Q1 2021 Hovnanian Enterprises Inc Earnings Call

March 2, 2021

[music].

Good morning, and thank you for joining us today for the <unk> and prices fiscal 2021 first.

The first quarter earnings conference call, an archive of the webcast will be available after the completion of the call and run for 12 months.

Conference is being recorded for rebroadcast and all participants are currently in a listen only mode management will make some opening remarks about the first quarter results and then open the line for questions. The company will also holds the web casting a slide presentation, along with the opening comments from management.

Lines are available on the investors page on the company's website at Www Dot K H O V dotcom.

Listeners, who would like to follow along should now log into the website I will now turn the call over to Jeff O'keefe, Vice President Investor Relations. Jeff. Please go ahead.

Thank you Jonathan and thank you all for participating in this morning's call to review the results for our first quarter, which ended January 31 2021 on.

Statements in this conference call that are not historical facts should be considered as forward looking statements within the meaning of the safe Harbor provision of the private Securities Litigation Reform Act of 1095, 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.

The format 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 the financial results for future financial periods of.

We believe that our plans intentions and expectations reflected interest 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 of forward looking statements speak only as of the date. They are made are not guarantees of future performance of results and are subject to risks uncertainties and assumptions that are difficult to.

Predictor of quantifying 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 are described in detail on the section entitled risk factors and management's discussion and analysis, particularly the portion of the MD&A entitled Safe Harbor statement in our annual report on.

Form 10-K for the fiscal year ended October 31, 2020, 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.

Our Arab Damian Chairman, President and CEO, Larry stores, the executive Vice President and CFO, and Brad O'connor, Senior Vice President and Chief Accounting Officer and Frac on.

Now I'll turn the call over to Aaron Aaron go ahead.

Thanks, Jeff.

COVID-19 continues to present challenges from both the business and personal perspective, and I certainly hope all of you and your families remain safe and healthy I'm going to review our first quarter results and then address the current market environment as usual Larry <unk>, Our CFO will follow me with more of.

Details I'll, then make a few closing comments and we'll follow with Q&A.

On slide four we compare our first quarter results to the guidance. We gave on our fourth quarter conference call. Our total revenues were within the range that we gave however, the adjusted gross margin SG&A ratio adjusted EBIT and.

And adjusted pre tax income were all better than the high end of the range fiscal 'twenty. One is off to a good start on slide five we show that our backlog at the end of the first quarter increased 71% to 3795 homes.

Excluding unconsolidated joint ventures, you can also see that the dollar value of this backlog increased 85% to $1.

$6 7 billion again, excluding joint ventures, the strength of this backlog sets us up nicely for strong results over the remainder of the fiscal year.

Moving on to slide six we show year over year comparisons for the first quarter performance metrics. We begin with total revenues in the upper left hand portion of the slide.

Our total revenues for the first quarter increased 16% to 575 million this year compared to $494 million in the last year's first quarter.

Moving to the upper right hand portion of the slide you can see that our adjusted gross margin increased 340 basis points year over year. Adjusted gross margin was 27% this year compared to 17, 3% in last year's first quarter.

As we have said on previous calls, we pivoted to increasing home prices back in June.

We've intensified our focus in the month of February during.

During the first quarter, we had some headwinds on lumber and cement costs as well as some labor cost creeping up but home price increases more than offset those.

Headwinds as evidenced by our increased margins in the first quarter.

With housing demand remaining very strong and we believe that it's likely that the industry will see additional labor and material costs as well as longer cycle times.

We continue to increase home prices to offset potentially higher material and labor costs to slow our sales pace as well as to improve our gross margins.

In the lower left hand quadrant of the slide you can see that our total SG&A ratio improved by 110 basis points to 11, one this year compared to 12, 2% last year as the.

Our revenues grow we are leveraging our fixed SG&A and expect to see our SG&A expense ratio trend lower.

In the lower.

Right hand quadrant of the slide we show the adjusted EBIT.

100, and the 11% from $30 million in last year's first quarter to $64 million this year.

On the lower excuse me on the left hand portion of slide seven you can see that our pre tax income in the first quarter increased $27 million for.

From a $7 million of loss last year, two of $20 million of profit in this year's first quarter.

You ignore land charges and the gain or loss from the extinguishment of debt. The adjusted pretax income improved $36 million.

Two of $21 million profit this year from the $14 million loss in the first quarter of the previous year the for.

First quarter is typically our weakest and we expect this year will follow that pattern, having said that the strong improvement in this year's first quarter sets the stage for a very profitable full year.

On the left hand portion of slide eight we show that our quarterly contract increased 34% to 1778 homes from 1322 homes in last year's first quarter the <unk>.

Picture is even better on our contracts per community basis, which we show on the right hand portion of the slide we achieved a 74% increase to $16 nine contracts per community for the first quarter of this year compared to nine 7% for last year's for.

First quarter.

The strength of the market has been widespread across product type and by geography.

And in the first quarter of Southeast, Florida, Southern California, Northern California, and Dallas Fort Worth had the largest year over year increases each of these divisions posted year over year increases in contracts per community of more than 175%.

Having said that every geography is rock solid right now.

So far our traffic website visits and sales trends indicate that demand remains very strong early into this years spring selling season.

We have taken steps to slow the pace with much more substantial price increases, which I will describe in a moment to.

To give further transparency slide nine shows the number of consolidated contracts on a monthly basis for each month since January of 2020, just before the full impact of the pandemic took hold in the United States each month as compared to the same month a year.

Or before.

As you can see on the slide the housing market was extremely strong before the pandemic our contracts were up 44% in the month of February of 2020 compared to the prior year and again this was before the pandemic shutdown.

As the pandemic unfolded in the U S contracts in March and April April dropped dramatically.

Then Americans mindset regarding the home purchases shifted significantly in May.

Demand for housing gained further momentum in June.

Through the end of our fiscal 'twenty, one first quarter, we've reported year over year increases for each of the past nine months, including a very strong 52% increase in January.

The same pattern followed in terms of contracts per community only the increases were even more significant with January contracts per community rising 100%.

During our analyst call.

We described our pivot in June to price and margin increases instead of volume.

Since then we continued debt approach for November one to the middle of January we increased our average home prices by 3%. However.

However, as evidenced by January 100% increase in sales per community are price increases since June we're not enough the slower sales pace two of more manageable level.

The higher pace causes of several issues for.

It was the pace that was not aligned with our production pace and cost longer cycle times to both start and construct our homes.

Second it was the pace that would sell out of our existing communities too quickly and finally, it could potentially put our margins at risk if construction costs increased further on homes that were sold but not yet started.

Starting in the middle of January to the third week in February on average, we raised prices and the additional 5% with some communities as high as 15% increases.

This much more aggressive approach to price increases was consciously designed to slow our sales base further improve our margins and reduce our exposure to potential of construction cost increases.

As you can see on slide 11, which shows the results for the month of February our efforts to slow our sales pace had been successful well.

While February was still a very strong month, even compared to a very strong February last year the year over year increases in contracts per community were up only <unk>, 7% compared to a 100% year over year increases in the month of January.

The absolute number of contracts were down 5%, but the dollar amount of contracts for the month of February were up 9%, primarily due to increases in home prices.

