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Executives

Jeffrey T. O'Keefe - Director of Investor Relations

Ara K. Hovnanian - Chairman, Chief Executive Officer and President

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

Analysts

Adam Rudiger - Wells Fargo Securities, LLC, Research Division

Andrew Casella - Imperial Capital, LLC, Research Division

Susan Maklari - UBS Investment Bank, Research Division

Jason A. Marcus - JP Morgan Chase & Co, Research Division

Daniel Oppenheim - Crédit Suisse AG, Research Division

Nishu Sood - Deutsche Bank AG, Research Division

Alan Ratner - Zelman & Associates, Research Division

Megan McGrath - MKM Partners LLC, Research Division

Kristen McDuffy - Goldman Sachs Group Inc., Research Division

Joel Locker - FBN Securities, Inc., Research Division

Alex Barrón - Housing Research Center, LLC

Susan Berliner - JP Morgan Chase & Co, Research Division

Hovnanian Enterprises (HOV) Q2 2012 Earnings Call June 6, 2012 11:00 AM ET

Operator

Good morning, and thank you for joining us today for Hovnanian Enterprises Fiscal 2012 Second Quarter Earnings Conference Call. An archive of the webcast will be available after the completion of the call and run for 12 months. [Operator Instructions] Management will make some opening remarks about the second quarter results and then open up the line for questions.

The company will also be webcasting a slide presentation along with the opening comments from management. The slides are available on the investors page of 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 turn the call over to Jeff O'Keefe, Vice President, Investor Relations. Jeff, please go ahead.

Jeffrey T. O'Keefe

Thank you very much. Before I turn the call over to Ara, I would like to read the following about 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. Although we believe that our plans, intentions and expectations reflected in or suggested by such forward-looking statements are reasonable, we can give no assurance that such plans, intentions or expectations will be achieved.

Such risks and uncertainties and other factors include but are not limited to changes in general and local economic and industry and business conditions and impacts of the sustained homebuilding downturn; adverse weather and other environmental conditions and natural disasters; changes in market conditions and seasonality of the company's business; changes in home prices and sales activity to the markets where the company builds homes; government regulation, including regulations concerning development of land, the homebuilding sales and customer financing processes, tax laws and the environment; fluctuations in interest rates and availability of mortgage financing; shortages in and price fluctuations of raw materials and labor; the availability and cost of suitable land and improved lots; levels of competition; availability of financing to the company; utility shortages and outages or rate fluctuations; levels of indebtedness and restrictions on the company's operations and activities imposed by the agreements governing the company's outstanding indebtedness; the company's sources of liquidity; changes in credit ratings; availability of net operating loss carryforwards; operations through joint ventures with third parties; product liability litigation, warranty claims and claims by mortgage investors; successful identification and integration of acquisitions; significant influence of the company's controlling stockholders; changes in tax laws affecting the after-tax costs of owning a home; geopolitical risks, terrorist acts and other acts of war; and other factors described in detail in the company's annual report on Form 10-K for the year ended October 31, 2011.

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, changed circumstances or any other reason.

And with that out of the way, I'd now like to turn the call over to Ara Hovnanian, our Chairman, President and Chief Executive Officer. Ara, please go ahead.

Ara K. Hovnanian

Thanks, Jeff. Good morning, and thank you for participating in today's call to review the results of our second quarter and 6 months ended April 30, 2012. 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, Finance, and Treasurer; and Jeff O'Keefe, who you just heard from, Vice President of Investor Relations.

On Slide 3, you can see a brief summary of our second quarter results and comparisons to the prior year's second quarter. All in all, we had a very good second quarter when you look at just about every line on this slide. Contracts were up 52% compared to the same quarter last year and up 56% on a contracts per community basis.

The higher sales pace resulted in selling out some communities ahead of plan, resulting in our community count dropping 3% compared to last year. Deliveries increased 25%, backlog increased 48% and total revenues were up 34%. Land-related charges were dramatically lower at $3.2 million for the second quarter versus $16.9 million for the same period last year. Income was a positive $1.8 million, helped by a $27 million gain on extinguishment of debt, compared to a loss of $73 million last year.

Finally, while cash was down compared to last year, it increased sequentially for the quarter from $202 million at the end of the first quarter 2012 to $229 million at April 30, 2012, including after land purchases and land development.

Slide 4 shows the sequential and annual growth in net contracts gaining momentum during the second quarter. This is the first time that we have had 4 consecutive quarters with year-over-year net contract growth since the first quarter of 2006. During each of the prior 12 months, we achieved year-over-year net contract growth, including every month of our second quarter. More importantly, the magnitude of these monthly increases has been gaining momentum through April.

Slide 5 shows greater granularity, with monthly net contracts data on the left and weekly data on the right. While we've added our results for the month of May post quarter end, it's important to note that May of 2012 only had 4 Sundays compared to the 5 Sundays during April of this year and May of last year. As we've said on prior calls, since the vast majority of our sales occurred during the weekends, the number of weekends in a month will affect monthly sales results.

You'll clearly see May of '12 dropped in net contracts, including unconsolidated joint ventures, from -- to 506 from 635 during April but increased slightly compared to May of last year at 501. However, it's important to note, our weekly contract pace was unchanged at 127 per week during May of '12 compared to 127 per week in the prior month of April of '12 and it increased 27% compared to 100 contracts per week in May of 2011.

Of note, our monthly trends were very different from those reported by the NAR last week for pending home sales. Homebuilding stocks sold off as pending home sales fell 5.5% in April of '12 compared to March of '12. This is different than the 3.8% increase that we reported over the same time period. We're often puzzled by the magnitude and direction in both directions of the data reported by other national statistics, including the NAR for existing home sales and the U.S. Census Bureau for new home sales.

I recognize that, some analysts, in spite of the fact that our weekly sales pace was exactly the same in May as in April, they still may be concerned by the fall-off in the absolute number of May contracts. I can tell you the housing market continues to feel very solid in spite of some of the current international economic concerns in the media. Let me reiterate that, similar to the first quarter, there were no coordinated national sales promotions that led to the increased net contracts during the second quarter. As a matter of fact, we either raised base prices or lowered incentives in roughly 40% of our communities during the first half of fiscal '12.

As our sales pace has increased, we have tested pricing increases in many of our communities. More often than not, these pricing increases came in thousand-dollar increments. We've been gradually raising prices because the last thing we want to do is push prices too far and slow down our sales pace to the point that we reduce our ability to leverage our fixed costs and improve our operating margins. We've had good success while maintaining sales -- with maintaining sales pace even with the price increases we've implemented. With some of our price increases -- excuse me, while some of our price increases have gone to offset cost increases, our margins did continue to climb, and we'll describe this more fully in a couple of slides.

