Hovnanian Enterprises F1Q08 (1/31/08) Earnings Call Transcript

Mar.11.08 | About: Hovnanian Enterprises, (HOV)

Hovnanian Enterprises, Inc. (NYSE:HOV)

F1Q08 (1/31/08) Earnings Call

March 11, 2008 11:00 am ET

Executives

Ara Hovnanian - President and CEO

Larry Sorsby - EVP and CFO

Kevin Hake - SVP and Treasurer

Analysts

Michael Rehaut - JPMorgan

Carl Reichardt - Wachovia Securities

Ivy Zelman - Zelman & Associates

Susan Maklari - UBS

Larry Taylor - Credit Suisse

Megan McGrath - Lehman Brothers

Susan Berliner - Bear Stearns

Robert Moniot - RBF

Rashid Dahod - Argus Research Corp.

Joel Locker - FBN Securities

Alex Barron - Agency Trading Group

Lee Brading - Wachovia

Vicki Bryan - Gimme Credit

Gary Freedman - GEM Royalty Capital

Beth Holstra - AllianceBernstein

Keith Wiley - Goldman Sachs

Clifford Rosen - UBS

Tim Moray - BlackRock

Operator

Good morning and thank you for joining us today for Hovnanian Enterprises fiscal 2008 first quarter Earnings Call. By now you should have all received a copy of the earnings press release. However, if anyone is missing a copy and would like one, please contact Donna Roberts at 732-383-2200. We will send you a copy of the release and ensure that you are on the company's distribution list.

There will be a replay of today's call. This telephone replay will be available after the completion of the call and run for one week. The replay can be accessed by dialing 888-286-8010, pass code 97074528. Again the replay number is 888-286-8010, pass code 97074528. An archive of the webcast live will be available for 12 months. This conference is being recorded for rebroadcast and all participants are currently in a listen-only mode.

Managers will make some opening remarks about the first 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 investor's 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 remind everyone that the cautionary language about the forward-looking statements contained in the press release also applies to any comments made during this conference call and to the information in the slides presentation.

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

Ara Hovnanian

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

If you turn to slide number one, you can see that performance for the quarter and most key metrics was off from last year's first quarter. We provide detail in our press release which we issued yesterday. I'm not going to go over every data point but we'll focus on some of the key areas.

Overall, the housing market remains challenging and we clearly don't see evidence that the market is improving yet.

Sales for the quarter were down 41% from last year's first quarter. You can see on the slide that this was largely due to a fall off in contracts per community as our number of open communities is down about 7% from a year ago. The pace of new contracts in the quarter was definitely weak; however, the 37% falloff in the pace of sales per community is a bit distorted due to two factors that I'd like to mention.

One is that our first quarter last year, excluding our Fort Myers operation was only off 2% from the first quarter of '06. We actually had a decent period of sales in December and January of '07, considering the normally slow season around the holidays. So our contracts are off more this year on a percentage basis, partly due to the difficult comparison with the year ago quarter.

In addition, in this year's first quarter, we started off with a very slow contract pace in the month of November, partly as a result of our "Deal of the Century" promotion which captured a significant amount of sales in September but led to a dead period of sales in October and November. Over a three-day period in September, we sold a lot of homes but what we ultimately did was pull some amount of these sales forward from October and November which leads to some distortion for our first quarter.

Collectively, the three-month period from September through November was the reasonable sales period in this environment. Sales were down about 17% over the same period in the prior year. But there is no doubt that we cannibalized some sales contracts from buyers that would otherwise have signed in the subsequent months of October or November.

This can be seen on slide two where we show monthly sales and the year-over-year change in monthly sales from September '07 through February '08. In December, our sales pace recovered a bit, as a matter of fact we almost sold as many homes in December as we did in October and November combined which is highly unusual given the holiday season.

When we reported our fourth quarter results in December, we talked about the relative strength of our sales in the first couple of weeks in December versus a very dry month of November. The December improvement was real in comparison with November. But on a year-to-year basis, December was off 33% from the prior year and January could be further off 39% from January of '07. Again these were tough comparison months due to the relatively strong months last year.

For the month of February on slide three we showed a bit of improvement with 804 net contracts, a decline of 31% from last year. But again it's against the difficult comparison month with February of '07 showing contract up 3% from the previous year. That's obviously unusual in this kind of market environment. Overall, we are continuing to sell at a pace which is about 25% below last year after adjusting for the decrease in the number of open communities.

Although our sales are down year-over-year, the pace over the past several weeks has been at our internally seasonally adjusted budget. This means that if we stay on or close to budget, we'll sell enough homes over the next few months to meet or exceed our budgeted deliveries in the final two quarters of the year. This will enable us to more easily meet our operating cash flow projection of more than $100 million for fiscal '08.

Operating cash flow as you know includes both EBITDA and the cash we generate from inventory reductions. The latter is the results from our careful management of the replacement of lots under the homes we deliver, which we are only doing on a very limited basis, and therefore we are confident that we'll be able to meet our cash flow targets.

We have a fair amount of control over cash flow by managing our inventory level. So I will talk a little bit more about inventory reductions to-date.

In '06, we began to pull back heavily in our inventory growth plans by walking away from a significant number of lot options. The effect of our inventory investment levels can be seen on slide number four. This was a necessary first step for us, but it took until the middle of '07 after walking away from further lot options to reach the pivot point where the amount of lots we were taking down became a smaller percentage of the lots we were delivering in each month and quarter, such that our inventory investment dollars and the number of owned lots began to decline. The effect is that we are now on a position to generate cash for the full year in '08 on top of the significant cash flow of $376 million that we generated in the fourth quarter of our most recent year.

We are now making progress in reducing our owned lot position. As you can see on slide five, at the end of the first quarter of fiscal '08 owned lots were down to 27,372. This is a 25% reduction from the peak levels of owned lots in July of '06. Further reductions in the owned lot position will lead to continued cash flow.

Remember during the growth cycles home builders are big users of cash as they are adding to their lot positions and increasing deliveries. During the trough of the cycle, cash generation is achieved by replacing lots at a much lower pace than homes are delivered.

Our option lot position also came down. We ended the quarter with only 31,729 lots under option. We terminated and walked away from land contracts, totally about 1600 lots during the quarter. Our remaining investments in option lots, options deposits has dropped dramatically from a peak of about $466 million at the end of the second quarter in fiscal '06 to about a $143 million at the end of our recent quarter. Our total lot position is down 51% from the peak in '06.

On slide six, we showed the geographic breakout of our owned and option lots. Looking at deliveries for the previous 12 months, our land position now stands at a two-year owned land supply and the 2.3-year supply of option lots. We expect to continue driving down our lot position. Additionally, we keep a close eye on another important component of our inventory, the number of homes that are started and unsold.

Over the past 10 years which is shown on slide seven, we have averaged 5.1 started unsold homes per community. At the end of the first quarter, we're at about 4.7, which is back below five specs per community after a period of about 10 quarters with higher spec levels, largely resulting from the increasing cancellation that we experienced over that period of time.

On slide eight, you can see that the absolute number of started unsold homes at July 31 was at the lowest level in nine quarters. We had 1898 started unsold homes or a 3.8-month supply based on the very low first quarter sales pace and a 2.3-month supply based on the trailing 12-month sales pace. As a Group, the large public home builders have been significantly reducing the number of started unsold homes.

On slide nine, we show that for a group of 10 public home builders that report the data, the total number of started unsold homes over the past year has declined by 25% to 27,586 homes from 36,538 homes.

Using trailing 12-month sales for the same builders, it equates to a 2.3 months supply similar to our 2.3 months supply. Recognizing that the public home builders represent a large percentage of the total housing production and that private builders are not getting the financing for spec homes today, I am optimistic that the spec home inventory will continue to decline and will not be the large problem in the marketplace. I am not saying that there are no other big issues, it just that the amount of new spec housing is unlikely to be the big problem. We have been aggressive in discounting our started unsold homes which is one of the reasons that we are reporting low gross margin levels.

On slide 10, we show our dollar investment in inventory has broken into two separate categories. Number one, sold and unsold homes which includes homes that are in backlog, started unsold homes and model homes. And two, land and lots under development which are all other owned lots that do not have a sales contract and/or any vertical construction. As you can see, the dollars invested in our inventory came down again during the first quarter after a substantial reduction in the fourth quarter of '07.

