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Homebuilder investors try looking at a company's book value to determine at which price a given stock should be trading at, regardless of what it is trading at. On Hovnanian's recent FQ4 2007 conference call, an analyst tries to get clarity on just what a book value means in the industry these days.

The conference call also gives Hovnanian's perspective on the industry-wide debate over the best way to get through a downturn: Stop building, sell off land and cut down supply, or keep building and wait for things to blow over?

Ara K. Hovnanian, President and CEO, Hovnanian Enterprises Inc.

Our current plan is not to shrink our footprint, but shrink the size of the foot that’s in that footprint, if you will. We just plan to pare down our inventories in virtually all of our markets.

Carl Reichardt – Wachovia Securities

Okay.

Later on in the call:

Wayne Cooperman - Cobalt Capital

You wrote off a lot of stuff this quarter and you still have a $19 book value. I was wondering if you could actually opine what I should take that to mean. I mean, does that imply that you should earn some kind of return on that $19 book value, or you could sell all the rest of your assets and we could get $19? Because your stock’s at $7 and something doesn’t make sense.

J. Larry Sorsby, Executive VP, CFO of Hovnanian Enterprises

The stock is too cheap.

Wayne Cooperman - Cobalt Capital

Seriously, though, what does $19 mean to me? I mean, are we going to earn a 15% return on that $19 book value? Are we going to keep selling assets that are now at the same price we’ve written them down to?

Ara K. Hovnanian

Well, as I am sure you are well aware, Wall Street has not been kind to homebuilders. Many are selling below book value and --

Wayne Cooperman - Cobalt Capital

[They believe] in the book value. You guys just wrote off a lot of stuff. The $19 is now your kind of -- what you would think accurate book value, or at least that’s part of the question.

J. Larry Sorsby

What you are really asking us to do is make a projection and as I think we’ve made it pretty clear, we are just not in a position that we are going to make a projection.

Wayne Cooperman - Cobalt Capital

I don’t even want a projection. I just wonder if you could just talk about what you guys see as the -- what’s embedded in that? Do you think you could sell your assets for what you’ve written them down to or do you think they are written to a level where you actually earn a return on them?

Ara K. Hovnanian

If you are planning on a 15% return on $20 of book value, I wouldn’t bank on that at this moment. Fifteen-percent ROE is for normal times. We are not in normal times, so I say if that’s your benchmark, I wouldn’t count on that for the short term.

J. Larry Sorsby

Yeah, when the market recovers, which it ultimately will do, we’ll get back to earning those kinds of returns. But when we are still in a cyclical correction or downturn, it’s difficult to approach a 15% return and that’s about all we can say at this point.

Ara K. Hovnanian

Yeah, I mean obviously when the markets were better, we were earning in excess of 40% returns on our after tax, on our beginning equity. Fifteen-percent we kind of consider a more normalized part of the market. And then when you are in a trough of the market, you’d expect to earn below that for sure.

Wayne Cooperman - Cobalt Capital

The other -- I mean, would you guys expect to sell off more raw land or assets and get close to your book value and pay down debt that way?

Ara K. Hovnanian

No. I think generally speaking, the most logical course right now is to continue building and selling homes. We think that maximizes value and cash flow. As opportunities arise on land sales or potential joint ventures, we are certainly going to explore those as well. The main focus and certainly the main thrust is continuing to build through the housing and we think that maximizes the recoverable dollars that we’ve got invested.

Source: What Is Book Value for a Homebuilder?