Q2 2021 Hovnanian Enterprises Inc Earnings Call
[music].
Good morning, and thank you for joining us today for Hovnanian Enterprises fiscal 2021 second quarter earnings Conference call.
An archive of the webcast will be available after the completion of the call and run for 12 months.
This conference is being recorded for rebroadcast and all participants are currently in a listen only mode.
Management will make some opening remarks about the second quarter results and then open 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 Dot K H O V Dot com those listeners who would like to follow along should now log onto the website.
I would like to turn the call over to Jeff O'keefe, Vice President Investor Relations. Jeff. Please go ahead.
Thank you Liz and thank you all for participating in the call. This morning.
For our second quarter.
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 995.
These statements involve known and unknown risks uncertainties and other factors that may cause actual results performance or achievements for the company to be materially different from any future results performance or achievements expressed or implied by the forward looking statements such forward. Looking statements include but are not limited to statements related to the company's goals and expectations with respect to its financial results.
For future financial periods, although we believe our plans intentions and expectations reflected in 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 day. They are made and are not guarantees of future performance or result.
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 and uncertainties and other factors are described in detail and the section entitled risk factors and management's discussion and analysis, particularly the poor.
And of MD&A entitled Safe Harbor statement, and 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 on the call are Ara Hovnanian, Chairman, President and CEO, Larry <unk> Executive Vice President and CFO, and Brad O'connor, Senior Vice President and Chief Accounting Officer and Treasurer.
Now I'll turn the call over to Ara Ara go ahead.
Jeff I'm going to review, our second quarter results, and then and address the current market environment as usual Larry <unk>. Our CFO will follow me with more details and we will and with Q&A.
On slide 4 we compare our second quarter results to the guidance. We gave on our first quarter conference call. Our total revenues adjusted gross margin adjusted EBITDA and adjusted pretax income were all within the guidance range.
The range that we gave however, SG&A was higher than anticipated the SG&A Miss was related to $17.5 million of incremental Phantom stock expense related solely to our common stock price increasing from $51 at the edge.
And of the first quarter to $133 at the end of the second quarter, only 1 time and our company's history. During 2019 Phantom stock was issued for and equity grants and it was because our stock price was very low at the time and we are concerned about the negative impact.
And that dilution could have on our shareholders. While we certainly have been bullish and our long term stock price, we did not budget for the magnitude of the increase and 1 quarter, Larry will talk more about the Phantom stock expense and just a few moments and the third column, we show what our results would have been without the incrementals.
Stock expense the SG&A would have been better than the guidance. We gave additionally, our results would have been above the high end of the range for adjusted EBITDA and adjusted pretax income.
Moving on to slide 5 we show year over year comparisons for the second quarter performance metrics, we begin with total revenues and the upper left hand portion of the slide our total revenues for the second quarter increased 31 per cent to $703 million.
Moving to the upper right hand portion of the slide you can see that our adjusted gross margin increased 310 basis points year over year. Adjusted gross margin was 21, 3% this year compared to 18, 2% and last year's second quarter.
And as we've said on previous calls and anticipation of cost increases and our desire to improve margins, we pivoted to increasing home prices back in June of 2020. During the first half of 'twenty..1 housing demand remains strong and we saw both labor and <unk>.
Material costs, especially lumber continue to increase as a result, we continue to both aggressively increase home prices and limit home sales to a pace similar to our homes starts. These actions will help ensure that we stay ahead of future cost.
Increases will talk more about that and the impact on margins and a moment.
And the lower left hand quadrant of the slide you can see that our SG&A was certainly impacted by the incremental Phantom stock expense. If you were to ignore the incremental stock expense. The SG&A ratio would have improved to 9.3% as shown in the lower blue.
Per in the lighter blue excuse me compared to the 10, 4% and last year's second quarter, we're benefiting from the normal leverage of scale as we grow and.
And the lower right hand quadrant of the slide we show that adjusted EBITDA increased 47 per cent from $52 million and last year's second quarter to $76 million this year.
While we were within the guidance range for EBITDA. Once again, if you ignore the incremental Phantom stock expense, our adjusted EBITDA would have increased 80% to $94 million above the upper end of our guidance range.
On slide 6 our adjusted pre tax income before land charges and gains or losses from the interest.
Englishman of debt improved to a $31 million profit this year from a $5 million profit last year. Once again, ignoring the Phantom stock expenses would've resulted in a higher profit of $49 million this year.
On slide 7 we show that our net income for the second quarter of 'twenty, 1 was $489 million compared to $4 million and the same quarter last year, a huge portion of that year over year increase or $469 million was due to the.