We believe our margins from the contracts sold during this recent period will prove to be among the best margins we've had on over a decade.

I'll add that higher sales prices.

We're not the only issue that slowed our February sales.

Our Houston, and Dallas markets, where certainly affected by the unusually bad winter storms in February of most of our Texas sales offices were closed for one to two weeks, which negatively impacted our February sales results.

Looking forward, we will have the benefit of too easy months of comparisons in March and April when home sales were adversely impacted by the initial COVID-19 shutdown last year.

Housing demand rebounded in may of last year. So starting in May this year sales comparisons will be a little more challenging.

The fundamentals that are driving of the housing market remains the same.

One extremely low mortgage rates and I'll elaborate a little more on that later.

Two of significantly lower than normal supply of existing homes, three strong demographic trends, including the surge of millennials buying their first home and a desire by all of them of graphic groups to upgrade or enlarge their homes and for theirs.

Low supply of lots to construct new home construction.

The combination of these factors has resulted in the supply and demand in balance for the housing industry.

Similar to trends in online shopping that accelerated.

After the COVID-19, many of these home buying trends existed before COVID-19, but accelerated after COVID-19, I think we've demonstrated that.

For the very strong results in February and January of last year again before the Covid shutdown.

We've now entered the spring buying season, and we continue to see very strong traffic and contract trends throughout our markets. Additionally, slide 12 shows our website visits per day this year in blue compared to the same day last.

The year and Greg.

As you can see website visits continue to show significant increases compared to last year in the month of January we surpassed 1 million monthly website visits for the first time in our history.

The strong website traffic trends continued through February.

Further slide 13 shows Internet leads per day compared to last year, an internet lead is a potential customer that gives us their phone number or email information.

Requested that we contact them about a particular community.

Those leads also remain extremely high.

We believe visits to the website and Internet leads are both a leading indicator of demand for our homes and both of these indicators remain very strong.

Whether it's website traffic internet leads sales pace or backlog margin all indicate that our 2021 financial results are expected to be dramatically better than last year on.

I'll now turn it over to Larry <unk> our CFO.

Thanks Sarah.

Given the strong demand for new homes, we recognize that some analysts and investors are concerned about builders, having sufficient land supply in community count to meet that demand.

We are pleased to report we are on a strong position.

Virtually all of the land the community's necessary to achieve further growth in profit during fiscal 2021.

On fiscal 2022 are already under contract today, our land acquisition teams are primarily focused on obtaining control of land and the communities for home deliveries in fiscal 2023 and beyond.

We remain focused on growing our revenues one scenario is that we sell fewer homes per community and therefore need the increased community count to grow revenues. Another scenario, where we achieved both revenue growth and efficiencies of scale is when we sell at a faster pace per.

The community from a smaller total community count pre.

Previously we thought the primary way, we would achieve revenue growth would be through community count growth more recently, we have been achieving remarkable increases in our sales pace per community and that higher sales pace rather than increased community count is stealing our anticipated revenue growth. This.

Year.

Even at our current faster sales pace, we think our fiscal year end community count will grow about 5% from our first quarter end levels again, we believe we can achieve this growth in community count even at our toward current sales pace.

<unk>, if our sales pace were to slow down our projected community count would increase even more since we would not sell out of communities. So quickly.

On slide 14, we show despite the adverse impact of COVID-19, we added 2140 newly controlled consolidated lots during the first quarter.

During the same quarter, we had 1400 seven deliveries on lot sales, resulting in a net increase of 733 consolidated controlled lots after.

After temporarily slowing new land acquisitions earlier this year due to the onset of Covid. Our land acquisition teams are back in the market sourcing new deals.

Keep in mind that due to the onset of COVID-19 last spring, we temporarily paused contracting for new properties Slide 15 shows the lots we controlled at the end of each of the past three quarters as you can see on this slide even with the high level of deliveries in each of the past three quarters, we've been able to.

Gradually control more of new lots and homes, we delivered.

At the end of our 2021 first quarter, we controlled 26782 lots, which is 1030 for more than we control the at the end of the 2023rd quarter last year.

It bears repeating.

Now control virtually all of the lots we need to achieve our expected growth in profit in both fiscal 'twenty one 'twenty two.

Our land acquisition teams are now primarily focused on controlling loss for fiscal 2023 and beyond deliveries.

While not affecting the total number of lots. We control. We are pleased that during fiscal 2021, we will be UN mothballing and bringing into active status approximately half the lots representing multiple product lines and a large 1400 homesites masterplan in northern California.

Reopening this community was delayed as we modify our site plans and entitlements that dated back to 2005, we took significant impairments on this master plan during the bottom of the last housing cycle and today. It has of book value of only $5 million.

After a long period of redesign and re entitlement, along with continued improvement and the northern California housing market. We believe this community is positioned to performed quite well.

If you turn to slide 16.

You can see that our consolidated community count was 105 at the end of January of this year.

As you can see on the slide the community count decreased by 11 communities sequentially from the end of October 2020 to the end of January 2021.

As we said on our last call our community count is likely to fluctuate from quarter to quarter.

Throughout the remainder of fiscal 2021, we plan to replenish the communities, we sell out and close this year with more new communities given no material changes in current market conditions, we expect our community count at the end of fiscal 2021 to grow roughly 5% from our first quarter end level.

Turning to slide 17.

During the first quarter of fiscal 2021, our land and land development spend was $179 million, a 51% increase over the same quarter a year ago. This is the most we spent in any first quarter during the past several years.

Turning to slide 18, even with the significant increase in land spend we ended the first quarter with $306 million of liquidity above the high end of our liquidity targets, we have excess capital of invest and we're busy contracting additional land parcels across the country today.

We continue to find land opportunities that makes sense of today's home prices sales pace and construction cost.

Turning to slide 19. This was another strong quarter for our financial services Division driven by historically low rates and strong home demand our financial services first quarter pre tax earnings increased 105% year over year to $9 million.

Turning to slide 'twenty compared to our peers you can see that we still have the third highest percent of land controlled via of options. We continue to use land options whenever possible in order to achieve high inventory turns enhance our returns on capital and reduce risk. We are pleased to control 61% of our <unk>.

Land through options.

Looking at our consolidated communities in the aggregate, including the $166 million of inventory not owned we have an inventory of book value of $1 3 billion net of $176 million of impairments.

Turning now to slide 'twenty, one compared to our peers you can see that we have the second highest inventory turnover rate for the trailing 12 month period our.

Our inventory turns of 46% higher than the next highest peer below us high inventory turns are a key component of our overall strategy.

We believe one of the key pure operating metrics for the homebuilding industry is EBIT to inventory on.

On slide 22, we show the trailing 12 month EBIT to inventory returns for us and our peers. This ROI metric measures pure operating performance before interest expense, we remain above median when compared to our peers on this metric given the recent increase in new home demand we believe.

Returns will continue to improve for us and the entire industry. We continue to work hard to get further to the right on this chart.

On slide 23.

Another area of discussion is related to our deferred tax asset our deferred tax asset is very significant and because it is fully reserved for by a valuation allowance. It is not currently reflected on our balance sheet. We've taken numerous steps to protect this asset as of January 31, 2021, our deferred tax assets.

In the aggregate were $572 million.

