Jeff O’Keefe – Vice President-Investor Relations Ara Hovnanian – Chairman, President and Chief Executive Officer Larry Sorsby – Executive Vice President and Chief Financial Officer Brad O’Connor – Vice President, Chief Accounting Officer and Controller.

Megan McGrath – MKM Partners Tim Daley – Deutsche Bank Sam McGovern – Credit Suisse Alan Ratner – Zelman Susan Berliner – JPMorgan Alex Barron – Housing Research Steve Salemy – BNP Maneesha Shrivastava – Citi.

Good morning and thank you for joining us today for Hovnanian Enterprises Fiscal 2016 Fourth Quarter Earnings Conference Call. An archive of the webcast will be available after the completion of the call and will run for 12 months. This conference is being recorded for rebroadcast and all participants are currently in a listen-only mode.

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. The slides are available on the investors page of the Company’s website at www.khov.com.

Those listeners who would like to follow along should log on to the website at this time. Before we begin, I would like to turn the call over to Jeff O’Keefe, Vice President of Investor Relations. Jeff, please go ahead..

Thank you, Esther and thank you all for participating in this morning’s call to review the results for our fourth quarter, which ended October 31, 2016.

All statements in this conference call that are not historical facts should be considered as forward-looking statements within the meaning 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 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 assurance that such plans, intentions or expectations will be achieved.

By their nature, forward-looking statements speak only as of the date 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 other factors include, but are not limited to changes in general and local economic industry and business conditions and impacts of the sustained homebuilding downturn; adverse weather and other environmental conditions and natural disasters; levels of indebtedness and restrictions on the Company’s operations and activities imposed by the agreements governing the Company’s outstanding indebtedness; the Company’s sources of liquidity; changes in credit ratings; changes in market conditions and seasonality of the Company’s business; the availability and cost of suitable land and improved lots; shortages in and price fluctuations of raw materials and labor; regional and local economic factors, including dependency on certain sectors of the economy and employment levels affecting home prices and sales activities in the market where the Company builds homes; fluctuations in interest rates and the availability of mortgage financing; changes in tax laws affecting the after-tax cost of owning a home; operations through joint ventures with third-parties; government regulation, including regulations concerning development of land, the homebuilding, sales and customer financing processes, tax laws and the environment; product liability litigation; warranty claims and claims made by mortgage investors; levels of competition; availability in terms of financing to the Company; successful identification and immigration of acquisitions; significant influence of the Company’s controlling stockholders; availability of net operating loss carry-forwards; utility shortages and outages or rate fluctuations; geopolitical risks, terrorist acts and other acts of war; increases in cancellations of agreements of sale, loss of key management personnel or failure to attract qualified personnel; information technology failures and data security breaches; legal claims brought against us and not resolved in our favor; and certain risks, uncertainties and other factors described in detail in the Company’s annual report on Form 10-K for the fiscal year ended October 31, 2015 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 will now turn the call over to Ara. Ara, go ahead..

Thanks very much Jeff. I am going to start by comparing our full year results to our guidance then review some of our operating results for the fourth quarter. Larry is going to follow me discussing many items including our liquidity position in a little more detail.

On Slide 3, we show the most recent guidance we gave for the full year and how it compares to our actual results. We met or exceeded each of the guidance metrics we provided on our third quarter conference call. Our total revenues were $2.8 billion right in the middle of our guidance and an improvement of 28% versus 2015.

Our gross margin was 16.9%, which was closer to the high-end of our guidance. In addition our SG&A as a percentage of total revenues was 9.2% which was closer to the lower end of our guidance and was 250 basis points better than the 11.7% we’ve reported last year.

Our adjusted EBITDA of $231 million exceeded the upper end of our guidance and was up 54% versus the $154 million we achieved last year.

Our pre-tax profit before land related charges and loss on extinguishment of debt was $39 million for all of fiscal 2016 that exceeded the top end our guidance and compares favorably to the pretax loss we reported to 2015 on the same basis. Being fully transparent during fiscal 2016 our instances of construction defects continued to decline.

