Jeff O'Keefe - VP, IR Ara Hovnanian - Chairman, President & CEO Larry Sorsby - EVP & CFO Brad O'Connor - VP, CAO & Controller David Bachstetter - VP, Finance & Treasurer.

Alan Ratner - Zelman & Associates Arjun Chandar - JPMorgan James Finnerty - Citi Sam McGovern - Credit Suisse Megan McGrath - MKM Partners Alex Barron - Housing Research Center.

Good morning and thank you for joining us today for Hovnanian Enterprises Fiscal 2017 Fourth Quarter Earnings Conference Call. An archive of the website will be available after the completion of the call and run for 12-months. This conference is being recorded for rebroadcast and all participants are currently in a listen-only mode.

Management will make some opening remarks about the fourth 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. These 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 on to 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..

Thank you, Chelsea, and thank you all for participating this morning in our call to review our results for the fourth quarter, which ended October 31, 2017.

All statements in this conference call that are not historical facts should be considered as forward-looking statements within the meanings of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

Such statements involve known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements of the company to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements.

Such forward-looking statements include, but are not limited to, statements related to the company’s goals and expectations with respect to its financial results for future financial periods.

Although we believe that our plans, intentions and expectations reflected and/or suggested by such forward-looking statements are reasonable, we can give no such assurance that such plans, intentions or expectations will be achieved.

By their nature, forward-looking statements speak only as of the date that they are made, are not guarantees of future performance or results and are subject to risks, uncertainties and assumptions that are difficult to predict or quantify.

Therefore, actual results could differ materially and adversely from those forward-looking statements as a result of a variety of factors.

Such risks, uncertainties and others are described in detail in sections entitled Risk Factors and Management’s Discussion and Analysis, particularly the portion of MD&A entitled Safe Harbor statement in our Annual Report on Form 10-K for the fiscal year ended October 31, 2016 and subsequent filings with the Securities and Exchange Commission.

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.

Joining me today from the company are Ara Hovnanian, Chairman, President and CEO; Larry Sorsby, Executive Vice President and CFO; Brad O'Connor, Vice President, Chief Accounting Officer and Controller; and David Bachstetter, Vice President, Finance and Treasurer. I’ll now turn the call over to Ara. Ara, go ahead..

Thanks, Jeff. I am going to review the operating results for the fourth quarter and I’ll discuss our current sales environment. Larry will follow me with a little more detail and discuss a few other items, including our liquidity position.

Although we continue to take steps to replenish and add to our land position which over time will lead to growth in our community count, our 2017 deliveries and revenues were certainly impacted by a decrease in our community count this year.

As we've discussed many times these decreases resulted from decisions we made in 2016 to exit four underperforming markets, convert a number of wholly-owned communities to joint ventures, and temporarily reduce land spend all so that we could pay off $320 million of maturing debt which obviously is already occurred.

On Slide 4, we show consolidated revenues in gray and joint venture revenues in blue. Including joint venture revenues, our revenues declined 6% and 4% for our fourth quarter and full year respectively. Turning to Slide 5, here we show some of our fourth quarter operating results.

You can see in the upper left-hand portion of the slide that our adjusted gross margin was higher than last year at 18.2% compared to 17.6% a year ago. Moving over to the upper right-hand quadrant, our SG&A expenses increased during the quarter from $54 million to $73 million obviously we need to explain that a bit.

Construction defect reserves which are non-cash item impacted the fourth quarter of both 2016 and 2017 but in opposite directions. During the fourth quarter of 2016, we decreased our construction defect reserves by $9 million as a result of our annual actuarial study which reduced our SG&A.

During the fourth quarter of 2017, we increased our construction defect reserves by $12.5 million related to litigation for two older closed communities that delivered homes over 10 years ago.

If you ignore these unusual changes in construction defect reserves for both years, our SG&A expense was actually fairly similar and would have been $63 million during '16s fourth quarter compared to $60 million during this year's fourth quarter.