We will not have to pay federal income taxes on approximately one $8 billion of future pre tax earnings.

We show that we ended the first quarter with the shareholders' deficit of $416 million.

If you add back of the valuation allowance as we've done on this slide our shareholders' equity would be of positive $156 million give.

Given the strong housing market all public builders will likely see their book values grow this year.

Some analysts and investors may not understand is given the smaller beginning book value. We have we expect our book value will grow much faster and as a percentage growth much more significantly than our peers. This year.

As our profitability continues to improve we will evaluate and may reverse much of the DTA valuation allowance at some point in fiscal 2021, our total DTA consist of $376 million related to the federal tax deferrals and 190 day.

$6 million related to state tax deferrals due to the long period of time left to utilize it we're confident 100% of the federal DTA valuation allowance will ultimately be reversed. However, there is a shorter period of time to utilize state DTA at the time, we did.

Chairman it is appropriate to reverse our federal valuation allowance, we will complete an analysis to estimate how much of the <unk>.

State DTA valuation allowance can be reversed at that time.

If the federal corporate income taxes are increased in the future, which has certainly been discussed recently the book value benefit from reversing on deferred tax asset would be even greater.

Turning now to slide 24 on this slide we show our debt maturity ladder at the end of the first quarter.

In July 2021, one year prior to maturity, we expect to pay off in full the $111 million of our 10% senior secured notes due July of 2022.

Additionally, we also intend to pay off early the remaining balance of $70 million of our 10, 5% senior secured notes due July of 2020 for in advance of their maturity.

Considering that our revolver sits at the very top of our secured capital structure. We believe we will be able to refinance and extend our revolver on a prior to its maturity in fiscal 2023.

As always we will continue the annual analyze and evaluate our capital structure and explore transactions to further strengthen our balance sheet and our financial performance.

On slide 25, we provide guidance for the second quarter of fiscal 2021.

Before I review, our second quarter guidance I will state that while we remain optimistic regarding our Texas divisions ability to claw back of the delays caused by the recent.

The extreme winter weather conditions. The final impacts are just not known at this time.

For the second quarter, we are assuming the for the second quarter, assuming no adverse changes in current market conditions. We expect to report total revenues between 700 $750 million up almost 40% at the high end of the range from $538 million in the same period last year.

We also expect gross margins to be on the range of 25 to 21, 5% up substantially compared to the 18, 2% in last year's second quarter and SG&A as a percentage of total revenues to be between nine five and 10, 5% compared with 10, 4% last year.

Sure.

Excluding land related charges gains or losses on extinguishment of debt, we expect adjusted EBITDA to be between 75 and $90 million.

Between 44, and 73% compared to the same quarter last year the.

This 44% to 73% adjusted EBITDA increase comes on top of the 116% increase we achieved an adjusted EBITDA during the second quarter last year.

Finally, we expect our adjusted pre tax profit for the second quarter of fiscal 2021 to grow between 30% and $45 million compared to a $5 million profit in the same period last year.

Turning now to slide 26.

In June 2018, we first talked about our multi year key metric targets that time, we said that we expected that we could hit them within a couple of three years. Those key metric targets are on the far right side of this slide the trailing 12 month financial results we were achieving.

At the time, we set these targets are shown on the left hand portion of the slide.

On our last conference call in December 2020, we said that we had an opportunity to achieve the key metric targets by the end of fiscal 2021.

Based on the guidance, we're now giving you for our second quarter, we now expect to achieve on a trailing 12 month basis, our multiyear targets by the end of our second quarter ahead of our earlier timeframe.

Assuming we achieved the midpoint of our second quarter guidance the middle column on this slide indicates how both our trailing 12 month adjusted EBITDA and adjusted pretax earnings performance would exceed our key metric targets.

Turning to slide 27, we show guidance for the full fiscal 2021 year for the full year, assuming no adverse changes in current market conditions. We expect to report total revenues between $2 65, and $2 $8 billion up from 234 billion last year.

We also expect gross margins to be in the range of 25% to 21, 5% compared to 18, 4% last year and SG&A as a percentage of total revenues to be between nine five and 10, 5% compared with 10, 3% in the prior year.

Excluding land related charges and gains and losses on extinguishment of debt, we expect adjusted EBITDA to be between 300 $340 million up between 28% and 45% compared to last year and again that would be on top of achieving a 35% increase in adjusted EBITDA.

Last year.

Finally, we expect our adjusted pre tax profit for fiscal 2021 to grow between to between 140 and $160 million up of 175% to 214% compared to $51 million pretax earnings last year.

The combination of our expected improved financial performance this year and the potential DTA valuation allowance reversal will meaningfully increase our year end book value per share those.

Those increases the book value combined with executing on our debt reduction strategy this year, which significantly improved our balance sheet now I'll turn it back to Ara for some brief closing remarks.

Thanks, Larry I'd like to close by making a brief macro commentary on the housing market I wanted to take a step back in time and remind everyone of what was going on on the housing market before COVID-19 on slide 28, we show that from 2014 through too.

2019, we had seen a steady increase in contracts per community each and every year. The compounded annual growth rate over that period of time was 6% on slide 29, you can see the dramatic increases in sales pace over the last year.

Year by month.

The point I want to emphasize here again is that prior to COVID-19, the market was already turning and already gaining strong momentum COVID-19, only accelerated many long term trends that were already present in an improving.

The market.

Given the significant improvements that we've experienced recently it would be easy to assume that we're entering the housing bubble, but it's important to put the overall housing market into perspective.

Slide 30 shows annual housing starts dating back to World War II.

Much like the trends I talked about regarding our contracts per community.

Housing starts were growing steadily for the past several years through the end of 2020 on.

On this slide we show average starts per decade, with the horizontal black line going from the 19 fifties through the 2010 the decade.

If you throw out the highs of the 19 seventies and the lows of the most recent decade, where we averaged only a million housing starts per year. The long term average has been over one 4 million starts per year.

While it has grown steadily last decade, you can see the average production during the most recent decade was by far the lowest level since World War II.

Even 2020 with 10 incredible months housing starts were below historical decade averages on slide 31, we show the annualized start pace for the most recent month of January it's only one month, but you.

Can see a significant jump.

However, it is important to note that even now with one of the most.

Robust housing market, we've seen in a long time housing production is only two of us.

Above the historical decade averages for.

Further the shortage of available developable losses will likely keep the start pace somewhat moderated.

You can see that Annualizing. The 2021 January starts pace would indicate total housing production of about 1.58 million of homes per year. This level of starts.

Is nowhere near the peak levels that we've seen in the past decades, which we're plus or minus 2 million starts.

It's especially impactful when you consider the historically low level of housing starts over the last decade.

The last decade produced almost 4 million fewer homes than a normal decade.

It's also important to note that today's homebuyers are users not speculators that we've seen in prior housing peaks.

Be remiss not to comment on the recent increase of mortgage rates over the past two weeks the increase in rates was sudden and not generally expected.

This is especially true given the fed said that it intends to keep rates low for the foreseeable future.

However rates are still incredibly low.

If you look at slide 32, it puts our current interest rates into perspective by comparing them over the last 20 years.

And more importantly, higher mortgage rates.