Because of the improvements in our construction defect trends our actuarial analysis of insurance reserves indicated that we are over reserved for construction defects. Therefore we recorded a reduction in our insurance reserves resulting in a $9 million reduction of SG&A expenses.

Nonetheless even excluding this benefit we would have still been within the range of our SG&A and our pretax profit guidance metrics. Going forward we will be reserving for construction defects at a slightly lower rate per home. Turning to Slide 4, I’ll now go through some of our quarterly results.

On this slide we start off in the upper left hand corner and we show that year-over-year total revenues increased 16% to $805 million.

In the upper right hand portion of the slide, you can see that our gross margin was 17.6% in the fourth quarter of this year compared to 18% in last year's fourth quarter but it was up sequentially from 16.9% in the third quarter of 2016.

Down in the lower left hand quadrant, you can see that we continued to get good leverage on our SG&A expenses during the fourth quarter this year at 6.7% which was better than the 7.1% we reported in last year's fourth quarter.

In the lower right hand corner of the slide we show that we have $46 million of income before income taxes, land related charges and loss on extinguishment of debt in the fourth quarter of this year compared to a $42 million profit last year.

Needless to say while these metrics show improvement over last year, we remain committed to improving our operating results dramatically. Highlighted on, Slide 5, we continued to improve some of our credit statistics.

In the upper left hand corner we show that our adjusted EBITDA increased 14% during the fourth quarter to $96 million compared to $85 million in last year's fourth quarter. In the upper right hand corner we show that our adjusted EBITDA to interest incurred, also increased about 2.4 times compared to 2 times in last year's fourth quarter.

Moving to the lower left hand quadrant, our adjusted EBITDA for the 12-month period increased 54% this year to $231 million dollars. While in the lower right hand portion of this slide, we show that for the full-year our adjusted EBITDA to interest incurred increased to about 1.4 times from 0.9 times last year.

Additionally during the year, we reduced our total notes payable by $258 million and debt from nonrecourse mortgages by $60 million for a total debt reduction of $318 million. As we look to improve our operating efficiencies in the future we expect our credit statistics to improve further.

Our gross margin, is one area where we need to see some improvements going forward. Three factors continue to be a headwind for gross margin. The first is rising labor costs. It varies in amount from market to market but during the last year, we experienced higher labor costs in virtually all of our markets.

While it's not the same trade in each market overall there's just not a sufficient supply of trained labor to build quality homes. This has resulted in our trade partners being able to charge more for their work. The end-result to all homebuilders not just Hovnanian is increased labor costs.

While the pace of labor increases, has slowed compared to a year ago. It is still occurring, especially in markets that are seeing higher growth rates. Second in certain markets, we saw an increased use of incentives by our peers that we had to match.

The increased incentives effectively reduced the home sales price, which in turn puts downward pressure on our gross margin. The final factor is the adverse impact of higher land costs from land that we purchased in 2013 and early 2014 when the sales absorption paces were higher, incentives were less and labor costs were also lower.

By 2018 we expect that the impact from the land that we purchased in 2013 and 2014 will begin to diminish and begin to migrate our gross margins back to more normalized levels. As has been common in many of the most recent quarters, we’re not the only homebuilder fielding pressure on gross margin.

On Slide 6 we show the trailing 12-month gross margin for 10 of our peers who reported September or October quarter-end results plus our own. 10 of the 11 homebuilders reported year-over-year declines in gross margin.

We suspect the same combination of factors I just discussed that are negatively impacting our margins are also having an adverse effect on our peers gross margins. Moving on to our SG&A ratio, which we show on Slide 7. On the left hand portion of the slide, you can see that our annual total SG&A ratio from 2001 all the way through 2016.

We consider 10% of the ratio that we achieved in 2001 through 2005 to be at normalized level. As we do every year in our fourth quarter, we enlist an actuarial firm to conduct a study to estimate reserves necessary to cover our outstanding exposure to construction defects.

Any increases or decreases in these reserves impact our SG&A expenses, the grey bars on this slide are the reported numbers, which include the reductions from our construction defect reserves. We also show the ratio, if you exclude the 2015 and $9 million dollar benefits from these defect reversals.