In the lower left-hand corner of the slide, you can see that total interest dollars were - million dollars compared to $48 million one year ago. The 2017 fourth quarter interest expense included $9 million of capitalized interest from selling a single large land parcel. This compared to about $400,000 in last year's fourth quarter.

Like SG&A if you've ignored the unusually large interest amount related to the large land sale, the interest expense in both years was fairly similar. During 2017 we reduced the capitalized interest component of inventory by 27% to $71 million at the end of '17 compared to $97 million at the end of 2016.

And finally in the lower right-hand corner of the slide, we show that our net income decreased to $12 million compared to $22 million in last year's fourth quarter.

However, if you exclude the impact from the construction defect reserves we just discussed, our net income would have increased in the fourth quarter to $24 million compared to net income of $16 million in the same quarter a year ago.

On Slide 6 you can see that our gross margin increased in both the fourth quarter and the full year in '17 compared to '16. In spite of this improvement, we remain well below the 20% normalized level that we were able to achieve as recently as 2013 and 2014.

The biggest driver of our improved gross margin in the fourth quarter of fiscal '17 was a benefit that we recorded in our warranty reserves as a result of the annual analysis we do in the fourth quarter of every year. This is a benefit specific to the fourth quarter that is not expected to repeat in future quarters.

Had we not recorded this benefit the gross margin in the fourth quarter this year would've been about the same as last year's fourth quarter which we show on the far right-hand portion of the slide. In many of our communities, we've been able to raise our home prices.

Unfortunately construction costs both labor and material costs also increased offsetting the benefit of the home price increases. Turning to Slide 7, we're feeling the impact of rising material costs primarily related to lumber and OSB prices.

To put this in perspective, the left side of the slide shows that the framing lumber composite is up 24% from a year ago. On the right-hand side, you can see that OSB is up 57% from a year ago. These meaningful increases are particularly relevant because lumber and OSB make up about 15% of the home cost.

Most of the lumber spike in 2017 was driven by recent Canadian lumber import tariffs. Most of the very recent spike in OSB was due to the impact from two hurricanes. Commodity prices are volatile and they certainly fluctuate a bit. In fact during the month of November, we saw OSB prices come down significantly.

These rising construction costs have and will continue to impact the gross margin on deliveries for land that we already own. The higher lumber and labor costs are factored into all new land acquisitions that we're underwriting today.

Assuming no further cost increases on average home delivered on these new land purchases are expected to generate normalized gross margins of about 20%. The increases in labor and material costs are an issue that have affected our entire industry. On Slide 8 we show the trailing 12 month gross margin for 14 of our peers plus our own.

8 of our peers reported year-over-year declines in gross margin, three builders reported flat gross margins Hovnanian and three other builders reported small year-over-year increases. Gross margins are generally low at the current time for all homebuilders.

We expect our gross margin will gradually return to normal as the market adjusts to these cost increases and as the market moves to a more normalized part of the housing cycle. I've already mentioned the declines in our community count. If you turn to Slide 9, you can see the trend in our community count for the last year and half by quarter.

As I also mentioned earlier, the declines you see are primarily the impact of the steps we took in 2016 to payoff $320 million of maturing debt. As a result, our community count decreased sequentially each quarter throughout 2016 and 2017. I’ll speak about our success this year in new land options to reverse this trend in just a moment.

In spite of our declining community count, the overall housing market continues to improve. On top of each quarter, we show an arrow with year-over-year percentage increases in contracts per community for those same quarters.

On the far right-hand portion of the slide, we show our contracts per community increased again during the fourth quarter this year rising 10% over last year's fourth quarter. We reported increases in contracts per community for each of the last six quarters.

In order to show even greater granularity and transparency, Slide 10 shows our contracts per community on a monthly basis. Here we show the most recent month in blue and the same month a year ago in gray. For each of the last 12 months contracts per community were equal to or better than the same month of the prior year.

During our 2017 fourth quarter, two of the three months were better than last year and September was flat. Keep in mind our September '17 contracts were adversely affected by Hurricane Harvey in Houston and Hurricane Irma in Florida.