And of our valuation allowance the profit for the quarter combined with the reduction and our valuation allowance resulted in total shareholders' equity increasing sequentially by $489 million on.
On the left hand portion of the slide we show that our quarterly contracts increase excuse me on the left hand portion of slide 8 we show that our quarterly contracts increased 19% to 1771 homes.
[noise] contracts during the second quarter of last year were adversely impacted by the early stages of the Covid shutdown and making this year's second quarter comparisons much easier.
We achieved a 62% increase to $18.3 contracts per community for the second quarter of this year compared to 11.3 contracts per community for last year's second quarter.
The strength of the market has been widespread across product types and by geography.
During the second quarter, Phoenix, Delaware, and Dallas Fort worth had the largest year over year increases and contracts per community.
Each of these divisions posted year over year increases of more than 135 per cent or other markets continue to do well also but in many of those cases, we have been more focused on slowing down sales pace and increasing price.
<unk> 9 shows the number of consolidated contracts on a monthly basis over the past year.
As we discussed last quarter, we consciously raised prices significantly and February to slow the sales pace and improve our margins.
While we held the sales pace to comparable numbers and the months of March and April with steady price adjustments. The contracts are still up over the prior year because the comparisons were much easier.
Turning to slide 10, you can see the contracts per community for the past several months. This shows a similar pattern of significant increases compared to the same month last year, but even more significant again with particularly easy comparisons for last April.
<unk> and March.
We spiked at 7 contracts per community in January.
Then we saw the intended impact from our aggressive home price increases and the restriction of sales and certain locations in both February and March contracts per community slowed to 6.1 and in April It came down further to 5.5.
<unk> per community.
Even at these lower contract paces per community our annualized paces are the highest they have been for.
Over a decade.
A sales pace of 6 to 7 per month per community is difficult to match and production today, and we pivoted harder to a greater focus on margin.
As I mentioned earlier, we'd like to control our sales pace to the point, where it aligns more closely with starts this strategy significantly reduces the risk of construction cost increases reducing our margins.
As we stated on our analyst call last quarter.
We expected the year over year sales comparison for March and April to be much easier due to the COVID-19 shutdown last year. We also stated that the comparisons would be more difficult and may and over the summer months due to the surge in COVID-19 housing demand last year.
Further over the past several quarters were particularly aggressive regarding raising sales prices to both increase margins and slow sales to a more rational pace.
During the recent months, we have significantly metered sales and temporarily stopped sales and certain communities in order to better match, our sales pace with our ability to start homes as a result compared to intrinsic demand. We believe our may sales paces artificially low.
You can see the start of these more difficult comparisons on slide 11.
During the month of May due to restricting sales and especially difficult comparison to a very strong made last year and a lower community count our contracts per community declined 19% and our contract dollars decreased 23% and total.
<unk> declined by 266 homes year over year. However, we achieved our objectives and our may contracts had the highest gross margin percentage at the point of contract for any month and over a decade as.
As we intended the slowing of our sales pace has kicked in the difficult comparison to last years sales pace will continue over the summer months.
This was the last.
Was this time last year when the market was absolutely on fire and we and the homebuilding industry had not begun to aggressively throttled back contract paces.
However, like the month of May we expect significantly higher gross margins and our new contracts compared to last summer's contracts.
The broad strength and the housing market continues to be driven by the same factors that have been in place over the past year solid demographic trends limited supply of new and existing homes, historically low mortgage rates and an ever improving economy.
The potential for an infrastructure bill can only improve the economic conditions, we plan to continue to raise prices in order to keep up with rising material and labor costs align our sales pace with our ability to start homes and improve our margins all signs indicate that.
Our 'twenty 1 financial results are.
Are expected to be dramatically better than last year.
I'll now turn it over to Larry <unk>, our Chief Financial Officer.
Thanks Kara.
Going to start with a discussion about for 17, and a $5 million of incremental Phantom stock expense that we booked and the second quarter of fiscal 2021.
And 2019 for the only time and our history Phantom stock was used in lieu of actual equity for our long term incentive plan for L tip Grant.
This was done and the best interest of shareholders to avoid dilution concerns associated with the low stock price of $14.50.
And at the time of the grant.
We term, we determined that granting phantom shares eliminated the significantly higher than normal EPS dilution that would have resulted from granting actual shares at the 14 and a half dollars stock price when actual shares are used for and equity grant there are no GAAP expenses related to stock price movements from.
1 quarter to the next however, non cash GAAP expenses for Phantom stock there is depending upon changes and common stock price each quarter. During the performance period, which began in 2019 cash payments for the 2019 Phantom stock LTI Grant will occur beginning.