As we look at the remainder of the lot take downs that are coming up during fiscal '08 as well as the dollars that we need to invest in land development, we are confident that we are going to hit our cash flow projection of more than $100 for fiscal '08. I recognize that over $100 million is a broad range, but given that much of our cash flow is typically generated in the fourth quarter, we want to wait further into the year and the spring selling season to give more specific targets.

For the fourth quarter of fiscal '07 we were significantly ahead of our previous cash flow guidance as we generated $376 million of cash flow in that quarter. We used the cash we generated during that quarter to reduce our debt. As we stated in our year end conference call, we anticipated increasing our bank borrowings modestly in the first half of '08, with reductions weighted towards the second half of the year, which again follows our typical seasonal pattern.

On slide 11, you can see that typical seasonal pattern, but overlaid with a steady trend of an improved cash flow in each quarter over the prior three years moving towards positive annual cash flow which we'll achieve this year.

Much of this cash flow will come by way of reducing inventories, mainly by taking down significantly fewer lots than we are delivering. Today we are proceeding very cautiously in converting option lots to owned land. We've had great success in delaying take downs in our renegotiations much further into the future. We are at the point now where every land parcel must be approved by me personally before it's purchased.

We expect our total land position to continue to decline. We are steadily burning through our old land supply and where we're taking down lots, we are replenishing the supply with renegotiated lands, at prices that will reduce our total cost. Once we burn through that land, we will begin to see some margin improvements on newer lots, even without an improvement in the housing market for higher home prices.

At this stage, we're primarily taking down lots only in the healthier markets where the lot price will result in a good margin, and in most cases, we already have a contract for a home on that lot.

We're keeping a close eye on the dollars that we're spending on land development. So far, we have mothballed a number of communities where we determine the current performance did not justify further investment at this time. We continually review communities to determine if mothballing is appropriate. We prefer to avoid spending money to improve land today and save the raw land until such time as the markets improve and we can generate higher returns.

We continue to take steps to reduce our construction costs and overheads. First, we've continued to negotiate for lower labor cost with our sub-contractors. These negotiations have resulted in sizeable reductions, which buffer but have not been able to offset the significant net prices decreases related to incentives and base price reductions.

Secondly, we've been proactive in renegotiating our national contracts, within the last six months, we renegotiated contracts that will result in several million dollars of incremental savings in fiscal '08 and we expect to continue to reduce cost for materials as we renew additional contracts going forward.

The final component of cost that I will talk about is overheads. We estimate that most of SG&A costs are variable costs, at least over a longer period of one to two years. As the business is contracting, we can make significant adjustments to our total SG&A in order to match it to current demand for homes.

While we haven't exited any markets, we've been consolidating our operations within a number of our markets to operate more efficiently at a much smaller scale. An example of this, in Southern California, we are consolidating our coastal and our inland operations. In the Northeast, we are combining our Eastern Pennsylvania and South Central New Jersey operations.

While there is some ability to reduce costs in office space and other overheads, the driver for reducing SG&A is largely related to reducing staffing levels. These are not enjoyable decisions to make, but they are necessary to manage through the current downturn. Since our peak in July '06, our staffing levels are down 47% company wide as of the end of February.

I will now turn it over to Larry Sorsby, to discuss some of the charges we took in the first quarter and our revised credit facility as well as our mortgage operations in greater detail.

Larry Sorsby

Thank you, Ara. I will start by talking about the recent amendment to our credit facility. As we announced in the press release, we received approval from our bank group and closed an amendment to our revolving credit facility last week. The amendment included the following revisions to the facility. First, we reduced the commitment of the facility to $900 million as our inventories and debt levels are now shrinking and are projected to continue to decline this year. We're confident that a $900 million committed facility provides us with ample liquidity.

The outstandings on the revolving credit facility are now secured with first lien mortgages on residential properties with a 65% advance rate against a priced value. To the extent that we have cash balances, these can also collateralize the amount as outstanding and letters of credits. This structure allows us the flexibility to fully utilize our $900 million credit facility.

Note that not all our assets are pledged, only in an amount necessary to support the outstandings and letters of credit. Once we complete our initial securitization revolver we expect to have over $1 billion of book value of assets that are not provided as collateral for our amended credit facility.

Three, we increased the maximum leverage threshold significantly and reset the minimum tangible network threshold to a very low level that we believe will give us adequate operating room under these financial covenants. In addition, the maximum leverage threshold is not a default so long as we've reduced the facility amount further and abide by a lower advance rate on the borrowing days.

Four, we continue to have no interest coverage test that could trigger a default. We do have a coverage test based on operating cash flows, but it is also not at the full trigger as long as we have adequate availability under our borrowing days.

Five, the maturity remains May of 2011. Although, we would have preferred not to provide mortgage collaterals, we felt it was accrued trade-off for improved flexibility under the covenants particularly with a limited amount of such mortgage collateral required and an ability to reduce that collateral as we reduced our usage under the facility overtime. We have a strong long standing relationship with many of the banks and a revolving credit facility, and we are satisfied with the agreement we've reached.

Now I'll give some further detail on the land related charges that we took in the first quarter. We took charges of $16.3 million related to land option walkaways on 1,600 lots in the first quarter as shown on slide 12. These charges represent the amount invested in these options including option deposits and predevelopment cost.

In our more challenging operations our land option positions have come down dramatically; in Florida, California, Minnesota, Arizona, and Chicago, we only have slightly more than 4,000 lots under option remaining out of our total options positions companywide of about 32,000 lots.

For those options still in place today in most cases the price terms or both have been re-negotiated, so that they continue to make economic sense going forward even in this tough housing environment. The majority of our remaining lots under option are in Texas, North Carolina, Washington DC and the North East. About 24,000 total lots in these markets were 75% of the total of all our options.

Given the impact of the downturn the markets in Texas and North Carolina performed relatively well and better than California, Florida and the Midwest. Although conditions are obviously slow, sales and pricing have also held us better in the DC and North East markets.

The next category of pre-tax charges relates to impairments. As shown on the slide we incurred impairment charges of $73.8 million related to land and communities that we owned in the first quarter.

We impaired a total of 28 communities in the first quarter of 2008, 10 of those had previously been impaired. That leaves us with the last major area of charges for the quarters which are related to taxes and the FAS 109 deferred tax asset valuation allowance.

Normally when we record losses, we would be recognizing a tax benefit. Many of those losses primarily related to impairments of land are not eligible for current tax refund until we actually sell the inventory, but the tax benefit can be carried forward for 20 years. We concluded that we should book an additional $21 million after tax non-cash deferred tax asset valuation allowance during the first quarter.

Let me reiterate what I said last quarter. The FAS 109 deferred tax asset valuation allowance was for GAAP purposes only. For tax purposes our tax asset may be carried forward for 20 years and frankly we fully expect to utilize those tax loss carry forwards as we generate profits in the future.

Although financial accounting requirements limit the company's ability to consider future profits and determining the need for a valuation allowance, the company is confident that will generate sufficient profits in the future to ultimately fully utilize as deferred tax assets. As we generate future profits the valuation allowance reserve will reverse such that we will not have to record any federal taxes on our earnings. Once we can determine that we are no longer and/or expect to no longer be in a three year cumulative loss position the entire remaining valuation allowance will be reversed in a single quarter.

While our deferred tax asset valuation allowance charge was non-cash in nature it did affect our balance sheet and our network by $21 million during the quarter, and $237 million to-date. After our walkaways, impairments and an additional FAS 109 deferred tax asset valuation allowance. We ended the quarter with approximately $1.2 billion in shareholders' equity or $16.79 per common share. Our share price is still traded about 50% of book value even after all of the charges I just described.

Additionally our net recourse debt to capital at January 31, 2008 was 64.6%. Prior to the affect of the deferred tax assets valuation allowance our net debt to cap ratio was 60.3%. It's important to look at this ratio, both before and after the application of FAS 109 when comparing publicly traded homebuilders. Because of the difference in application of FAS 109 depending on which outside auditors the home builder uses.

Now let me touch on the mortgage markets, and our mortgage financing operation. If you will turn to slide 13, a recent data indicates that the average credit quality of our mortgage customer remained higher than national averages. The average FICO score for the first quarter of fiscal '08 was 729 higher than it was in 2007. Of course some of this improvement in our FICO scores is likely linked to tighter underwriting criteria and the fall-off in subprime and Alt-A originations this year. Similar to the national pattern, our buyers also continued to use more fixed rate products as the percentage of buyers using adjustable rate mortgages originated through mortgage company declined to only 6% in the first quarter.

