are due to several factors, including impairment reversals which were $42.8 million for the second quarter. Gross margins would have improved without the impairment reversals, just less so. We also had a better mix of deliveries coming from communities that generate higher margins and price increases in a few of our communities as well.

In the short term, quarterly gross margin results from our legacy communities will definitely fluctuate due to product and community mixes and any changes in home prices or incentives. Rising raw materials, particularly wallboard and lumber, could present a headwind to further margin improvement. However, we actively monitor commodity prices and have taken a series of steps with our suppliers and distributors that allowed us to lock in lower costs than today's prices for gypsum and lumber for three to 12 months into the future in many of our geographies.

The recent gains in gross margin have come without a significant number of deliveries on newly acquired land. Homes delivered on new land should yield a more normalized gross margin in the 20% range. The percentage of deliveries that we expect from newly acquired lots for all of 2010 is less than 10%. In 2011, deliveries from newly identified lots are projected to account for about 40% of our deliveries and in 2012, deliveries from newly identified lots should be a larger percentage of deliveries than from legacy lots.

Although we've already signed contracts for over 5,200 newly identified lots, we have to continue to purchase a significant number of new lots every quarter going forward. Fortunately, the deal flow remains steady as we continue to approve land acquisitions on a regular basis. As our mix of deliveries on newly acquired lots increases, even with zero home price appreciation, our gross margin should continue to gravitate to more normalized 20% to 21%.

We also continue to see positive trends in SG&A as a percentage of total revenues. Our total SG&A decreased by $23 million or 29% year-over-year during the second quarter and $65 million or 36% for the first half of 2010.

Slide nine shows the improvements in total SG&A as a percentage of total revenues. As our revenue grows through improved absorption levels and an eventual rise in the number of communities, we expect to see further progress in getting our SG&A ratio back into the historic normalized range of about 10% shown on the left side of this slide. These improvements have come as the number of full-time associates has remained more stable. We've made substantial adjustments to our staffing levels since the peak of the market, as you can see on slide number 10.

Going forward, we may have some more isolated positions that need to be eliminated, but I hope that most of the significant adjustments to our staffing levels are behind us. It is more likely as we just saw in the recent quarter that we add to our staffing levels. As we open up new communities, we will need to add construction and sales associates. In other areas, like our corporate, regional and divisional offices, we will not have to add many associates until deliveries increase a considerable amount from the current levels.

We'll gain SG&A efficiencies as we begin to grow again. We can't just cost-cut our way into profitability. We need to grow the top line in order to spread out these fixed costs more efficiently.

Finally, we've made progress in reloading our land position. As seen on slide 11, we have contracted for or purchased a grand total of about 7,100 lots in 98 communities. We purchased about 2,300 lots and optioned an additional 2,900 lots in 86 new communities on a wholly owned consolidated basis.

Additionally, in joint ventures, we have purchased 1,900 lots in 12 communities. We continue to seek out and evaluate new land deals for purchase in each of our markets. Slide 12 shows recent trends in our community count. Since the beginning of our fiscal year, we've opened 38 communities, including five that were previously mothballed.

During this time, our community count was virtually flat due to the wind down of older communities. We had to run pretty hard just to keep the community count stable. In order for us to have success in improving our gross margin and profits, we need to get more new communities opened for sale.

When we begin to achieve year-over-year increases in community count, we'll be able to better leverage our fixed costs and we'll begin to see our total SG&A and interest costs as a percentage of total revenues inch closer to more normalized levels. By the end of our fiscal year, we project to have approximately 200 communities open for sale, reversing the downward trend of the past several years.

I do have to add that estimating community counts is very difficult, even in the best of times, given delays in new communities and accelerated sellouts of older communities and a variety of other factors. I'll now turn it over to Larry who is going to discuss our inventory, liquidity, mortgage operations as well as a few other topics.

Larry Sorsby

Thanks, Ara. Let me start with a discussion of our current inventory from a couple of different perspectives. If you turn to slide 13, you will see our owned and optioned land position broken out by our publicly reported segments. Based on trailing 12-month deliveries, we owned 3.5 years worth of land. The good news is that each quarter we continue to work through the land we purchased at higher prices during the crest of the housing cycle and add land that we believe that we are purchasing at or near the bottom of this housing cycle.

Over time, working through our older legacy land and replacing it with newly identified land parcels will lead to sustainable gross margins back in the 20% range. We do not need to have home price appreciation to see further improvements in our gross margin, just a shift in the mix of lots that we own to be more heavily weighted to our newly acquired land parcels. While this will not happen overnight, we have started down the road to achieving this objective. If home pricing power does return then getting back to normalized gross margins could happen even sooner.

As seen on slide 14, our owned lot position has stabilized during the second quarter of 2010 as we replenish our land supply with newly identified lots. As a matter of fact, it's increased by about 900 lots during the first half of 2010, which is a step in the right direction.

During the second quarter, we delivered approximately 1,100 homes and we bought about 900 lots. On the options side of equation, we saw sequential increases of about 600 lots during the second quarter. We walked away from 600 lots and we took down 700 lots that were previously optioned and we signed new option contracts for an additional 1,900 lots.

On slide 15, we show a breakdown of the 17,408 lots we owned at the end of the second quarter. Approximately 47% of these were 80% or more finished, 8% had 30% to 80% of the improvements already in place and the remaining 45% had less than 30% of the improvement dollars spent. While our primarily focus is on improved lots -- purchasing improved lots, we have recently purchased or contracted to purchase several land parcels where it makes sense to do land development and we started to complete land development on sections of our legacy land as well.

Now, I'll turn briefly to land-related charges. During our second quarter we incurred only $1.2 million of land impairments, the lowest level of land-related charges that we have taken since the first quarter of 2005. We test all of our communities including communities not open for sale at the end of each quarter for impairments. We're pleased to see that home prices continue to stabilize. If this trend continues, we expect to see minimal additional impairments in future quarters. However, if home price or the sales pace in any particular neighborhood falls further or incentives are increased, our level of future impairments could rise.