This is represented by the blue bars for fiscal 2015 and 2016 and the fourth quarter bars for both of these years as well. Our positive trends, over the last two years in the reduction of defect is certainly helping our expenses.

We didn't just show an improvement in our SG&A ratio because of the reversal of these construction defect reserves regardless of whether you look at SG&A ratios with or without the reversals you can see the operational improvements that we've made with respect to this ratio.

On either basis the SG&A ratio for all of 2016 is as good or better than any year since 2001. At the end of the fiscal year, Tom Pellerito our COO stepped down and will retire completely at the end of our calendar year. Tom has been an exceptional leader in our Company since 2001.

That position was filled by our EVP of homebuilding Lou Smith and we are not replacing Lou's former position. During the year we also reduced the number of Group Presidents from four to three. These reductions were made easier with our exit from four underperforming markets and the benefits will affect our 2017 SG&A.

These are just a few of the changes that will allow us to maintain our efficiency going forward. On the right hand portion of the slide, you see our fourth quarter SG&A ratios for 2015 and 2016. Once again the improvement was even more significant when you exclude the benefits from reversing insurance reserves.

Now I'm going to shift the conversation to our community count and the current sales environment. Before I get into the details, I just want to remind you of two things influencing our community count and contracts.

Over the past year debt markets for issuing public high yield bonds remain closed to companies with our credit ratings and we needed to pay off $260 million of maturing public debt. This led to our decision to temporarily reduce land spending in 2016 and to exit four underperforming markets.

Further we increased the use of our land bank financings and joint ventures in order to enhance our liquidity position. The net effect temporarily adversely affected our ability to invest as aggressively in new land parcels than we previously had planned.

The combined effect of exiting four markets and less land spend resulted in a short-term reduction in our community count, which in term means fewer net contracts. However we ended fiscal 2016 with a liquidity position of $347 million, well in excess of our targets.

This has allowed us to once again actively seek land investment opportunities, which should ultimately result in community count growth and higher levels of profitability in the future.

We've already seen a pick up in optioning new lots during the fourth quarter of 2016 approximately 2,100 lots including unconsolidated joint ventures were put under option in 37 communities and increased sequentially from 900 lots in 20 communities during the third quarter.

If you turn to Slide 8, you can see that our consolidated community count decreased 24% at the end of the fourth quarter compared to last year's fourth quarter 219 to 167. The decline was partially due to the sale of communities in Minneapolis and Raleigh and the wind down of the Bay Area of California and Tampa.

During the year we opened 70 new communities and closed out off a 122 older communities. On this slide, you can also see that our joint venture community count increased from 10 at year-end of 2015 to 21 at the end of 2016.

So if you look at total communities both wholly owned and joint ventures they decreased from 18% from 229 last year to 188 this year. We're confident that the changes to our footprint will make us more profitable and efficient in the long run.

However the changes make for a challenging year-over-year comparisons for community count as well as net contracts for 2016 and 2017. We are redeploying the capital from selling two divisions, winding down two other divisions, and the proceeds from the refinancings we did with H2 into our other more successful existing divisions.

Once we get these new communities up and running, it should lead to better community count and contract comparisons. Given that the availability of finished lots that make economic sense are fewer, there are more opportunities with respect to undeveloped lots.

This certainly creates a lag in our deliveries because the period from acquiring the lots to delivering the homes is extended due to the time involved in land development.

Since we do have declines in our community count we believe that most appropriate barometer of our sales results is to look at our contracts per community, which also happens to be a key metric for our efficiency. On Slide 9, we show that our consolidated contract per community increased 11% to 7.8 net contracts per community for the fourth quarter.

As we've said on previous conference calls, we shifted our focus from growth to reaping operating efficiencies and improving our bottom line. Improvements in net contracts per community allows us to receive the benefit of those extra deliveries from existing communities without having to add much if any additional SG&A costs.

And that certainly goes a long way to making us more efficient. It's not surprising that with a 24% decline in our community count from October of 2015 to October of 2016 that the number of net contracts also decreased. But our contracts, our net contracts only declined year-over-year by 15% in the fourth quarter of 2016.

If you look at contracts per community restacked as if we had a September quarter-end so that we could compare our results to nine of our public peers who reported September quarter-ends.