Turning to slide 14, we show a breakout of all the various loan types originated by our mortgage company during the first quarter of fiscal '08 compared to all of fiscal '07.

Keep in mind that we sell all of our loans on whole owned basis, we identify buyer of the loans prior to closing on an individual loan. Our conventional prime loan business, defined as conventional loan, was full documentation of income and assets with these are conforming or non-conforming loan limits has increased 52.3% during fiscal '07 to 60.3% in the first quarter of fiscal '08.

FHA/VA loans also increased to 13.5% during the first quarter of '08 from 8.1% of total originations in fiscal '07. A level of subprime business originated through our mortgage company is continued to contract and is nearly non-existing.

The amount of subprime mortgages generated by our mortgage company declined from 3.7% during fiscal '07 to less than 1% of our total loan volume during the first quarter of '08. The volume of Alt-A loans has also decreased to 19.7% in the first quarter of '08 compared to 27.3% of our volume in all of fiscal '07.

To reiterate what we told you on our last call, the industry is going back to mortgage lending 101 basics. The market has just returned to sound mortgage credit underwriting criteria principles. Buyers who have a decent credit history who can verify their job, make a modest down payment, and will have no issues obtaining approval for conventional, jumbo, FHA, or VA loans.

Our pre-tax earnings from Financial Services was $3.1 million in the first quarter fiscal '08 compared with $8.5 million in the prior year's first quarter. The decrease is largely related to the decline in originations from our homebuilding operation as sales and closing volume have declined.

Now I will turn it back to the performance of our homebuilding operations in the first quarter.

Our contract backlog at January 31, 2008 excluding unconsolidated joint ventures were 3,845 homes with the dollar value of the $1.3 billion.

On slide 15, we show the backlog at January 31 for the prior five years and we provide a breakout of the portion of backlog associated with our Fort Myers-Cape Coral operations. As anticipated in the first quarter, we reported the closing of 1,345 homes in the Fort Myers market on which we earned only a 2% gross margin due to the unique nature of these closings. Our operations in this market are very different from most of the company's divisions.

Most of our home buyers in this market first buy a lot from us and then use construction financing from the third-party lender to build a home. We typically receive between 75% and 90% of the purchase price from our Fort Myers customers via their construction loans. However, even if the market is deteriorated so significantly in Fort Myers, many buyers have chosen not to convert permanent financing where we would normally receive the balance of our sales price. This is what occurred for virtually all of the 1345 closings in Fort Myers during our first quarter.

As a result, at the end of our first quarter fiscal '08, only 306 homes amounting to $84 million of backlog are associated with the company's Fort Myers-Cape Coral operations, down from 1652 homes in our Fort Myers backlog in October 31, 2007. Notwithstanding the effects of Fort Myers, incentives and price reductions that we've instituted across the country had kept our margins below normal levels for the past several quarters.

Reflecting the continued weakening of the housing market and our efforts to reduce started and unsold homes, our homebuilding gross margins excluding our Fort Myers-Cape Coral operations would have been 8.6% in the first quarter of 2008 compared with 11.3% for the fourth quarter of 2007.

In order for any homebuilder to get through a downturn, first you must build through your owned land position which is a land you owned at higher prices and replace it with lower prices land at today's market values. Once that is accomplished, it will allow us as well as other homebuilders to get back to a more normalized gross margin. For us that's in the range of 20% to 21%.

Now I'll shift to talking about joint ventures. Our investment in unconsolidated joint ventures declined to a $162 million as of January 31, 2008 compared to a $176 million at the end of last year.

Turning to slide 16, we have continued to maintain modest leverage in our joint ventures and have financed them solely on a non-recourse basis.

At quarter end, our debt-to-cap of all of our joint ventures in the aggregate was 46%. We do not have any debt arrangements at any of our joint ventures that will require us to provide additional equity capital to joint ventures in the future. And we don't anticipate a need for cash to voluntary support our joint ventures.

In fact, we expect to generate cash from our joint ventures as I number them are in the wind down stage of delivering homes without significant additional development dollars needed. We report a significant amount of details of the balance sheet and profits of our unconsolidated joint ventures in our 10-Qs and 10-Ks so you can look there for more details.

Now, I'll turn it back to Ara for some closing comments.

Ara Hovnanian

Thanks Larry. The Federal Reserve, Congress, Fannie Mae and Freddie Mac have been doing their part to give a shot of confidence to consumers. History has shown that over time the Fed seems to be able to either slowdown or stimulate the economy with its interventions, not only it's apparent in the quarter or two, but it ultimately comes to being that Fed is clearly more interested in stimulating the economy today.

The recent declines in mortgages rates will undoubtedly help since that impacts affordability directly. About 83% of the mortgage applications around the country in the most recent months were based on fixed rate mortgages and 30-year fixed rate mortgages have declined about another 6 basis points over the last 12 months to an average of 5.98% last week.

The market is too challenging right now to make accurate forecast for fiscal '08. Fiscal '08 will clearly be another difficult year, but we've already taken significant steps to position ourselves and reduce our overheads to be better prepared for an environment with lower sales and prices. We're experienced operators. We've been around as a company for almost 50 years. We've been through many downturns. We were much smaller in those past downturns than we are now. We were less diversified with far fewer products and price points and in far fewer geographies.

We are also more highly leveraged in the past than we are operating today. We've successfully managed through these difficult times in the past and we're taking the steps now that we know are necessary to come through this downturn and ensure that we will be in the best possible position when the inevitable recovery takes place.

Long-term housing demand is not going away. In fact, it's projected to go up. Most of our competition on the other hand primarily to smaller and medium-sized private builders may go away. As this has occurred with every major housing downturn, it will become a really solid housing environment soon, with pent-up demand and less competition for those that can advantage of the times and we absolutely plan on doing that as we have after every housing cycle before.

I recognized that it's difficult to see a bright housing picture as we're in the middle of the current quagmire. We need to get above the trees to see the forest. The herd is running from housing, it's precisely the time to be in and recognize all of the wonderful opportunities that are cleverly disguised these problems.

That concludes by comments, and I will be happy to open up the floor for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Michael Rehaut from JPMorgan. Please proceed.

Michael Rehaut - JPMorgan

Hi, good morning.

Ara Hovnanian

Good morning.

Michael Rehaut - JPMorgan

The first question just on the absorption rate. Ara, you had mentioned that the comp was sort of obscured a bit by Fort Myers. But still net-net it looks like with a 3.7, absorption for the quarter that would be somewhat below what I would assume you'd be targeting. So I wanted to know, what do you feel is the rate that you want to get it up to and what do you think you need to do to get it to a better pace?

Ara Hovnanian

Well Mike, first of all remember obviously, our first quarter takes place over, Thanksgiving of November, it takes place over Christmas and all the other holidays, and New Years of December and of course traditionally a very slow period right after that. In January it's the slowest season normally at any time in the marketplace.

What also made it a little difficult to compare as we talk about were the tougher comparisons, because we actually had an unusually good season the prior year, plus as I mentioned also, we have the fall out after "Deal of the Century" which happened to be held in the middle of September.

So clearly today we recognize that we cannibalize some sales that were coming up after that. We feel pretty good about the current sales pace right now that we've been experiencing, and we think we're well on the way to meet our projections.

Michael Rehaut - JPMorgan

To just understand, I mean, you were at 3.7 in the first quarter of this year, a year ago you were at 5.9, a year ago before that you were at 9.0. Where do you want to see that settle out, and maybe you can just talk about in general?

Ara Hovnanian

Yeah. I mean, we don't give a specific target, Mike in sales, and again we recognize it was a very low pace for the first quarter. Obviously, if you just look at the month of February alone it was dramatically higher at over 800 contracts. We are pleased with that pace. We think we've taken and implemented the steps we need at this time in the marketplace to get that right balance of pace and price.

Larry Sorsby

I think clearly we are at a low point of absorptions end of this downturn and as the market firms up and improves we'll get back to a more traditional absorption, right. But there is not a whole lot any individual builder can do to get it back to the levels we clearly want to see it. We just have to weather the storm.