Our investment in land option deposits was $27.3 million at April 30, 2010 with $20.9 million in cash deposits and the other $6.4 million in deposits being held by letters of credit. Additionally, we have another $48.2 million invested in pre-development expenses.

Turning to slide 16, we show that we have 7,582 lots in 67 communities that were mothballed as of April 30 and we break these lots out by our geographic segments. Book value at the end of the second quarter for these communities was $276 million, net of an impairment balance of $531 million.

To date, we’ve unmothballed five communities where we can now achieve acceptable cash flow from building homes on these lots. However, many of the remaining communities that we have mothballed need to see an improvement in home price and/or sales pace before it’s going to make sense to open them up for sales.

Looking at all of our consolidated communities in the aggregate, including mothballed communities, we have an inventory book value of $1.1 billion, net of $829.7 million of impairments, which were recorded on 194 of our communities.

Turning to slide 17, it shows our investment in inventory broken out into two distinct categories, sold and unsold homes which includes homes which are in backlog, started unsold homes and model homes, as well as, the land underneath those homes. Of note, as we’ve been actively reloading our land position is the trend of sequential increases in land inventory for the past two quarters.

Turning now to slide 18, you can see that on a sequential basis the number of started unsold homes excluding models has once again decreased. We ended the second quarter with 626 started unsold homes. This translates to 3.5 started unsold homes per active selling community, slightly lower than the 4.1 started unsold homes per community at the end of our first quarter.

Earlier this year, we increased the number of started unsold homes per community in order to have more homes available to close before the June 30th closing deadline on the home buyer tax credit. This was not a substantial increase and as expected this increase was temporary.

One more area of discussion for the quarter is related to our current and deferred tax asset valuation allowance. During the second quarter, the tax asset valuation charged to earnings was $7.6 million. At the end of the second quarter, the valuation allowance was $713.7 million. We view this as a very significant asset not currently reflected on our balance sheet.

We expect to be able to reverse this allowance when we generate consecutive years of profitability. When the reversal does occur, the remaining allowance will be added back to our shareholder’s equity and will further strengthen our balance sheet.

We ended the quarter with a total shareholder’s deficit of $138 million. If you add back the total valuation allowance, as we’ve done on slide 19, our total shareholder’s equity would be $576 million.

Let me reiterate that the tax asset valuation allowance is for GAAP purposes only. For tax purposes, our tax assets may be carried forward for 20 years and we expect to utilize those tax loss carry-forwards as we generate profits in the future. For the first $1.5 billion of pre-tax profit we generate we will not have to pay federal taxes.

Now let me update you briefly on our mortgage markets and our mortgage finance operations. Turning to slide 20, you can see here that the credit quality of our mortgage customers remains strong.

If you turn to slide 21, we show a breakout of all of the various loan types originated by our mortgage operation during the second quarter of fiscal 2010 and compared to all of our fiscal 2009, 47.9% of our originations were FHA/VA loans during the second quarter very similar to the 45.9% we saw during all of fiscal 2009.

Overall, the mortgage industry continues to be risk reverse and has embraced sound reasonable lending practices. We continue to offer competitive mortgage rates and loan programs and we are leveraging our mortgage associates knowledge and expertise to assist our home buyers in obtaining mortgage loans suited to their needs and qualifications.

Turning to slide 22, it shows our debt maturity schedule as of April 30, 2010. What you see very clearly is that we have very little in the way of debt coming due over the next several years.

Through the end of calendar 2013, we have less than $160 million of debt maturing. During the second quarter, we repurchased an additional $87.6 million of face value of debt in the open market for approximately $70 million in cash.

We get many questions about potential moves we could make in the capital markets, particularly given the many deals our peers have recently completed. To do an equity offering today even though our stock has increased significantly from where it was three months ago, would be extremely dilutive to our shareholders and not raise sufficient additional capital to dramatically improve our liquidity position or significantly improve our balance sheet.

For example, a $20 million share offering at $6 per share would generate about $120 million in gross proceeds. We feel comfortable that our current liquidity is sufficient to meet all of our debt maturities through 2015 and sufficient to take advantage of land opportunities at the bottom of the real estate cycle that will ultimately fuel our growth as the housing industry ultimately recovers.

However, we recognize the advantages of further strengthening our balance sheet. The more likely timing for a Hovnanian equity offering would be when we return to solid profitability.

At that point, our stock should be trading at a multiple of earnings that should result in a higher stock price and a larger equity raise with less stockholder dilution than would be possible today.

In terms of cash, we believe that we have liquidity we need to weather this downturn, but also invest for the future. Our cash position can be seen on slide 23. At the end of April we had $560 million of home building cash. This cash position does include $111.4 million of cash used to collateralize letters of credit and it also includes the $274.1 million federal tax refund we received early in the second quarter of fiscal 2010. An additional federal tax refund of $17.2 million is anticipated to be received later this year.

Thank you. And we’ll be pleased now to open the lines up for questions.

Question-and-Answer Session

Operator

(Operator instructions) And our first question will come from the line of Michael Rehaut of JP Morgan. Please proceed.

Michael Rehaut – JP Morgan

Thanks. Good morning, everyone. First question, I was wondering if you could talk about, you had said in the press release that pricing trends were steady. And I just want to confirm that, that comment, similar to the comments regarding order trends, is applicable to what you saw in May?

And also, you talked about the fact that you saw some price increases, I was wondering if you could give a little detail regionally where that occurred and if there are any markets that still saw a little bit of deterioration and then I have a follow-up question.

Ara Hovnanian

Okay. Well, first of all, stability in pricing is obviously a very generalized comment, very affected as you know and as you pointed out by geographies. We’ve, in the general comment of stability, we’ve had some communities that have gone up in price and some that have had adjustments that have effectively net reduced the price.

I can’t say there’s a huge overall trend. I’d say in general, let’s see, we’ve had some price increases in Chicago, nothing, no price movement really in Minneapolis, which is quite small. We’ve had some price increases in Ohio. We’ve had some price increases in southern New Jersey, nothing in northern New Jersey. We’ve had some price increases in Washington. In southern and northern California we had both instances of some price increases and some price decreases. Texas has been pretty steady in pricing really no big adjustments either way, nothing too substantial in Phoenix.