We saw solid improvement the following month of October with net contracts per community up 12% year-over-year and November was even better with contracts up year-over-year 27% from 2.2 in November '16 to 2.8 in November of '17.

Furthermore, the absolute number of contracts in November of '17 was 443 compared to 400 in November of '16 and that is despite the 15% decline in our community count. These increases in sales per community reflect the broader markets improvement and we've seen the overall housing market improving general over the last 12 months.

On Slide 11 we show contracts per community by our geographic segments. This slide shows the contracts per community were up year-over-year in four of our six segments. Leading the way was our West segment with 51% growth. Improvements in the Midwest, the Southeast and the Northeast were also very strong.

Only the Southwest again affected by the hurricanes in Texas and the mid-Atlantic segments had declines and those were fairly minor. So the strength we're seeing is generally broad-based. For one last perspective on contracts per community, turn to Slide 12 where we show annual contracts per community for the last several years.

On the far left side of this graph, you can see our historical norm of 44 contracts per community per year. That reflects the '97 to '02 period, a time that was neither a boom nor a bust in housing market. On the right side of this slide with the year's 2014 to 2017, you can clearly see the steady growth in contracts per community each year.

Over time, we expect to at least get back to the normalized 44 days of sales per year. When you look at contracts per community on a monthly, quarterly or annual basis, our sales results definitely reflect a strengthening housing market.

We're encouraged by these trends because improvements in pace per community should help us get back to solid profitability faster. It also allows us to increase our operating leverage because we get benefits from these extra deliveries from existing communities without having to add SG&A.

We continue to work hard to replenish and grow our land supply and our land acquisition teams remain very busy throughout the country. On the top of Slide 13 you can see that for all of fiscal '17 we increased our net new options by 5565 lots compared to 2016. This is an increase of six fold. We remain disciplined to our underwriting standards.

Our underwriting assumptions use current sales price, current sales pace and current costs. Typically as we progress in the recovery sales, pace and price increase more than costs. However, our budgets don't assume that benefit. We're not stretching for transactions that don't make sense based on the current conditions.

Consistent with our strategy to maintain or improve our inventory turns, we look to control as much as possible through options where we purchased the land just before construction begins.

Looking at the bottom of the slide, you can see that in addition to optioning lots, we are busy purchasing lots and for all of fiscal '17 we purchased 5825 lots about 702 more lots than we purchased a year ago.

Once we control the land since there is a significant lag from the initial contract - from the initial contract to the time when the community ultimately opens for sale and the delivery of homes. This time lag can vary from a few months in a market like Houston to 3 to 5 plus years in markets like California or New Jersey.

Given the mix of land that we control today and the significant liquidity available to control even more land, we continue to expect our community count will grow sequentially in the second half of fiscal '18. Once the community count begins to grow delivery and revenue growth will follow a few quarters later.

I'll now turn it over to Larry Sorsby, our Executive Vice President and Chief Financial Officer..

Thanks Ara. I’m going to start by providing an update on our Houston operations including the impact of Hurricane Harvey. Turning to Slide 14 despite the fact that we've had almost three years of significant lower oil prices, our Houston operations continue to post solid results. Here we show annual contracts for community for the last five years.

As you can see, the 26.5 contracts for all of fiscal 2017 is the highest on the graph and even exceeds the level that we achieved prior to the lower oil prices. Turning to Slide 15, as expected due to Hurricane Harvey we did experienced a year-over-year slowdown in sales per community in Houston during the fourth quarter.

For the fourth quarter of 2017, we had 5.7 contracts per community in Houston compared to 6.7 contracts per community in last year's fourth quarter. Despite the impact from Hurricane Harvey, this is still the second best fourth quarter sales pace per community for the past five years.

September the month immediately following the hurricane was the slowest. This was largely impacted by cancellations from buyers that had been in contract and whose lives were changed by the storm and could no longer go forward with their purchases.

Since then, traffic and sales picked up during the month of October and gained even further strength in November. Net contracts per community in November 2017 were 2.1 an increase of 31% over the 1.6 we had in November of 2016.