Slide 6 shows our net contracts per community per month for the last 12 months through April of 2012 in the red bars and comparisons to the same month from a year earlier in the yellow bars. Here, you see that net contracts per community increased in 10 of the past 12 months. Once again, the gains in February, March and April have been larger in magnitude. It is worth pointing out that, excluding our 2007 Deal of the Century promotion, we sold more homes in April of 2012 at 3.2 homes per community than we have since the spring selling season of 2006. It was helped by having 5 selling Sundays, which are noted along the bottom of the graph.

Turning to Slide 7. We have added the results for May of 2012 at 2.6 net contracts per community in May of 2012. We reported year-over-year increases in net contracts per community for the month of May of 2012 versus the 2.4 reported in May of 2011. Additionally, we reported year-over-year increases in the absolute number of net contracts for May despite the fact that there were only 4 Sundays in May of '12 compared to 5 Sundays in May of '11, another testament to the strength of the market.

Slide 8 shows annual net contracts per active selling community since '97. In normal times, say, between 1997 and 2002, which is on the left-hand side of the slide, we averaged at about 44 net contracts per community. For the past 3 months, we've been operating at about 1/2 of that normal average -- excuse me, for the last 3 years. This annualized -- excuse me, the annualized 6-month selling pace per community for 2012 is 31.2 net contracts per active selling community and is shown by the red bar on the far right-hand side of the slide. While this is not as quite as good as our normal annual sales pace, this annualized pace is much higher than what we have seen over the past several years and approaching the level we saw in 2006.

Given these trends, it appears that the homebuilding industry is in the early stages of a recovery. Our optimism is based on the fact that the strength in our sales has been broad-based from every perspective: price point, geography and buyer profile.

On Slide 9, you can see that each of our 6 segments showed solid year-over-year increases in net contracts for the quarter ended April 2012 compared to same period last year. Of course, some submarkets within these segments have done better while others have not performed as well, and we give some examples of several of these submarkets on the slide.

On a consolidated basis, our net contracts increased 52% over this period of time. And when looking at broad submarkets throughout the country, the smallest increase was 23%. Houston, which has been a solid performer throughout this downturn, was up only 31%, ranking them almost at the bottom of our list. It's not because sales in Houston were poor, they simply have performed well in recent years and therefore had a tougher comparison to last year.

Phoenix is a market that's been getting a lot of press lately as a red-hot market, and our operations in Phoenix are doing quite well. Market conditions in Phoenix are improving, as you can see on Slide 10. This slide shows MLS listings in red and MLS sales in each month in yellow. The month's supply of used homes for sale in Phoenix, which is shown in blue, has gone from a high of 24.5 months supply in January of '08 to 2.5 months supply in March of 2012. We've also circled in black the months of March in 2011 and 2012 and you can see a similar long-term downturn.

In general, we have seen similar trends in MLS data in many of our markets across the country. Our net contracts in Phoenix over this 3-month period grew 80%, which is better than average, but there were a couple of markets that did even better. For instance, Ohio was up 100% and net contracts in Chicago were up 98%.

Looking at a fourth submarket, if you combine all of the Florida markets, they were up 74%. Palm Beach County, Florida, which is shown on Slide 11, is another example of a market where the month's supply has dropped considerably. It's shown in blue and you can see that it's dropped from 43.3 months supply in February of '08 to 5.2 in March of 2012. That's a much more normal level of supply.

Given recent trends in traffic and anecdotal evidence from our sales associate about the quality -- sales associates about the quality of the traffic, we're cautiously optimistic that improved sales paces will continue throughout the summer months. The good news is that we're grabbing our fair share of the pick-up in the market activity. However, there is an impact in our land position from the increased sales paces that we've been selling. We're selling through communities at a faster pace and ended the quarter with 199 active selling communities, as seen on Slide 12.

The combination of more rapidly selling legacy communities and a slowdown in some of our opportunities to acquire new land late last year resulted in a decrease in open-for-sale communities. However, the recent increases in home sales pace and home sales prices have justified higher land values. This in turn has caused more land sellers to offer land and lots to the market, increasing our opportunities to replenish our pipeline. You'll see the result of greater land opportunities in a few slides. Up until now, community count was the only way we could grow our top line. Now we're seeing increased sales pace and price, which is helping drive top line growth.

Let me get back to our operating performance for the second quarter. Our gross quarterly margin, as shown on Slide 13, was 17.4%, a 90 point improvement over the first quarter of 2012 and a 260 basis point improvement over the prior year's second quarter. As you can see on this slide, this sequential improvement in gross margin has been very steady for the past 4 quarters. Of note, this is the highest our gross margin has been since the first quarter of 2007. We're still not back to a normalized gross margin of about 20%, which you can see on the left-hand portion of Slide 14, but the improvement in the year-to-date period is a step in the right direction.

At the end of the second quarter, 82% of our wholly-owned communities that were open for sale were newly identified communities that we controlled after January of '09. 61% of our consolidated deliveries in the second quarter were from newly identified land, which is higher than the 44% of deliveries in all of fiscal '11 from new land. Given the current number of new communities, we would expect the mix of deliveries from newly acquired land for all of 2012 to be higher than it was in 2011. As long as we see no adverse changes in market condition, this mix should result in our gross margins increasing during fiscal '12 compared to fiscal '11. During the second quarter of '12, there were $20.8 million of impairment reversals related to home deliveries compared to $22.2 million of impairment reversals in the second quarter of 2011.

Turning to Slide 15, you see on the right-hand slide (sic) [side] that the absolute dollar amount of our total SG&A in the second quarter of 2012 decreased 8% year-over-year in spite of a 52% increase in contracts and a 25% increase in deliveries. Underneath the bars, we show that, as a percentage of total revenues, second quarter total SG&A was 13.9%, which is a 640 basis point improvement over a year ago when it was 20.3%. Not only is this much lower than last year's second quarter, this is the lowest our SG&A ratio has been since the first quarter of 2008. This improvement is illustrative of the leverage we get from an SG&A perspective as our sales volumes increase.

As net contracts per community increase, the leverage we gain from the SG&A line is even greater than it would be if the top line growth came purely from community count growth. Once again, this -- while this ratio has improved, it's not back to our historical norms of about 10%.

On the left-hand side of this slide, we show the annual percentage rates for the last 12 years. Keep in mind that as our delivery volumes increase over the next 2 quarters, and they should with the 52% increase in net contracts and the 48% increase in backlog, these SG&A percentages should continue to trend lower.

The combination of the improvements in gross margin and in SG&A as a percentage of revenue will allow us to get to the point where we are consistently earning in operating profit. As we look forward, we expect continued improvement on both fronts, which will push us even further down the path of returning to profitability.