Florida has actually seen, we don’t have much there right now, but we’ve had a few incidents of price increases, North Carolina not much activity but a little bit of ups and downs and I think that off the top of my head that covers most of the markets.

Michael Rehaut – JP Morgan

And -- thank you, Ara. And before the second question, those comments also apply to May, is that fair to say or?

Ara Hovnanian

Yeah. I mean, the comments are somewhat generalized, April and May. I mean, we don’t get overly hung up over a week or two or three weeks. I’m trying to give you trends over the last couple of months.

Michael Rehaut – JP Morgan

Okay. Thanks. And the second question, I was wondering if you could comment on the USDA loans that you’ve been making or that your customers have been taking out. There’s been some talk and news flow with regards to the future and the funding of that program.

I was wondering if you could comment on that as far as how you understand that’s going to play out this year and what your expectations if that program pulls back, if you’d be able to transition those buyers to FHA/VA?

Larry Sorsby

Yeah, Mike. I’m not sure that we have any greater clarity than what you do in terms of how that program is proceeding. The information that we’re getting indicates that the government is very likely to fund that program and it will be back in place for the remainder of this year. That represented about just over 7% of our originations in the second quarter of 2010.

If in fact it doesn’t get funding or it doesn’t survive longer than the remainder of this year. We do believe most of those buyers would be able to be transitioned to FHA and that what commonly would occur is that the parents or a close relative would likely help them, assist them with the down payment requirements under FHA.

Michael Rehaut – JP Morgan

When you work with buyers that don’t have that necessary down payment, is there a typical, like, six-month waiting period or how successful are you in kind of counseling or keeping those buyer in the loop and working with them to build that up or, I mean, can you give any type of commentary on like perhaps like a conversion rate in terms of working with those types of people?

Larry Sorsby

I don’t have a specific conversion rate but we have programs in place to help our prospects save money for the down payment. We educate them. We work kind of on a passbook savings kind of program with them to assist them in the discipline necessary to come up with the down payment. I don’t think there’s been huge numbers that have gone through that particular program. But we do have programs in place to assist them.

Michael Rehaut – JP Morgan

Okay. Thank you.

Operator

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

Nishu Sood – Deutsche Bank

Thanks, and good morning, everyone.

Ara Hovnanian

Good morning.

Larry Sorsby

Good morning.

Nishu Sood – Deutsche Bank

I wanted to ask about the 40% figure you gave for your expected closings, I believe you said in 2011 from new communities. Is that a number that would happen even if you stopped new land purchases today? In other words, is that just as of now or does that require some level of further new land expenditures and if so, how much?

Larry Sorsby

Yeah. Go ahead, Ara, if you want.

Ara Hovnanian

I believe it does require some level of new land expenditures. I don’t have the exact breakout. But it more or less assumes we continue on the path that we’ve been doing in terms of new land acquisitions for the last several quarters.

Nishu Sood – Deutsche Bank

Got it. Great. No, that’s helpful. And the second thing I wanted to ask about was to focus in, Larry, you mentioned that some of the land purchases that you’re going ahead with now. I’m sorry, land purchases or land contracts that you’re going ahead with now require a little bit more development expenditure.

Also you’ve mentioned that you’ve started to green light some development expenditure on some of your legacy positions. I was just wondering if we could focus in on those situations maybe from a, where are they geographically or what product type is it?

What are the specific things that you’ve seen in those particular areas or product types that has kind of spurred a more kind of optimistic view on spending the money to develop it?

Ara Hovnanian

Well, I’ll comment on that. I mean, generally speaking they are -- the sites that warrant land development are the closer in A locations. We have one in -- actually I think two in the greater D.C. market, generally closer in. We’ve got an A location in Orlando that warrants it and one in New Jersey. I believe one in New Jersey and one in Southern California.

And so you can’t justify it. The numbers don’t work as you get further out and that’s because the residual land value, we work backwards in our land acquisitions. We know the returns we want, we know the sales price, we know our costs and we work backwards to figure out what you can afford to pay for land.

And once you get past the A locations at this moment, it’s hard to justify developing land because the developed lot that you price is typically less than the cost to develop. So in B and C locations it is tough to make it work.

Nishu Sood – Deutsche Bank

Got it. And just -- I mentioned this as still, Larry, I think, mentioned it was still just a small phenomenon. What has the shift been? So far in the land purchases you've been focusing on the more developed lots. Is it maybe 10% of the more recent new contracts that are -- that will require some more development or what's the kind of scope?

Ara Hovnanian

That's probably a good guess but, I mean, the good news is that a year ago we could not find many at all, if any. So we're continuing to focus on developed lots as a first choice. But, frankly, we think land is going to be so critical that whether it’s developed or undeveloped, as long as we can get the returns we need we're ready to go forward. We're seeing -- everything is situational, as you know. And so we're just seeing more neighborhoods turn up whether either the velocity or the price or the land opportunities have improved that make some of these transactions work.

Nishu Sood – Deutsche Bank

Okay. Great. Thanks a lot.

Operator

Your next question comes from the line of Jonathan Ellis of Banc of America/Merrill Lynch. Please proceed.

Jonathan Ellis – Banc of America/Merrill Lynch

Thank you, and good morning, guys. The first question that I wanted to ask is related to -- you pointed out that average net orders in May were down year-over-year. I'm wondering, was that consistent across all regions, or were there some regions in which you saw orders up year-over-year and some that -- where it was down and just to provide some context? I'm wondering if the regions where perhaps the tax credit played more of a role were down and the tax and the regions where the tax credit perhaps had less of an influence were more stable or up?

Larry Sorsby

I don't think we have that specific data at our fingertips but it -- my sense is that it is about the same impact across the board. The only place I'd say perhaps we saw more of an impact than elsewhere might be Houston, Texas. But everywhere else I would say it's pretty much a similar impact for us.