As anticipated we did end up missing some deliveries in Houston during the fourth quarter but our associates and our home buyers have been extremely resilient. Unfortunately, we are beginning now to feel the impact of our Harvey on material and labor cost.

We've been hit with increases in the cost for sheet rock labor and our overall bill times are getting longer. It is likely that we will see even further pressure on labor cost when insurance companies begin to make payments the most homeowners whose homes were damaged by the flooding.

Our Houston team performed very well during the aftermath of the hurricane and we expect to have continued success in this important market. While on the subject of hurricanes, our Florida operations have also bounced back nicely from the impact of hurricane Irma which followed closely on the heels of Harvey.

Traffic sales and deliveries in Florida were adversely affected for a few weeks after the hurricane but recent trends are pointing to improve future results. One other issue that also negatively impacted our fourth quarter is related to Weyerhaeuser's Flak Jacket I-joists. We discussed this quite a bit last quarter.

Our exposure to this product was limited to 63 homes in Delaware and New Jersey. Through October 31, we have delivered about half of those homes. We will be happy when we get the other half delivered in this issue is truly behind us. I want to add a brief comment on the Thomas Fire in Southern California.

We have been fortunate and not had damage in either of our two Ventura County communities. However, we are at risk of missing some first quarter deliveries. Right now, the power company is focused on fire related issues and are not currently setting up electric meters in new home communities. We don't expect the impact to be too significant.

Turning to Slide 16 and our land position. Here you can see our owned and option land position broken out by our publicly reported market segments. The end of the third quarter we controlled 13,907 consolidated lots through option contracts.

Many investors mistakenly believe that the majority of our land options are held by land bankers which certainly is not the case. Our land bank lots peaked at 16% of our total lot options at the end of the third quarter of fiscal 2016.

As you can see on Slide 17, this percentage is declined only 9% of our lot options by the end of October 2017 compared to 15% at the end of last year. As further evidence, we've seen the dollar amount of inventory not owned on our balance sheet decrease 40% year-over-year.

Much of this decline is related to us working through the land bank on previously owned land. Our investment and land option deposits was $57 million as of October 31, 2017. Additionally we have another $6 million invested in predevelopment expenses.

Looking at all of our consolidated communities in the aggregate including mothballed communities and the $125 million of inventory not owned, we have an inventory book value of $1 billion net of $328 million of impairments.

Turning to Slide 18, one of the positive points about un-mothball bowling lots is we don't have to spend cash to buy that land because we already own it. Since the end of fiscal 2014, we have steadily reduced our mothballed lot position by a total of 2398 lots.

About half of those lots reactivated which means that those communities are now open for sale or have already been sold out. The other half was sold and generated revenues of $50 million which were used to reinvest in new communities.

We still have a large portion of our mothballed lots in California about 82% of the 3573 total but the good news is that the market in California continues to improve and over time we expect to un-mothball additional lots.

For example about 1600 of the mothballed months in California are in a single community that we are currently redesigning and re-entitling to maximize its value in today's market. We hope to have it open for sale within the next couple of years.

Further on the subject of inventory, we believe one of the key pure operating metrics for the homebuilding industry is EBIT to inventory. This metric neutralizes the impact of debt. On Slide 19 we show the trailing 12 month adjusted EBIT to inventory for us and our peers.

This ROI metric measures pure operating performance before interest expense and we remain in the top quartile when compared to our peers. We and the entire industry are still at on normalized ROI levels yet but this will improve as we get further into the recovery. One of the ways we're able to achieve this is with a focus on inventory turns.

Turning to Slide 20, compared to our peers you could see that we have the second highest inventory turnover rate over the trailing 12 months. We are right at the midpoint between NDR's industry leading number and the next highest peer below us. This is a key component of our overall strategy.

You can see on Slide 21, our inventory turns have improved from 1.1 times 6 years ago to 1.5 times 3 years ago and to 2.1 times for the most recent quarter. Another area for discussion is related to our tax-deferred asset valuation allowance.

