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Hovnanian Enterprises (NYSE:HOV)

Q2 2011 Earnings Call

June 08, 2011 11:00 am ET

Executives

J. Sorsby - Chief Financial Officer, Executive Vice President and Director

Brad O'Connor -

Jeffrey O'Keefe - Director of Investor Relations

Ara Hovnanian - Chairman, Chief Executive Officer and President

Analysts

David Goldberg - UBS Investment Bank

Joel Locker - FBN Securities, Inc.

Jason Marcus - JP Morgan Chase & Co

Alex Barron - Agency Trading Group

Adam Rudiger - Wells Fargo Securities, LLC

Ivy Zelman - Zelman & Associates

Susan Berliner - JP Morgan Chase & Co

Michael Kim - CRT Capital Group LLC

Joel Locker - FBN Securities

Rob Hansen - Deutsche Bank AG

Operator

Good morning, and thank you for joining us today for the Hovnanian Enterprises Fiscal 2011 Second Quarter Earnings Conference Call. An archive of the webcast will be available after the completion of the call and will run for 12 months. This conference is being recorded for rebroadcast, and all participants are currently in a listen-only mode. [Operator Instructions] The company will also be webcasting a slide presentation along with the opening comments from management. The slides are available on the Investor page of the company's website at www.khov.com. Those listeners who would like to follow along should log on to the website at this time.

Before we begin, I would like to read the forward-looking statements. All statements made during this conference call that are not historical facts should be considered as forward-looking statements. Such statements involve known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements of the company to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Such risks, uncertainties and other factors include, but are not limited to: first, change in general and local economics and industry and business conditions and impact of the sustained homebuilding downturn; second, adverse weather and other environment conditions and natural disasters; third, change in market conditions and seasonality of the company's business; fourth, change in home price and sales activity in the markets where the company builds homes; fifth, government regulation, including the regulations concerning development of land, the homebuilding sales and customer financing processes, tax laws and environment; sixth, fluctuations in interest rates and availability of mortgage financing; seventh, shortage and price fluctuations of raw material and labor; eighth, availability and cost of distraught land and improved lots; ninth, levels of competition; 10th, availability of financing to the company; 11th, utility shortage and outage of rate fluctuation; 12th, levels of indebtedness and restrictions of the company's operations and activities imposed by agreements governing the company's outstanding indebtedness; 13th, the company's source of liquidity; 14th, change in credit ratings; 15th, availability of the net operating loss carryforwards; 16th, operations through joint ventures with third parties; 17th, product liability, litigation and warranty claims; 18th, successful identification and integration of acquisitions; 19th, significant influence of the company's controlling stockholders; 20, geopolitical risks, terrorist acts and other acts of war; and 21, other factors described in detail in the company's annual report on Form 10-K/A for the year ended October 31, 2010, and the company's quarterly reports on Form 10-Q for the quarters ended January 31, 2011, and April 30, 2011, respectively. Except as otherwise required by applicable securities laws, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, changing circumstances or any other events.

I would like to turn this conference call over to Ara Hovnanian, Chairman, President and Chief Executive Officer of Hovnanian Enterprises. Ara, please go ahead.

Ara Hovnanian

Good morning, and thanks for participating in today's call to review the results of our 6 months and second quarter ended April of '11. Joining me today from the company are Larry Sorsby, Executive Vice President and CFO; Brad O'Connor, Vice President, Chief Accounting Officer and Corporate Controller; David Valiaveedan, Vice President of Finance and Treasurer; and Jeff O'Keefe, Vice President of Investor Relations.

On Slide 3, you can see a brief summary of our second quarter results. During January and February, we experienced a typical seasonal increase in sales, and we're hopeful that the increases would continue in the beginning of the spring selling season of March and April, but they did not. The early part of the spring selling season was disappointing. However, we saw a significant turnaround in sales in May, both on a sequential and year-over-year basis.

Slide 4 shows our monthly net contracts. Fiscal 2010 months are in yellow. You can see the tremendous sales momentum last year, building to a peak in April of 2010 as the homebuyer tax credit was about to expire. As we all know, sales fell off a cliff the next month in May of 2010. This year, you notice in red, sales started a typical seasonal upturn in January but then held steady at about 390 contracts a month for 3 straight months. Obviously, this paled compared to last year's tax credit enhanced sales environment. However, sales finally gained momentum in May of 2011, with 501 net contracts, a 28% sequential and year-over-year increase, almost matching the peak month during last year's tax credit. This was helped a bit by our increased community count, ironically, despite inactivity, occurred the exact month as the sales drought last year. There was not any special national promotion during the month of May with pricing and concessions similar to the recent previous months. Anecdotally, many of our competitive studies in each of our markets generally indicate May was stronger for other builders as well.

Slide 5 shows similar monthly contract data but broken down to contracts per community. Our net contracts per community were consistent throughout each month of the second quarter at 1.9 net contracts per community per month. Like absolute sales, this trend changed in May and net contracts jumped to 2.4 per month, an increase of 26% sequentially and 20% year-over-year. This is the highest monthly sales pace since April of 2010, the month that the federal tax homebuyers tax credit expired. Given the negative media regarding housing and the economy, we were pleasantly surprised by the sales in May. Needless to say, we are hopeful that the momentum will continue, but we have not built our internal business plans based on the May sales pace. The impact of last year's homebuyers tax credit caused contract comparisons for the first half of 2011 to be lower than the first 6 months of 2010. Because the tax credit expired at the end of April of 2010 and sales dropped subsequently, we expect the comparisons for the second half of this year to be easier.

Slide 6 gives even more granularity as we show our weekly sales comparisons over the 2 years. We normally don't discuss weekly sales given the greater volatility, but we made an exception this quarter because it vividly shows the momentum building last year through April and the abrupt drop in sales the very next month. Again, given the fact that net contracts fell off a cliff in May of 2010 and remained at very low levels through July, we anticipate reporting improved results year-over-year for the third quarter of 2011, and we are hopeful that, that trend will continue into the fourth quarter as well.

Slide 7 shows contracts per community on annual basis. While the first half of 2011 was behind 2010's pace, we expect the second half of the year to show year-over-year improvements. We'll likely end up at a smaller annual sales per community as last year. Although May showed significant improvement, we are still off 50% compared to our historic normalized pace of about 45 contracts per community per year. As I said earlier, we were pleasantly surprised by May sales given much of the negative news about the economy and housing. There were a couple of housing indicators, however, that showed some positive trends. First, affordability has risen to the highest levels in over 36 years since this index has been published as you can see on Slide 8. This record high affordability has obviously been driven by the combination of reduced home prices and extremely low mortgage rates.