Jonathan Ellis – Banc of America/Merrill Lynch

Okay. And then the next question I have, in terms of the community count increase between now and the end of the year, can you give us some sense as to where that increase may be concentrated? And, again, I want to ask the question in the context of understanding how mix may play a role in terms of average selling prices going forward?

Ara Hovnanian

I just don't think we have those numbers at our fingertips.

Larry Sorsby

I mean, it's -- clearly would be where we've been more active in buying land and I think Phoenix, Arizona, Northern, Southern California, a little bit in Washington, D.C.

Ara Hovnanian

A little bit in Florida.

Larry Sorsby

And Texas. And that's probably -- those kinds of states.

Ara Hovnanian

Yeah. Probably a little less emphasis on -- right now, just because of the timing of new land acquisitions and approvals, we've got less coming up in terms of new communities in New Jersey, in Minneapolis and in Ohio. Those come to mind as places where we -- we don't have any…

Larry Sorsby

And Chicago because it is joint venture related versus wholly owned. But anyway, that gives you a little bit of a flavor.

Jonathan Ellis – Banc of America/Merrill Lynch

Okay. And then just to sneak one last one in, just in the Northeast, both if you look at the homes delivered and also the orders, price was down materially year-over-year, much more so than other regions. Any special factors in the Northeast in terms of mix or other considerations that would…

Larry Sorsby

It was primarily mix. You shouldn't read anything other than mix into that.

Ara Hovnanian

Yes. In the Northeast in particular, we do a very broad product range, everything from million-dollar waterfront homes overlooking New York to C locations way out where prices are much more reasonable, so mix has a huge impact. We haven't seen any gross changes or significant changes in pricing overall on an apples-to-apples basis.

Jonathan Ellis – Banc of America/Merrill Lynch

Great. Thanks, guys.

Operator

Your next question comes from the line of Ivy Zelman of Zelman & Associates. Please proceed.

Ivy Zelman – Zelman & Associates

Thank you. Good morning, guys. Recognizing that you are in a challenging environment which seems to right now be on a deceleration mode, post the tax credit expiration. Pricing has been stable or apparently stable for the past five months and what we're hearing is builders already starting to do more promotional activity, Beazer has got our a big bonanza program.

I guess I'm just wondering with respect to your strategy, assuming that you really talked about volume as a possible part of your goals to return to profitability, when do you hit the alarm button? For example, in Phoenix we know there's a tremendous amount of spec that was left over that was not sold prior to the expiration of the tax credit and that market has slowed significantly and many of those builders that were specking will try to move those inventories.

So even if you were not specking now all of a sudden you have buyers in backlog that you might be building a home for that could get a better deal. So talk to us a little bit, Ara, about what the next few months would look like in terms of your willingness to start to discount, or will you hold ground and be firm on pricing and not try to move inventory at the expense of price and, therefore, giving up margin?

Ara Hovnanian

Okay. Well, first of all, I think that the recent period was pretty much to be expected, I mean a little run-up in April was pretty much reasonable given that it was the last month of tax credit. And in the month of April, it was the only month over the quarter we had a year-over-year gain. It was a pretty reasonable one in sales per community. And the corollary is also pretty reasonable and that is that May would have slower activity. So for the moment there's no panicking. It's all pretty much playing out as per a reasonable game plan. There's no reason to overreact. So we don't have any specific strategy on pricing.

Generally speaking, however, if there was an issue on pricing or absorption going longer term, which I don't anticipate, but if there was, we would err on the side of reducing prices, reacting appropriately and continuing to move our inventory, both existing legacy locations as well as the new locations. I will add, by the way, our new locations, we've opened many of them in scattered geographies and we are at or ahead of our acquisition pro forma, so we're very pleased on that front, even considering the recent drop-off in May. We're very pleased right now.

Larry Sorsby

Conversely -- yes, conversely, Ivy, if the opposite of your premise comes true and the U.S. economy begins to improve and jobs start to be created at a faster pace and, therefore, demands for homes begins to increase. I certainly think you'll see us, just as Ara talked about some of the isolated examples where we've been able to increase prices in many of our markets, we'll continue to try to tweak prices up as the market will allow us to do that as well.

Ivy Zelman – Zelman & Associates

No. And I certainly hope that that is the case. I just wanted to understand the strategy and so I appreciate the response. And if I can ask a follow-up, this quarter if you exclude the benefit of your tax refund you are using cash and realizing you are being opportunistic to acquire lots, as well as be in the marketplace and using your working capital to fund your operations. Assuming that you continue to burn cash, you say that you are in a very good position and you don't have to come to the capital markets per se. It's hard for us to see what the cash burn coupled with the lack of volume, I mean what are your assumptions on volume going forward over the next few years in growing your top line volume to get you so comfortable that you can continue to acquire land and be opportunistic in burning cash without necessarily seeing the profitability yet?

Larry Sorsby

Yeah. I mean we've not made any projections publicly. Obviously, we have internal projections that show us growing and coming out of this and returning to profitability. I'm just not in a position to give you the specifics. But I will give you an insight in terms of our cash position.

When we make acquisitions, most of the acquisitions that we've been making have been 40 lots, 50 lots, 60 lots and have been $3 million or $4 million and that money actually gets returned to us over the next two, two-and-a-half years in advance of any significant maturities coming due. So we're able to take cash that is sitting in a bank account today or in investments getting a couple of basis points in treasuries and instead of keeping it there we put it to work getting a 25-plus percent unlevered IRR in these communities and then get the cash back by the time debt maturities come forward.

So we keep one eye on our debt maturities, one eye on top line growth and we do feel comfortable that we have the sufficient liquidity to not only weather this downturn, pay all our debts, but also take advantage and invest in the future and grow and if we find larger parcels that make sense, as we've stated previously, we'll do those in the form of joint venture.

Frankly, we have just not been successful in finding larger parcels that made economic sense. Someone usually is willing to pay more for them than we think they are worth and we just haven't done any since the fall. When we do find it, we'll do joint ventures to where we put up 10% to 20% of the equity, our partner puts up 80% or 90% and then we get a promote on the return.