As we do on Slide 10 we were one of four builders with double-digit growth year-over-year, our 12% improvement in sales pace per community was the fourth highest among our peers. Slide 11 shows our contracts per community on a monthly basis, giving as much granularity and transparency as possible.

The most recent month is in blue the same month a year ago is in grey. For 11 of the past months net contracts per community were equal to or better than the prior year, in fact eight were better. On Slide 12, we show on the left hand side the dollar amount of our net contract backlog.

Including unconsolidated joint ventures decreased 9% to $1.2 billion dollars from $1.3 billion dollars. Despite the decline in community count our backlog is still strong and high and gives us a good position for a solid first quarter. I will now turn it over to Larry Sorsby our Executive Vice President and Chief Financial Officer..

Thanks Ara, given Toll's announcement earlier this week regarding their charge for stucco, let me start with a discussion about our stucco experience. Over the past fifteen years we have had stucco repair cost in excess of $60 million.

As a result a number of years ago we took many steps to ensure stucco was properly installed on our homes and actually discontinued it’s use in many markets including New Jersey and Pennsylvania where a majority of our stucco repairs originated.

Therefore we do not expect to record any significant additional reserves for stucco related claims in the future. On Slide 13, we provide an update on Houston. Despite the fact that we've had two years of significantly lower oil prices our Houston operations continue to post solid results.

As a matter of fact 2016 was the most profitable year ever for our Houston Division.

During the fourth quarter of 2016, we saw the absolute number of net contracts in Houston increase by 19% year-over-year and net contracts per community increased 32% year-over-year to 6.7, which was the highest level for fourth quarter net contracts per community over the past four years.

There are three things that set our Houston operations apart from many of the builders we compete against in that market. Number one with an average home price on homes delivered of approximately 300,000 we focus on a lower average price point. Number two we do not build in any of the highly competitive master plan communities.

And number three we have less exposure to communities in the energy corridor in Houston than our peers. Despite another solid profitable year, for Houston operations we remain cautious about the impact of the lower oil prices on the Houston economy.

We continue to keep a close eye on the market and we’ll take appropriate actions should circumstances change. Our Texas, operations both Houston and Dallas remain amongst our strongest markets. Turning to Slide 14 you will see our owned and optioned land positions broken out by our publicly reported market segments.

Our investment in land option deposits was $62 million as of October 31 2016. Additionally we have another $9 million invested in predevelopment expenses. In general we are reviewing a greater number of our mothballed assets as these markets seem to be improving to a sufficient level to either sell or develop these assets.

Looking at all of our consolidated communities in the aggregate including mothballed communities and $209 million of inventory not owned. We have an inventory book value of $1.3 billion, net of $452 million of impairments. We are focused on return on inventory and an important component of that is how quickly we can turn our inventory.

On Slide 15, you can see that we have the second highest inventory turns over the trailing 12-months as compared to our peers. In addition to our historical focus on more heavily utilizing land options than the majority of our peers.

More recently our turns, were also aided by utilizing the land banking which facilitates us purchasing lots on a just in time basis, achieving a high inventory turnover, continue to be a focus for us going forward. Another area for discussion for the quarter is related to our deferred tax asset valuation allowance.

During the fourth quarter of fiscal 2014, we reversed $285 million of deferred tax asset valuation allowance. We should reverse the remaining valuation allowance when we begin generating sustained profitability levels higher than recent years.

At the end of the fourth quarter of fiscal 2016, our valuation allowance in the aggregate was $628 million dollars. The remaining valuation allowance is a very significant asset not currently reflected on our balance sheet. And we've taken numerous steps to protect it.

We will not have to pay cash federal income taxes on approximately $2 billion of future pretax earnings. On Slide 16 we show that we ended the fourth quarter with a total shareholders' deficit of $129 million. If you add back the remaining valuation allowance. As we've done on this slide, then our shareholders' equity would be a positive $499 million.

If you look at this on a per share basis, it's $3.39 per share, which means at yesterday's closing stock price of $2.44 per share our stock price is trading at a 28% discount to our adjusted book value per share. Over time, we believe that we can repair about sheet and have no current intentions of issuing equity anytime soon.