Second, on Slide 9, you see the 90-day mortgage delinquency rate has fallen sequentially in each of the last 5 quarters. Although it's still very high at 8.1%, it has fallen from almost 9.7% in the fourth quarter of 2009. This would indicate that we are likely near the crest of foreclosures since foreclosure rates eventually trend similar to seriously delinquent home mortgage rates. One of the few positive articles was in this weekend's Wall Street Journal. Among many data points, it mentioned a recent Zelman Associates survey of renters, indicating 67% planned to buy a home in the next 5 years. Another interesting survey conducted by Fannie Mae, who finances both home purchasers and apartments, indicated 87% of the people surveyed would still prefer to own than rent. Despite these small positive indicators, our internal business plan assumes market conditions do not improve until 2013, and even then, we only assume a modest sales pace improvement and no home price improvements. Since we underwrite new land purchases based on today's home prices, as long as the housing market remains relatively stable, we can achieve higher gross margins without relying on improved market conditions. Additionally, again, assuming stable market conditions, as we continue to grow our community count, both revenues and absolute levels of gross margin dollars should increase, which puts us on the path to returning to profitability. Seeing household formations return to normalized levels is a key component to improvements in demand for homes. We do not expect to see household formations to meaningfully increase until more jobs are created and consumer confidence improves. Absent in increase in sales pace, we can still achieve improved operating efficiencies and revenue growth by increasing our community count.

We continue to make progress in growing our community count as seen on Slide 10, reversing the downward trends of '08 and '09. Our community count, including joint ventures, was 206 this quarter, a year-over-year increase of 10% and a sequential increase of 5 communities. Our mix of newly identified active selling communities to total communities continues to rise. Keep in mind that this chart shows communities open for sale. As many of these, our new deliveries lag behind sales. We expect to see the delivery impact in the third and particularly the fourth quarter. While we have not provided guidance on how many communities we expect to have opened at the end of the year, as long as we continue to find new land that makes economic sense, we expect our community count to continue to grow in the second half of fiscal 2011.

Slide 11 shows the progress we have made in controlling new land parcels to fill this pipeline. Since January of '09, we have purchased or optioned 15,400 lots. The land that we purchased or optioned net or exceeded our investment threshold of a 25% IRR based on the then current sales price and no change in sales pace for the next 2 years. We stepped up our land acquisitions and options considerably in fiscal 2010. It's obvious today that the sales pace and price has deteriorated for many of the land parcels that we've underwrote during the first half of 2010, while the federal homebuyers tax credit was in place. Thus, the IRRs we are achieving today on those communities are less than they were when we originally contracted or optioned the land. However, the overwhelming majority of these new communities that we purchased are still generating profits and absorbing overheads. Further, most were smaller communities, which will liquidate about 2 years from the start of deliveries, quickly turning the assets back into cash for reinvestment or repaying debt as it comes due. Without a doubt, these purchases were better than sitting on our cash, earning a few basis points on treasuries even with the slightly deteriorated performance since acquisition. Of the 161 new communities purchased since January of '09, only 2 or about 1% have had performance deteriorate enough to warrant a write down. Staying true to our underwriting criteria since the expiration of the tax credit and the subsequent slowing of sales pace, we walked away from 57 optioned properties or approximately 4,400 lots. As you can see on the bottom of the right-hand side of the slide, we optioned 1,650 new lots in the second quarter and bought about 250 new lots that were not previously optioned or about 1,900 total additions. We then walked away from about 1,700 lots. The net result for the quarter was that our total lots purchased or controlled since January of '09 increased by about 200 lots, which happens to be the same net change we reported for the first quarter, as you can see on the upper right-hand portion of the slide. About 700 or 20% of the 3,400 options we walked away from during the first half of 2011 were options that were signed in the first 3 quarters of fiscal 2010, when the sales pace was heavily influenced by the homebuyers tax credit. We are constantly reviewing our option contracts and not moving forward with options that don't make economic sense based on today's sales prices and today's sales paces. The other 80% of the communities simply did not pass our scrutiny during our due diligence process sufficient to yield our 25% IRR during the current selling environment.

In the second quarter, we purchased about 1,170 newly identified lots in 84 communities. In addition, we purchased about 270 lots from legacy options. In total, we spent approximately $125 million of cash in the quarter to purchase 1,440 lots and to develop land across the company. Cash flow from operations after interest was positive at about $37 million prior to the investment in new land and land development. We continue to seek opportunities in all of our markets, and we've had success in finding new deals that make sense in most of our markets.

At the end of the second quarter, 66% of our communities that were opened for sale were newly identified communities that we controlled after January of '09. However, only 39% of our consolidated second quarter deliveries were from newly identified land. Since many of these newly identified communities were recently opened, they will not begin to deliver homes until the second half of 2011 and beyond. As long as we see no changes in the market conditions, this mixed shift should cause our gross margins to improve in the second half of the year. The margins will likely be weighted toward our fourth quarter, which is consistent with the statements we made in our past 2 quarterly calls. Our gross margins were weak during the second quarter due to a mix of lower margin home deliveries this quarter and some softness in home prices. Because the spring selling season was not as good as we had hoped, it was necessary to use concessions on a community-specific basis. Many of these concessions occurred in Maryland and in the Sacramento Valley in Northern California. These lower prices were in enough communities that it adversely affected our gross margin for the second quarter. The sequential and year-over-year declines in our gross margin can be seen on the right-hand side of Slide 12. We saw our gross margins decline from 16.9% during our 2011 first quarter to 14.8% in the second quarter of this year. This decline disrupted our 8-quarter trend of improving year-over-year gross margins. During the second quarter of 2011, there were $22.2 million of impairment reversals compared to $42.8 million of impairment reversals in the second quarter of 2010. As we have said in the past, gross margins have the potential to fluctuate from quarter-to-quarter, which is evident from the results we posted in our second quarter. In addition to the previously mentioned concessions, some of this downward pressure was related to the mix of homes that we delivered. Some of it had to do with the low margin legacy deliveries. Additionally, the increased mix of deliveries from Texas also dampens our gross margin somewhat. Since we underwrite to an IRR target, not a gross margin target, in a market like Houston, where we optioned finished lots on a quarterly takedown basis, we can achieve our IRR target with lower gross margins. The 16% gross margin can yield our 25% IRR target because of the inventory turns and because of the lower SG&A costs in Houston. On the right side of Slide 13, the bars show the absolute dollar amount of total SG&A is lower when compared to both the second quarter of last year and the first quarter of 2011. As a matter fact, you have to go back to the first quarter of '02 to find a quarter where total SG&A was as low as what we reported for this recent quarter. When you look at total SG&A as a percentage of total revenues, as we have shown underneath the bars on the right-hand side of Slide 13, the 20.3% for the second quarter of fiscal '11, while lower than it was during the first quarter, is still much higher than our historical norm. These high percentages occurred despite the reductions in our staffing levels shown on the left-hand side of this chart. However, assuming we achieve the higher deliveries we are anticipating, our SG&A ratios should improve over the next 2 quarters. It's important for you to understand the leverage we can get from our existing SG&A as we grow our community count. As we have said in the past, in spite of our rightsizing efforts, we still have some excess capacity at our divisional and regional and corporate offices. As we open new communities, incremental spending related to our community count will come almost exclusively at a community level. There, we typically need to add a construction supervisor and one sales associate per community. Over time, the combination of further improvements in gross margin trending back to normalized gross margins in the 20% range, coupled with SG&A and interest leverage as we grow our community count and increase revenues, will get us to the point where our homebuilding operations are once again profitable. We still have more work to do as we seek new land parcels to invest in that will bring us the types of returns that we need to continue down the path to profitability. Fortunately, deal flow remains steady as we continue to approve land acquisitions on a regular basis. Our current backlog gives us some visibility over the next 6 months. As long as current prices and current sales pace continues, on Slide 14, you see that we anticipate wholly-owned deliveries between 950 and 1,050 homes in the third quarter and a range of 1,150 homes and 1,250 homes in the fourth quarter. This compares to 899 deliveries in the second quarter. Our expectations are for home sales revenues between $265 million and $295 million in the third quarter and between $320 million and $350 million in the fourth quarter, both of which are significantly above home sales revenues we achieved in the second quarter of 2011. Further, again, assuming stable housing conditions, we expect a modest improvement in gross margin in the third quarter and a 200 basis point improvement in the fourth quarter.