Ara Hovnanian

Yeah. Ivy, in general, first of all, during the quarter, as we pointed out, we did spend about $70 million of our cash buying back debt, way ahead of the maturities. So that's used up the some of our cash, but I think also that's a pretty clear signal that we're extremely comfortable with our cash position going forward and our ability to still reinvest in land at the same time given that we bought back some maturities that are years and years out there.

We see the cash flow coming in from our legacy communities. We see the rapid turn of some of our -- the newer acquisitions that Larry just mentioned that are the smaller ones and on our land acquisitions given that we've got a fair amount of cash on the balance sheet and we know that a lot of our new community purchases are going to turn very quickly.

We're not being overly focused on lot-by-lot acquisitions as we want to be, ultimately, it is just because we got the access cash and we'd rather to put it to work at the moment. But what we hope, frankly, is that by next quarter we may discuss at a high level kind of a macro model of how we plan to be growing and how we plan to utilize our cash and still have plenty left over for our maturities. But we'll analyze that over the next quarter and hopefully we'll get something that we're comfortable enough sharing.

Ivy Zelman – Zelman & Associates

That would be very helpful.

Ara Hovnanian

Obviously, it would be a high-level, hypothetical model and we're not going to make a long-term projection but it would give people a flavor for why we are feeling so comfortable.

Ivy Zelman – Zelman & Associates

Great. Thanks, guys.

Larry Sorsby

Thank you.

Operator

Your next question comes from the line of Megan McGrath of Barclays Capital. Please proceed.

Megan McGrath – Barclays Capital

Good morning. Thanks. Wanted to talk a little bit about seasonality in the third quarter and while we model, is it fair for us given what you know about your backlog and the structure of the tax credit with the closing necessary by the end of the month, is it fair to expect an outside conversion rate in the third quarter and could your closings actually be up year-over-year because of that and the push to close those units by the end of the month?

Larry Sorsby

I think it's fair to assume that there's some pressure on consumers that want to get the benefit of the tax credit to make sure that they close their home by June 30th. We just haven't made any public projections on precisely how many deliveries, but I think if I was sitting in your shoes trying to put my own model together, I think you should assume that there will be a -- just similar to the boost in sales activity that happened in the month of April that there will be a boost in closings that happen in the month of June.

Megan McGrath – Barclays Capital

Okay. Thanks. And then just a follow-up on your comments on growing your community count over the next couple of years and I think you used a phrase, you must continue to buy and expand your community count and lots and I'm sure that you are not the only builder in that position and so I'm just curious on what you are seeing in terms of the environment for these lots? Are prices actually firming up on the land side? Is that why maybe you are going to more undeveloped lots, because there are builders now in the position that you are, that it's much more necessary for you to start building and you are comfortable in buying more lots now?

Ara Hovnanian

Well, first of all, remember that land has always been a competitive commodity in our industry. We're competing against the publics, as we always have. Frankly, in the past, we also had to compete against a lot more aggressive private home builders. The private home builders in general and there are exceptions, but in general are clearly having a more difficult time competing right now on new land acquisitions.

So while we certainly have competition from our public peers, we have last competition from our private peers than we're used to. And at the same time, there is a push and a pull and there's a limited supply of lots. We all would prefer to have improved lots, because we can get them turn it very quickly, get those houses on the ground.

But prices in general are at levels that make economic sense. Are there transactions that we see where we scratch our head and say, gee, how did they make that work? That doesn't seem to make economic sense to us. That certainly does happen. But on the whole there are – land sells for prices and terms where we can meet our threshold hurdle of 25% unlevered IRR minimums, using today's prices and never changing pricing assumptions. And using today's pace for the next year or two and then gradually increasing it up if it is a community that has a longer life. What's happening is basically the banks that have taken back a lot of these properties or are dealing with their borrowers are just slowly, every month that passes dealing with every parcel.

So they will dole some out, some they want to hold onto, then the next quarter they finally say, well, let's sell some now or find a builder, et cetera. So we're all out there buying, the supply is coming out and right now it is a healthy balance and there is still plenty of economic viability, new acquisitions.

Megan McGrath – Barclays Capital

Great. Thanks.

Ara Hovnanian

Okay.

Operator

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

David Goldberg – UBS

Thanks. First question, it is more of a statement to see, is it fair to say that the joint venture that you guys put out a 8-K on in March that you were trying to raise $360 million and you were going to put in $60 million, we have not gotten much about that subsequently. Is it fair to say that the reason we haven't heard much is exactly what you were talking about before, there's not enough land deals out there and so the process is not moving forward that quickly because the opportunities aren't out there and, if that is the case, why the 8-K in March, I guess, is kind of the first question?

Larry Sorsby

David, that's not the reason you haven't heard more about it. There's not much that I can add to what we've put into that 8-K. I will tell you that it is taking longer than we anticipated to put Newco together. And as we have, real news that we can report on that, we will put it out there, but it really has nothing to do with your assumption about not finding larger deals.

Newco could just as easily do small deals and then send them back to us or other builders on a just-in-time lot-by-lot basis, which was kind of the thought process behind Newco and we talked about in the 8-K.

David Goldberg – UBS

Right. Large deals was probably not the right way to put it, I guess, the point was the comment that you made earlier about not finding enough deals in the JVs generally, there's not that many deals out there but that's not --

Ara Hovnanian

No. What we said regarding the JVs, we would only look to JVs for the large transactions. For moderate-sized transactions we've got plenty of cash on our balance sheet. So we wouldn't look to do that in a JV, however, this Newco structure is more nimble in that regard.

Larry Sorsby

I think maybe connecting Newco and JV and thinking about them as one and the same is an inaccurate assumption on your part.