On the left hand side of Slide 17, we showed total interest expense as a percentage of total revenues for the full year of 2009 through 2016. We lowered our interest expense ratio during 2016 to 6.7% from 7% last year. On the far right, primarily as the result of interests from land banking transactions we closed in early in fiscal 2016.

You can see that interest during the fourth quarter of 2016 was just a tick higher than it was in the fourth quarter of 2015. While we did not reduce while we did reduce, our debt by $318 million during fiscal 2016 we replaced some of this debt with land banking transactions at a higher interest rate.

As we close out of these early 2016 land bank communities, we expect the dollar amount we spend on interest to decrease. On Slide 18, we show our maturity ladder, our first significant maturities do not come due until January 2019.

Although we’ve looked at refinancing opportunities from time to time we are running the business as if we will have to pay off the $64 million of notes due December 2017 and the $52 million revolver due June of 2017 as well as the 75 million of notes due October 2018 with cash.

Then as our operating performance and our credit statistics improve further, we anticipate tapping the capital markets to refinance both our 2019 and 2020 maturities.

As seen on Slide 19, after spending $131 million on land and land development in the fourth quarter, we ended the fourth quarter liquidity position of $347 million, which is well above the high end of our liquidity target of between $170 million and $245 million.

We are very comfortable operating near the low-end of this range and recognize the fact that we need to invest in new communities. So that we can grow our deliveries and our top-line in the years to come. For all of fiscal 2016, we spent $567 million on land and land development. About $90 million less than we spent on land during fiscal 2015.

As we look ahead to fiscal 2017, we have more capital available to spend on land than we have spent in either of the past two fiscal years. Looking ahead to 2017, we expect to shrink our consolidated deliveries due to a combination of issues. First our decision to exit from Minneapolis, Raleigh, Tampa, and the Bay Area of California markets.

Second our decision to convert 12 wholly owned communities into joint venture communities. To-date 10 of those have already been purchased by the joint venture. Finally during fiscal 2016 our priority was paying-off over $260 million of public debt that was maturing.

As a result we spent less aggressively on land, we now expect to have 5% to 10% lower number of total deliveries including both consolidated and joint venture deliveries in fiscal 2017 as compared to fiscal 2016.

However when you look at our total deliveries expected in fiscal 2018, including both wholly owned deliveries and deliveries from unconsolidated joint ventures. We now expect 2018 total deliveries to be similar to fiscal 2016 delivery levels.

Additionally we expect our gross margins for all of fiscal 2017 to be similar to what it was for all of fiscal 2016 and we expect to be able to keep our SG&A ratio around our normalized 10% level.

While we expect lower interest expense in fiscal 2017, because of anticipated total revenue decline in 2017 we do not expect to make progress in reducing our interest expense as a percentage of total revenues for fiscal 2017. However as our total revenues begin to grow again in 2018, we would expect to see this ratio declining again.

Assuming no changes in market conditions and excluding the impact of land related charges and gains or losses on extinguishing of debt we expect our fiscal 2017 first quarter results to be similar in almost every respect to the first quarter results one year ago. That concludes our formal remarks and we would like to turn it over for questions..

[Operator Instructions] Our first question comes from the line of Megan McGrath with MKM Partners. Your line is now open..

Hi, good morning. Thanks for taking my questions. I wanted to follow up a little bit on some of your comments early on around the three reasons that you saw some gross margin pressure this year. The second reason was an increase in incentives that you had to match. So curious if you could give us some detail on that.

Was that broad-based or were there particular reasons there were you saw your competitors being a little more aggressive? The follow-up there is on the land cost. When you think about the mix to that 2013 and 2014 land, is that vintage of everything that you have. So is that going to get better next, stay the same or get a little bit worse. Thanks..

Regarding the incentives, it is really very situational. Certainly two areas come to mind, The Silicon Valley area got a little frothy with everyone and I think the market moved a bit ahead of itself. So we have seen some increase in incentives there as well as some locations in Southern California, so those are two that certainly come to mind.

Regarding the ratios of the higher priced land in 2013 and 2014, we expect that the deliveries from those purchases will be fewer as a percentage of our business next year in 2018..