The necessarily means that someone's going to change their decision, whether the buy a home or not it might mean that the bias of smaller home or add fewer design options or buy a home further out.

As homebuyers reset their expectations to the current rates I don't foresee the recent increase in rates will have much of a long term impact.

As a reminder, the United States build more homes in 1982 with mortgage rates in the teens then were built last year.

While we are cautious regarding our outlook, we believe the demographics the shortage of an existing housing stock and the shortage of developable land for new housing interest rates that remain near all time lows and the likelihood of further economic stimulus on.

All bode well for the near term outlook for housing all.

You also mentioned that the baby boom generation is in their price second home buying age of trend that's likely to increase.

The COVID-19.

That concludes our prepared remarks, and I'd now be happy to turn it over for Q&A.

The company will now answer the questions. So that everyone has an opportunity to ask questions participants will be limited to one question and one follow up after which they will have to get back in the queue to ask another question. We will open the call for questions. If you have a question at this time. Please press Star then one on your Touchtone telephone if for your question has been answered.

And you'd like to remove yourself from the queue. Please press the pound key are for.

First question comes from the line of Alan Ratner from Zelman and Associates. Your question. Please.

Hey, guys. Good morning, Congrats on the on the great performance and results.

I appreciate the commentary, especially around that that price and volume equation and I think it's a really interesting dynamic right now.

If I look at your absorption pace really since since COVID-19, you've been selling somewhere on the five and a half per month range over the last three quarters and it sounds like when one of the hearing from you and correct me if I'm wrong.

That perhaps that might be hitting a little bit of an upper bound in terms of how quickly you could actually get those homes built. So I guess my question is what is the ideal sales pace today that you're trying to solve for with these price increases and what happens if you. If you cross that line on the low end.

If you push too hard on price.

What.

How low are you willing to take that before you have to actually roll back some of these increases.

Alan It's a it's really a balance of that varies depending on how soon we see our new communities coming online.

What we don't want to do with GAAP out so to speak.

I'll, let our community counts go down.

So we're trying to balance the right pace.

On margin and part of that is affected by what we see as our new communities coming online, we're feeling pretty good about communities coming online and we're unmask hauling a lot of communities as well that we've talked about.

So we feel like we can keep up with a pretty good pace.

And still show some really fabulous margins, but we don't have a specific target. We're adjusting it based on what we can see in our production capabilities and that varies we're adjusting it based on some ebbs and flows of material shortages.

We're adjusting it based on what we're seeing on cycle times and adjusting it based on when we were getting some new replacement communities online.

So we're varying it.

Really month to month.

Got it that's helpful.

It sounds like there's not a hard number there and it might fluctuate based on whatever the the bottleneck is at the moment, whether it's land or labor materials et cetera.

Second question just on the balance sheet certainly good news that.

It sounds like you're accelerating some of the debt debt the debt pay down there just curious with the stock.

Trading close to three times book now if you adjust for the full DTA is there any thought about tapping the equity markets to even further accelerate debt reduction because clearly.

Theres an opportunity to bring down the the interest expenses. If you were to do that yes.

Alan I wanted to start by reminding you that we expect our book value to grow.

By year end I mean, it's the law of small numbers are all homebuilders are going to have increases, but we really expect ours to increase very significantly.

Further we think we've got a lot of opportunity.

The two.

Improve our equity and reduce our debt even without any.

Sure.

The selling of any stock we think it's of based on what we're seeing out on the horizon. We think it's a little early to to sell stock also keep in mind one of the thing that we Didnt mentioned on the call as we reduce debt early and we're really focused on that and as we increase.

Our performance, we think there's a great opportunity to refinance our debt most of our debt is at very high rates right. Now, we think there'll be an opportunity at some point to refinance at.

At significantly lower rates and that would really boost our earnings since our interest is a huge part of our.

Of our operating results. So I think we're going to wait.

Consider our options a little later in the cycle of Larry do you want to add anything to the.

You nailed it perfectly I don't think on the man.

Depending on that that was very helpful. Can I just sneak in one just fact checking question I might have missed it but did you give the <unk>.

One of 24 notes that you said you intend to pay down early is that something you expect to do this year or are you just signaling its going to happen before the actual maturity date.

We just said it was going to happen in advance of the maturity date, we did not make a specific project can precisely when but we are committed to reducing debt.

Got it okay. That's very helpful. Thanks, a lot guys.

Thank you. Our next question comes from the line of Alex Barron from housing Research. Your question. Please.

Good morning, gentlemen, great job in the quarter.

Just wanted to congratulate you on the ground.

I had the question regarding your comments about Texas, and the snowstorm and all of that stuff just curious.

Are things back up.

100%.

At this point.

And if there is any impact on deliveries roughly how many units do you think would shift into the next quarter.

Okay.

Right now first of all I think I believe of 100% of our communities are back up in terms of sales.

And construction is pretty much getting back to norm the.

The one wildcard of courses.

How the utilities are affected and how long they might slow things down to repair some of the outages and in addition, when insurance.

Carriers.

Start preparing or giving reimbursements, how much of the trade base gets.

Chuck the way into that but at the moment.

Really we really believe we'd only slip a few deliveries in the months and we think we can actually make that up in.

In the quarter, so thus far we're feeling pretty good.

But we don't know everything just yet.

Got it.

And then I'm not sure if I missed it but did you give revenue guidance for the.

For the year.

The model.

Okay.

In terms of the the gross margin.

Sounds like you guys are at.

At this point shifting more towards raising price and said you feel like the gross margin.

Further upside than the <unk>.

Range given us for the next quarter in the back half of the year.

The he's not even dry on the guidance for just gave us and you're asking if there's upside to us so.

Anything is possible I guess, but.

We're going to stick to the range, we just just put out.

Okay.

Now.

Correct me, if I'm wrong, but if you reversed the DTA later this year that debt.

Show up on your income statement right not just on your balance sheet.

The Rad I'll, let you handle on it.

Okay.

That's correct.

<unk> comes through the tax expense line item on the income statement.

And the tax expense okay.

Got it.

Alex I will.

The comment that we mentioned all the mentioned it one more time.

There is a lot of talk in Washington of raising federal income taxes.

While that's not a great thing for most homebuilders.

Net because we have this large NOL in the large deferred tax asset it would actually increase our income and we have an opportunity to IND.

Increase that reversal in the future. We don't know, we'll see what happens, but we're uniquely positioned.

And because we haven't used up our tax credit.

It will have the opposite effect on us compared to our peers.

No.

As far as I know it is kind of looking up for next year, but on one on the assumption that you probably will be for the tax credit. This year. If that's the case should we assume that tax rate for next year, what 25% or something like that for modeling purposes.

Yes.

Given current rates at the goods.

Active rate to estimate yes.

Okay.

I could ask one more.

On the diluted share count I noticed it went down from $6 7 million last quarter to $6 three.

What was the reason for that between debt buyback stock or whatnot.

It was it related to.

On vested.

Compensation shares so they changed so of nothing with the outstanding shares of all had to do with the non vested compensation shares.

So for modeling reasons should we assume $6 three billing for the.

The $6 seven or what.

The 6% to six three.

Okay.

Alright and.

I guess it sounds like you guys are pretty good on track too.

Pay down debt, which is going to be great.

So at some point.