David Goldberg – UBS

The follow-up question I had is you guys are looking to get back to profitability, clearly getting a lot of operating leverage in the business is important and I would assume that geographically, certainly, there are some areas where you guys, obviously, have more operating leverage and some where you have less. I guess, I wanted to ask you about how you think about potentially over time maybe shrinking the footprint to get back just into areas where you do have more operating leverage in the business with the idea that as the market gets better and as your profitability continues to expand in those markets where you are more concentrated at that time, you can then expand back out? How do you think about, I guess, shrinking the footprint in that kind of environment when profitability is so important to you?

Ara Hovnanian

Yeah. Well, as you know it is yin and yang because if you shrink your footprint, you've got fewer opportunities to buy land and increase your delivery count. We have shrunk the footprint in a variety of ways. We're not in the Fort Myers market, in Pennsylvania we had expanded all the way out to Harrisburg, we've cut that out. We've cut back our new acquisitions in the -- and we're not really focusing on Bakersfield, for example. We're just building out what we have there now. So we've pulled in many of our geographies. We've gotten out of Tucson.

At this point, we are comfortable with the locations we are in. And we think they make sense for us and give us the opportunities we need to buy land and increase the top line. Regarding changes in the future, as with everything, we'll see but at the moment, we're very comfortable with the geographies we're in and we think they are appropriate for us.

David Goldberg – UBS

Got it. Thank you.

Operator

Your next question comes from the line of Alex Barron of Housing Research Center. Please proceed.

Alex Barron – Housing Research Center

Yes. Thanks, guys. I wanted to ask you about, I think you mentioned your gross margins are going to get back to 20%. Is that on a before interest basis or including interest basis?

Larry Sorsby

Yeah. On a normalized before interest basis back in the 1999 to 2001 kind of timeframe, we were between 20% and 21%. That is where we kind of consider normalized and it is against that benchmark that we're saying we're going to migrate back towards the kind of 20% gross margins.

Alex Barron – Housing Research Center

Okay. Sorry, go ahead.

Larry Sorsby

I didn't say anything.

Alex Barron – Housing Research Center

Okay. Sorry about that. And if you -- if you look back at that timeframe, the 2000 plus or minus timeframe, so this would be about the same time when you guys had similar revenues as to now and yet the SG&A was significantly lower, I'm trying to understand what are the structural differences if…

Ara Hovnanian

I will stop you because the answer is so clear. It is sales per community. That has a huge impact on SG&A efficiency. If you have a sales center and it is selling 20 homes a year or 44 homes a year, I can tell you it is a lot more efficient to do 44 homes a year. The other thing is each of our divisions had greater velocity as well and that is roughly…

Larry Sorsby

One other big one and that is that in 2000 we were probably in four or five states and now we're in 18 states. So you have a lot more divisional offices doing the same volume we used to do with a fraction of the number of divisional offices. So it is at the sales, at the community level and at the division office level.

Alex Barron – Housing Research Center

Okay. That's fair. And then my other question was when you guys do these lot deals, how much analysis goes into looking at the situation with the shadow inventory within those communities or in communities around there?

Ara Hovnanian

We do a fair amount at various levels. We look at the supply of current MLS listings. We typically do mapping of all foreclosures in the pipeline. We look at those that have received, that are in default. We look at those that have received bank notices of auction. We go through a variety of tests to determine what we feel about the shadow pipeline.

Alex Barron – Housing Research Center

Got it. Okay. Thanks.

Larry Sorsby

Yeah.

Operator

Your next question comes from the line of Dan Oppenheim of Credit Suisse. Please proceed.

Dan Oppenheim – Credit Suisse

Thanks, very much. Was wondering if you could talk a little bit more in terms of the expectations, you talked about how you thought that May would be soft following the tax credit and I think we can all agree we should see at least one month of weakness. You talked about, though, how you're needing land for future growth and how we'll see a macro model of growth when you report the next quarter. When we have the next quarter, will you then be saying that you are expecting to see weakness through June and July as well? Or I guess I'm trying to get a sense in terms of how long you expect this weakness to persist and at what point you would become more concerned and start to use pricing to get volume back?

Larry Sorsby

Yes. I would say that no one knows for sure how long the slowdown will be. I mean, if it proceeds for the entire quarter I think that the yellow light would be flashing at us and we would begin to take action. If it proceeds for a few weeks into June, I don't think that we're going to get overly excited but there may be individual communities that we would begin taking action on.

But it's hard to have some kind of a bright line to say that if it goes beyond this date, Dan, that we're going to – Katy, bar the door, we're going to do something everywhere. All of these decisions will be community by community, very localized, depending precisely on what is going on both with our communities and the competitions around there.

Dan Oppenheim – Credit Suisse

Okay. And then secondly and somewhat relatedly, this second quarter is the first time in the past six quarters that absorption did not increase on a year-over-year basis, but you said that the sales -- the orders were above internal expectations even with the benefit of the tax credit. Can you just provide a little bit more color in terms of why the expectations were so low for the quarter, even with the credit?

Larry Sorsby

I mean three times a year we go through a very extensive bottoms-up budgeting process, so that we set our internal forecast based on what each of our divisions are saying that they expect to occur and on a very simplistic basis, precisely what we said is accurate. The divisions said they were going to sell X-number of homes and we did X plus Y number of homes, so, therefore, we were doing better than our expectations for the quarter.

Typically, when we do our budgeting process, when they establish the budget, they take the last six or eight weeks kind of sales pace for each one of the communities. They adjust it for whatever seasonality factors need to be adjusted and that's how we budget going forward. We don't assume that the market is going to get worse. We don't assume that the market is going to get better and that's how we set our internal expectations.

Dan Oppenheim –Credit Suisse

Okay. Thanks very much.

Operator

(Operator instructions) Your next question comes from the line of Joel Locker of FBN Securities. Please proceed.

Joel Locker – FBN Securities

Hi, guys. I was just curious on your quarterly interest payments, I know they used to be staggered and wanted to see what they would be in the third quarter and the fourth quarter, of the roughly $150 million in annual interest payments?

Larry Sorsby

We'll try to look that up. We do not have it right at our fingertips. So do you have another question?