After spending $44.2 million on land and land development, we ended the second quarter of fiscal '12 with approximately $229 million in homebuilding cash, including cash used to collateralize letters of credit, as seen on Slide 16. Even though we said on our last quarterly conference call that we'd be comfortable with the low end of our cash target range, we ended the second quarter close to the high end of our range of $170 million to $245 million.

As we have said before, our future investment decisions will be made within the confines of this cash target range. This increase in cash came despite starting 33% more homes in the second quarter compared to the first quarter.

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

J. Larry Sorsby

Thanks, Ara.

Turning to Slide 17. We show our gross margin for our second quarter compared to the most recent quarter of the other public homebuilders. The gray arrow indicates the year-over-year change in gross margin for each public builder, and you will note that our 270 basis point improvement was the highest amongst our 12 peers and was 90 basis points higher than the builder with the second largest quarterly increase. Unfortunately, not all public builders report gross margins the same way. Pulte, NVR and ourselves include commissions and cost of sales while the remaining public builders include all or a portion of those costs in SG&A.

Turning to Slide 18. We have attempted to compare all public builders' gross margins on an apples-to-apples basis. To do this, we reduced the gross margins of KB Home, Lennar, MDC, M/I Homes, Meritage and Standard Pacific by the same 3.5% that our sales commissions totaled in our second quarter. For builders who publicly report sales commission or responded to industry surveys, we reduced their gross margins per the amounts contained in their SEC filings or per the estimates we have footnoted on this slide. As you can see, once the adjustments are made, our 17.4% gross margin is at the median and is directly comparable to the group's 17.46% average gross margin.

To be fair, we also need to show you a similar apples-to-apples comparison to our peers for SG&A for the most recent quarter. Turning to Slide 19. As footnoted on this slide, we reduced SG&A amounts by the same adjustments we made on the previous slide for all the public builders who include all or some portion of the sales commission in SG&A. Once these reductions in SG&A costs are made for our peers, our 14.8% SG&A compares favorably to both the median and the average for our 12 peers.

While we still have further improvements to make in order to return both our gross margin and SG&A ratios back to normal levels, we are pleased with our progress and hope these comparisons provide you with a clear understanding of how our performance on these metrics stacks up on an apples-to-apples basis against our peers.

Turning to Slide 20. We controlled an additional 700 newly identified lots in the second quarter of fiscal 2012. The pace of land purchases and lot options has increased from the previous quarter on both a gross and net basis. Through the end of the second quarter, we now have purchased or optioned approximately 17,700 newly identified lots and 316 communities since January 31, 2009.

Primarily as a result of finding pure land purchase opportunities that met our underwriting criteria last fall and early winter, the total dollar spend on new land acquisition and land development during the second quarter was lower than previous quarters. While it may seem counterintuitive, we've seen a greater number of new land opportunities in recent months. Part of that may be that the pace and price of home sales have increased sufficiently to warrant higher prices and better terms on land offers, which is attractive to more land sellers, including the banks. We are optimistic that we will return to higher levels of land expenditures in the ensuing quarters.

We are still looking for new land opportunities throughout all of our markets and continue a disciplined approach when underwriting new land parcels. The land that we purchased or optioned met or exceeded our investment threshold of a 25% unlevered IRR and underwriting based on the then-current home selling prices and no changes in sales pace for the next couple of years. During the second quarter, we optioned 1,800 new lots, purchased about 50 lots not previously optioned, walked away from about 800 newly identified lots and sold about 350 lots. The net result for the second quarter was that our total lots purchased or controlled since January 2009 increased by about 700 lots sequentially from the first quarter of 2012.

During the second quarter, we purchased 400 newly identified lots and 79 communities. In addition, we purchased about 340 lots from legacy options. Our corporate land committee schedule to review new opportunities is growing rapidly.

Turning to Slide 21. You'll see our owned and optioned land position broken out by our publicly reported segments. Based on our trailing 12 month deliveries, we still own 4.2 years worth of land. However, if you exclude the 6,913 mothballed lots, we only own 2.5 years worth of land based on the delivery rate of the past 4 quarters. Our owned and optioned lot positions decreased sequentially by about 580 lots in the second quarter.

We purchased approximately 740 lots during the second quarter, which was offset by 1,043 deliveries and about 525 lots from land sales. On the option side of the equation, we walked away from 828 option lots, purchased about 740 option lots and signed new option contracts for an additional 1,800 lots during the quarter.

We continued to be disciplined and only taking down option contracts that make economic sense. At the end of the second quarter, 72% of our optioned lots were newly identified lots and 26% of our owned lots were newly identified lots. If you exclude mothballed lots, 44% of our owned lots are newly acquired. When you combine our optioned and owned land together, 43% of the total lots that we control today are newly identified lots. Excluding the mothballed lots, 58% of our total lots are newly identified lots.

Our investment in land option deposits were $25.4 million in April 30, 2012, with $24.2 million in cash deposits and the other $1.2 million of deposits being held by letters of credit. Additionally, we have another $5.4 million invested in predevelopment expenses.

Turning to Slide 22. We show our mothballed lots broken out by geographic segment. In total, we have 6,913 mothballed lots within 54 communities that were mothballed as of April 30, 2012. The book value at the end of the second quarter for these remaining mothballed lots was $141 million, net of an impairment balance of $449 million. We are carrying these mothballed lots at 24% of their original value. Since 2009, we have un-mothballed 3,200 lots within 57 communities, including 200 lots in 3 communities during the second quarter of fiscal 2012.

As the market recovery that we're beginning to feel gains some momentum, we will be able to justify returning more of our mothballed lots into production. This would provide us with a rich supply of lots at a low cost basis.

Looking at all of our consolidated communities in the aggregate, including mothballed communities, then we have an inventory book value of about $946 million, net of $720.3 million of impairments which we recorded on 116 of our communities. Of the properties that have been impaired, we're carrying them at 24% of their pre-impaired value.

On the balance sheet, you may have noticed the increase in consolidated inventory not owned. The increase was attributable to favorable new opportunities for model sale leaseback transactions. During the second quarter, we entered into model sale leasebacks on 86 of the 217 model homes we owned at the end of the first quarter. These transactions allowed us to deploy capital previously tied up in model homes more efficiently into our homebuilding business. The lease agreements offer single-digit financing rates on average and give us participation in the future sales price appreciation of the model homes, which may lower the financing costs further in the future. Because of our continuing involvement, the transaction is accounted for at a GAAP as a financing and the inventory remains on the balance sheet as other inventory not owned.

Now turning to Slide 23. The number of started unsold homes, excluding models and unconsolidated joint ventures, decreased both sequentially and year-over-year. We ended the second quarter with 706 started unsold homes. This translates to 4 started unsold homes per active selling communities, which is lower than our long-term average of about 4.8 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 $906.8 million. We view this as a very significant asset not currently reflected on our balance sheet and have taken steps to protect it. We expect to be able to reverse this allowance after we generate consecutive years of solid profitability and can continue to project solid profitability going forward.