Slide 15 shows the quarterly revenues for fiscal 2010 in yellow and actual revenues for the first half of 2011 in red. What is noticeable when you look at the guidance range for the next 2 quarters, which is shown in blue, the trend should get us to a critical milestone in revenue growth by the fourth quarter, finally stopping the shrinking revenues comparisons that have dogged us for years as this housing market has turned down. Delivery increases like these should make a significant difference on our cash flows. The increases in joint venture deliveries are expected to be more dramatic on a percentage basis in both the third and fourth quarter. The combined impact of delivery and gross margin improvement should yield a reduction in our pretax loss in the third quarter and an even more substantial reduction in our loss in the fourth quarter. While we are not yet projecting break-even levels for profit or positive cash flow after land purchases, we believe we will soon clearly demonstrate that we are on the right path. Although we are providing guidance for the third and fourth quarters of fiscal '11, we are not planning to provide quarterly guidance in the future until the markets are a little more stable. We are doing this, this quarter to illustrate the impact of our investment in new communities and the positive impact it will have on our deliveries, revenues, gross margin and cash flow in the upcoming quarters. The above guidance assumes flat home prices, steady home absorption paces and no additional impairments. We believe the large impairments are behind us. As you know, impairments don't impact cash flow.

I'll now turn it over to Larry who will discuss our inventory, liquidity and mortgage operations, as well as a few other topics.

J. Sorsby

Thanks, Ara. Let me start with discussion of our current inventory from a couple of different perspectives. Turning to Slide 16, you'll see that our owned and optioned land position broken out by our publicly reported segments. Based on trailing 12-month deliveries, we own 4.4 years worth of land. However, if you exclude the 7,489 mothballed lots, we only own 2.7 years worth of land. Our owned lot position increased sequentially in the second quarter while the optioned lot position decreased. We purchased approximately 1,440 lots during the second quarter, which was offset by 899 deliveries. On the option side of the equation, we walked away from 1,700 options and signed new option contracts for an additional 1,650 lots during the quarter. At the end of the second quarter, 64% of our optioned lots are newly identified lots, and 23% of our optioned lots were newly identified lots. When you combine our optioned and owned land together, 38% of the total lots that we control today are newly identified lots.

On Slide 17, we show a breakdown of the 18,878 lots we owned at the end of the second quarter. Approximately 37% of these were 80% or more finished, 14% had 30% to 80% of the improvements already in place, and the remaining 49% have less than 30% of the improvement dollars spent. While our primary focus is on purchasing improved lots, it's getting more difficult in certain markets to find finished lots for sale at a reasonable price. Where land development is required, we typically are able to break development down into many smaller phases, as small as 15 to 20 lots, minimizing our capital outlay and returning the expenditures into cash relatively quickly. About 30% of the remaining newly identified lots we've purchased or contracted to purchase are lots where it makes economic sense to do some level of land development, and we continue to complete land development on sections of our legacy land as well.

Now, I'll turn to land-related charges, which can be seen on Slide 18. We booked $16.3 million of land impairments in 6 communities during the second quarter and 84% of those charges were in just 3 communities. These charges were concentrated in 2 legacy communities located in New Jersey and one newly identified community in Northern California. To date, including $2.2 million of charges in the second quarter, we have taken $3.3 million of impairments on 2 newly identified communities, both of which are located in Northern California. So far, we've taken impairments on just 2 of the 161 newly owned communities we've purchased since January 31, 2009. During the second quarter, our walkaway charges were $600,000, which were spread across 23 communities throughout our markets. In total, we booked $16.9 million of land-related impairments and walkaway charges in the second quarter of fiscal 2011. 81% of the charges were related to just 3 communities. Our investment and land option deposit was $27.6 million at April 2011 with $25 million in cash deposits and the other $2.6 million of deposits being held by letters of credit. Additionally, we have another $29.5 million invested in predevelopment expenses.

Turning to Slide 19, we show that we have 7,489 lots within 52 communities that were mothballed as of April 30, 2011. And on this slide, we break those lots out by geographical segment. During the second quarter, one community in New Jersey that was previously mothballed has now been opened and is now an active selling community. In total, we have unmothballed approximately 2,800 lots in 51 communities since January 31, 2009. The book value at the end of the second quarter for these remaining mothballed communities was $161 million, net of an impairment balance of $545 million. We are carrying these mothballed lots at 23% of their original value. Looking at all of our consolidated communities in the aggregate, including mothballed communities, we have an inventory book value of $965 million, net of $854 million of impairments, which were recorded on 148 of our communities. Of the properties that have been impaired, we are carrying them at 26% of their pre-impaired value.