Ara Hovnanian

Again Mike remember in September we had an unusually high sales pace with our "Deal of the Century", and we clearly had an aftermath effect in our first quarter driving down that sales pace as we pulled buyers from the future. We also had our normal cancellations from that large number of sales, so all of that affected it. But again as you could see February was off to a pretty good pace with a monthly pace of 800 homes.

Michael Rehaut - JPMorgan

Okay. Second question, just on the amendments to the revolver. Larry, I was wondering if you could give a little bit more specificity in terms of how much; in terms of a dollar amount was put up in terms of the secured portion. What is the revolver balance today, and also what are the new leverage requirements?

Kevin Hake

Well, Mike this is Kevin. We gave the balance I think, so what's outstanding. But we've to secure we said 65% advance rate we have put up enough mortgage collateral or cash collateral to support the amount outstanding at a 65% advance rate.

Michael Rehaut - JPMorgan

I'm sorry, the leverage I meant the -- just the overall leverage covenant for this revolver in general.

Kevin Hake

Yeah. Both are a little complicated to answer in a short question similar to what others have done in their agreements and we had in the past. There are ways that that ratio can increase or decrease based on other things. So rather than trying to go into the complexities of it I think, as we said we were able to raise the peak level that we're allowed to have and if we exceed that level it's still not a default as long as we've lowered our advance rate somewhat under our borrowing base and reduced the total commitment amount. So I don't have any specific answer otherwise in terms of the leverage.

Larry Sorsby

I think we have a lot of runway in front of us it provided us a lot of flexibility we are not concerned about having to go back to the banks on the leverage test anytime that in the near term future, so we feel pretty good about it Mike.

Michael Rehaut - JPMorgan

Thanks and just one last question on that, the new minimum tangible networth requirements?

Ara Hovnanian

I think general kind of comment in terms of we are not going to provide the absolute specifics. There is significant reduction from what the target, our trigger was previously, and that too isn't an automatic default. We can do things to lower it even further and again we think we have adequate runway in front of us and we are pleased with where we are.

Michael Rehaut - JPMorgan

Okay. Thank you.

Operator

(Operator Instructions). Your next question comes from the line of Carl Reichardt from Wachovia Securities. Please proceed.

Carl Reichardt - Wachovia Securities

Hi guys, I have only one question right now. Can you tell me of the sales century orders back in September through now, how many or roughly what percentage of those have closed by now, and what kind of margins you have earned on those?

Larry Sorsby

About half of them have closed. I am not sure we have margin data broken out for those. So, I am not able to answer that for you Carl.

Carl Reichardt - Wachovia Securities

Larry, half of them are closed, but do you expect the next half to close this coming quarter or they will be more spread out to the rest of the fiscal year?

Larry Sorsby

Probably the majority of them would close over this, certainly over the next two quarters probably all of them will with a majority of them by suspicion, I don't crack it quite that way will be this quarter.

Ara Hovnanian

Our can rate by the way has been slightly less than our typical amount where we've been running about 29%. So, not a bad can rate.

Carl Reichardt - Wachovia Securities

On the sale, of century house it's 29%?

Ara Hovnanian

Yeah. It's "Deal of the Century", yes.

Carl Reichardt - Wachovia Securities

Sorry, yes. Thanks guys, appreciate it.

Ara Hovnanian

Okay.

Operator

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

Ivy Zelman - Zelman & Associates

Good afternoon, guys. Realizing you guys are more in an enviable position than the private builders, and you have the ability to mothball assets. I think if you could help us understand, with your today owned, I think you said 27,000 lots. What percent of those have been mothballed, and of those mothballed, how much of those have you impaired.

And then I guess strategically are you looking as some other builders are out there with packages in the marketplace trying to sell land on a bulk basis. Would you consider doing that or are you looking at the mothballing as sort of you are black or white, or is there something in the middle as many builders right now, are contemplating which direction they are going to go and we've seen some changes in positioning recently?

Ara Hovnanian

Hi Ivy. Well that’s a big question with lot of different components to it. But first…

Ivy Zelman - Zelman & Associates

You said one question. I had to sneak it in.

Larry Sorsby

Like a run off.

Ara Hovnanian

First at this point, we only have maybe a dozen mothballed communities and it can be a little misleading, because we might have a current section that we are actively selling the developed lots, but we might have decided to mothball the balance and not spend the dollars on land development on the remaining ones, because we just not requiring enough to make it meaningful and we like a that parcel of land that we would rather hold on to it, while that is low cost bases without improvements in place for the market to recover. The other question had to do with bulk land sales.

Ivy Zelman - Zelman & Associates

Ara before you go there, can you just comment on the dozen or so that you have mothballed, whether you have impaired those while you have mothballed those?

Ara Hovnanian

Yeah, many of them have been. I think probably perhaps most of them have been. I don’t have that at the tip of my fingertips, but we clearly feel that the value. I mean we look very carefully at valuations of everything.

Larry Sorsby

We will get back to you on specifics, but the vast majorities haven't been impaired. I think we still don’t have it impaired?

Ivy Zelman - Zelman & Associates

Okay.

Ara Hovnanian

So, going back to your second sneakily disguised question, with the bulk sales. We like all builders, are kind feeling around in the marketplace as to what opportunities are out there. We had considered and had looked at doing the larger sale. I would say that's not something that's exciting to us right now.

However we are extremely interested in looking at a joint venture partner that would provide us with the capital we would like to explore and use to exploit the bottom of the marketplace that we see coming up this year with some good land opportunities. Some have asked that we'd see that with some amount of our assets, a small [seed] amount just to get a relationship going. So, we are considering that.

In general, I'm pleased to report there is a lot of interest by financial institutions to be a financial partner with us on new acquisitions. And that's important because we are interested in delevering, not using our capital at this stage in the marketplace to take advantage of the market opportunities that we know are there.

In the past, we've done that after the cycle and we've leveraged ourselves a little more. And at this stage, we think it's more prudent to be even more cautious, preserve all our capital and bring on a financial institution as a joint venture partner for that.

Ivy Zelman - Zelman & Associates

That's very smart I think. Do you have any thought just, Ara, on land prices relative to the Morgan Stanley-Lennar deal? What those institutions are? What the bids are? Are they sort of being aggressive, coming in below where Lennar's deal traded and therefore it's tougher to see you doing that, any sense on just--?

Ara Hovnanian

There is a very wide range. First of all, one has to dig through and see if it's a developed lot or an undeveloped lot. Raw land typically would go at a much greater discount. I haven't reviewed the Lennar transaction in detail, but my understanding is that a substantial amount of that is raw land and that typically yields the highest discount in the marketplace. The developed lots are typically less of a discount. It also just depends on the nature of the acquisition.

Lennar, as they publicly mentioned, had a lot of tax advantages to doing a sale. So, frankly some of their worst land made most sense in the transaction, getting the lowest valuations with the biggest lots that gave them the biggest amount of tax refund. I know, I'm sure, Lennar has many, many parts sold, by the way, I don't think that's a good surrogate for the value of the land in general on their portfolio, given that they were driving to get a year-end transaction that would give them some great tax refunds, it wouldn't make sense to get the middle of the road land parcels or the good land parcels in that scenario.

So, I'm glad you asked that question because a lot of people are just looking out there and say, looking at that transaction and repeating this 40% number all the time. And the fact is there is just a huge spread and there are some parcels that weren't that kind of discounts and many others if they are developed weren't less of a discount. And then there are other good parcels that require a much less or no discounts. It's really all over the place.

Ivy Zelman - Zelman & Associates

Thanks, guys. I appreciate it.

Ara Hovnanian

Okay

Operator

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

Susan Maklari - UBS

Hi. This is Susan Maklari for David. Going a little further on land, can you give us a sense of the land that you have, what stages of development, the different plots are in; perhaps, break that down by percentage or something for us?

Larry Sorsby

That's a good question, that frankly I think, it's one that's been asked enough that it would probably be a good idea for our company and our peers to start tracking it. We do not track that way now. It's a little complex, because you can have partial development, and so how do you count that if a there is a phase that's completely developed, and another phase that's 37% developed with the streets in, and other one where maybe only the grading is done, so it's a little complicated but I think we may endeavor to try and tackle that over the next quarter or two. I've got to talk to our people. They haven't heard this idea, but it's something that might make sense.