When a reversal does occur, we expect the remaining allowance to be added back to our shareholders' equity, further strengthening our balance sheet.

Today, we could issue more than 100 million additional shares of common HOV stock per cash without limiting our ability to utilize our NOLs. This has been reduced from what we reported last quarter based on the 25 million shares of common stock we issued in early April 2012.

We ended the second quarter with total shareholders' deficit of $455 million. If you add back the total valuation allowance, as we've done on Slide 24, our total shareholders' equity would be $451.8 million. Let me reiterate that the tax asset valuation allowance is for GAAP purposes only. For tax purposes, our tax assets may be carryforwards for 20 years from incurrence, and we expect to utilize those tax loss carryforwards as we generate profits in the future. For the first $1.9 billion of pretax profits we generate, we will not have to pay federal income taxes.

Now let me update you briefly on our mortgage operations, turning to Slide 25. You can see here that the credit quality of our mortgage customers continues to be strong with an average FICO score of 736. For the second quarter of fiscal 2012, our mortgage accounting captured 75% of our non-cash home-buying customers.

Turning to Slide 26. We show a breakout of all the various loan types originated by our mortgage operations in the second quarter of fiscal 2012 compared to all of fiscal 2011. 31% of our originations were FHA during the second quarter of fiscal 2012, slightly less than the 34% we sold during all of fiscal 2011.

Regarding the repurchase request from various banks, we continue to believe that the vast majority of requests that we've received are unjustified. On Slide 27, you'll see our payments from fiscal 2008 through the second quarter of fiscal 2012. During the first half of 2012, our repayments were only $0.9 million on 7 loans.

During the second quarter of 2012, we received 22 repurchase inquiries, which was higher than the quarterly average of 10 repurchase inquiries for all of fiscal 2011. It is our policy to estimate and reserve for potential losses when we sell loans to investors. All of the above losses have been adequately reserved for in previous periods. At the end of the second quarter, our reserve for loan repurchases and make whole requests were $6.6 million, which we believe is adequate for our exposure. To date, mortgage repurchases have not been a significant problem, but we will continue to monitor this issue closely.

Turning back to our homebuilding operations. Primarily due to our recent increases in sales activity, our cancellation rate for the second quarter was 17%, slightly better than normal levels. During the month of May, our cancellation rate was 19% as it began to edge back up to more normal levels.

Turning to Slide 28. It shows our debt maturity schedule through 2021, which takes into account the $88 million of debt we repurchased or exchanged during the second quarter.

I want to further clarify the timing of the equity offering we completed in April of 2012. A single large bondholder approached us about selling us their position in our bonds. Both the timing and the size of the equity offering were driven by this single conversation. At the end of the second quarter, we have approximately $138 million of restricted payment capacity left to repurchase additional bonds.

Additionally, as you may have seen with the 8-Ks we filed during the second quarter, we have entered into several 3(a)(9) debt-for-equity exchanges. During the second quarter, we exchanged 3.1 million shares of common stock for approximately $12.2 million of debt. As we look forward, we have only $48 million of debt that matures before 2015 and additional $84 million of debt that matures before 2016.

Additionally, we believe the $84.5 million of debt reduction on the 2016 and 2017 maturities we made in the second quarter will help position our company to refinance our 2016 secured notes in the future. At the end of fiscal 2012 second quarter, after having spent approximately $44.2 million in cash during the quarter to repurchase -- to -- excuse me, to purchase about 740 lots and on land development across the company, we ended the quarter with $229 million of cash. This includes $33.8 million of homebuilding restricted cash used to collateralize letters of credit. Recently, there have been more land deals coming to corporate land committee.

As we look forward, we would expect the dollars invested land and land development to increase from the $44.2 million reported for the second quarter of fiscal 2012. Our focus will remain at keeping our minimum total cash balance at quarter end within the range of $170 million to $245 million. As we said last quarter, given the reduction in restricted cash and our bigger backlog position, we are much more comfortable at the lower end of our targeted cash range. We are well above the midpoint of that range as of the end of the second quarter and believe that we have adequate liquidity to reinvest in sufficient land to increase our deliveries as well as repay the debt that matures between now and the end of 2015. Purchasing smaller land parcels resulting in faster inventory turns has been part of our strategy that makes that achievable. This is evidenced by about a 30% increase in inventory turns in the second quarter of fiscal 2012 compared to last year's second quarter.

That concludes our prepared remarks, and we'll open it up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Adam Rudiger with Wells Fargo Securities.

Adam Rudiger - Wells Fargo Securities, LLC, Research Division

Ara, you mentioned in your opening remarks some of the drivers potentially of the gross margin improvement, but I was wondering if you could elaborate a bit more and just break it down for us because it was a pretty nice correction this quarter, and then the components that you think quantify each for the sequential improvement.

Ara K. Hovnanian

We really don't break it down. There are so many factors, frankly, everything from the mix of communities that are delivering to a little bit of price increase to a little bit of cost increase. There's just a lot of factors going in and we don't have a breakout.

J. Larry Sorsby

I mean, as we've been saying for a number of quarters now, as our mix of deliveries increases from our newly identified communities, we would expect our margins to improve. And I think you're seeing that begin to occur as well. It's very difficult to -- I mean, the geographic mix, the product mix, community by community, it's very tough to give you any granularity other than we're seeing the increase of newly identified lots finally begin to kick in, in a more meaningful way.

Adam Rudiger - Wells Fargo Securities, LLC, Research Division

And then just sticking with gross margins. Ara, you mentioned that some of your price increases are being offset a bit by costs. Could you mention or elaborate at all that -- what kind of cost increases you're seeing and maybe address, if you could, from a material perspective and also from a geographic perspective.

Ara K. Hovnanian

Sure. Well, it's really been focused on some of the commodity materials. Since the beginning of our fiscal year end, lumber overall has increased about 20% and it's probably the single largest material cost component driver in the houses. The -- a variety of other commodity materials have moved in some directions. Interestingly, shingles have been fine. Concrete has moved up but only a few percent. Plastic, PVC pipe has been moving up and down, not a huge factor. Drywall, however, has increased quite a bit, it's been up over 10% since the beginning of the year. Insulation, on the other hand, has been flat. Paints moved up just a bit; vinyl siding, just a little bit. So there's stuff all up and down in general on the commodities. They would have been trending up a bit. Our branded materials, we have national contracts for most of them that hold prices for 1, 2 or 3 years. That includes kitchen cabinets, carpeting, appliances and a few other materials. So that has held out fine.

Operator

Your next question comes from the line of Andrew Casella with Imperial Capital.