Joel Locker – FBN Securities

Yeah. The other one too is regarding the interest expense of, or annual payments of roughly $149 million, $150 million. If you explored, obviously, you said you did not want to issue any equity, but some, like a convertible that was maybe above current market price with a lower interest, just to lessen the interest burden?

Larry Sorsby

We feel the same way in terms of the comments I made in the script about the dilutive -- the potential dilutive impact of that. We've looked at that. We'll explore it in the future as well. But right now we just do not see that it moves the needle enough without being dramatically dilutive, that it makes sense to do it.

Joel Locker – FBN Securities

Right. And did you guys put a number on May orders, on what they exactly were and if you didn't?

Larry Sorsby

No. We do not.

Joel Locker – FBN Securities

I mean, were they down minimally or were they down more than…

Larry Sorsby

On a per community basis, they are down about 23%.

Joel Locker – FBN Securities

23% from a year ago?

Larry Sorsby

On a per community basis, yes.

Joel Locker – FBN Securities

Right. All right. And did you get the interest payments or I'll just follow-up?

Larry Sorsby

They are still looking at it, we'll either call you or we'll answer it before this call is over as our guys are trying to dig it up.

Joel Locker – FBN Securities

All right. Thanks a lot.

Larry Sorsby

Thanks.

Operator

Your next question comes from the line of Jim Wilson of JMP Securities. Please proceed.

Jim Wilson – JMP Securities

Thanks. Good morning, guys. Was wondering, let's say the first one, a simple question, but the gross margin assumption acquisition I assume that's without interest as well. Is that correct, Larry?

Larry Sorsby

The gross margin on acquisitions?

Jim Wilson – JMP Securities

I'm sorry, acquisition lots that you've acquired.

Ara Hovnanian

That's correct.

Larry Sorsby

We're talking about gross margin. It is pre-interest.

Jim Wilson – JMP Securities

Right. Okay. And then I was wondering if you could go into kind of describing how both Four Seasons and build on your lot businesses have been doing and I guess ideally if you could kind of contrast it with conventional Hovnanian over the last, I don't know, whatever period, six months or something?

Ara Hovnanian

Yeah. Well, first of all build on your own lot is really isolated to the Ohio market. That's virtually the only place we're doing it in any meaningful way. And the Ohio market has been quite affected by what's happened in manufacturing, specifically for the auto industry. So it's been fairly slow. It hasn't gotten any worse over the last six months, but it's kind of just continued in a slow, lethargic level of sales.

Regarding the Four Seasons, that vacillates. It just -- sometimes it does a little bit better than the market rate houses. Sometimes it does a little bit worse than the market rate houses. But generally speaking, there's not a huge differential on the active adult from the market rate buyers. At first blush some people sometimes think, well, they don't need mortgage money. And so and there are not a lot of foreclosures in active adults, which is accurate.

And therefore, I would expect better sales. The only issue that keeps that from coming to fruition is that active adult buyers almost by definition have a home to sell. And so therefore, they've got those same issues to deal with. So on the whole, I'd say maybe six months ago some of our active adult communities were doing a little bit better than market. Right now maybe they are doing a little bit -- they are selling a little more slowly than market, but not enough to make a meaningful impact.

Jim Wilson – JMP Securities

Great. Okay. That's good. Thanks.

Larry Sorsby

And just to follow-up on Joel's question about interest. Our interest costs are higher in the second and fourth quarters than they are in the first and third. The second and fourth around $45 million in the first and third a little more than $25 million, obviously, it gets adjusted based on whatever we've done in terms of debt repurchases, et cetera, but that's pretty close ballpark numbers.

Operator

And your next question comes from the line of Susan Berliner of JP Morgan. Please proceed.

Susan Berliner – JP Morgan

Hi, thank you. Larry, I guess a specific question for you, with regards to your debt repurchase capacity remaining in your RP basket. Can you just remind us of the amount I think it's just under $60 million? And then also what could potentially increase that going forward, I believe an equity issuance but is there anything else that could increase that?

Larry Sorsby

Yeah. I think the total available to us today is closer to $90 million, Sue, than it is 60. And equity increases are -- issuing equity is the primary method that we can do to increase the size of that basket.

Susan Berliner – JP Morgan

Okay. Great. And then one follow-up. I guess when you guys and you have this in the slide as well, with regards to your valuation allowance. I guess I was just curious, I think that you had said and I do not know if this is an update from your accountants that if you were profitable, I believe you said for a couple of years that could come back on. Any clarity as to when it could come back on? Is it a couple of years or is it still a little bit unknown?

Larry Sorsby

Well, in terms of how many years of profitability?

Susan Berliner – JP Morgan

Yeah.

Larry Sorsby

Yeah. We actually had a CFO conference with Ernst & Young a month or two ago where this was a topic of discussion trying to put E&Y, kind of feet to the fire and get them to an answer and just happened to be that they sponsored it. Our auditors are Deloitte, but we kind of get the same answer out of Deloitte. No one will give us an absolute firm response to that. It's very fact and circumstance based.

Our expectations having said all of that kind of a caveat is that if in that second year of returning to profitability we can look forward and see solid profitability in the third year out. We think sometime in that second year of profitability the auditors will deem that it's appropriate to reverse the valuation allowance balance at that time. But there is no bright line that anyone can give us.

Susan Berliner – JP Morgan

Great. Thanks very much.

Operator

And your next question comes from the line of Michael Kim of CRT. Please proceed.

Michael Kim – CRT

Hi, thanks for taking my question. Just wanted to talk about your spec count and saw that the sequential decline of 99 units. How many were actually sold during the second quarter and is there any way that you could provide a breakdown of geography of those particular sales?

Larry Sorsby

I just don't think we have that data available right here.

Michael Kim – CRT

Okay.

Larry Sorsby

I mean it's a safe bet to say that it declined a combination of -- we didn't start as many more…

Michael Kim – CRT

Right.