At the end of fiscal 2017, our valuation allowance and the aggregate was $918 million, our deferred tax asset is very significant and is not currently reflected on our balance sheet. We've taken numerous steps to protect it. We will not have to pay cash federal income taxes on approximately $2.1 billion of future pretax earnings.

I know that sounds like a lot of pretax profits but keep in mind that between 2002 and 2006, our pretax profits were about $2.2 billion. On Slide 22 we show that we ended the year with a total shareholders' deficit of $460 million. To add back our valuation allowance as we did on this slide that our shareholders equity will be a positive $458 million.

If you look at this on a per-share basis it's $3.10 per share which means that yesterday's closing stock price of $2.67 our stock price is trading at 14% discount to adjusted book value per share. Over time, we believe that we can repair our balance sheet and have no current intentions of issuing equity anytime soon.

Now let me comment on our current liquidity. As seen on Slide 23, we ended the year with liquidity of $474 million which is significantly in excess of our liquidity target of between $170 million and $245 million. That's the most liquidity we've had since the end of the third quarter of fiscal 2010.

Since we would rather be at the low end of our liquidity range, this illustrates that we have ample cash to invest in growing our community count. We spent $115 million on land and land development in the fourth quarter of 2017 which brings our full-year spend of $555 million.

As I have mentioned earlier, we have controlled significantly more lots during fiscal 2017 when compared to lots controlled during fiscal 2016. We option 5565 more lots and purchased 702 more lots than last year. We control these additional lots with less money than we did last year.

Much of this activity was through new options where we put down a deposit and laid a full purchase price of the lots until we are just about to begin construction. This is consistent with our focus on high inventory turns and enhances our return on inventory. Once again we ended the year with $474 million in total liquidity virtually all in cash.

So we have ample liquidity to increase our land spend. However, we remain disciplined in our approach to underwriting new land parcels, we continue to use current sales pace, construction cost, and home price assumptions when underwriting new land parcels. Our minimum IR hurdle rate for new land parcels remains at 20 plus percent.

As we look at our maturity ladder on Slide 24, you can see the significant impact our secured bond refinancing from this past summer had on pushing out those maturities. Subsequent to the end of the quarter, we paid off the $56 million of exchangeable notes that came due on December 1, 2017.

Additionally, we expect to pay off the cash our current $52 million and the $15 million of letters of credit outstanding under our unsecured revolver due in the third quarter of 2018. We are continuing to actively explore options for refinancing our unsecured bonds coming due in 2019.

It would not be appropriate at this time to discuss the options available or our current thinking. We will not comment on recent reports in the Bloomberg and the Wall Street Journal on this topic or answer questions related to this subject during the Q&A period.

We trust that you understand that we are not in a position to engage further on this topic. This concludes our formal remarks, and I will like to open it up for questions..

[Operator Instructions] And our first question comes from the line of Alan Ratner with Zelman & Associates. Your line is open..

Nice job with cash generation and the margin.

So my question is on tax reform obviously there's a lot of optimism right now in the markets and while you guys are probably not directly impacted in the near-term from that given your large deferred tax asset, we've heard some speculation or concern in general in the marketplace that is builders become flush with some excess cash as a result of paying lower taxes that you’re going to see some of that and that cash competed away through getting a plan prices potentially paying more for labor given how tight the labor environment is.

So I’d be curious just kind of thinking about your competitors in the market as you're looking to become more aggressive purchasing land in 2018 with the vision toward expanding community count.

Is that something that you're concerned at all about as far as seeing land values and labor prices inflating and you not being a direct beneficiary in the near term of tax reform? Thank you..

Alan I would say that a lack of cash has not been holding back competitors in the industry and it hasn't been holding us back obviously it’s all with our year-end cash of almost $0.5 billion.

It’s really just been fine having the patience and discipline to find the right opportunities and thankfully on the whole, the whole industry has been demonstrating that patience and discipline to not go crazy and again I'd say the entire industry has not had liquidity issues. So I don't think that's going to change dramatically.