Andrew Casella - Imperial Capital, LLC, Research Division

I guess, just looking at your price increases, is there a way you could quantify, I guess, to the extent you're increasing prices as a percent of base price, what that might be across the portfolio on average and just talk about the range of price increases you're seeing?

J. Larry Sorsby

As Ara mentioned in his prepared remarks, I mean, most of the increases have been kind of in thousand-dollar increments. And I would say, in the majority of the 40% of our communities where we've had it, there may be 1, may be 2, price increases. But they're relatively small. We just don't want to slow down the absorption pace that we've been experiencing. So we're just testing whether we can get price increases without adversely impacting kind of sales pace.

Ara K. Hovnanian

And to put it into perspective, our average price is about $300,000. So if we did $1,000 increment, that's 0.3% at a time. So it's really been in very small increments, but I'm happy to say that we've been able to test those increments in a good percentage of our communities.

J. Larry Sorsby

And I would also say that not many of those price increases have ever -- have actually come through those deliveries yet. We're -- when we say 40% of our community, we're talking about from a contract perspective rather than from a delivery perspective.

Andrew Casella - Imperial Capital, LLC, Research Division

And my follow-up question, if you could. Can you break down the allocation of cash between the secured group and the restricted group under the 2 different bond indentures and then also talk a little about how much inventory is sitting in the secured group as of the end of the second quarter?

J. Larry Sorsby

Yes, we'll come back to that when -- we got to look it up. So if there's another question, we'll move on, but we will come back to answer that.

Operator

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

Susan Maklari - UBS Investment Bank, Research Division

It's actually Susan for David. Your land spend in the quarter was about $30 million lower sequentially despite what seems to be an improvement in the overall land market. Can you just give us an update in terms of what you expect it to be for the year and how we should expect that to trend as we go through the back half of the year?

Ara K. Hovnanian

I'd say you should expect it absolutely to trend up. As Larry mentioned, I think, on his slides, our lands secured through options this past quarter increased significantly. And we absolutely are seeing more opportunities that make economic sense. I mean, the pace and price has helped. We are disappointed that the number was one of our lower quarters just recently, but we think it's going to get back. Certainly in the back half of the year, we'll see increases.

Susan Maklari - UBS Investment Bank, Research Division

So it's more of really just a timing issue, I suppose.

Ara K. Hovnanian

It really was. And there is a delay and there was a period ensuing last year when we just didn't quite find the opportunities given there was a period last year where sales pace was not nearly where it is today and it was harder to make numbers pencil out. The time from contract actually closing on land can have a lag and that's what we felt this last quarter. But we feel quite confident that's going to be picking up. We're certainly seeing -- entering into new contracts that would settle in the next quarter or 2 and we're seeing more opportunities pop up right now.

Susan Maklari - UBS Investment Bank, Research Division

Okay. And then given the fact that you expect the -- some level of overall improvement to continue through the summer, are you changing anything in terms of your expectations to open new communities or your scheduling for opening them?

J. Larry Sorsby

Yes, well, I mean, we do it as fast as we can get them open after we actually control the land and have all the permits to where we can open them and have the models built and that kind of thing. So it's really just the speed of being able to get them open that's what's driving the timing of the openings.

Susan Maklari - UBS Investment Bank, Research Division

Okay, but you don't expect to bring any more or any change in the overall?

Ara K. Hovnanian

Well, I mean, again, we are stepping up land acquisition. We've been as interested in land acquisition now as in the past. We're just finding more opportunities. So as we execute and consummate those land contracts, we would hope to be opening up more communities. As you know, it can depend on what the sales pace is in our existing communities, how rapidly do we wind those down based on the sales pace, what entitlement and regulatory delays are involved in new ones. But we are certainly planning to increase our new acquisition pace from what you just saw, and hopefully that will have some good results in community openings as well.

J. Larry Sorsby

Before we take the next question, let me answer the previous question that we had to look up in terms of breaking out cash and inventory between the old secured group and the new secured group. With respect to the old secured group, cash at quarter end was $142.5 million and inventory was $687.1 million. With respect to the new secured group, cash was $93 million at quarter end and inventory was $31.5 million.

Operator

Your next question comes from the line of Michael Rehaut with JPMorgan.

Jason A. Marcus - JP Morgan Chase & Co, Research Division

This is actually Jason Marcus, in for Mike. So just going back to the gross margins for a second. Gross margins improved pretty nicely sequentially on a year-over-year basis, and I know that you commented that you expect gross margins to increase in fiscal '12 over fiscal '11. So I was just wondering if the current level of gross margins, the 17.4%, is kind of an appropriate level that you expect to go going forward or if you expect that it can even increase from there in the back half of the year.

J. Larry Sorsby

We're not providing any additional guidance before -- beside what we've already kind of indicated. So we're just not making an absolute projection on what's going to happen precisely with gross margins. Mix is a big driver of what margins may or may not be. But we're just not in the projection business these days, too much uncertainty.

Jason A. Marcus - JP Morgan Chase & Co, Research Division

Okay. And then the next thing is if you could give -- break out what the May year-over-year order growth was, excluding JVs, and then also what the fully diluted share count was at the end of the quarter.

J. Larry Sorsby

We'll get back to you on that one.

Operator

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

Daniel Oppenheim - Crédit Suisse AG, Research Division

I was wondering if you can talk about land. I think, if we look at your order trends and from other builders, many are starting to worry about lands probably in the next couple of years. And so just I'm wondering what you're doing in terms of land underwriting how you're thinking about margins on land that you're looking at right now.

Ara K. Hovnanian

Overall, our criteria has remained pretty steady. It's -- we're really focused primarily on an unleveraged IRR. Our hurdle rate has been 25%. That includes all overheads but excludes a corporate overhead allocation. So that remained pretty steady. We're actually finding more opportunities ironically now than we did 6 or 9 months ago. And I think, although it's counterintuitive, as we mentioned earlier in the presentation, it's because the faster pace -- we underwrite to a land residual. We know the IRR threshold we have to get to. We know the house prices and the cost, so we work backwards and come up with a land residual that we can offer a land seller. That number was disappointing for a long time. It still is from certain perspectives on many land sellers. But that number, that land residual, has been rising and that has made it more enticing for land sellers, including the banks, to sell their lands. So we're just finding more opportunities out there. So we're a little optimistic. There is always competition for land. I mean, that's been since the caveman era, I suppose, and we're out there slugging it away with everyone, as we normally are. In general, compared to the boom era, there are fewer private builders that we're competing against. So from that perspective, it's probably a more limited arena in terms of competition on land than it was 7 or 8 years ago.

Daniel Oppenheim - Crédit Suisse AG, Research Division

And I guess, wondering in terms of the May order trends. You talked about how there was really an issue in terms of the weekends during the month and such. Just to get a more -- a little bit more color on that, were the trends that you saw in terms of percent, if we look at it regionally on that per-week basis, similar to what we saw during the full second quarter? Any change there? Just trying to understand if -- how May was relative to that.