Ara Hovnanian

We gave pretty good data on where those option lots are remaining. And I think, they give you a pretty good sense that in Texas we primarily buy finished lots, and you can apply some general rules as opposed to in DC, and in the northeast it's a little bit more of a blend, and some of it may be less developed in a more of a mix.

Susan Maklari - UBS

Sure. Okay. And then, can you give us any sense of what you expect to spend on land development for the year?

Ara Hovnanian

No. We don't go into that level of detail. We'll try and cut that.

Larry Sorsby

We look at inventory change community-by-community. So we know community-by-community that exactly what we're doing in the aggregate between taking down lots and spending on land development as well as we've work-in- progress, but we don't break it down to it's components and track it on a consolidated basis to where we can tell you how much we're going to spend on land development versus other things.

Ara Hovnanian

What I will say is, in general, our land development spend is down dramatically. We do have a sufficient number of developed lots ahead of us in many of the markets. So there is just not a lot of new land development going on.

Susan Maklari - UBS

Okay. Thank you.

Operator

Your next question comes from the line of Larry Taylor from Credit Suisse. Please proceed.

Larry Taylor - Credit Suisse

Good morning and thank you. I wonder if you could compare pricing in February to where it was last fall. In other words, what the change is both comparing it to where you were in the Deal of the Century and otherwise, last fall?

Ara Hovnanian

I'd say in general, pricing is better than it was at Deal of the Century. Remember, Deal of the Century, we lowered prices, we raised them afterwards in the month of October and November, we're down in February from that amount, but typically we're still above the pricing that was in place at the Deal of Century.

Larry Taylor - Credit Suisse

And the order of magnitude kind of the price decrements since the post Deal of Century levels?

Ara Hovnanian

I can't give you a good specific number on that.

Larry Taylor - Credit Suisse

Okay. It's a very separate question, when you look at what's going on in Washington as potential programs to sort of stimulate the housing industry. I wonder if you could perhaps tell us the one or two of the programs that you think would be most beneficial to Hovnanian and the industry.

Ara Hovnanian

Well, first, as you probably know Larry, the higher Fannie Mae and Freddie Mac lending limits was passed that's actually been implemented now. So starting just from a few days ago, you could actually get larger loans without going to the typical jumbo market. That's helpful. That's not a huge part of our business, but it is a part in some of our markets. The net operating loss carry back is one that's important to the builders. I think there is a reasonable opportunity for that. And clearly, it would provide an additional source of cash flow for all home builders in the future ourselves is included.

And finally, the other one that is perhaps the most important for the consumer is the opportunity for a tax credit for home purchases. Some are proposing it for only first time home buyers others are proposing a broader appeal. If you go back to 1975, there was a small tax credit that was in place; I think up to $2,000 per consumer for a home purchase at that time, which is maybe equivalent to about $10,000 today which is around the kind of levels that have been proposed.

And I mentioned it because it was a short-term stimulus and it worked from 75 to 76. I think housing starts went up 70% in one year coming out of the trough of the 75 housing correction. So it's a program that definitely can help.

Larry Sorsby

And Larry, we need something to offset all the negative publicity press, media hype about housing, and a tax credit would be just the thing that perhaps would start the ball rolling in the right direction again psychologically for home buyers.

Ara Hovnanian

I will add that the one advantageous position we have in this downturn as an industry compared to others is that 30-year fixed rate mortgages have been very, very low, relative to most downturns. And the 75-period, I was talking about we were about 10%, in '81 we were at 18%, which is just amazing I think about. In '91, again, we were over 10%. So to be in an environment here where we've got a 30-year rate of at this point about 5.98%, is very helpful.

Hopefully, the fed will lower short-term rates. It doesn't affect 30-year rates directly but it can affect adjustable rates. But more than that, hopefully, loss will give a good psychological consumer confidence boost, which the market desperately needs. The good things that need to happen are happening.

Our homebuilders are cutting back their inventory significantly. It's interesting when you look at that inventory 27,000 speculative homes at some stage of construction, those aren't even finished homes generally, and that's not a lot of homes among the public home builders who are a very significant portion of the overall country's production. So that is coming down housing starts, in general, are coming down dramatically.

We are down to the trough levels of a million housing starts that we've seen over the last three downturns, 75, 81 and 91 all hit a trough about a million, that’s right around where we are now. That's important, because that sharp cut back on new production helps burn off the excess inventory that's in the marketplace. I think that's starting happen now and we are seeing inventories reduced. Obviously, if we can get the additional support from congress and get some of these additional housing Stimulus bills passed. It would only help enhance and speed up a recovery.

Larry Taylor - Credit Suisse

Thank you very much.

Operator

Your next question comes from the line of Megan McGrath from Lehman Brothers. Please proceed.

Megan McGrath - Lehman Brothers

Hi thanks. As a quick follow-up to the last question, in light of the fed actions today, to put more liquidity into the system, any sense of, of your cancellation rate, how many of those or what portion of those are because the buyer couldn't obtain a mortgage or their buyers' buyer couldn’t obtain a mortgage?

Larry Sorsby

Yeah, I don't think necessarily adding liquidity to system is going to solve that. I mean what we are seeing, when we have cancellations due to mortgages, is still people that under the new underwriting criteria just don't qualify, they are looking for 100% financing, they are looking to get a loan when they really have poor credit, or they are not willing to or are capable or verifying their jobs.

So, even though certainly I don't know the exact percentage of our cancellation rate, at 38%, that's not being able to qualify for mortgage. Certainly it’s a decent size, decent percentage of that, I just don't know, off the top of my head what that number is. I don’t think liquidity in the system is going to solve that. I think those are people who are just going to have fix their credit, save for their down payment and have a job before they are going to be able to get a mortgage going forward.

Ara Hovnanian

And by the way, as a reminder we've discussed this on prior calls. Those kinds of buyers never had mortgage opportunities in the past cycles. Anyway, in 75, 81, and 91, the market recovered and we didn’t even have the Alt-A opportunities that we have today. So, even with tighter credit standards today, mortgages are actually more available than they were in the challenging periods of the past.

Megan McGrath - Lehman Brothers

Great, thanks. And then just a quick follow-up on the write downs. Any sense of the $74 million in inventory impairment, do you have the dollar amount of that inventory either pre or post impairment?

Larry Sorsby

We will look it up and answer that question. We will move on to next question, but before we get off the call, we think we can answer that.

Megan McGrath - Lehman Brothers

Great, thank you.

Operator

Your next question comes from the line of Susan Berliner from Bear Stearns. Please proceed.

Susan Berliner - Bear Stearns

Hi, good morning. Just two questions, I guess one is did you say, you had full availability on the bank loan after you took out the outstanding and the LC?

Larry Sorsby

Yes.

Susan Berliner - Bear Stearns

So, is that an increase, so it's about $260 million or can you give us the LC amount?

Larry Sorsby

I guess you will see it in the 10-Q when we filed it, it has come down from what it was at the end of the year. So, we have $325 million outstanding on the revolver, call it roughly $269 million of LCs.

Susan Berliner - Bear Stearns

Right, so availability did improve from last quarter then. And then could you also provide what you spent from cash flow this quarter?

Larry Sorsby

I am not sure I understand the question.

Susan Berliner - Bear Stearns

Used in cash flow, what was the cash flow usage this past quarter?

Kevin Hake

The cash flow number for the quarter negative $55 million.

Larry Sorsby

Negative $55 million. Net of cash on a balance sheet, we used $55 million.

Kevin Hake

Cash flow from operations was negative $55 million for the quarter.

Susan Berliner - Bear Stearns

Perfect, thank you.

Kevin Hake

What else you are asking for Sue?

Susan Berliner - Bear Stearns

Kevin that was great, perfect.

Larry Sorsby

I have the other question about the pre-impairment value. It was about $319 million. The impairment was about 23% of that value.

Ara Hovnanian

And recognize some of the assets, the impairment was the second time we took an impairment, so from our original cost the total impairments have been even more [flat.]

Operator

And next question comes from the line of Robert Moniot from RBF. Please proceed.

Larry Sorsby

I guess he is not there. You want to go the next question.

Robert Moniot - RBF

I am sorry.

Larry Sorsby

We couldn’t hear Robert’s question.

Robert Moniot - RBF

Okay, well I will repeat that. Can you here me now?

Larry Sorsby

Yes.

Robert Moniot - RBF

Great.