What I would say is as we get later in the cycle that we will pass this inflection point as I've mentioned before where demand and supply shifts a bit and as almost always happens in every housing recovery, we’ll see margins expand and pace expand and I think that's going to be - and by the way therefore overall returns on investment expand, I think that’s going to be way more significant personally and have a greater effect on the industry than the tax changes..

Second question maybe this one is more for Larry but as we look at the joint ventures really strong order growth there and it's growing to become a more meaningful percentage of your business, I think almost 20% communities and unfortunately the disclosures on joint ventures, I think in general are not as good as the consolidated business.

So I was curious if you could just give us a little bit more color on the structure of these joint ventures, what percentage of equity you have in them, where these projects tend to be located? How large they are? When we should expect the cash to really come back, your equity investment should start coming back from them and then what the plan is as you recycle that cash, is joint ventures are they going to remain a big part of the business or is the hope and intention that you could recycle that cash and bring it more on the consolidated business, I know there is a lot there but anything you have on the JVs? I would appreciate it, thank you..

Well just macro first, we've been doing joint ventures since early 2000s including periods when we're absolutely flush with cash and had zero liquidity issues. We like joint ventures for larger communities because it does enhance the return on our investment, obviously it also in our case diversifies risk on larger parcels.

So I'd say joint ventures will continue to be part of our long-term plan. In general - generally save joint ventures for larger transactions, it’s just not worthy effort normally for smaller transactions.

During ‘16 we did make an exception to that as we frankly scrambled a bit to deal with the maturities of $300 million plus that we keep referring to and we did more medium sized communities than we normally would do but generally we reserve it for larger more expensive communities.

With those tend to occur on the West Coast California occasionally in Arizona and it occurs in Florida for us and also in the North East. So I'd say in general that probably represents the overwhelming majority of our joint ventures.

In particular we have a larger joint venture that’s going to begin deliveries in the second quarter that should have a very positive impact on the joint venture performance.

Overall, it’s a larger 14-storey building, it’s more unusual for us but not something that we haven't done in the past, we have done it, it's just not the common occurrence for us, it's on the New Jersey waterfront overlooking Manhattan, it’s been very successful in terms of sales thus far and will be in a position to start delivering in the second quarter..

Alan we will take under advisement of disclosure typically if we have multiple parties asking for additional information, we at least give it serious thought as to whether we can - as my Chief Accounting Officer is grimacing take some additional disclosures. So we’ll look into that..

Yes I mean broad brushed without being really specific we put 15% to 20% of the equity capital required net of any financing.

Our partner would put the remaining part which would be obviously in the majority of it and then we would typically get promotes as the returns get in the teens typically enough so that if community performs well we'd end up with 50% plus of the profits. So that’s broad brushed structure and returns..

And our next question comes from the line of Arjun Chandar with JPMorgan. Your line is open..

Fully appreciative of the fact that you said at the end of the prepared remarks that you’re not taking any specific questions around recent press reports out there but wanted to get at the comments you made around your refinancing strategy for the unsecureds.

You've been consistent in saying that once the secure deal got done over the summer, the next step was to refinance the unsecureds..

Let me just stop you there. I understand your question to be about a potential refinancing of our bonds coming due in 2019 and as I mentioned during my prepared remarks, we’re just not in a position to discuss this topic in any way even strategically or comment on any news reports regarding it.

If and when we have news to share appropriate announcements certainly are going to be made I apologize but we’re just not in a position to comment right now..

Fully understand, just real quick just on timing potentially do we think it's through the next few weeks or is it something that could be a little, little longer?.

I have no comment, so I can make on that..

Okay. Moving away from the balance sheet then, just wanted to focus on inventory position, you did mention that liquidity was in the 470s, you’re obviously building significant cash balance.

You mentioned land spend growing in ‘18 and I just wonder to get at the fact that community count is expected to grow in the back half of ’18 that’s one thing you said in your Q3 call, is that something you still expect to play out after pipeline in Q4 or do you think it’s going to be more of a fiscal ‘19 event?.

I think we’re standing by our previous comment on we expect to begin to see community count growing in the second half of ’18..