J. Larry Sorsby

Didn't really change in any material way. May's weekly pace was virtually identical -- it wasn't virtually. It was identical to what our April weekly pace was and there was no notable change in terms of mix.

Ara K. Hovnanian

And I'd say it was very steady during the month. And so far, it feels pretty steady again.

J. Larry Sorsby

Before we take the next question, the prior questioner had a question with respect to fully diluted shares. For the quarter, fully diluted shares were about 116,117,000 shares. I think he also wanted to know what it was, what our fully diluted share count was at quarter end. I mean, there is no such thing. I can tell you what was outstanding at quarter end, and outstanding number of shares at quarter end was 126 million shares, roughly.

Unknown Executive

May's contracts.

J. Larry Sorsby

May contracts was also another question, excluding JVs. So excluding JVs, our May net contracts for 2012, May of 2012, was 462 compared to 459 for May of 2011. And I think that those percentages are roughly the same that we've seen year-over-year, as well.

Operator

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

Nishu Sood - Deutsche Bank AG, Research Division

I wanted to ask a question about your cash balance, obviously at the higher end of your range. If I look back to 1Q, you had a really helpful slide where you basically laid out that -- beyond operating backlog conversion cash generation, a number of levers you can pull. If I looked at this quarter, you had 3 of those in effect basically, a reduced amount of land spend. You sold, I think, about $18 million or $20 million of excess land. There was the $27 million model sale leaseback as well. So I guess I wanted to step back and look at the bigger picture here. Was the second quarter just a confluence of events, these opportunities came up so you decided to take them? Or is this a broader push to boost your liquidity ahead of housing recovery?

J. Larry Sorsby

I think, from a land sales perspective, there wasn't anything unusual in the quarter land sales-wise. And we periodically had land sales. In this quarter, we had land sales not too unlike what we've had in prior quarters. With respect to the model sale leaseback, I think, in some of the -- my comments that I've made in my prepared remarks, it was really finding very attractive rates and terms of a model sale leaseback. We'd much prefer to redeploy the cash from a model sale leaseback back into buying new land that we're getting 25-plus-percent unlevered IRRs and paying less than 10% on the model sale leaseback and participating in the upside of any price increases those models might have so, we just think, a great way to enhance returns as well as provide additional capital to invest in additional land transactions. So we didn't think about it in terms of pulling those levers because we have to. We think it's very opportunistic ways to be able to invest more on core operating business.

Nishu Sood - Deutsche Bank AG, Research Division

Okay, great. And the second question I wanted to ask was about your mothballed communities that you are un-mothballing. You've laid out for us pretty clearly that -- on your new vintage land, the 2009 and post vintage land, that you have good margins on those relative to obviously your legacy communities. I wanted to ask about the communities that are being un-mothballed. How do those fit in the margin spectrum?

Ara K. Hovnanian

I mean, generally speaking, mothballed lands have lower margins. And part of the reason why they're mothballed: either they don't generate a good-enough margin at this moment or they don't generate a cash flow that's worth the land development investment going into it right now. So I'd say, in general, those have lower margins. Now having said that, we're seeing some price and pace escalation in some of the areas where we've been un-mothballing, so that will be helpful. And that could ultimately change things because we'll be replenishing land at the then-current market, but our mothballed properties have been written down some time ago by 75% approximately and that price doesn't change with the market. So that could change, but right now, we have better margins on our new purchases, for sure.

Operator

Your next question comes from the line of Alan Ratner with Zelman & Associates.

Alan Ratner - Zelman & Associates, Research Division

Ara, just first off on the orders side with regard to the number of weekends. I was just wondering if you could maybe quantify either in a typical month or year what percentage of your orders typically are written up on the weekends as opposed to during the weeks, just to kind of give us a little bit more clarity on that topic.

Ara K. Hovnanian

Oh, boy. I...

J. Larry Sorsby

I think it's around 70% that occurs in those 2 days, as compared to the other 5.

Alan Ratner - Zelman & Associates, Research Division

And the second question just relates to what you're seeing in the labor market in May with the job report. The BLS actually reported, at least on a seasonally adjusted basis, a pretty significant drop in construction-related jobs, and that definitely contradicts what we're hearing from builders that might be a little bit more concerned about possible labor cost increases in the next few quarters. So just curious kind of what you're seeing in your local markets on the labor side. Do you feel like you're creating jobs, losing jobs? And what your expectations are on costs going forward.

Ara K. Hovnanian

It's funny, I think we made a comment, sometimes we just can't figure out some of the overall statistics in housing and in other areas, and this is one of those areas. We just reported obviously a 52% increase in sales contracts. We're not standing out there by ourselves with the big increases. Many of our peers are reporting big increases and have over the recent months and quarter ends. While sales contract orders translate to permits, translate to starts, and I can guarantee you -- I mean, in our case, with 52% more starts. Pretty good chance we'll be employing 52% more masons, 52% more plumbers and 52% more painters and rug installers than we did the same quarter last year. So I think that's good news -- very good news in the coming quarters for the national unemployment rates. I'd be just shocked if it's not. And the reason I say that is because a lot of the unemployed has been in our sector as housing starts went from 2 million starts per year, including rentals, from -- down to 500,000. That put a lot of carpenters and sheetrock layers out of employment. They are not the same workers that are going to get a job at an Intel plant or writing a new Google app. They are often in the construction trade and need -- and stay in that business and are looking for the construction to come back. Well, based on the orders we're putting forward and the same with our peers, employment in this one industry, construction, which has really been lagging, has got to be growing in the next few quarters. I think it's going to be growing and help many in enterprises. And by the way, we, like most public homebuilders, subcontract out almost all of the construction, so you won't necessarily see our employee count rise but the employee count of all of the electricians, plumbers, roofers, et cetera that we hire should be going up in the coming quarters.

Alan Ratner - Zelman & Associates, Research Division

Great, that's really helpful and it's definitely consistent with what we're expecting as well. Just adding on to that, though, are there any expectations then that, that increased volume will lead to inflation on the labor cost side in terms of what you're paying your subs? And any type of quantification you could give there would be helpful.

Ara K. Hovnanian

Yes, I -- it's a very good point and it's something we are really focused on and sensitive too. And I'd be lying if I didn't say that we will see pressure on labor side around the country, but I can't really quantify that. And at the moment, our price increases have been outpacing any overall construction cost increases that we've experienced. And that's cost increases from both the materials and the labor side. But it's something that is clearly a factor all homebuilders are very focused on.

Operator

Your next question comes from the line of Megan McGrath with MKM Partners.