Ara Hovnanian

Although it was easier to answer the question the first time really.

Robert Moniot - RBF

Well, I will keep the hurdle low.

Ara Hovnanian

Okay.

Robert Moniot - RBF

As a follow-up to the question that was just asked about availability. If I could just get a better understanding on the mechanics of that availability. I am assuming that you are below the two times coverage ratio under the debt and current [test] in the indentures.

Ara Hovnanian

Yes.

Robert Moniot - RBF

So, are we not limited to the basket under the 8 of 12 (inaudible) and if we are, have we used any of that baskets through the first quarter?

Larry Sorsby

We didn’t use any of the basket. The most restrictive basket in our indentures is 440 plus a miscellaneous basket of 30,470; that basket gets increased as we payoff certain of our older public debt. And we did not use any of that basket as of the end of the first quarter.

Robert Moniot - RBF

Great. Thank you very much.

Operator

(Operator Instructions)

Your next question comes from the line of Rashid Dahod. Please proceed.

Larry Sorsby

We are not hearing it again.

Ara Hovnanian

Operator?

Larry Sorsby

We are not hearing a question.

Operator

Sir, you may proceed.

Rashid Dahod - Argus Research Corp.

Hello?

Ara Hovnanian

Yes.

Rashid Dahod - Argus Research Corp.

Hello, can you hear me?

Ara Hovnanian

Yes, yes.

Rashid Dahod - Argus Research Corp.

Okay. Sorry. You had mentioned in your comments that you had approximately 4.5 or 4.7 spec homes per community. I was wondering, what is that number for some of your more challenged markets like, say California, Florida and Nevada?

Larry Sorsby

No, we are not in Nevada so I can't answer to that.

Rashid Dahod - Argus Research Corp.

Sorry. For Arizona, sorry.

Larry Sorsby

But I don’t think, I don’t have that number right in front of me. But I think we've controlled it pretty much everywhere. And where we've had higher cancellation rates, one of the first things they try to do, if they have a unexpected cancellation on home where we've started, is immediately try to market that and move it first. So, I don’t think we have it bunched up too terribly anywhere.

Rashid Dahod - Argus Research Corp.

Okay. So, you think that number could be close to your average?

Larry Sorsby

Yeah. I think pretty much, yes.

Rashid Dahod - Argus Research Corp.

Okay. And then just to follow-up. Regarding Deal of the Century and the resulting cannibalization that you'd mentioned in certain markets, I guess just as an overall, do you view Deal of the Century as a success? And do you think, that it's something, a promotion of this nature that you may run again?

Larry Sorsby

Well, I would say, it was successful in that we stimulated sales, and achieved what we are hoping to achieve at that time. But I would say, when you net-net, when you take into account that we achieved a lower sales afterwards, it really neutralizes the benefit. So, I wouldn’t say, it was a failure by any stretch, nor would I say we're extremely motivated to do it again. It's conceivable that we could achieve the same sales pace over the longer term with out the hoopla. It's something we're debating internally, ourselves right now, but there's nothing imminent at this moment.

Rashid Dahod - Argus Research Corp.

Okay. And in terms of pricing for Deal of the Century in markets was it a success, following the deal, does that new price essentially become the new ceiling?

Ara Hovnanian

The new price becomes the new ceiling? Right after Deal of the Century, we raised prices in most cases, right back to where it was before, in some cases, to a very close level to what it was before.

Rashid Dahod - Argus Research Corp.

Okay. I guess, my question was, when you dropped the price, following the Deal of the Century, how successful are you in raising the price?

Ara Hovnanian

We did it but clearly, our sales were slower for a period of times, a couple of months. But eventually, sales picked back up again in December but it took a period of time, but I am not sure if that was directly related to price or the fact that any buyer at our communities that was considering buying, bought it right then and there in September. So they might have normally -- if we had to run the sale, come back to the sales office three or four more times, they maybe bought in October or maybe in November, but they bought it in September. So they were out of the market. So it's hard to really gauge what the effect is.

Rashid Dahod - Argus Research Corp.

Okay. Thanks for your time.

Operator

The next question comes from the line of Joel Locker from FBN Securities. Sir, you may proceed.

Joel Locker - FBN Securities

Yes, just I guess the impairment reversals in the first quarter. How many were there, and do you have a breakdown of what they were land and were housing or what line item they came to?

Larry Sorsby

The total reversals is $55 million and about $11 million was on land sales.

Joel Locker - FBN Securities

$11 million and the rest, housing. And just the follow-up question on, on what are your gross margins round about figure for the west regions, for the west region on closings in the first quarter?

Larry Sorsby

They worked very good. They were lower than our average. I don't have it right in front of me but they were low single digits.

Joel Locker - FBN Securities

Low single digits. That's why I guess with the owned lots out there just kind of surprised me the impairments weren't a little more based on the over 7,000 lots owned. We run an impairment tests for all, 7700 of the lots or is it just each quarter?

Larry Sorsby

We've been doing impairments pretty regularly in California over the past 18 months.

Joel Locker - FBN Securities

Alright. Thanks a lot.

Operator

The next question comes from the line of Alex Barron from Agency Trading Group. Please proceed.

Alex Barron - Agency Trading Group

Yeah, hi guys. I guess I'm still a little confused as to why the cash flow was negative this quarter, and hoping you can help me walk through what happened because I thought most builders are generating cash and so on. And I am just trying to understand why you guys weren't able to do that this quarter?

Ara Hovnanian

Well, traditionally, first, if you go back 20 years, our early quarters are absolute worst. Seasonally, it's the toughest, because we have the lowest deliveries and also sales in our first quarter. Remember it's very tough time of the year.

So, the other part of it is Fort Myers really had, those closings did not have any incremental cash for us as Larry described in his part. It is important to note, though, compared, I think we are definitely on the positive track. If you remember on one of our slide where we talked about cash flow per quarter, you can see that over the last couple of years, the first couple of quarters we have been significantly negative of couple of hundred million dollars. So, to only have a minor negative in the first quarter, I think it was pretty positive trend.

Larry Sorsby

And Alex I think the other thing is we did tell you that we were going to be a user of cash in the first couple of quarters of the year and generate positive cash in the second half of the year. So this is something that we anticipated for seasonal factors and our own kind of projections and have told the market on our last conference call, so maybe you missed that.

Ara Hovnanian

As with last year, cash flow was doubly weighted towards the lateral part of the year versus the earlier part, but we expect each and every quarter will absolutely yield better results than last year.

Alex Barron - Agency Trading Group

Okay.

Ara Hovnanian

As we did with this first quarter, the exact number just to refresh your memory in '06, the first quarter we were negative $372 million. In '07 we are negative $271 million. This most recent quarter, we are only minus $55 million. So we are definitely on a positive trend and again we anticipate improving on last year's results for the second quarter, third as well as the whole year.

Alex Barron - Agency Trading Group

Okay. Now as far as the amount of debt that you guys increased on the line of credit, where would you expect that to be I guess by year-end?

Larry Sorsby

We've given guidance for the full year a $100 million of cash flow so there can be some other changes but a general rule that's going to reduce debt.

Ara Hovnanian

Again our guidance is in excess of $100 million. We'll try and give you a little finer tuned picture of that a little later in the year as we get through the spring selling season.

Alex Barron - Agency Trading Group

Okay. Thanks a lot.

Operator

Your next question comes from the line of Lee Brading from Wachovia. Please proceed.

Lee Brading - Wachovia

Hi guys. Thanks for taking my questions. Can you guys hear me?

Ara Hovnanian

Yes.

Larry Sorsby

Yes. We can hear you.

Lee Brading - Wachovia

Okay. On community count, this quarter we saw a drop over 6%. Can you give us any idea what, looking forward to '08 if we should see continue declines or some flatness here?

Ara Hovnanian

We don't have an exact number but I'd expect continued declines.

Lee Brading - Wachovia

Kind of like in this range maybe 5% (inaudible).

Ara Hovnanian

I think we might have projection.

Lee Brading - Wachovia

Yeah.

Ara Hovnanian

Lee but I think it's a safe that they will continue to tweak down.

Lee Brading - Wachovia

Okay. And then on the gross margin, now looking from any specific guidance obviously if you won't be able to give it, but from a directional standpoint excluding Fort Myers, you finished around 8.6 I think you said earlier Larry. And the goal here is long-term 20%, 21%, but in light of the environment and so forth, looking over the next couple of quarters should we expect continue kind of difficultly on gross margin here and hope to trend up by the end of that year?