You paid down the 2022 and 2020 fours are you guys expecting to just let the leverage stay you know.

Or are you guys expecting to replace that debt eventually with other lower cost of debt in other words are you.

Are you trying to just lower the overall amount outstanding or are you thinking you will eventually replace that with some lower cost debt.

We are trying to lower the amount of debt outstanding. So we're not intending to replace the 22% or 20 for us by refinancing them whereby it later, replacing it with additional debt, we want to lower the debt and really focus on repairing the balance sheet.

Okay, Great I'll, let somebody else NAV.

Thank you.

Thank you I sort of reminder, ladies and gentlemen, if you have any.

The question at this time. Please press Star then one our next question comes from the line of Jordan Hymowitz from Philadelphia Financial Your question. Please.

Thanks, guys.

Just checking the math with the guidance you provided it comes out the almost $25 per share on.

On next year and I guess my question is that 25 of little less 20 for something.

It assumes the debt is outstanding for the first half of the year now at the back half loaded earnings company, but the run rate. The following year would be a higher number because you would have a much lower cost of debt is that of ready to think about it at this point.

Yeah, I think I think I can't argue with your math I Didnt actually do the math on the on <unk>.

Yes, but I think your math is accurate and certainly it's accurate to state that as we pay off debt there'll be less interest in subsequent years.

And so I'll use.

The fine gentleman, who asked the question of three times book before and maybe we should take advantage of that at under three times. This year's earnings I think he'd be crazy the issue of share of equity at this point.

I agree with you.

Okay great.

Great.

Okay. Thank you.

Thank you.

This concludes the question and answer session of today's program I'd like to hand, the program back to Ara Hovnanian for any further remarks.

Well. Thank you very much we're certainly off to a great start.

We're going to be reporting even better news in subsequent quarters. Thank you.

This.

<unk> of our conference call for today. Thank you all for your participation and have a nice day all parties may now disconnect.

Okay.

[music].

Good morning, and thank you for joining us today for the half naming embraces fiscal 2021.

First quarter earnings conference call an archive the webcast will be available after the completion of the call and run for 12 months.

Conference is being recorded for rebroadcast and all participants are currently in a listen only mode management will make some opening remarks about the first quarter results and then open the line for questions. The company well also hope the web casting a slide presentation, along with the opening comments from management the.

Lions are available on the investors page on the company's website at Www Dot K H O V. Dotcom, those listeners who would like to follow along should now log into the website I will now turn the call over to Jeff will keep Fife, Vice President Investor Relations. Jeff. Please go ahead.

Thank you Jonathan and thank you all for participating in this morning's call to review the results for our first quarter, which ended January 31, 2021, all statements on this conference call that are not historical facts should be considered as forward looking statements within the meaning of the safe Harbor provision of the private Securities Litigation Reform Act of 1095 such statements involve.

The owned 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 the financial results for future financial periods.

Although we believe that our plans intentions and expectations reflected <unk> 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 of results and are subject to risks uncertainties and assumptions.

<unk> that are difficult to predict for quantifying 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 are described in detail on the section entitled risk factors and management's discussion and analysis, particularly the portion of MD&A entitled Safe Harbor statement.

Our annual report on form 10-K for the fiscal year ended October 31, 2020, 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 are Arab Damian Chairman, President and CEO, Larry stores, the executive Vice President and CFO, and Brad O'connor, Senior Vice President and Chief Accounting Officer, and fraction of I'll now turn the call over to Aaron Aaron go ahead.

Thanks, Jeff.

The with 19 continues to present challenges from both the business and personal perspective, and I certainly hope all of you and your families remain safe and healthy on.

I'm going to review, our first quarter results and then address the current market environment as usual Larry <unk>. Our CFO will follow me with more detail I'll, then make a few closing comments and we'll follow with Q&A.

On adjusted pre tax income were all better than the high end of the range for fiscal 'twenty. One is off to a good start on.

On slide five we show that our backlog at the end of the first quarter increased 71% to 3795 homes, excluding unconsolidated joint ventures.

Can also see that the dollar value of this backlog increased 85% to one.

$6 $7 billion again.

Excluding joint ventures, the strength of this backlog sets us up nicely for strong results over the remainder of the fiscal year.

Moving on to slide six.

We show year over year comparisons for the first quarter performance metrics, we begin with total revenues in the upper left hand portion of the slide.

Our total revenues for the first quarter increased 16% to 575 million this year compared to $494 million in last year's first quarter move.

Moving to the upper right hand portion of the slide you can see that our adjusted gross margin increased 340 basis points year over year the.

Adjusted gross margin was 27% this year compared to 17, 3% in last year's first quarter.

As we have said on previous calls, we pivoted to increasing home prices back in June.

We have intensified our focus in the month of February during.

During the first quarter, we had some headwinds on lumber and cement costs as well as some labor cost creeping up but home price increases more than offset those headwinds.

Headwinds as evidenced by our increased margins in the first quarter.

With housing demand remaining very strong we believe that it's likely that the industry will see additional labor and material costs as well as longer cycle times.

We continue to increase home prices to offset potentially higher material and labor costs to slow our sales pace as well as to improve our gross margins.

In the lower left hand quadrant of the slide you can see that our total SG&A ratio improved by 110 basis points to 11, one this year compared to 12, 2% last year.

As our revenues growth, we're leveraging our fixed SG&A and expect to see our SG&A expense ratio trend lower.

In the lower.

Right hand quadrant of the slide we show the adjusted EBIT.

Increased of 111% from $30 million of last year's first quarter to $64 million this year.

And the lower excuse me on the left hand portion of slide seven you can see that our pretax income in the first quarter increased $27 million.

From a $7 million loss last year, two of $20 million profit in this year's first quarter.

If you ignore land charges and the gain or loss from the extinguishment of debt. The adjusted pretax income improved $36 million.

Two of $21 million profit this year from the $14 million loss in the first quarter of the previous year the <unk>.

On the left hand portion of slide eight we show that our quarterly contracts increased 34% to 1778 homes from 1322 homes in last year's first quarter the.

First quarter.

The strength of the market has been widespread across product type and by geography.

During the first quarter of Southeast, Florida, Southern California, Northern California, and Dallas Fort Worth had the largest year over year increases each of these divisions posted year over year increases in contracts per community of more than 175%.

Having said that every geography is rock solid right now.

So far our traffic website visits and sales trends indicate that demand remains very strong early into this years spring selling season.

We have taken steps to slow the pace with much more substantial price increases, which I'll describe in a moment.

Or before.

As the pandemic unfolded in the U S contracts in March and April April dropped dramatically.

Then Americans mindset regarding the home purchases shifted significantly in May.

Demand for housing gained further momentum in June.

Through the end of our fiscal 'twenty, one first quarter, we've reported year over year increases for each of the past nine months, including of various 52% increase in January the.

The same pattern followed in terms of contracts per community only the increases were even more significant with January contracts per community rising 100%.

During our analyst call.

We described our pivot in June to price and margin increases instead of volume.

Since then we continued debt approach for November one to the middle of January we increased our average home prices by 3%.

However, as evidenced by January of 200% increase in sales per community are price increases since June we're not enough the slower sales pace two of more manageable level.

The higher pace causes of several issues for.