Megan McGrath - MKM Partners LLC, Research Division

Larry, I guess I'm just trying to gauge some of your comments around capital structure and equity issuances. It sounds like that you -- that the sort of larger equity issuance was kind of a one-off. Would you do it again in the same situation? Or is your appetite more for these smaller equity issuances related to debt paydown?

J. Larry Sorsby

I think it depends on the circumstances at the time. We certainly haven't been interested in doing the lower share price. And frankly, the day we pull the trigger on the equity offering, I think we were fighting an extremely ugly tape in the overall broader markets, and that's kind of been down ever since. So I don't think we'd be very interested at these kind of prices, but it really depends on the circumstances at the time and what debt we could potentially be getting rid of. I mean, we've continued to chip away at our debt positions since 2008. We've reduced debt by $1 billion. I think sometimes that fact is overlooked by the analysts that follow us. And we've continued to chip away at it on a fairly regular basis. We'd be much happier to use our precious equity at higher prices than they are today, but if we had a tremendous opportunity that we felt made sense, we'd look at it.

Megan McGrath - MKM Partners LLC, Research Division

And then just to follow up a little bit on Phoenix. You put that graph up and you're talking about sort of 1D, 2D [ph] incremental price increases. So just curious what's actually happening specifically in Phoenix, in a typical market at -- 2 months supply, that would be a great kind of market for you to really see price increases, but clearly this isn't a typical market. So what are you seeing specifically in Phoenix in terms of prices?

Ara K. Hovnanian

Phoenix specifically -- in the last few months especially, many of our communities have seen net price increases. And I use that term because, for us, it really doesn't matter what comes in base price or what's in the reduction of concession. It's really -- net price is all that matters. And we've been steadily tweaking net pricing up in Phoenix over this last quarter. It's always a delicate balance and a trade-off between that and velocity, which really helps our operating returns as well. But thus far, in Phoenix specifically, we've had good success raising prices.

Megan McGrath - MKM Partners LLC, Research Division

Much higher than that sort of 0.3% you're talking about, or kind of in line with that?

Ara K. Hovnanian

I don't know percentage-wise, but I'd say it's been -- in the last quarter, pricewise, it's one of the healthy markets.

J. Larry Sorsby

I think it's the best community by community, but it wouldn't surprise me if, on average, the price increases are slightly higher in Phoenix than they've been elsewhere.

Operator

Your next question comes from the line of Kristen McDuffy with Goldman Sachs.

Kristen McDuffy - Goldman Sachs Group Inc., Research Division

I wanted to ask you a little bit more about the liquidity levers that you guys have listed in the past. You mentioned that you sell leaseback on 86 of 217 model homes. Do you expect to continue to do that sort of activity? And if so, should we think about the remaining model homes as being roughly worth what you got for the first 86?

J. Larry Sorsby

I think it would be something that we would look at and potentially do. I can't address -- I -- if I stood in your shoes, I'd do the same kind of percentages, if you can get the percentages of -- I'm just not sure where the geographic mix of those models are or the product mix of those models versus what we've actually done. So that portion of the question, I can't really answer. But we're always interested if we can do something to enhance our return on invested capital, ROI. And we think we can do that by having less cash invested in models and more cash invest in our core homebuilding business. That's something we'd be interested in doing if the cost of the models sale leasebacks remains single digit. We certainly can earn much better returns on that in our core homebuilding business.

Ara K. Hovnanian

I will emphasize: We've been doing sale -- model sale leasebacks for a long, long time. There certainly was a larger slug than normal and slightly unusual in that there were transactions where we participate in the upside, hence you see a slightly different accounting treatment. Oftentimes, we'd sell the models at a higher cost than this but we have no participation in the upside. So this is going to be unique opportunity that we want to take advantage of for several of them.

Kristen McDuffy - Goldman Sachs Group Inc., Research Division

And can you also update us on any progress with respect to land banking opportunities?

Ara K. Hovnanian

I'd say -- go ahead, Larry.

J. Larry Sorsby

People that -- have approached us months and months ago and years ago. There's probably fewer land bankers out there than there used to be, but it seems like there's a few tiptoeing back into the market that it will be interesting to see whether a transaction is going to actually occur.

Kristen McDuffy - Goldman Sachs Group Inc., Research Division

And just one last question in light of kind of the new sales pace that you guys are experiencing. Over the next couple of years, do you expect to replenish inventory at the same rate that you sell through, maybe draw down or build inventory in terms of your land purchase intentions?

J. Larry Sorsby

We really don't make projections on what we're going to do land purchase-wise.

Ara K. Hovnanian

What I would say, though, in general, our focus is on more inventory turns. So to the extent we could own a month's worth of land and have the balance optioned, we would love to do that. It's difficult to do, but that would certainly be an optimum use of our cash. In general, I'd say we strive toward a shorter ownership position but a lengthy controlled position through options.

Operator

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

Joel Locker - FBN Securities, Inc., Research Division

Just a question on actual interest expense. It just jumped up a little bit. You expensed more. And your interest incurred actually fell, which should fall a little further with the -- more paydown of debt. But just wondering, going forward, like, looking at that, what do you expect from an interest expense line item?

J. Larry Sorsby

Well, I think interest is up in the other interest line for this particular quarter because the assets that qualify for capitalization were down. And we have to look at the assets and the status that they're in, in terms of under construction or if the land is under development to capital that interest. And if they're -- if that total value goes down, we expense more of the interest that we've incurred in the period. I think, if you looked at the 6-month -- over the whole 6-month period and took that on a quarterly basis, it's probably closer than what you'll see on a quarterly rate going forward. But that will depend on what we do in terms of new land acquisitions and what we put under development, so...

Ara K. Hovnanian

But in general, we've been expensing more than we've been incurring. And over time, you'd expect -- and therefore, capitalized interest on our balance sheet has been going down. Over time, that should -- so the expense and the incurred should get more in line than it has been recently.

Joel Locker - FBN Securities, Inc., Research Division

Right. And just a follow-up question on, say, Phoenix. Your owned lot supply there is -- in the Southwest, based on forward earning -- forward deliveries, is probably more like 0.9 versus the 1.1. And just was curious what it was in Phoenix on your owned lot side based on the trailing 12 months or forward 12 months or how...

J. Larry Sorsby

Yes, unfortunately, we don't give market-by-market specifics beyond the segment data, but I will give you a hint. And that is that we're able to control, primarily by options on adjusted signed basis, land in the Houston and in Dallas, which is why the year supply is 0.9 in the Southwest segment. But I'm not going to give you specifics for a market segment in Arizona.

Ara K. Hovnanian

Yes, I'll tell you, just in general, we're making some progress in Phoenix and feel pretty good about some recent land commitments.

Operator

Your next question comes from the line of Alex Barrón with Housing Research Center.