Turning now to Slide 20, on a sequential basis, the number of started unsold homes, excluding models and unconsolidated joint ventures increased slightly. We ended the second quarter with 822 started unsold homes. This translates to 4.3 started unsold homes per active selling community, which is lower than our long-term average of 4.9 unsold homes per community. Another area of discussion for the quarter is related to our current and deferred tax asset valuation allowance. At the end of the second quarter, the valuation allowance in the aggregate was $841 million. We view this as a very significant asset not currently reflected on our balance sheet and have taken steps to protect it. Despite the equity transactions we completed earlier this year, we still have the capacity to issue a significant amount of new common shares per cash without triggering a change in control, which would limit our ability to use this valuable asset. Today, we could issue more than 100 million additional shares for cash, and as of October 2011, that increases to more than 125 million shares without limiting our ability to utilize our NOLs. We expect to be able to reverse this allowance after we generate consecutive years of solid profitability and can look forward and continue to project solid profitability. When the reversal does occur, we expect the remaining allowance will be added back to our shareholders' equity and will further strengthen our balance sheet. We ended the second quarter with a total shareholders' deficit of $350 million. If you add back the total valuation allowance, as we've done on Slide 21, our total shareholders' equity would be $491 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 carryforwards as we generate profits in the future. For the first $1.8 billion of pretax profits we generate, we will not have to pay federal income taxes.

Now, let me update you briefly on the mortgage markets and our mortgage finance operation. Despite chatter in the markets about the lack of mortgage availability, mortgages are available today for creditworthy customers. However, lenders are asking for more evidence that borrowers are creditworthy, so consumers have to provide much more loan approval documentation. Although loan approval standards have not materially changed during the past 6 to 9 months, it is true that the filing for loan applications today is much thicker than it has been. And it is true that mortgage underwriters are typically unwilling to make any exception to their underwriting guidelines, even when consumers have mitigating or compensating factors. While mortgage underwriting standards today on paper, adversely identical to the standards that were in place prior to the addend of subprime and Alt-A mortgages, the marginally qualified applicant who has compensating factors, who would have been approved years ago, is finding it virtually impossible to get a loan today.

Turning to Slide 22, you can see here that credit quality of our mortgage customers continues to be strong with an average FICO score of 736. During the second quarter, our mortgage company captured 76% of our noncash home-buying customers.

Turning to Slide 23. Here, we show a breakout of all the various loan types originated by our mortgage operations for the second quarter of fiscal 2011 compared to all of fiscal 2010. 50.5% of our originations were FHA/VA during the second quarter of fiscal '11, similar to the 49.3% we saw during all of fiscal 2010. Let me

Update you quickly about what's happening with our loan repurchase request. We continue to believe that the vast majority of repurchase requests that we've received are unjustified. On Slide 24, you'll see our payments from fiscal 2008 through to first half of fiscal 2011. So far, in the first 6 months of 2011, our repayments were $1 million. Additionally, during the second quarter, we received 10 repurchase inquiries, which was less than last year's quarterly average of about 25 inquiries. It is our policy to estimate and reserve for potential losses when we sell loans to investors. All of the above losses had been actually reserved for in previous periods. At the end of the second quarter, our reserve for loan repurchases and make whole request was $5.6 million, which we believe is adequate for our exposure. To date, repurchases have not been a significant problem but we will continue to monitor this issue closely. Our cancellation rates continue to remain at normal levels. Our cancellation rate for the second quarter was 20%, lower than the 22% we've reported for this year's first quarter, but it's slightly higher than the 17% cancellation rate that we reported for last year's second quarter when the tax credit was in place.

Turning to Slide 25. It shows a debt maturity schedule or our debt maturity schedule for the end of our second quarter. Pro forma for approximately $12 million of higher coupon second and third lien notes that we have redeemed early in the third quarter, as well as the tack on of approximately $12 million to our 2016 first lien notes that we issued early in the third quarter as well. What you see very quickly is that we have only $70 million of debt coming due before 2015. In spite of the extended debt maturities, clearly having adequate liquidity for growth is a concern of many investors. We have run endless financial models using numerous scenarios and assumptions. We have assumed slower and faster land acquisition paces, smaller and larger land acquisitions, higher and lower number of joint ventures, sales pace that's starting recovery in 2013 and no sales pace recovery during the period we've modeled. You name it. We've modeled it. Under all of our reasonable scenarios, we believe we have adequate cash flow to continue to grow our way out of the recession, return to profitability, meet our maturities in 2015 and position our balance sheet for refinancing options in 2016. In our primary modeling scenarios, we assume no home sales price improvement, and we assume no improved sales pace until 2013. At which time, we very gradually start to migrate our sales pace assumptions back towards normalized levels. We assume we will invest approximately $100 million in land and land development each quarter through the end of fiscal 2012. This expenditure is similar in nature to the quarterly land and land development payments we've been making during the past year. However, we assume fewer of our future acquisitions of new communities will be already developed. Further, as deliveries start to increase from our community count growth, we expect cash flow before land spend will be $450 million in the aggregate through the end of fiscal 2012. This $450 million of cash flow from operations after interest payments will allow us to maintain cash levels around our $275 million target, while still investing about $100 million in land and land development every single quarter. This gives us some cash cushion in our financial models.

On Slide 26, you see our sequential 18% increase in the dollar amount of our contract backlog. Our backlog at the end of April and our May sales levels gives us confidence that we will see increased delivery levels in future quarters, which we expect will generate the cash flow I've just described above. We recognize that some analysts are projecting a few percent further decline in home prices. The majority of the home price declines this past year have been associated with distressed home sales. The declines have been much less significant on nondistressed home sales, including new home sales. While further price reductions would clearly impact profit, it will have less of an impact on our cash flows. We believe purchasing new properties today is still the correct strategy, even if home prices deteriorate a few more percent. Our models show the ability to do all of the above without raising additional equity or considering debt for equity swaps. While our recent quarterly cash flows are making significant land or after making significant land purchases may cause concern for some, we remain confident that the investments we have made in land acquisitions over the last 2 years will begin to reap benefits in cash flow in the coming periods. In general, we are harvesting cash from slowly turning legacy assets and investing that cash into quicker turning newly identified land parcels where we can make a good return and harvest cash even faster in the future. This allows us to do more with the capital we have. In normal times, we were turning our assets over 2x per year. Over the last few years, as the market slowed and we were burdened with our legacy assets, our asset turnover rate dropped to 1x per year. Given that our typical land acquisition today has only about a 2-year delivery stand and we are making greater use of finished lot takedowns, we expect to migrate to a more normalized inventory turn of 2x in the future. We have gotten a lot of questions recently about different steps we can take to repair our capital structure, particularly with respect to our appetite to swap debt for equity. While swaps would reduce our interest cost, it would not provide us with much increased liquidity in the near term. If we were going to issue additional equity, we would prefer to do it in a scenario that would generate cash by selling stock at higher prices once we are profitable and trading at a multiple of earnings. An alternative such as the debt-for-equity swap could be an option in the future, but that is not a path we are likely to head down in the near term.