It was the pace that was not aligned with our production pace and caused longer cycle times to both the start and construct our homes.

Second it was the pace that would sell out of our existing communities too quickly and finally, it could potentially put our margin that risk if construction costs increased further on homes that were sold the not yet started.

Starting in the middle of January through the third week in February on average, we raised prices and the additional 5% with some communities as high as 15% increases.

<unk> much more aggressive approach to price increases was consciously designed to slow our sales base further improve our margins and reduce our exposure to potential of construction cost increases.

As you can see on slide 11, which shows the results for the month of February our efforts to slow our sales pace has been successful.

February was still a very strong month, even compared to a very strong February last year the year over year increases in contracts per community were up only 27% compared to a 100% year over year increases in the month of January.

The absolute number of contracts were down 5%, but the dollar amount of contracts for the month of February were up 9%, primarily due to increases in home prices.

We believe our margin from the contracts sold during this recent period will prove to be among the best margins we've had in over a decade.

I'll add that higher sales prices.

Not the only issue that slowed our February sales.

Both of our Houston, and Dallas markets, where certainly affected by the unusually bad winter storms in February of most of our Texas sales offices were closed for one to two weeks, which negatively impacted our February sales results.

Looking forward, we will have the benefit of too easy months of comparisons in March and April when home sales were adversely impacted by the initial COVID-19 shutdown last year housing.

Housing demand rebounded in may of last year. So starting in May this year sales comparisons will be a little more challenging.

The fundamentals that are driving the housing market remains the same.

One extremely low mortgage rates and I'll elaborate a little more on that later to a significantly lower than normal supply of existing homes, three strong demographic trends, including the surge of millennials buying their first home and the desire.

By all of them of graphic groups to upgrade or enlarge their homes and for there is a low supply of logs to construct new home construction.

The combination of these factors has resulted in the supply and demand in balance for the housing industry.

Similar to trends in online shopping that accelerated.

After the COVID-19, many of these home buying trends existed before COVID-19, but accelerated after COVID-19, I think we've demonstrated that.

With the very strong results in February and January of last year again before the Covid shutdown.

Last year in Gray.

As you can see website visits continue to show significant increases compared to last year in the month of January we surpassed 1 million monthly website visits for the first time in our history.

The strong website traffic trends continued through February.

Further slide 13 shows Internet leads per day compared to last year, an internet lead is a potential customer that gives us their phone number or email information and requested that we contact them about a particular community.

Those leads also remains extremely high.

We believe visits to the website and Internet leads are both a leading indicator of demand for our homes and both of these indicators remain very strong.

Whether it's website traffic internet leads sales pace or backlog margin all indicate that our 2021 financial results are expected to be dramatically better than last year on the.

Now I'll turn it over to Larry <unk> our CFO.

Thanks Sarah.

Given the strong demand for new homes, we recognize that some analysts and investors are concerned about builders, having sufficient land supply and committed now to meet the demands.

We are pleased to report we are on a strong position.

Actually all of the land of communities necessary to achieve further growth in profit during fiscal 2021 and fiscal 2022 are already under contract.

Today, our land acquisition teams are primarily focused on obtaining control of land and keep the entities for home deliveries in fiscal 2023 and beyond.

We remain focused on growing our revenues.

One scenario is that we sell fewer homes per community and therefore need the increased community count to grow revenues.

Another scenario, where we achieved both revenue growth and efficiencies of scale is one we sell on a faster pace per community from a smaller total community count for.

Year.

Even at our current faster sales pace, we think our fiscal year end of community count will grow about 5% from our first quarter end levels again, we believe we can achieve this growth in community count even at our toward current sales pace.

<unk>, if our sales pace were to slow down our projected community count would increase even more since we would not sell out of communities. So quickly.

On slide 14, we show despite the adverse impact of COVID-19, we added 2140 newly controlled consolidated loss during the first quarter.

During the same quarter, we had 1400 seven deliveries on lot sales, resulting in a net increase of 733 consolidated controlled lots.

After temporarily slowing new land acquisitions earlier this year due to the onset of Covid. Our land acquisition teams are back in the market sourcing new deals keep.

Keep in mind that due to the onset of COVID-19 last spring, we temporarily paused contracting for new properties.

Slide 15 shows the lots we controlled at the end of each of the past three quarters as you can see on this slide even with the high level of deliveries in each of the past three quarters, we've been able to gradually control more of new lots and homes. We delivered at the end of our 2021 first quarter we controlled.

<unk> 6782 loss, which is 1030 for more than we control the at the end of the 2023rd quarter last year.

It bears repeating we now control virtually all of the lots we need to achieve our expected growth in profits and both fiscal 'twenty one 'twenty two.

Our land acquisition teams are now primarily focused on controlling loss for fiscal 2023 and beyond deliveries.

While not affecting the total number of lots. We control. We are pleased that during fiscal 2021, we will be UN mothballing, and bringing them to active status approximately half the lots representing multiple product lines and a large 1400 homesites masterplan in northern California.

Reopening this community was delayed as we modify our site plans on entitlements that dated back to 2005, we took significant impairments on this master plan during the bottom of the last housing cycle and today. It has the book value of only $5 million.

After a long period of redesign and re entitlement, along with continued improvement and the northern California housing market. We believe this community is positioned to performed quite well.

If you turn to slide 16.

You can see that our consolidated community count was 105 at the end of January of this year.

As you can see on the slide the community of cap decreased by 11 communities sequentially from the end of October 2020 to the end of January 2021.

As we said on our last call our community count is likely to fluctuate from quarter to quarter.

Turning to slide 17.

During the first quarter of fiscal 2021 of our land and land development spend was $179 million a 51% increase over the same quarter a year ago. This is the most we spent in any first quarter during the past several years.

We continue to find land opportunities that makes sense of today's home prices sales pace and construction cost.

Turning to slide 'twenty compared to our peers you can see that we still have the third highest percent of land controlled via options. We continue to use land options whenever possible in order to achieve high inventory turns enhance our returns on capital and reduce risk. We are pleased to control of 61% of our <unk>.

Land through options.

Looking at our consolidated communities in the aggregate, including the $166 million of inventory not owned we have an inventory of book value of $1 3 billion net of $176 million of impairments.

Turning now to slide 'twenty, one compared to our peers you can see that we have the second highest inventory turnover rate for the trailing 12 month period our.

Our inventory turns of 46% higher than the next highest peer below us high inventory turns are a key component of our overall strategy.

We believe one of the key pure operating metrics for the homebuilding industry of EBIT to inventory on.

Returns will continue to improve for us and the entire industry. We continue to work hard to get further to the right on this chart.

On slide 23.

In the aggregate were $572 million.

We will not have to pay federal income taxes on approximately $1 $8 billion of future pre tax earnings.

We show that we ended the first quarter with the shareholders' deficit of $416 million.

If you add back of the valuation allowance as we've done on this slide our shareholders' equity would be of positive $156 million.

Given the strong housing market all public builders will likely see their book values grow this year.

What some analyst and investors may not understand is given the smaller beginning book value. We have we expect our book value will grow much faster and as a percentage growth much more significantly than our peers. This year.