And with regards to the community count growth, it’s obviously your absorption rates have also increased quite a bit, does that imply that land spend is going to increase more significantly in the first half of fiscal ‘18 because it feels like you have taken a pause on land spend over the past year to address that maturities to build liquidity, should we expect more of an acceleration in land spend in the first half of fiscal ’18?.

Yes, I think land spend was actually flat year-over-year in ‘17 to ‘16 and we were able to control additional lots which is really what the objective is, the objective is not to spend cash. The objective is to control more lots which we did significantly, more lots in 2017 than we did in 2016. We’re going to continue to have that strategy in the 2018.

We have ample cash available to invest in new land parcels. Our land teams have been very busy. So it wouldn't surprise me to see our spent the increase in 2018 versus 2017, but its not necessarily requirement as we demonstrated in 2017 versus 2016, if that make sense..

And our next question comes from the line of James Finnerty with Citi. Your line is open..

On the land sale, was that in the Northeast and was it mothballed properties?.

Yes. That's correct for both. It was the Northeast and it was mothballed, yes..

Yes. So, the mothballed and Northeast. Okay..

Yes. Correct..

And then on one other point of guidance you had previously given, it was for joint ventures to generate positive earnings in fiscal 2018. I'm not sure if you had addressed that in your prepared comments.

Is that's for the case?.

Yes. Absolutely.

And then just on land spend as you did 555 this year, 567 in 2016.

Should we be thinking 2018 should be kind of in the same ballpark slightly up relative to the past three years?.

I think what you should be thinking is that we’re going to figure out a way to control even more lots in 2018 than we did in 2017. We have sufficient cash if need be to invest more than we did in 2017 during 2018.

If it's necessary to do that we’re going to continue to focus on high inventory turnover and trying to control as much land as we can by option, but we have ample cash, ample liquidity to invest more and it will maybe that we invest more dollars in 2018 than we did in 2017..

And our next question comes from the line of Sam McGovern with Credit Suisse. Your line is open..

In your prepared remarks you guys highlighted that you guys paid off on December 1, and in the letters of credit that you had expected to pay off the cash there as well.

Just given where the CDS trading, can we expect that you guys will make normal correspond as we expected normally?.

I don’t know how we can be any clearer on that that we’re going to pay off at maturity, the debt that’s coming due this summer on an unsecured revolver that also has a component of it to be the letters of credit.

So – and just as we had previously told you that we’re going to pay off the exchangeable notes that came due on December 1, we did that as well. And I don’t how to be any clearer and that's about all I can say on that topic..

So just turning back to the business you talked about potentially increasing options and it sounds like that probably will cause you guys to increased inventory turns further than where you guys are currently.

Is that correct assumption over time or is just sort of inventory turn level that you guys feel most comfortable at?.

I’d say, that is certainly our target and in the past we have had higher inventory turns than we are right now. It is definitely as we’ve talked about before a key part of our overall strategy and we need to do as much as we can with the investment levels that are available to us.

We think our best opportunity for returns on investment are through a very high inventory turns. So we're going to continue to march in that direction.

Clearly there is one homebuilder in our industry who is on the extreme and in terms of inventory turns, it would be our ideal goal to get in that range, but I wouldn't say we’ll get done nearly that far. We tend to be a little more flexible overall.

But generally speaking our goal is to be as high as we can on inventory turns and it’s a key part of our strategy..

And our next question comes from the line of Megan McGrath with MKM Partners. Your line is open..

I would ask for little bit more color on some of your commentary around margins and input costs.

If you could maybe give us, however you feel comfortable giving some detail on the magnitude of what you're saying both maybe overall nationally on a labor and input cost perspective? And then if you could give more detail on Houston commentary you made, how much of an increase have you seen lately in those costs?.

Well, interestingly the labor part has subsided a bit in terms of broad brushed national comments. And as we mentioned, the real focus has been on this unusual lumber spike increase and that's relevant because it’s such a major part of our costs. It has spiked more than just a normal part of the recovery cycle for the reasons we mentioned.