Our cash position can be seen on Slide 27. At the end of April, after spending approximately $125 million of cash to purchase 1,440 lots and on overall new land development across the company, as well as $41 million on interest payments, we ended the quarter with $415 million of cash. Keep in mind that our second and fourth quarters bear the brunt of our interest payments. This cash position does include $67.1 million of homebuilding restricted cash used to collateralize letters of credit. The amount of homebuilding cash that is restricted has been steadily declining, from about $135 million at the end of fiscal 2009 to the current level of $67.1 million. At the very end of the second quarter, we announced that we had expanded the December 2010 joint venture with GTIS to include 5 additional communities that we have recently acquired. At the closing of this joint venture, we sold the 5 communities to the joint venture. About $39 million in cash was returned to us, and we then invested $11 million back into the joint venture. Looking forward, our strategy on joint ventures has not changed. We still intend to utilize joint ventures for larger land transactions.

We have stated that we will manage our cash position to a target of $275 million. This target may fluctuate on a quarterly basis but should not fall below $200 million at any quarter end. Our intention is to become fully invested in land as quickly as we can. It is possible that we could reach this target by the end of fiscal 2011, but it would require a sufficient number of land deals that make economic sense at today's slow sales pace and low sales price in order for us to be fully invested. I realize that saying this may cause some unease with our investors. Some people believe that we should not be investing in the land but should just sit on the cash we have. We are comfortable targeting this level of cash because the bulk of our investments in wholly owned inventory will be in community with shorter lives, regenerating into cash in the near term. Investments in land are needed to grow our community count, and in turn our top line, which will eventually drive greater operating efficiencies and return us to profitability. We understand the market's concern with liquidity. It is something we are monitoring closely. However, our internal financial models give us the confidence that we have sufficient capital to grow our way back to profitability, even in a flat, nonrecovering market. While we cannot project when the housing market will recover, we do feel that our performance is at an inflection point. Sales dropped precipitously in last year's third and fourth quarters after the expiration of the tax credit. Our first 2 quarters of deliveries this year showed the effect of that. However, net contract comparison to last year should be positive in the third and fourth quarter given the current sales pace and growth in community count. Our gross margins should improve as our mix from newer communities improves. While this is not a direct proxy for cash flow, we do see our cash flow improving. Given that our large bond maturities are in 2016, we think that gives us sufficient time to improve our performance and our balance sheet, giving us further options on the capital front. That concludes our prepared remarks and now, we are glad to open it up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of David Goldberg from UBS.

David Goldberg - UBS Investment Bank

My first question, I wanted talk about the improvement in the sales pace sequentially in May. And when I'm trying to get an idea of it -- I know you mentioned, Ara, that you felt like most of your peers have been reporting similar improvements. The sales pace is about 2.4, 2.5 sales per month seem a little bit higher than what we've been hearing from a lot of other builders. And I'm wondering if you can talk about maybe it seems that that's kind of the pace you've been seeing in most of your markets. Is that a geographic thing? I know you said incentives didn't really change. Is there something to that number that we should be kind of aware of? Or is it just kind of what you've been hearing?

Ara Hovnanian

Okay. First, I didn't indicate that our peers reported the sales. What I did say was that we do look at our competition in each of our geographies. We look at it regularly community by community, and what we've noticed is that in many of our markets, competitors' sales paces have picked up in the recent 4 weeks compared to the prior few months. I can't put my finger, David, on an exact number. We don't really get that level of granularity, but I definitely noticed, as we reviewed communities and all the local competitors for those communities, both public and private, although probably a little more on the public side, actually probably quite a bit more on the public side, we definitely noticed a pickup in the last 4 weeks.

David Goldberg - UBS Investment Bank

Got it. And then just my follow-up question, Larry, in your commentary you talked about debt-for-equity swaps and debt for equity. You didn't feel that was really something you are going to address in the near term. And I'm just wondering about the decision-making process and what would change that would make you reconsider potentially a change in the capital structure of that nature. Is it just a deterioration in the sales pace from where we are? Or are prices going down more? Kind of what's going on in the decision-making process? And given you that you've modeled this out quite a bit, it sounds like it doesn't seem like you see a scenario where there's a real cash problem under this scenario as you run. What would change the decision-making process?

J. Sorsby

I think what would change the decision-making process is if it became apparent through our financial modeling that we weren't going to be able to get through 2015 with adequate liquidity and return to profitability. At the point in time that it looks like that just wasn't going to happen, we would not rule out any option, including debt-for-equity swaps. But we just don't think that's something in the near term that's likely to occur, and it would take some deterioration in the marketplace for that to occur.

David Goldberg - UBS Investment Bank

To just to make sure I understand what you're modeling, you're including downside scenarios, too? I mean, there's a certain sense of a sales load if prices went down a certain -- maybe not catastrophic scenarios but the downside scenarios.

J. Sorsby

I mean, obviously, we model all kinds of different scenarios, including downside. But when I say something has to deteriorate, the downside would have to become a significant reality. What we really believe is going to happen is the scenario, which we kind of stay for the foreseeable future at these lousy home prices and slow home paces that are 50% of the normal historical sales basis that we've experienced. And under a no-improvement scenario, we believe that we have adequate liquidity to get through 2015 maturities.

Ara Hovnanian

Yes. We're probably sensitive to sales pace than sales price. Sales price will affect our margins quite a bit, but won't have as significant a percentage increase on cash flow, which is what we're very focused on.

David Goldberg - UBS Investment Bank

Got it.

Operator

And your next question comes from the line of Nishu Sood from Deutsche Bank.

Rob Hansen - Deutsche Bank AG

This is Rob Hansen, on for Nishu. In regards to your cash flow guidance, you mentioned higher cash flow later this year. And is this just going to be as a result of seasonality? Or are you going to slow land development in the short term? And in terms of the overall $450 million of cash flow guidance, just wanted to see if you can give a little more details on that and how much cash you have earmarked for JV deals and whatnot as well.

Ara Hovnanian

Our guidance of expecting better cash flow is really more related to an increased deliveries and revenues. That will be, as we've shown on the slide, definitely better than the second quarter. It will be definitely better in the third quarter than the second quarter and much better in the fourth quarter, and that's really the primary driver of the additional cash flow.