Ara Hovnanian

Well, we are definitely not going to hit the 20% target this year.

Lee Brading - Wachovia

I did expect that.

Larry Sorsby

I don’t want to give you guidance, but if I was sitting in your shoes. The only data you can use is what we had in our first quarter net of kind of Fort Myers and just build your model.

Lee Brading - Wachovia

Okay, so you expect at least flatness and hopefully bring it up a little bit towards the end of the year.

Ara Hovnanian

Yeah. It's really..

Lee Brading - Wachovia

I'll try it again, alright.

Ara Hovnanian

If your crystal ball can accurately project housing prices.

Larry Sorsby

You call us after the call and tell us.

Ara Hovnanian

Yeah.

Lee Brading - Wachovia

That's was good. Thanks guys.

Ara Hovnanian

Okay, thanks.

Operator

Your next question comes from the line of Vicki Bryan from Gimme Credit. Please proceed.

Vicki Bryan - Gimme Credit

Yes, good morning.

Ara Hovnanian

Good morning.

Vicki Bryan - Gimme Credit

I just wanted to have a little bit more detail if I could on the credit agreement. I missed that number. I didn't think I got it correctly. Did you say you had $269 million in letters-of-credit outstanding right now?

Larry Sorsby

Yes, that's what we said.

Vicki Bryan - Gimme Credit

Okay.

Larry Sorsby

At January 31st.

Ara Hovnanian

That was as of January 31.

Vicki Bryan - Gimme Credit

Right, okay. And then the balance, does that mean that you have offered security for the 325 drawn plus the 269 on Letters of Credit.

Ara Hovnanian

Yes.

Vicki Bryan - Gimme Credit

Okay. And the balance remaining under $900 million minus, both of those figures would be what you have available, you could draw today.

Ara Hovnanian

Correct.

Vicki Bryan - Gimme Credit

Okay. How much can you secure in assets without getting in the way of your bond indenture coming out?

Larry Sorsby

100% of our assets can provide security and there is nothing in our indentures that prohibit that.

Vicki Bryan - Gimme Credit

Okay. Good. And so what kind of cushion do you have under the tangible net worth covenant today?

Larry Sorsby

I am sorry.

Vicki Bryan - Gimme Credit

The cushion on your tangible net worth covenant.

Larry Sorsby

We didn’t give a number, but it's a sufficient we are comfortable with.

Vicki Bryan - Gimme Credit

Sufficient, got it.

Ara Hovnanian

LIBOR changes based on meeting other provisions. So it's just a little complicated.

Vicki Bryan - Gimme Credit

Is that the most restricted still, it’s a tangible net worth relative to the other two?

Ara Hovnanian

I'm not going to answer something that's more restricted or less restricted.

Vicki Bryan - Gimme Credit

Okay

Ara Hovnanian

Right now we have enough room under all of them for the foreseeable future.

Vicki Bryan - Gimme Credit

Okay, great.

Larry Sorsby

We feel very good.

Vicki Bryan - Gimme Credit

Okay. And then just shifting gears a little bit, you're saying you are actually are replacing land in the some of the healthier markets. I assume that's Texas, what are some of the areas that where you are buying land. And does that mean that land worth that hasn’t dropped, so I guess you're betting that those will remain fairly stable where they are?

Ara Hovnanian

Sorry, repeat the question there?

Vicki Bryan - Gimme Credit

Where are you buying land? You said you're buying in healthier markets?

Ara Hovnanian

Well, most the land purchases today are in markets like in Texas, which has been healthy and North Carolina, where we really don't have a lot of land, options remaining are in the tough markets. So, we've got very little land options remaining in the California's or Florida's et cetera. But I'd say,

Larry Sorsby

You are not going to takedowns that or --

Ara Hovnanian

We're not really optioning new properties today. These are just takedowns under existing options.

Vicki Bryan - Gimme Credit

Okay. So this is not new. This is you're coming in existing arrangements that you already had at possibly renegotiating prices?

Larry Sorsby

What we've probably in most of these is a model house park already there and it's a second section land the next few lots that we're taking down that's what we're doing.

Vicki Bryan - Gimme Credit

Okay. Well, thank you.

Ara Hovnanian

You're welcome.

Operator

Your next question comes from the line of Gary Freeman from GEM Royalty Capital. Please proceed.

Gary Freedman - GEM Royalty Capital

Yeah, thanks for the opportunity guys. Can you give us your perspective on how the securing of the line might impact your operational flexibility going forward?

Larry Sorsby

I don't think it's really going to affect our operational. It's administratively cumbersome and it will take some time. But it really doesn't hamper flexibility from an operating perspective.

Gary Freedman - GEM Royalty Capital

Does the bank need to provide sort of waivers or sign off on lot releases that kind of thing?

Larry Sorsby

I mean, as we close the house, obviously, they have to release the lien.

Gary Freedman - GEM Royalty Capital

Yeah.

Ara Hovnanian

I mean there are mechanical parts of it, that do require some administrative planning, but in no way do we feel it's going to hamper our operations at all.

Gary Freedman - GEM Royalty Capital

Are there release prices in terms of lot sales?

Larry Sorsby

No, as long as we have something slated over the next say 45 days to be sold and released in ordinary course of business, we're not in default in the agreement than it's just pretty standardized process for releasing the mortgages.

Yeah. I think you have to keep in mind that the vast majority of builders across the country operate with secured credit facilities at all times. So it's not something that's necessarily a brand new concept.

Gary Freedman - GEM Royalty Capital

No, I understand that, but a lot of those builders are also going through some tough time. So I'm just trying to understand how tough it can become?

Larry Sorsby

Well they are not, we're still a big company, and we're not putting mortgages in place on all of our communities. For those that we're putting it in place, there is going to be a fairly flexible arrangement for releasing mortgages, so as to not infringe on our business. The lenders were not looking to restrict in any way, the vulnerability to deliver and sell homes.

Gary Freedman - GEM Royalty Capital

Got you, got you. And another point, I might have missed this or must heard this but where you actually talking about raising prices now versus last fall. I just want to try to understand that point a little better?

Larry Sorsby

No, what we did say was, immediately after the "Deal of the Century", where we lowered prices for that four-day event or a three-day event, we raised prices right back to where they were just prior to the event.

Gary Freedman - GEM Royalty Capital

And pricing now relative to back then is same, better, worse?

Larry Sorsby

Well, it's higher than it was during that three day event. But I'd say, in general, it's drifted a little lower than it was immediately afterwards, which is part of the reason why you saw some deterioration in margins.

Gary Freeman - GEM Realty Capital

Right. Right. That's what I figured. I just wanted to clarify that. Thank you.

Ara Hovnanian

Okay.

Larry Sorsby

Before the next question is asked, although Vicky's question was under our indentures how much security can we provide and the answer is 100%, and there is no restriction in the indentures to providing a 100% security of all of our collateral. There is a restriction on how much we can draw of that secured amount, and it's limited to 40% of our assets. Well, we have a big question even on that to fully draw the revolver, but I just wanted to clarify that point.

Operator

Your next question comes from the line of [Beth Holstra from AllianceBernstein]. Please proceed.

Beth Holstra - AllianceBernstein

Hi, guys. Good afternoon. I guess I was surprised to hear the earlier comment that about only half of the homes in Deal of the Century have closed and given that we're five months away from that, and I'm just curious if there is a conclusion, or a take-away, because these were spec homes as we understood?

Ara Hovnanian

You know interestingly, we expected more of the activity to be spec homes, and typically spec homes have a greater incentive. But to our surprise, about half of the sales were to be built homes, and in those cases they had to finalize their house, they had to finalize the option selections on the house, we have to get the permits on them and then start construction. And that's why it takes longer to deliver those.

Larry Sorsby

If you look at it in terms of gross sales that we did during that weekend, about a third, a little less than a third have cancelled, a third we closed, and a third are left to be closed for the reasons that I just pointed out.

Beth Holstra - AllianceBernstein

Well, I guess the can rate might actually end up being not much better than the average, and

Larry Sorsby

Yeah. I think that might--

Ara Hovnanian

That might be true.

Larry Sorsby

Ara, thanks a lot.