Larry Sorsby

And there were some unsold at the end of the quarter and we sold some. But the trend clearly is that we temporarily increased our started unsold very consciously in order to have a few more homes in those communities that we thought would be attractive to customers who wanted to use the tax credit that expire expired for -- as of April 30 for contracts and the homes had to be finished by the end of June. So we did exactly what we said we were going to do; and now, we've kind of pulled it back and tightened down. So you know…

Michael Kim – CRT

Yeah. Without going through the numbers though was there any particular geographic concentration with those specs?

Larry Sorsby

I don't think so. I think it -- each of our markets kind of made their own decisions as to which communities we needed to build a few more specs at, that they thought that they would sell and we've been able to pretty much bring it back down on the same basis.

Michael Kim – CRT

Okay. Great. And as a follow-up. Just curious as to where you stand with your coverage ratio under the secured notes? I know the test is 2.0 times and just curious where that stands today and if you could maybe provide a breakdown of your expected cash balance between letters of credit and cash collateral?

Larry Sorsby

Okay. Let me -- let me just clarify your question. You're asking about the two times coverage so that we can do what?

Michael Kim – CRT

No. Just where it stands today.

Larry Sorsby

Where…

Michael Kim – CRT

On the calculation, I know there's a minimum of…

Larry Sorsby

We're underneath two times coverage and we don't anticipate getting to it in the next quarter or two.

Ara Hovnanian

But more clearly it's not a -- that is not a covenant in our debt right now.

Larry Sorsby

Well, it…

Ara Hovnanian

Not a covenant put it that way.

Larry Sorsby

It has some ramifications; we're not in default of anything.

Michael Kim – CRT

It is not a maintenance covenant but just curious about it.

Larry Sorsby

We're underneath it today.

Michael Kim – CRT

Okay.

Larry Sorsby

What was your other question?

Michael Kim – CRT

The split of restricted cash on the balance sheet between letters of credit and cash collateral?

Larry Sorsby

I believe it is $111 million that is used to collateralize letters of credit.

Michael Kim – CRT

Okay. Great. Thank you.

Larry Sorsby

Yeah.

Operator

You have a follow-up question from the line of Michael Rehaut of JP Morgan.

Jason Marcus – JP Morgan

Hi, this is Jason Marcus [ph] in for Mike. Just a quick question about the community count increase. Just wanted to know if all of that increase was going to hit in Q4 or if it's going to be spread out evenly over the next two quarters?

Ara Hovnanian

We just don't have it that precisely, but by the end of the year.

Jason Marcus – JP Morgan

Okay. Thanks.

Ara Hovnanian

Yeah.

Operator

You have a question from the line of Timothy Jones of Moloney Securities. Please proceed.

Timothy Jones – Moloney Securities

Good morning or afternoon. First of all, you gave -- I'm very happy that your decline in May sales for subdivision and you can extra it per the company. But what I wanted to know is the, oh, gosh. You -- basically in the last quarter, if you pull out everything the write-off and from land and the buyback of bonds, you dropped about $44 million still, with your backlogs and sales and so forth still down. How are you going to get this turned around in the near term? I understand that you're going to bring these low priced lots on next year and I'm sure it is going to have an effect. But this year how are you going to get to it given the fact that maybe the economy, especially housing may be facing a double dip recession?

Ara Hovnanian

Well, I think it's fair to say that we're not trying to insinuate that it is going to turn around this year. I think we started out our discussion today talking about the three key things that need to happen for us to get to solid profitability, reloading our land position, which is key, not going to help us this year very much. We already said less than 10% of our deliveries will be from new properties. But it will help dramatically in 2011. We think that's going to be the critical year for us. We mentioned improving margins and we talked about that being very much helped by the better mix of new communities.

Again, that's not going to be very helpful in 2010 since less than 10% of our deliveries are from new communities, should be very helpful in 2011. And finally, increasing the sales pace that would be a little bit more market dependent and we need more of a return to normality over time there for that to happen. We're not budgeting that for 2010. We're not even budgeting that for 2011. But we hope that will be a little additional wind at our backs it is that occurs.

Timothy Jones – Moloney Securities

Secondly, there's been a huge disparity between various builders who have reported the first quarter or their first calendar quarters in sales being up as much as 55%, being down over 35%. I know that the number of subdivisions is one factor and the spec units is the second factor. But can you address what -- even if you pull that out and adjust for that, can you address it? Why such a huge disparity?

Ara Hovnanian

Well, I don't think you can pull out those factors. I think that is the driver. How many -- what is the community count is a huge driver. And what was it before? In our case, we had a higher community count. We actually grew in '06 and had some communities coming online later. We shrunk from there. And we were -- as was appropriate and we weren't buying properties until they made economic sense.

And you saw the huge shrinkage in our community count. We have reversed that. And I think that's going to play out. In terms of sales per community, kind of retail's equivalent of sales per store, we had been making significant increases. We did have a quarter where we flat lined. And so I think that's -- the combination of sales per community and community count are the big drivers.

Timothy Jones – Moloney Securities

With the sales per store being flat with the tax benefit, wasn't that a disappointment or didn't you just have enough spec units out there?

Larry Sorsby

Yes, Tim. As I -- as I've mentioned just a couple of minutes ago. We -- and I think we said in the script and maybe in the press release, we were ahead of our internal expectations but -- and I think Ara said this as a quote, he would be less than candid if he didn't say that we were hoping for even more benefit from the tax credit. So I mean that's directly from our script. So we acknowledge that we were hopeful that we would get even more of a wind at our back from the tax credit. Having said that, our results were ahead of our internal expectations.

Operator

And there are no further questions at this time. I would like to turn the call back over to Ara Hovnanian for closing remarks.

Ara Hovnanian

Great. Thank you very much. Obviously we, as all of you, will be very curious to see what happens in sales in the ensuing months, as the tax credit has gone away. We're hopeful that in the very near future the market is going to stabilize and we can continue to show the gains in the year-over-year sales improvement both on a per community basis and ultimately as we grow our community count on an absolute basis. With that, that concludes our comments and we'll look forward to giving you an update next quarter. Thank you.

Operator

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

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Source: Hovnanian Enterprises Inc. F2Q10 (Qtr End 04/30/10) Earnings Call Transcript
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