J. Sorsby

And in terms of spend, I think we said you can assume roughly the same $100 million of spend on land and land development quarterly for the next 6 quarters or so. And we've not provided any guidance on how much we may or may not spend on joint ventures. But we have said that joint ventures remain a part of our strategy for larger parcels but we've not quantified that.

Rob Hansen - Deutsche Bank AG

Okay. And then in terms of your May results, a lot of times, the first-time buyers tends to be less seasonal than the move-up buyers. So were the gains in May from continued improvement in move-up buyers or did you start to see some of the first-time buyers come back to the market?

Ara Hovnanian

As you know, we really focus on a pretty broad array, not any specific segment. I'd say in general, the trends we've been experiencing with a little more strength in the move-up market versus the first-time market have kind of continued. I haven't really seen a significant change in that regard.

Operator

And your next question comes from the line of Ivy Zelman from Zelman & Associates.

Ivy Zelman - Zelman & Associates

I wanted to ask you with respect to your JVs, I noticed that during the quarter, you did report a loss in the joint venture, which is the greatest loss since really '08 in the fourth quarter. Just curious what's going on there. Is there some other cost involved there? Or are the communities in the JV not performing as well? And then I have a separate question.

Ara Hovnanian

Sure. It's mostly related to the brand new startup of the joint ventures that we've just announced very recently. We're starting up many communities so we've got the expenses associated with them. But the deliveries will be forthcoming in the near future.

J. Sorsby

Yes.

Ivy Zelman - Zelman & Associates

Right. And then secondly as it relates to your G&A, we noticed a nice drop in corporate G&A expense, $12 million from $15 million in 1Q and $14 million a year ago. Is this a sustainable decline or were there any one-time benefits? And what should we use as a good run rate?

Ara Hovnanian

No, I don't think there was anything unusual or a one-time occurrence this quarter.

Ivy Zelman - Zelman & Associates

Okay, easy question today. And then lastly, as you look to your...

J. Sorsby

We'll call you out more often for these.

Ivy Zelman - Zelman & Associates

If you look at your new communities -- and I think one of the interesting things the companies and the industry are early challenged by is the apple-and-oranges comparisons on looking at sales per community relative to other builders. And I think that one of the challenges is size of communities. So maybe you can talk a little bit about the size of new communities versus legacy communities and are they different and how you're going about strategically phasing out new openings?

Ara Hovnanian

Yes. I'd say generally a lot of our -- the majority of our new land acquisitions are about 50 lots. That, depending on the geography for a typical community is only a 2-year absorption pace. Historically, I'd say our community size was double to quadruple that amount. So it's really dropped in size. I can't say it was actually a conscious decision. It just seems like the numbers work far better on the smaller communities since we don't forecast price increases when we do absorptions. The larger communities present some pretty tough IRR hurdles if you don't assume any price depreciation. So we're just finding that harder to pencil. But in retrospect, that really is a helpful thing. I think it's smarter to keep our investments short, liquidate them faster, turn our inventory a little more, and it gives us the ability to do just a bit more with the cash. I'll also say, although I haven't tracked the exact number, the usage of quarterly finished lot takedowns versus bulk purchases has probably increased for our company a bit over the last few years.

J. Sorsby

A couple of additional points, Ivy, is one is on Slide 11 where we show reloading our land position. You can actually calculate the average size of the community of it, 294 communities since January '09 for a total of 15,400 lots. So that comes up roughly to arrows kind of 50-ish kind of number. I'm a little confused by saying it's an apple and orange on a per sales per community. The way we count communities, you have to have 10 or more homes left to be sold. So we don't have kind of the last few homes included in our community count even though we may have some because it may be slower or faster for one reason or the other. But regardless of whether you buy a community that's 100 lots or 150 lots or only 50 lots, I think sales per community is still a valid apples-to-apples measure.

Ivy Zelman - Zelman & Associates

No, I agree. I was confusing 2 different questions. So the legacy size versus new community size shouldn't have any impacts on the sales per neighborhood. It would prove more in the context of lots of builders are calculating their sales per neighborhood on a different basis. And when we think of you in that right now doing 2.4 and another builder tells us he's doing 1.6, sometimes it's a measure that could be a little bit distorted. I'm wondering how you calculate it sort of separately you from the legacy versus...

Ara Hovnanian

No. That is a good point, but essentially, our calculation is per product line. So if in a given geography, even in a master plan, we have 2 model complexes with 2 different sized lots and 2 different products. We'd count that as 2 communities. Some might count that as one, and that might yield a difference. I'm really not sure of how the other builders count it. But I agree with you, probably is different from builder to builder. Building on Larry's point, by the way, about our average community size, and I'm glad that math sided out to what I had just say, but you'll also note if you did the same calculation Larry went through on our joint ventures, they're a little larger on average. I think it comes out to be about 110 lots, more than double the size of our wholly owned purchases, and that's kind of consistent with the strategy we mentioned. We're really focused more on the joint ventures for our larger communities, in particular in the more expensive areas that are more capital intensive like Northern or Southern California, like Washington D.C. or like New Jersey or Eastern Pennsylvania.

Operator

And your next question comes from the line of Susan Berliner from JPMorgan.

Susan Berliner - JP Morgan Chase & Co

Larry, I was wondering if you could help us a little bit more with the gross margin. I guess, I know what you guys said about this quarter. I was wondering if you could talk at all about what you saw in May. And I guess, what kind of your expectation for maintaining that kind of $200 million of number of cash on hand? And I'm assuming that's unrestricted cash? Although, I'd love a confirmation on that. If you could just kind of walk us through with the higher land spend and the lower gross margin, how we should be thinking about it.

J. Sorsby

The first thing I'd say is that we are projecting with, again, nothing but a change in mix of deliveries based on what our backlog is, no improvement in the market, that gross margin will modestly improve in our third quarter and improve by 200 basis points in our fourth quarter this year. So that's, again, no change in current market conditions. That's what we are forecasting to occur and what our earlier comments were. And again, there's just no change from what we were doing that led to the lower margins in the April quarter. With respect to the May month, just as Ara had said in his prepared remarks, there was no national promotion. There was no increase in concessions or incentives of any note in May that led to the better sales. So that's what we're expecting in terms of margins over the next couple of quarters. And if you can ask the second part of your question again, I'll try to answer it.

Susan Berliner - JP Morgan Chase & Co

Yes. I guess, just in terms of modeling out cash flow going forward, I know you're not giving specific guidance for '12 and what you gave for the second half of '11 was helpful. But I guess, assuming a lower gross margin and a higher land spend -- I guess I'm trying to piece in -- I don't know if you guys have much...