And I think it will improve slightly in 2017 as well. So think it is beginning to diminish..

Great thanks..

Our next question comes from the line of Nishu Sood with Deutsche Bank. Your line is now open..

Hey this is actually Tim on for Nishu. So I just want to dig a bit in to the November trends. So looking at the monthly cadence that you guys provided, thank you, that’s always very helpful. It seems that community count has actually fallen, just extrapolating a bit almost like by 6% from the end of 4Q to November.

That’s obviously on the wholly owned side. We know that trend is trending down. I just wanted to dig a bit in to how did the JV communities and absorptions perform in November and then as well as what you guys expect for this mix of JV verse wholly owns community count going to 2017 and 2018. Thank you..

I mean I think we’ve given you some pretty good insights that the JV community count is going to grow in 2018 as compared to 2017 because we’ve converted a dozen communities. We initially planned as a wholly owned to JV. So the JV community count is growing.

I don’t have the numbers in front of me, but I don’t think there’s that materially of difference in absorption pace for JV communities versus wholly owned. We may publish that data later today on our website so you can actually see it. But I don’t recall it off the top of my head..

And while Larry is saying it – our JV count of active selling communities is growing, again, we’re not talking about a significant number. We’re up in the 20s. So relative to the overall is sphere, it’s growing quite a bit given that we had 10 last year, but it’s still not a huge number.

We generally reserve those for the larger more significant transactions..

All right, understood. Just to follow-up on your commentary that the JV absorption should be similar to wholly owned absorption, it looks like in 4Q 2016 JV absorptions fell almost 50% year-over-year while wholly owns were up about a 10%. I just wanted to understand.

I know that last quarter you commented that a lot of startup JVs will be slower absorbing a bit they open up, but when….

We had several that for one reason or another in the joint ventures either were just about to open models or in another one we had held off because sales had gotten too far ahead and we’re just turning on sales again. So that’s part….

What I’m really trying to say is there’s no logical reason if we had our joint venture communities at the same average point in community life as our wholly owned that there would be a material difference in absorptions, so you really shouldn’t kind of factor that in to your model..

Yes. That’s exactly what I was looking for. Thank you..

You bet..

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

Hey guys, thanks for taking my questions. Just on the order and backlog figures, how much of the year-over-year decline is driven by the exit of markets in the last year.

Should I just use the contrast per community figure that you guys gave on Slide 9 or do you guys have an apples to apples figure?.

Jeff or Brad have– go ahead..

We give a footnote in our communities under development table that shows you how much of the backlog decline is from Minneapolis and Raleigh. Minneapolis was down 64 homes. And Raleigh was down 67 homes..

Yes..

Okay, great.

And then just looking forward, do you guys have any plans for any new land banking agreements for newly identified lots or will the focus be mostly on the JVs?.

Yes..

As we look at potential new acquisitions of land it is something that we consider doing. It’s not like we have something teed up that there’s going to be significant land banking activity in a single transaction.

But as we used land banking activity back in the bull market run in the mid 2000s, we’ve continued to use them currently, so we may do a land banking action from time to time, but we do not anticipate at this time any significant – if we do it at all of land banking land that we currently own..

I mean in general, with new acquisitions, we obviously with smaller dollar amounts, we typically are doing them unfinanced on any basis on our balance sheet. For larger transactions, we look at joint ventures. We looked at new land banking transactions, not on existing but new acquisitions.

And finally we also are utilizing non-recourse financing from commercial banks as well. So we look at all of those. And it’s always situational..

Okay, great. Thank you so much. I’ll pass it along..

Our next question comes from the line of Alan Ratner with Zelman. Your line is now open. .

Hey guys, good morning. Nice job on the SG&A and cash flow improvements for the year. First question on Houston, pretty impressive results there.

Just curious with the absorptions where they are right now and it being your largest market, are you actually having success either reducing incentives or pushing prices in that market or is it still pretty competitive even though the absorption numbers are healthy? And then I have a follow-up. Thank you..

I would say again it is community specific. I mean there are communities in Houston that we’ve had to do some incentives and some concessions.