Beth Holstra - AllianceBernstein

Okay. The second question was, on the credit agreement, popular question, I guess today, I guess, should we expect an 8-K file soon that will have that, like you've done in the past to the kind of normal course of business and just gives us the credit agreement.

Larry Sorsby

I think at some point, we'll require to file that publicly, it won't be in the too distant future, and whether it will be by an 8-K or some other vehicle, I am sure. But it will be filed at some point.

Beth Holstra - AllianceBernstein

Okay. So, we'll be able to get the details, then?

Larry Sorsby

Yes.

Ara Hovnanian

Yes.

Beth Holstra - AllianceBernstein

Okay. Thank you very much.

Operator

(Operator Instructions). Your next question comes from the line of Keith Wiley from Goldman Sachs. Please proceed.

Keith Wiley - Goldman Sachs

Yeah. And just to confirm one more time, there's $306 million available then on your revolver that can be drawn without triggering this 40% of assets negative pledge clause?

Larry Sorsby

Correct.

Ara Hovnanian

Absolutely, there is plenty of room to draw that full amount.

Keith Wiley - Goldman Sachs

Great. And then you talked about forming a joint venture to buy land, using other people's capital, would you also have to contribute 50% of capital for that joint venture or would you try and just contribute your expertise?

Ara Hovnanian

Typically, on our joint ventures and our plan would be the same here. Number one, we employ low leverage in our joint venture, with no recourse and no guarantees. In the past, that means we've had leverage of 50% or below and as we mentioned our debt-to-cap rate now in our joint ventures is actually in the 40% or 42% or 45% range, so about half or even less would come from the debt side.

And then, as has also been the case on our joint ventures, we would put in somewhere between 10% and 20% of the total capital, of the total equity, which again is only half of the total amount. So lets say it was 10% of the equity, it would require about 5% of the total capital requirement. And I may add that what we're interested in discussions about right now are, is not just a joint venture to purchase land, but like our other joint ventures, we have maybe about a dozen it's not a huge factor in our company, but it is something we have experienced in and we like our experience so far. But the joint ventures we're considering, are to go all the way through the vertical and the building and that's where we feel we get the best returns.

Our returns, in spite of the fact that we may only be putting up 10% of the equity or 5% of the total capital, our returns will be disproportionate. Hopefully, tremendously disproportionate based on what the IRR's are and their performance if we can hear our pro forma. So that's why we're so intrigued by this opportunity.

Keith Wiley - Goldman Sachs

Okay. Thanks.

Operator

The next question comes from the line of [Clifford Rosen] from UBS. Please proceed.

Clifford Rosen - UBS

Hi, guys, and thanks for taking my question. Just a couple of housekeeping items. The first one was, I think you gave the option deposits in the associate expenses as $143 million. What portion of that was funded with cash and what portion of that is funded with LCs?

Larry Sorsby

Hold on a second, we're looking it up. $88 million was cash and $55 million was letters of credit.

Clifford Rosen - UBS

Got it. Thanks, and then another sort of similar question, can you give me the amount of your expected tax receivables, the tax refunds you expect to get back later this year? And then also is that included in your $100 million plus cash flow projection or is that something you are considering outside of that?

Larry Sorsby

Yeah, I don’t think we've actually made a projection on that number. So, I'm not sure I can tell you exactly what it is.

Ara Hovnanian

I know there is a lot of interest in cash flow in general. And as I mentioned, we just have so much our business as has traditionally been the case, weighted towards the back half of the year. So, we are just trying to hold off getting more specific than greater than $100 million, so we have a little more information about the full year.

Clifford Rosen - UBS

Sure, thank you very much.

Larry Sorsby

Okay.

Operator

Your next question comes from the line of [Tim Moray] from BlackRock. Please proceed sir.

Tim Moray - BlackRock

Hi, can I get little bit more color on the markets in Florida? And then more specifically you mentioned the Fort Myers/Cape Coral, what were those sales in comparison to historical sales and what would you attribute that to?

Ara Hovnanian

Okay, well, first Fort Myers just continues to be a dismal market. And we are not currently marketing any new construction there right now. We have got some amount of speculative homes, but not a lot. And that's all we are marketing at this point. To be honest, the sales price today is really less than the replacement cost, so it just doesn’t make sense to get through to do new construction. We've got to wait till this huge amount of excess inventory in that market clears. It's probably one of the worst markets in terms of excess inventory in the country.

That been said our position, well really most of the Florida markets are challenged. Southeast Florida is also challenged. Although, we have very little activity and investment in that market place. And then last two markets we are active are in Tampa and Orlando, which are clearly soft, but not nearly as bad as this Southern markets of Fort Myers and the Southeast.

Tim Moray - BlackRock

The 1345 closings that you had in Fort Myers, well how does that compare historically?

Larry Sorsby

It's much higher than normal. And again we've tried to explain it on the last several conference calls, including today, that it was a very unusual situation. That basically we determined we had no ongoing involvement with those homes. Plenty of those homes were finished last summer. But we had ongoing involvement, so for GAAP purposes we couldn’t tag them as a delivery. We determined on those 1345, or whatever the exact number was, that we no longer have any ongoing involvement. So, all of them closed in a single quarter. So, I don't think you should read anything into what's happening in the market at Fort Myers by the fact that we for accounting purposes were able to designate those as delivered homes.

Tim Moray - BlackRock

Got it. Thank you.

Ara Hovnanian

By the way the remaining lots there, I guess this answers an earlier question. The remaining lots there are effectively multiples, since we are not building new lots. And they've all been impaired substantially, as well, which answers another part of the question there as well. And finally, if this helps you in where you are going with it, we only have a few hundred homes in backlog, remaining in Fort Myers, plus maybe 30 or 40 speculative homes. And since we're not currently selling new construction, obviously, that's the maximum amount of new deliveries you can expect in the near future.

Operator

Your next question comes from the line of Michael Rehaut from J.P Morgan. Please proceed.

Michael Rehaut - JPMorgan

Hi, thanks, just a quick question on that $44 million of reversals in the gross margins, how much of that and this might be tough to answer, but if you have a sense, how much of that, could we think about being related to the Fort-Myers closings versus the other parts of your operations?

Larry Sorsby

$16 million

Michael Rehaut - JPMorgan

Great thanks very much.

Operator

The next question comes from the line of Beth Holstra from AllianceBernstein. Please proceed.

Beth Holstra - AllianceBernstein

Yes, good afternoon again, just under Fort Myers, I know the margins were very low, from working capital perspective though, that sort of leads to additional release of working capital, cash from those closings?

Larry Sorsby

No, no, and the reason was is that, again, I'll explain it again, and I know this is not the way most markets do it, but we've done our best to try to repeatedly explain this, including when we initially purchased the Fort-Myers acquisition back in August '05. But they do business differently in Fort Myers in terms of our operation, in terms of customer comes in to a sales center, they will buy a lot from us, when they locate a lot, that we control, they will purchase it from us by getting a construction loan from a third party lender. The lender initially will fund the purchase of the lot, and then they will enter into a contract with us to build the home. As we build the home we get construction draws as we complete certain stages of the house from the construction lender. The customer took the loan out, not the company. So therefore, the cash for these homes we've been getting, as we were completing the homes, virtually no cash came in, as we closed the homes in the first quarter of '08, if you understand what I said.

Beth Holstra - AllianceBernstein

Completely, that's okay, that's fine. And basically the improvement in the cash flow is largely on the land development side not because of the increase of the good….

Ara Hovnanian

I mean it has nothing to do with Fort Myers.

Beth Holstra - AllianceBernstein

Right, globally.

Ara Hovnanian

Yeah, globally we're purchasing generally less land than we are delivering, so we're getting cash flow as we deliver out houses.

Beth Holstra - AllianceBernstein

Great thank you.

Operator

At this time I would now like to turn the call back over to Management for closing remarks.

Ara Hovnanian

Great, well thank you very much. We are in a challenging time, hopefully some of the actions of the fed and our other governmental agencies have taken will help stimulate the economy. And as I said, I know it's difficult to see any bright light in this housing picture. We've seen these kinds of situations before and eventually this market too shall turn and will have a whole different environment with some pent up demand with a lot less competition and get back to normal operating margins and growth. Thank you very much. And we look forward to giving you an update next quarter.

Operator

This concludes our conference call for today. Thank you for your participation. Have a nice day.

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