J. Sorsby

I mean, the leverage are going to be what gets you to the $450 million aggregate cash flow after interest preland. And I don't know that I can give you any more guidance than that. But deliveries, higher deliveries lead to efficiency in G&A. And obviously, you're harvesting some of the cash you've already invested if you have higher deliveries, and our fixed costs aren't going to change much. So it comes back to us in cash since you have higher deliveries.

Ara Hovnanian

Yes. If you go back to Slide 15 and you focus on the 2011 actual quarterly revenues and kind of look at the trend with the guidance we've given for our third quarter, and obviously, we're in the middle of our third quarter right now, and the fourth quarter, you could see is upward slope as we're starting to harvest the revenues from our increased community count. Now our crystal ball, obviously, gets a lot fuzzier as we go further out. But in general, we are certainly focused on increasing the community count and getting deliveries from the recent increases. And we're certainly hopeful and anticipating that, that will result in an increase revenue. That's a big change for us. We've been shrinking revenues basically since the downturn. And as we stated, we kind of think we're at this inflection point where our recent investments over the last 2 years in land are starting to open. The communities are selling, and we think we're going to benefit with better deliveries and cash flow as a result.

Susan Berliner - JP Morgan Chase & Co

Great. And I have one last question. I was wondering, I guess, with the bond market a lot weaker in here, I know your RP basket increased with the notable amount of capital you raised this past quarter. Larry, if you can just update us on your thoughts of potentially buying back debt and what your RP basket is now.

J. Sorsby

I don't think it did materially change as we issued capital over the last quarter on all of the various issues. Some issues it did. Some issues it didn't. So on a net basis, it didn't really free up a whole bunch of additional capital for us to invest. There's some incremental capital. But I think the number roughly $70 million-ish kind of number is what we have available today to repurchase debt.

Ara Hovnanian

That's of a cash amount.

J. Sorsby

Yes, cash amount. We could buy back.

Operator

[Operator Instructions] Your next question comes from the line of Michael Rehaut from JPMorgan.

Jason Marcus - JP Morgan Chase & Co

This is actually Jason Marcus, in for Mike. So I was wondering if you could give us a little color regionally about what have been some of the best and worst markets for you and if any of those trends have changed notably over the last quarter or so?

Ara Hovnanian

Sure. Well let's see, you kind of go around the country. As I've kind of noted, the Sacramento, California, that greater valley in Linden, Northern California was definitely a little slower in the last couple of quarters. It's one of the places we've made some price adjustments, and the price adjustments had seemed to have helped, and there's a little more pick up there. In the Bay Area, more in the Silicon Valley commuting area, that market has continued to be strong. In the Southern California market, the further out areas, Inland Empires continue to be sluggish, better as you get closer to the coast. On the other coast, in the D.C. market, the Maryland market had slowed in the second quarter. But as we noted there, too, we did some pricing adjustments, and it seemed to have picked up a bit in that market in May. The Texas markets pretty much held steady. I'd say most of the other markets have generally held pretty steady in terms of sales pace.

Jason Marcus - JP Morgan Chase & Co

Okay. And then just regarding some recent land market trends, I was just kind of wondering what you've been seeing in the land market in terms of competition and then kind of what regions you've been focusing on?

Ara Hovnanian

We really have been focused on all the geographies. We really need to feed each of our geographies to hope to increase our revenues. And basically, we're at the moment, not trying to emphasize one geography or the other. We're really just looking at each deal as it rises and looking at the underwriting and just trying to get the best opportunities that meet our hurdle rates. Needless to say, we've got to go through a lot of opportunities to find some that meet our hurdle rates. I wouldn't say the competition has changed dramatically. It's generally more from the public builder arena, although there is some participation certainly from the private builders. I'd say most of the competition for land is from our fellow public builders.

Operator

Your next question comes from the line of Joel Locker from FBN Securities.

Joel Locker - FBN Securities, Inc.

Just on your May orders, how many of those 580 or so were JV orders? What was consolidated?

Ara Hovnanian

We're looking it up, hold on.

Joel Locker - FBN Securities, Inc.

And then just as you look that one up, the orders I guess were down a little over 30% year-over-year in the West and Midwest? Was that just a matter of absorptions or was community count down or different than the actual company?

Ara Hovnanian

Brad, do you happen to have that number at the tip of your fingers.

Brad O'Connor

Not for community count, I don't. We could get back to him on that.

Joel Locker - FBN Securities

I'll follow-up lately. And then are just community count on the -- yes, and then what about the orders?

Ara Hovnanian

Yes. JV -- Jeff, you can answer the question.

Jeffrey O'Keefe

Yes. JVs were 42 net contracts in May.

Joel Locker - FBN Securities, Inc.

42 net contracts.

Operator

[Operator Instructions] The next question comes from the line of Alex Barron from Housing Research.

Alex Barron - Agency Trading Group

I wanted to ask of that $450 million. Sorry if I didn't hear it correctly. The $450 million of cash flow, is that before you pay interest or after you pay interest?

Ara Hovnanian

After.

Alex Barron - Agency Trading Group

Okay. So what is it so far year-to-date?

J. Sorsby

You might have it at your finger tips.

Ara Hovnanian

Yes. Well, this quarter was $37 million positive. Again, that's before land and land development spend that we mentioned.

J. Sorsby

We can look it up. We don't have it at our fingertips.

Ara Hovnanian

I just don't recall precisely what the last quarter was. Jeff or Brad?

Jeffrey O'Keefe

$47.8 million last quarter.

Ara Hovnanian

$47.8 million of last quarter.

J. Sorsby

I'm sorry, that was -- you're talking about before land spend?

Ara Hovnanian

Before land spend. Hold on.

Alex Barron - Agency Trading Group

$47 million, okay.

Ara Hovnanian

No, hold on. That was after land spend. Just checking.

J. Sorsby

There was $27 million before land spend.

Alex Barron - Agency Trading Group

You went the wrong way. You said it's $47 million before land spend.

Ara Hovnanian

So it's $60 million combined year-to-date. But as we discussed, we expect the cash flow to be changing based on the revenues that we just cited, and I'll refer back to Slide 15 in our guidance for the next 2 quarters on revenues.

Alex Barron - Agency Trading Group

Right. Okay. And in terms of SG&A, I know you guys had a slight sequential drop this quarter. But I'm kind of looking at it from a number of different perspectives, and I guess the question is if conditions don't improve significantly from here, I mean, let's say revenues are up, I don't know, 10% next year or something, what are you guys doing to kind of cut SG&A further? I know you guys are trying to grow the top line, which is good, but what are you doing to try to cut your way through profitability as well?