As our profitability continues to improve we will evaluate and may reverse much of the DTA valuation allowance at some point in fiscal 2021 of our total DTA consist of $376 million related to the federal tax deferrals and 196.

Related to state tax deferrals due to the long period of time left to utilize it we're confident 100% of the federal DTA valuation allowance will ultimately be reversed. However, there is a shorter period of time to utilize state DTA at the time we.

It is appropriate to reverse our federal valuation allowance, we will complete an analysis to estimate how much of the state DTA valuation allowance can be reversed at that time.

The federal corporate income taxes or increase in the future, which has certainly been discussed recently the.

The book value benefit from reversing that deferred tax asset would be even greater.

Turning now to slide 24 on this slide we show our debt maturity ladder at the end of the first quarter.

In July 2021, one year prior to maturity, we expect to pay off and for the $111 million of our 10% senior secured notes due July of 2022.

Additionally, we also intend to pay off early the remaining balance of $70 million of our 10, 5% senior secured notes due July of 2020 for in advance of their maturity.

Considering that our revolver sits at the very top of our secured capital structure. We believe we will be able to refinance and extend our revolver on a prior to its maturity in fiscal 2023.

As always we will continue to annual analyze and evaluate our capital structure and explore transactions to further strengthen our balance sheet and our financial performance.

On slide 25, we provide guidance for the second quarter of fiscal 2021.

Before I review, our second quarter guidance I will state that while we remain optimistic regarding our Texas divisions ability to claw back of the delays caused by the recent.

The extreme winter weather conditions. The final impacts are just not known at this time.

So expect gross margins to be on the range of 25% to 21, 5% up substantially compared to the 18, 2% in last year's second quarter and SG&A as a percentage of total revenues to be between nine five and 10, 5% compared with 10, 4% last year.

Sure.

Excluding land related charges gains or losses on extinguishment of debt, we expect adjusted EBITDA to be between 75 and $90 million.

Between 44, and 73% compared to the same quarter last year the.

This 44% to 73% adjusted EBITDA increase comes on top of the 116% increase we achieved an adjusted EBITDA during the second quarter last year.

Finally, we expect our adjusted pre tax profit for the second quarter of fiscal 2021 to grow between 30 and $45 million compared to a $5 million profit in the same period last year.

Turning now to slide 26.

In June 2018, we first talked about our multi year key metric targets that time, we said that we expected that we could hit them within a couple three years those key metric targets are on the far right side of the slide the trailing 12 month financial results we were achieving.

At the time, we set these targets are shown on the left hand portion of the slide.

On our last conference call in December 2020, we said that we had an opportunity to achieve the key metric targets by the end of fiscal 2021.

Assuming we achieve the midpoint of our second quarter guidance the middle column on this slide indicate how both our trailing 12 month adjusted EBITDA and adjusted pretax earnings performance would exceed our key metric targets.

Last year.

Finally, we expect our adjusted pre tax profit for fiscal 2021 to grow between to between 140 and $160 million up of 175% to 214% compared to $51 million pretax earnings last year.

The combination of our expected improved financial performance this year and the potential DTA valuation allowance reversal will meaningfully increase our year end book value per share those.

Those increases the book value combined with executing on our debt reduction strategy this year, which significantly improved our balance sheet now I will turn it back to Ara for some brief closing remarks.

Thanks, Larry I'd like to close by making a brief macro of commentary on the housing market I wanted to take a step back in time and remind everyone of what was going on of the housing market before COVID-19 on slide 28, we show that from 2014 through too.

Year by month.

The point I want to emphasize here again is that prior to COVID-19, the market was already turning an already gaining strong momentum COVID-19, only accelerated many long term trends that were already present in an improving.

The market.

Slide 30 shows annual housing starts dating back to World War II.

Much like the trends I talked about regarding our contracts per community.

Housing starts were growing steadily for the past several years through the end of 2020 on.

On this slide we show average starts per decade, with the horizontal black line going from the 19 fifties through the 2010 decade.

If you throw off the highs of the 19 seventies and the lows of the most recent decade, where we averaged only a million housing starts per year. The long term average has been over one 4 million starts per year.

While it has grown steadily last decade, you can see the average production during the most recent decade was by far the lowest level since World War II.

Even 2020 with 10 incredible months housing starts were below the historical decade average units on slide 31, we show the annualized start pace for the most recent month of January it's only one month, but you.

Can see of significant month, Jon Howie.

However, it is important to note that even now with one of the most robust housing market, we've seen in a long time.

<unk> production is only <unk>.

Of the historical decade averages further the shortage of available developable losses will likely keep the start pace somewhat moderated.

You can see that Annualizing. The 2021 January storage space would indicate total housing production of about $158 million of homes per year. This level of starts.

Is nowhere near the peak levels that we've seen in the past decades, which we're plus or minus 2 million starts.

It is especially impactful when you consider the historically low level of housing starts over the last decade. The last decade produced almost 4 million fewer homes than a normal decade.

It's also important to note that today's homebuyers are users not speculators that we've seen in prior housing peaks.

I'd be remiss not to comment on the recent increase in mortgage rates over the past two weeks the increase in rates was sudden and not generally expected.

This is especially true given the fed said that it intends to keep rates low for the foreseeable future.

However rates are still incredibly low if you look at slide 32, it puts our current interest rates into perspective by comparing them over the last 20 years.

And more importantly, higher mortgage rates.

Necessarily mean that someone's going to change their decision whether to buy a home or not.

It might mean that the bias of smaller home or add fewer design options or buy a home further out.

As homebuyers reset their expectations to the current rates I don't foresee the recent increase in rates will have much of a long term impact.

As a reminder.

I'd say its build more homes of 1982 with mortgage rates in the teens then were built last year.

While we are cautious regarding our outlook, we believe the demographics of the shortage of an existing housing stock and a shortage of the developable land for new housing interest rates that remain near all time lows and the likelihood of further economic stimulus on.

All bode well for the near term outlook for housing.

I'll also mention that the baby boom generation is in their price second home.

Buying age of true.

That's likely to increase.

Post COVID-19.

That concludes our prepared remarks, and I'd now be happy to turn it over for Q&A.

The company will now answer questions. So that everyone has an opportunity to ask questions participants will be limited to one question and one follow up after which they will have to get back in the queue to ask another question. We will open the call for questions. If you have a question at this time. Please press Star then one on your Touchtone telephone if for your question has been answered.

And you'd like to remove yourself from the queue. Please press the pound key our first question comes from the line of Alan Ratner from Zelman and Associates. Your question. Please.

Hey, guys good morning.

Congrats on the on the great performance and results.

I appreciate the commentary, especially around that that price and volume equation and I think it's a really interesting dynamic right now.

If I look at your absorption pace really since since COVID-19, you've been selling somewhere on the five and a half per month range over the last three quarters and it sounds like when Im one of the hearing from you and correct me if I'm wrong.

That perhaps that might be hitting a little bit of an upper bound in terms of how quickly you could actually get those homes built. So I guess my question is what is the ideal sales pace today that youre trying to solve for with these price increases and what happens if you. If you cross that line on the low end.

If you push too hard on price.

What.

How low are you willing to take that before you have to actually roll back some of these increases.

Alan I'd say, its really a balance of that varies depending on how soon we see on new communities coming online.