There is this unusual Canadian tariff implementation and candidate is an important source of the overall lumber supply. And as often happens with the OSB market post hurricane, there was a spike there and given that they were two hurricanes we had a particularly significant spike there.

I suspect that we’re not going to see big spikes in either of those two markets going forward unless there's some other unusual event. It will be more in line with the general increases that you'd see across all other commodities. If I took aside lumber increases, other materials frankly have not gone up very much.

There been a few that have gone up a little bit, a few that have actually gone down a little bit. So with the exception of lumber there really hasn't been big changes in material prices..

So to summarize and when you said in your opening comments that price increases were basically entirely offset by labor and materials that's almost - that’s a little bit labor and almost entirely lumber, is that fair?.

No..

Go ahead, Larry..

The issue, Megan is more confusing because I think that comment was related to kind of what happened the last six, 12 months and what happens when you look at our margin or any of other homebuilders margin and that we control three years ago has a lot of labor increases in it that wasn't anticipated at the time that we underwrote it to achieve, normalized margin.

So over the last several years margin has eroded on land that we controlled three years ago, because of labor increases and then more this year because of material increases.

But as we've been able to raise home prices over that entire period of time they have not risen on average more than the cost increases we've gotten from both labor and materials over that same period of time..

And Megan, just to be clear, what we’re talking about is broad brushed national average. We absolutely have seen many communities where price increases have far outpaced material cost increases, but then there have been other markets and other communities where material prices have actually outpaced home price increases.

So what we’re talking about is the general averages..

And our next question comes from the line of Alex Barron with Housing Research Center. Your line is open..

I wanted to focus on orders and on the delivers. On the order side, it seems that you're ready to spend down a bit, but your sales pace has obviously improved as we pointed out. So I’m curious in terms of what you're - kind of where you guys are going with your land purchases and with your product type.

Are you shifting your product strategy? Are you moving more into entry-level? Or what's kind of driving the higher sales pace?.

I'd say, generally the higher sales pace is affected by the improving market. We’re not really doing any major strategic shifts in our product types. In general first time product is plus or minus 28% or 30% of our business that hasn't been a big shift.

I know many builders are all of a sudden making a big shift into that market that has been part of the market that we’ve been involved in for a while. There hasn't been a big shift. I’ll emphasize again one of the slides and data points that we talked about.

Our normal sales pace per community if we look - go back to and neither boom or bust period we picked '97 to '02, our average pace then was about 44 homes per community. In the boom time that typically does come at some point in the cycle we're actually well above that in the mid-50s per community.

Needless to say with the general housing recession years ago it went way, way below that and it is gradually been recovering. So I'd say, what we are seeing right now is more related to further progress toward a normal housing market much more so than mix.

We’re still below normal in terms of sales pace per community both our company is below normal and I say the industry is below normal. But we as well as the industry have made steady progress toward returning to normal each of the last many years..

How about on the backlog conversion side, so this year, this quarter was much better than any previous quarter. And I think the whole year was better than last year.

Is that a function of more labor improvement? Or do you think it's more - you guys are building more specs or what's driving the improvement in the backlog conversion?.

Alex, because we have very detailed budget community by community, division by division rollup, I mean, the backlog conversion is just not a statistic, and I’ve mentioned this on previous calls that that we as a company kind of focus on.

So I think it's just an impact of probably mix of where we we've gotten deliveries as well as maybe product type, but it's just not some we have any data to be able to comment on, because it's not some we actively monitor.

We monitor our business units against their budgets which are updated from time to time and hold them accountable doing that and obviously it start with sales and then monitoring I guess till they get the starts which obviously leads to deliveries with the cycle time and the backlog conversion rates is not something I'm able to give any real comment on..

One other metric that we do follow is contract cancellation rate and we really haven't seen any major changes there. We’ve been plus or minus 20% for a while now..

Thank you. And I'm showing no further questions at this time. I would now like to turn the call back to Ara Hovnanian for any closing remarks..

Great. Thank you very much. We’re relatively pleased with the quarter and we’ll look forward to giving even better news going forward. Thank you..

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