There’s been communities that, given what’s happened to land values in Houston that we’ve walked away from our option deposits or renegotiated them but we have a very astute management team in Houston that continues to, in our belief be one of the better performers in that market.

And they too have been surprised by the strength of our activity in Houston, both last quarter and frankly for the entire year. We begin to certainly think that the oil price collapse would have some kind of adverse effect on us during fiscal 2016 and frankly the opposite has occurred in the last couple of quarters much to our surprise.

So we continue to be nimble, continue to make appropriate adjustments. But I certainly wouldn’t say that there’s been any significant margin pressure in Houston, certainly has happened from certain communities..

Thank you for that, Larry. And my second question on the DTA, you guys have obviously taken a lot of steps to preserve that and make sure that there’s no risk there.

Just curious with the discussion of corporate tax reform potentially diluting the longer-term MPD of that DTA, does that change your thinking as far as potential recapitalization, debt for equity, anything like that, things that you’ve kind of stayed clear from in the past to preserve the value of the DTA and if you’ve got any thought in general about what in the corporate tax reform and potentially not being able to deduct interest expense, how that might factor in to the plans on the balance sheet going forward..

Yes. I think it’s premature to draw any conclusions till we see what the new administration is able to actually pass. I mean clearly if tax rates go down, our ability to fully utilize the entire DTA, we’d have to do the calculations, but my gut reaction is that it may be difficult to fully utilize the DTA that’s there.

Whether that’s in turn, causes us to make any other kind of tactical or strategic decisions regarding our capital structure, it’s just premature for us to comment on..

But overall we’d be pleased to have a lower tax rate which certainly would improve our projections for net income. So there are obviously positives..

Got it. Thanks and good luck..

Thank you, welcome..

Our next question comes from the line of Susan Berliner with JPMorgan. Your line is now open..

Hi, thank you and congratulations..

Thanks, Susan..

Thanks..

So I guess with regards to your guidance, can you help us frame out like your community count, how it should progress throughout 2017 and 2018 just directionally? I mean I know it’s down but can you give us any sort of a magnitude and are you in thinking about absorption paces continuing to increase in your projections?.

Yes. Our projections never take in to account any improvements in market conditions. So we’re not assuming anything other than current absorption pace, current home prices when we gave our directional guidance for 2017 and 2018 for that matter.

If there was any improvements in market conditions, there would be upside to the direction that I previously discussed. We’ve not publicly projected community count in the past, so I’m not in a position to project it now, but clearly it’s down. It might trend a bit further down before it begins to recover in 2018..

But overall and we’ve shown this slide on pervious quarterly calls. We are still well below absorptions per community on an normalized basis. If you exclude the boom years of 2004 and 2005 absorptions were still significantly higher than what we’re experiencing now. Now, we don’t fill that into our guidance and projections for next year.

But at some point the millennials continue the trend of finally getting back in to the marketplace, we expect – and mortgage qualifications get back to normal, we expect absorptions per community will start getting back to historical norms which would be a very helpful thing..

Great. And my second question had to do with your cash came in significantly stronger than we had anticipated. And I was wondering if there was anything else in there. I know you had a little land sales but not much. And if you could also give us any color on what your RP capacity for unsecured bonds is..

I don’t think there’s any unusual and the cash was just normal deliveries in the fourth quarter quick cash from operations. So I’m not sure why our number came in higher than your expectations but nothing unusual about it. So when you’re asking about restricted payments, is there some particular you’re focused on..

I’m just wondering the capacity, your ability to buy unsecured bonds in the market how big is it..

I don’t think there’s any limitation on our ability to repurchase bonds in the open market. Our reluctance to choose that is that we don’t really want to see our community count decline even further. So we had to reduce our land spend in fiscal 2016 as compared to 2015 because we were so focused on paying off debt.

And now that we’ve really created some additional liquidity we want to reinvest it back in to the business and grow our community count once again..

Great. Thanks very much..

[Operator Instructions] Our next question comes from the line of Alex Barron with Housing Research. Your line is now open..

Yes, thank you. I guess one of the biggest changes since the election is the interest rates have gone up and I was kind of wondering if you could address that topic, how you guys are expecting to cope with that or at what time do buyers typically lock in rates, those kind of things..