What we don't want to do with GAAP out so to speak.

I'll, let our community counts go down.

So we're trying to balance.

On the right pace and margin and part of that is affected by what we see as our new communities coming online.

We're feeling pretty good about communities coming online and we're unmask hauling a lot of communities as well that we've talked about.

So we feel like we can keep up with a pretty good pace and still show some really fabulous margins, but we don't have a specific target.

We're adjusting it based on what we can see in our production capabilities and that varies we're adjusting it based on some ebbs and flows of material shortages. We're adjusting it based on what we're seeing on cycle times and adjusting it based on when we're getting some new replacement communities online.

Sure.

So we're varying it.

Really month to month.

Got it that's helpful.

Sounds like there's not a hard number there and it might fluctuate based on whatever the the bottleneck is at the moment, whether it's land or labor materials et cetera.

Second question just on the balance sheet certainly good news that sounds.

It sounds like you're accelerating some of the debt debt the debt pay down there just curious with the stock trading close to three times book now if you adjust for the full DTA is there any thought about.

Tapping the equity markets to even further accelerate debt reduction because clearly.

There is an opportunity to bring down the the interest expenses.

We're to do that yes.

Alan I wanted to start by reminding you that we expect our book value to grow dramatically by year end I mean, it's the law of small numbers are all homebuilders are going to have increases, but we really expect ours to increase very significantly.

We think we've got a lot of opportunity.

Two.

Improve our equity in and.

And reduce our debt even without any.

The selling of any stock we think it's of based on what we're seeing out on the horizon. We think it's a little early to to sell stock also keep in mind. One other thing that we Didnt mentioned on the call as we reduce debt early and we're really focused on that and as.

We increased our performance, we think there's a great opportunity to refinance our debt most of our debt is at very high rates right. Now, we think there'll be an opportunity at some point to refinance.

Significantly lower rates and that would really boost our earnings since our interest is a huge part of our.

Of our operating results. So I think we're going to wait.

Consider our options a little later in the cycle of Larry do you want to add anything to the <unk>.

Now the perfectly I don't think on the net.

Building on that that was very helpful. Can I just sneak in one just fact checking question I might have missed it but did you give the.

2020 for notes that you said you intend to pay down early is that something you expect to do this year or are you just signaling its going to happen before the actual maturity date.

We just said it was going to happen.

In advance of the maturity day, we did not make a specific projected precisely when but we are committed to reducing debt.

Got it okay. That's very helpful. Thanks, a lot guys.

Thank you. Our next question comes from the line of Alex Barron from housing Research. Your question. Please.

Good morning, gentlemen, great job in the quarter.

Just wanted to congratulate you on the ground.

Thank you.

I had the question regarding your comments about Texas.

No storm and all of that stuff not just curious.

Are things back up.

The 100%.

At this point and if there is any impact on deliveries roughly how much of it do you think which shifted into the next quarter.

Yes.

Right now first of all I think.

Aleve of 100% of our communities are back up in terms of sales.

And construction is pretty much getting back to norm the one.

One wildcard of course is.

How the utilities.

Are affected and how long they might slow things down to repair some of the outages and in addition, when insurance.

Carriers.

Preparing or giving reimbursements, how much of the trade base gets sector.

The sector weigh into that but at the moment.

Really we really believe we would only slipped a few deliveries in the months and we think we can actually make that up in.

In the quarter, so thus far we're feeling pretty good.

But we don't know everything just yet.

Yes.

And then I'm not sure if I missed it but the revenue guidance for the.

For the year.

Okay.

In terms of the the gross margin.

Sounds like you guys are at this point more towards raising price since the deal like the gross margin.

Further upside in the room.

<unk> given us for the next quarter on the back half of the year.

The he is not even dry on the guidance, we just gave us and youre asking if there is upside to it so.

Anything is possible I guess, but.

We're going to stick to the range, we just the just put out.

Okay.

Now.

On.

Correct me, if I'm wrong, but if you reversed the DTA later this year that debt.

Show up on your income statement right now just on your balance sheet.

The Brad I'll, let you handle on it.

That's correct the the river.

First of all comes through the tax expense line item on the income statement.

And the tax expense okay.

And Alex I will add the comment that we mentioned all of mentioned it one more time.

There is a lot of talk in Washington of raising the federal income taxes.

That's not a great thing for most homebuilders.

That because we have this large NOL in the large deferred tax asset it would actually increase.

Our income and we have an opportunity to incur.

Increase that reversal in the future. We don't know, we'll see what happens, but we're uniquely positioned.

And because we haven't used up our tax credit.

It will have the opposite effect on us compared to our peers.

Correct no.

As far as.

I know, it's kind of looking up for next year, but.

Moving on the assumption that you probably will be for tech.

This year, if that's the case should we assume a tax rate for next year, what 25% or something like that for modeling purposes.

Yes.

Given current rates at the goods.

Active rate to estimate yes.

Okay, and if I could ask one more.

On the diluted share count I noticed it went down from $6 7 million last quarter to $6 three.

What was the reason for that debt buyback stock or what happened there.

It was it related to.

On vested.

Compensation shares.

So they changed so nothing with the outstanding shares of all had to do with the non vested compensation shares.

So for modeling reasons should we assume $6 three going forward or the $6 seven or what.

The $6 three.

Okay.

Alright.

I guess.

It sounds like you guys are pretty good on track to pay down debt, which is going to be great.

So at some point if you do pay down the 2022 and 2020 fours are you guys expecting cages, let the leverage stay on.

Or are you guys expecting to replace that debt eventually.

Other lower cost of debt in other words are you.

Are you trying to just lower the overall amount outstanding or are you thinking you will eventually replace that with some lower cost debt.

We are trying to lower the amount of debt outstanding. So we're not intending to replace the $22 20 for us by refinancing them or buy it later, replacing it with additional debt, we want to lower the debt and really focus on repairing the balance sheet.

Okay, Great I will let somebody else net and good luck for the year. Thank you.

Thank you.

Thank you and as a reminder, ladies and gentlemen, if you have a question at this time. Please press Star then one our next question comes from the line of Jordan Hymowitz from Philadelphia Financial Your question. Please.

Thanks, guys.

Just checking the math with the guidance you provided it comes out the almost $25 per share on.

Next year and I guess my question is that 25 low last 20 for something.

Assuming the debt is outstanding for the first half of the year now at the back half loaded earnings company, but the run rate. The following year would be a higher number because you would have a much lower cost of debt.

Is that of ready to think about it at this point.

Yes, I think I think I can't argue with your math I Didnt actually do the math on the on EPS, but I think your math is accurate and certainly its accurate to say that as we pay off debt there'll be less interest in subsequent years.

And so I'll use the.

The fine gentleman, who asked the question of three times book before and maybe we should take advantage of that at under three times. This year's earnings I think you'd be crazy the issue of share of equity at this point.

I agree with you.

Okay.

Yes.

Okay. Thank you.

Sure.

Thank you. This does conclude the question and answer session of today's program I'd like to hand, the program back to Ara Hovnanian for any further remarks.

Great well. Thank you very much we're certainly off to a great start.

We're going to be reporting even better news in subsequent quarters. Thank you.

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

Q1 2021 Hovnanian Enterprises Inc Earnings Call

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