Hovnanian Enterprises, which cut its number of home sites by nearly 32 percent last year, won't exercise its options on land it controls unless it can generate a much higher rate of return than what its been fetching lately during the recent market downturn.

That's the message Larry Sorsby, Hovnanian's CFO, delivered assertively on Wednesday afternoon to investors attending JPMorgan's High Yield and Leveraged Finance Conference. As its deliveries shrunk (they were off by 24.4 percent to 13,564 units last year), Hovnanian winnowed its land assets. The Red Bank, N.J.-based builder ended last year owning 28,680 lots and controlling another 36,104, which were down, respectively, by 5,224 and 24,610 lots from a year ago. It walked away from $126 million in options last year, and wrote down $457.8 million in inventory, with impairment charges totaling $331.8 million. Going forward, Sorsby said that "we're not going to take down a single one of those lots [it controls] unless we can get a very substantial IRR [initial rate of return]," which Hovnanian now pegs at 30 percent or higher.

Profitability, though, is competing with several other priorities Hovnanian is juggling. Despite an increase in average selling prices, gross margins last year dipped to 15.1 percent of revenue from 23 percent in 2006. In Fort Myers, Fla., one of this builder's weakest markets, Hovnanian expects to close all of its 1,652 homes there, but "at zero margin," said Sorsby. He insisted that one of the keys to his company's long-range profitability continues to be reducing its overhang of unsold homes. (It ended fiscal 2007 with 2,390 unsold homes and 432 unsold models.) So Hovnanian has been slashing prices in several markets: for example, homes in California's Inland Empire that had been selling in the mid $800s at the market peak were being offered for 35 percent less today; in another market, Hovnanian had dropped its net price "through a combination of discounts and incentives" to $204,000 from $285,000.

Sorsby pointed out, though, that new homes are selling for less than existing homes in many neighborhoods, and he lamented that homeowners have yet to reduce their selling prices steeply enough to make a real dent in the number of unsold houses on the market.

While he wouldn't hazard a guess about when the housing downturn might start improving, Sorsby showed data from previous declines to buttress his generally optimistic argument that a recovery could happen pretty quickly. He also noted that, contrary to prior downturns, economic conditions and demographics are far more favorable now. But, he conceded, "it's going to take more than [lower interest] rates to get people out to buy."

Some investors and analysts at the conference expressed more parochial concerns about why Hovnanian's land sales hadn't generated cash flow for the company. Sorbsy's explanation--that cash flow from land sales is a function of what the company paid for the land in the first place, and the relationship between takedowns and deliveries--didn't sit too well with some in the audience. At one point, a frustrated Sorsby retorted, "I've answered the question the only way I know how," and then reiterated Hovnanian's goal to improve cash flow by taking down land options at a "significantly" lower pace than that which it delivers homes this year.