Overall we’ve seen the selling environment remain very solid. So there are always two schools of thought and I don’t particularly subscribe to either of them.

Some people say as rates go up people will finally get off the sidelines and jump in to the markets, and others say it will scare people, but I mean overall affordability is still at very, very good levels compared to historical norms. So I think rates would have to go up quite a bit and quite rapidly to really cause any concerns in the marketplace.

The country, if you remember, produced more homes back in 1981 with 18% mortgage rates and we’re produced last year. The difference is obviously that buyers are going to have to adjust what they can buy. Right now it’s an amazing time because people could buy more house than many ever dreamed would be possible given the low rates.

As rates go up, somebody needs shelter, somebody is getting married, having children, relocating, whatever it might be, they may have to reduce their goals from a 3,000 square foot home to a 2,600 square foot home.

But if there’s a net increase in household, they’ve got to live somewhere and in the long run that’s how the market copes with interest rate changes..

Yes.

The only thing I would add is that similar to the run that the stock market has had upward since the election, I think the only reason that interest rates were up is that the bond market has also or the mortgage market is also optimistic that the economy is going to improve and although less people qualified today as interest rates incrementally increase, the economy will improve and people can get better paying jobs, I think it’s actually going to be healthy for the housing industry in the intermediate term.

And in the short-term it gets people off the fence that were maybe not going to buy and now they’re going to buy because their fearful that rates are going to go up..

Okay. That’s helpful.

As far as are you guys doing anything on the incentive front like buying down rates? So what point and time in the buying cycle do people lock down the rates?.

We generally allow our divisions to decide what type of incentive they want to offer. I know there are a couple of instances where they decided they wanted to buy down rates. Other times they want to give free options and upgrades or a discount on them. And other times they want to up the amount toward closing costs.

We really leave that to the division..

And actually to the consumer, we’ll offer a la carte even before rates went up. It would be a la carte, do you want to apply the incentive to the rate buydown? That’s fine with us. You want to apply it to closing costs, that’s okay with us. You want to apply it to option, that’s okay with us.

It’s what’s suits the needs of the individual consumer in many of our markets as well..

Okay. Thanks, best of luck..

Thank you..

Thanks..

Our next question comes from the line of Steve Salemy with BNP. Your line is now open..

Hi, thank you. A very quick question. I noticed the senior amortizing notes and unsecured notes balance looks like it dropped by about $20 million or so. I was curious if you had repurchased any of those funds during the current quarter and if you did, if you have any other intents potentially to continue to look at those throughout next year..

I think those are what we refer to as exchangeable notes and we took the residual proceeds of the H2 transaction that we did in early September. There was a little bit excess cash. We used that to repurchase the roughly $20 million that you’re speaking of.

Although our primary focus is going to be on investing the – on land and other things from time to time we may look at bonds as well. But our primary focus used capital to [indiscernible]..

Okay, great. Thank you very much for clarifying..

Yep..

And our last question last question comes from James with Citi. Your line is now open..

Hi, this is actually Maneesha Shrivastava on for James. I just had a quick question. Just to get a sense of what consolidated home building revenues might be next year bringing into account and your comments on incentive.

Could you give us a sense of what you are looking at the ASP in fiscal 2017, would you expect a significantly slower growth rate relative to this year?.

I think the only thing you can do, because we’re not giving out specific ASP guidance nor consolidated revenue guidance. We gave you pretty good hints on direction of total deliveries.

And if I was sitting in your seat trying to put a model together, the only assumptions you can kind of make is take what our recent quarter was or what our average sales price and backlog, whatever you want to do.

And if you want to apply some kind of growth rate to that, make your own assumptions but we’re not factoring in on our own projections any market improvements but obviously if mix changes community by community or in the aggregate it could have an impact up or down..

Great. Thank you..

At this time I’m showing no further questions. I would like to turn the call back over to Ara for any closing remarks..

Thanks. Well we were pleased that we are able to meet or exceed our guidance. But we know we still have a long way to go and we’re working hard to produce even better results in the coming years. Thank you very much..

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