Alex Barrón - Housing Research Center, LLC

I wanted to ask you -- one thing that I'm a little bit struggling with is, even though your orders were up huge, your inventory was down sequentially and year-over-year. One would think that if your orders are growing that much, you'd have to start putting in more capital to work. So was there just a delayed reaction? Or how should I think about it over the balance of the year?

J. Larry Sorsby

I mean, it's the inventory turns. I mean, we try to be pretty specific in the prepared remarks, but we are finding ways to turn our inventory more rapidly, which I think will work. Now a lot of what we sold during the quarter we haven't built at quarter end, so you're not going to instantaneously see an impact on inventory just because we sold a bunch of homes. It's more looking at what's in backlog and under construction compared to appropriated at the time. But our overall objective is to turn inventory more rapidly so that you can actually do more volume with the same amount of capital or even less.

Ara K. Hovnanian

And I think, Larry mentioned, comparing the same quarter of this year to last year, our inventory turn increased about 30%, so that can make a pretty significant difference. And that's part of our overall strategy: try to do more turns with the inventory we have.

Alex Barrón - Housing Research Center, LLC

Okay. So I guess related to that same issue, would you expect your cash balance to drop below the $175 million you guys had mentioned at some point, or not really? And I'd still like to ask a second question.

J. Larry Sorsby

It will be your third question. But we're managing the business to try to stay within that $175 million to $240 million or $170 million to $245 million total cash balance. Those are kind of the – accelerators or brakes to our ability to invest in new land deals, so that's really the governor to -- for that. We're not planning to fall below the $170 million, but we are comfortable at the lower end of the range, as we've previously mentioned. And feel free to ask a third question.

Alex Barrón - Housing Research Center, LLC

Larry, my other question was, can you -- since you mentioned your commissions that are inside your cost of goods sold, can you help me understand on your SG&A what – how should I think about what portion is fixed and what portion is variable?

J. Larry Sorsby

I mean, going forward, we think we can do lot more volume without very much increases in SG&A at all. I mean, at corporate, think of it as almost -- unless you want to get rid of a CFO or a CEO and run the company without us, we think most of corporate is pretty much fixed at this point in time. And frankly, the same thing's true at our various businesses. We shrunk those very significantly during this unprecedented industry downturn. I mean, our overall headcount's down 78%, I think, from the peak, something along those lines. So the people that are left and the costs that are left are, for the most part, fixed. The -- obviously, you can -- incremental decisions on advertising cost and those kinds of things community-specific. Or if you add a incremental additional community, you'll need another construction superintendent and 1 sales person or 2 and maybe a receptionist, but it's pretty incremental cost as we grow communities. So the rest of it we kind of look at as fixed. It just depends on your definition of fixed.

Alex Barrón - Housing Research Center, LLC

Yes, I know because I -- usually, most of the time when I model SG&A, I assume a -- certain dollars is, kind of like you said, people who are on staff and stuff like that, and some of it is generally variable because of commissions and what have you. I'm just kind of looking at -- you guys booked $35 million this year, and I'm trying to -- I know your revenues are going to go up in the back half because of the growth in backlog and deliveries. I'm just trying to figure out how much leverage you guys are going to post and whether you're expecting they will start showing up operating profit in the back half.

J. Larry Sorsby

Well, I'll just tell you that we're not anticipating adding much in -- if anything, in the way of people than you can model that -- as you see appropriate.

Operator

Your next question comes from the line of Susan Berliner with JPMorgan.

Susan Berliner - JP Morgan Chase & Co, Research Division

Larry, I just wanted to follow-up on the model leaseback, I guess. I know it's in liabilities from inventory not owned. Should we be thinking that as a debt? Because I know you said, I think, it's sub-10% rate. And what kind of maturities should we be thinking about there?

J. Larry Sorsby

Yes, it depends on the individual model. I mean, they're going to roll off as we roll out of those individual communities, it's a self rule. So each model sale leaseback has its own individual term. I mean, on average, our community lives that we've been doing on new identified is roughly 2 years, so that might be as good a benchmark as you can think about it in terms of. But at the time those roll off, it's going to come through as revenues like we're selling the home then from a GAAP accounting perspective.

Susan Berliner - JP Morgan Chase & Co, Research Division

Got you. And then the second question was, can you give any color on the land sale, I guess, where it was and with regards to was it part of mothballed land or active land?

Ara K. Hovnanian

Yes. The big sale was in Orlando where we had a very large land position, it's in a very good and successful community. But we had bought a big land position several year's worth. So we still kept a couple of years worth and sold the excess land beyond that.

Susan Berliner - JP Morgan Chase & Co, Research Division

And was that part of mothball or active?

Ara K. Hovnanian

No, it wasn't mothballed. It's actively selling community. And as I mentioned, it's selling quite well and with reasonable profits as well. But we didn't want to own 5 years worth of land and we thought it would be smarter to just keep a couple of years worth. I'd ideally like to keep 1 month's worth and just keep turning it over, but we took the longer end of that position, sold that. And those are the dollar that we'll deploy into shorter land positions, which is part of our overall strategy.

J. Larry Sorsby

Another -- further evidence of inventory turn focus.

Ara K. Hovnanian

Yes.

Operator

[Operator Instructions] Your next question is a follow-up from the line of Andrew Casella with Imperial Capital.

Andrew Casella - Imperial Capital, LLC, Research Division

Just, how much capacity do you have left to do the 3(a)(9) exchanges? I know in the past you've discussed that you do have some limitations on that. If you could give any color, that would be helpful.

Ara K. Hovnanian

I think, Larry, he's probably referring to how much capacity we could -- we have and not affect our NOL. Is that your question?

J. Larry Sorsby

Is that the question, NOL-related? Because 3(a)(9), we don't have any individual limitation on that, that I'm aware of from accounting perspective or regulatory perspective. If you are referring to the NOL limitation, what I said in my prepared remarks is that we could issue an additional 100 million shares of HOV common without limiting our ability to utilize our NOLs.

Andrew Casella - Imperial Capital, LLC, Research Division

And that's even with doing a sort of 3(a)(9) exchanges, as opposed to doing a secondary offering?

Ara K. Hovnanian

I think it's a little lower, Larry, correct me if I'm wrong, if you do it, the…

J. Larry Sorsby

It's just slightly lower. It is slightly lower, but I don't have an absolute number. It's not materially...

Ara K. Hovnanian

It -- yes, slightly lower, if you do it through 3(a)(9).

Operator

This concludes the Q&A session for today's call. I would now like to turn the call back over to Ara Hovnanian for any closing remarks.

Ara K. Hovnanian

Thank you very much. We are pleased to give the results, which are much improved in the second quarter, and look forward to giving even better results in the back half of the year. Thank you.

Operator

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

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