J. Sorsby

I mean, the first thing I'd say is we cut 80% of our staff since we beat into 2006. So we continue to take appropriate steps to right size our business units to the level of business that they're generating. So it's something that we constantly monitor, but we think most of the cutting is behind us and we're hoping to grow. But I mean, if the market had a double dip, as we've demonstrated over the last several years, we'll take appropriate action at the appropriate time.

Ara Hovnanian

It's something we're clearly focused on besides hoping to gain leverage from the size. I mean, we've taken a function that used to be at the divisional level, and we've centralized them to the regional or corporate level. We're watching extremely closely advertising spend. We're working on it in every possible area we can right now.

Alex Barron - Agency Trading Group

Got it.

Operator

And your next question comes from the line of Adam Rudiger from Wells Fargo Securities.

Adam Rudiger - Wells Fargo Securities, LLC

I want to first ask you a question about your breakeven. Looked at the kind of presentations you've used in the past and looked at kind of analysis like that, and from my math, I think you probably need some similar analysis you've done in the past anywhere from 315 to 380 communities, 380 to 315 based upon kind of a run rate of deliveries per community and kind of the gross margins you're targeting. I was wondering if that was consistent with what your thoughts were. And if so, when you think you would have that number of communities delivering, say, 25 homes a year.

J. Sorsby

Again, the kind of scenario we did last quarter gave various scenarios based on what assumptions you wanted to make. But at various margins and various absorptions per community, we're not changing anything we put on that sheet.

Ara Hovnanian

And none of those scenarios that we discussed last quarter had anywhere near that number of acquired communities. The range we discussed, depending on whether you had a 17% or 20% gross margin, depending on whether deliveries were 23 per year per community or 33, the range was between about 190 communities, which is less than we have right now, to a high of 320 communities with the lowest gross margin and the lowest deliveries.

Adam Rudiger - Wells Fargo Securities, LLC

Were you willing to share with us when you think you could...?

Ara Hovnanian

No, I think we try to give as much visibility as we could with 2 quarters' guidance.

J. Sorsby

We did the guidance on a one-time basis this quarter. Don't expect it in future quarters for the reasons that Ara cited earlier. We're just trying to illustrate from a cash flow perspective and give you some insights as to our thought processes. It's a difficult environment to make any kind of long-term precise projection as to when we're going to get to certain communities. That depends on when we find enough opportunities that pencil to our 25% unlevered IRR based on the then current home prices and then current sales pace. So it's just not something that we're willing to make a precise projection on.

Adam Rudiger - Wells Fargo Securities, LLC

Okay, understand that. My second question then is just on the May orders. What is the normal -- when does the bulk of the cancellations normally occur? And I asked that because I think since we're so close to the end of May still is likely that some of those orders will get canceled. I'm just trying to think about how to model the next quarter of orders.

J. Sorsby

Our cancellation rates been relatively stable for a number of quarters now, give or take the low 20% kind of range. So if you try to do your model, I would use that on a consistent basis, just kind of a normalized cancellation rate. Most of the cancellations that do occur happen during the right of rescission, which changes by state, could be nothing, could be 15 days, and that's when the majority of them occur. But in terms of a modeling perspective, just use the average of what our cancellation rates have been the last 3 or 4 quarters.

Ara Hovnanian

Keep in mind, 500, the 501 we reported was net. The gross number was higher. The 501 included cancellations from prior sales.

Adam Rudiger - Wells Fargo Securities, LLC

Right. What I'm just asking those, it's likely that all the orders you generated in the last quarter of May, maybe you haven't really gotten any cancellations on there so there's probably an appropriate haircut. I'm just trying to think...

Ara Hovnanian

The ones from the last couple of weeks of the prior period. But anyway, I think we've given you enough guidance today. We're pretty consistent and stable in our cancellation rates right now, and the cancellations typically happen, I'd say, the vast majority in the first 2 weeks.

Operator

And your next question comes from the line of Mike Kim from CRT.

Michael Kim - CRT Capital Group LLC

I just have a question on the ability to issue additional shares for cash. And I guess you mentioned the ability to issue more than 100 million shares, and it steps up to more than 125 million. Larry, could you help us reconcile how you get to the share count for additional issuance? I thought it was much lower but I'm just wanting to be sure.

J. Sorsby

We actually hired Ernst & Young to go through the count for us, and they completed it yesterday, knowing exactly who our 5% holders were. It's a very, very complicated calculation. I was pleasantly surprised to see the number as high as it was as well. But it has to do with how many new public groups are created when you do the issuance, and what the tax regulations require you to assume when you issue new shares. So suffice it to say that I'm not the expert on exactly how the math is done on that calculation, but we're very confident that Ernst & Young did the calculation properly.

Michael Kim - CRT Capital Group LLC

That's interesting. Okay, no, I appreciate that. Just wanted to discuss joint venture activity a bit further. I'm not sure if you can provide us guidance but what are the current gross margins for the JV units in backlog? And just to follow-up another question, when can we expect the contribution from unconsolidated JVs to turn positives?

J. Sorsby

We've made no public disclosure of what the gross margin on our JV sales are that are in the backlog but for purposes of modeling, all you can do is assume that our JVs are performing similar to our consolidated, maybe a little bit higher because their weighted to newly identified communities.

Ara Hovnanian

Yes, and because they are larger, the communities generally require a higher gross margin to achieve the IRR hurdle. So I'd say on average, as Larry mentioned, it's a little higher than the company average. And we're not making projections, that detailed projections in terms of P&L.

Michael Kim - CRT Capital Group LLC

Understood. And if I could sneak one last question. Just a housekeeping item. Were there any impairment reversals this past quarter or the prior quarter in gross margins?

Ara Hovnanian

Yes. As we announced, it was $22 million roughly of impairment reversals versus about $43 million last year. So clearly, it helped -- the impairment reversals helped gross margins quite a bit more a year ago than they did this year. That also made comparisons a little difficult.

Michael Kim - CRT Capital Group LLC

Understood. Okay.

Operator

And I show no more questions at this time. So I would like to turn it back to Mr. Hovnanian for closing remarks.

Ara Hovnanian

Great. Well, thank you very much. We're very helpful as I'm sure, hopeful. And I'm sure many of you are that the recent sales momentum will continue for us and the overall industry. We think that will be great for the economy. We look forward to giving you another update next quarter. Thank you.

Operator

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

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