And fiscal 2022.
Since 2019, when we granted our fan and stock <unk>. Our operating performance has significantly improved as a result, our stock price has materially increased especially after we reported our strong first quarter results and guidance for fiscal 2021 and early.
March the run up and our stock price from $51.16 to $132.59 during the second quarter resulted and a $17.5 million of SG&A expense that would not have occurred had we granted our 2019 L tip utilize.
And actual shares instead of Phantom stock, while we were not surprised at the stock price went up we were surprised by how much it went up and a single quarter.
On slide 12, we show our total mothballed lots as of the end of the second quarter of fiscal 2021 during the second quarter of fiscal 2021, and <unk> 860 for total lots, including 732 lots and a large master planned community in Northern California.
A 99 lot community and southern California, and a 33 lot community and Virginia that leaves US with 1500, 14, mothballed lots and 8 communities with a book value of $4 million and honored.
And 5 of those lots are in the same large master planned community in northern California, but remain mothballed because of the long development time of the later phases. We believe the value of these remaining mothballed lots is greater than our current book value.
We will continue to monitor the remaining 514 lots and get those communities reopened when it makes good sense to do so.
We remain focused on growing our land position.
On slide 13, we added 2920 newly controlled consolidated lots during the second quarter during that same quarter. We had 6800.25 deliveries and loss sales, resulting in a net increase of 295 consolidated controlled lots and for the 9 months.
Period ended April 32021, we added 7082 newly controlled lots delivered for 753 homes and lots and resulting in a net increase of 2329 lots.
On the left hand portion of slide 14, we show what our community count was at the end.
Yes.
Every quarter over the past 12 months as you can see primarily due to selling through communities at a significantly higher than normal pace. Our community count has been declining and we ended the second quarter of April 2021, with 117 communities, including domestic and consolidated joint venture.
<unk>.
As we said on our last few calls our community count is likely to fluctuate from quarter to quarter throughout the remainder of fiscal 2021, we plan to open more new communities given no material changes and current market conditions, we expect our community count including communities from domestic unconsolidated joint.
<unk> to grow to approximately 130 communities at the end of 2021 fiscal year. Our teams are busy trying to help us get to that goal and beyond on the REIT and portion of this slide we show the lot count at the end of the same for quarters and each quarter our lot count has.
<unk>.
And as excuse me and each quarter, our lot count has increased sequentially over this period of time, we've been steadily increasing our lot position and keep in mind, there's a lag between when we control the lots and when we can open a community our ability to increase our lot supply clearly indicates the progress we've made.
And towards the growing community count and future periods virtually all of the land and communities necessary to achieve further growth and profits during both fiscal 2021 and fiscal 2022 are already under contract today. Our land acquisition teams are primarily focused on obtaining.
Control of land and communities for home deliveries and physical 2023 and beyond.
Turning now to slide 15 during the second quarter of fiscal 2021, our land and land development spend was $175 million.
53% increase over the same quarter a year ago. This followed a similar increase of 51% and the first quarter of 2021 and before that a 41% increase and the fourth quarter of 2020. These increases demonstrate that we're investing the money needed and to grow our community count.
Nathalie Theres a lag between optioning the properties developing the land and opening the communities for sale. However, given our increasing land controlled position over the last year and a significant increase and land and land development spend over the recent quarters. We remain confident that after this lag period, we will soon.
See our community count rise once again.
And we're continuing to find land opportunities that make sense in today's environment, while we're using current home prices and current construction right construction costs, we have typically been underwriting with more conservative contract pace assumptions.
Turning to slide 16.
Even with that significant increase and land spin and we ended the second quarter with $353 million of liquidity well above the high end of our liquidity targets. Some of this liquidity will be used and the third quarter of 2021 to pay down the debt that comes due in July 2020.
2 after accounting for that we will still have excess capital to invest and land, we're busy contracting additional land parcels across the country today.
Turning to slide 17. This was another strong quarter for our financial services Division driven by historically low rates and strong home demand, which led to increased closing volumes and a financial services second quarter pre tax earnings increased 119% year over year to 10 million.
<unk>.
Turning to slide 18, compared to our peers you can see that we still have 1 of the highest percentages of land controlled via options. We continue to use land options whenever possible in order to achieve high inventory turns and enhance our returns on capital and to reduce risk.
We are pleased to control, 63% of our land through options, which is up from 60% and the same quarter a year ago looking.
Looking at our consolidated communities and the aggregate, including the $125 million of inventory not owned we have and then inventory book value of $1.3 billion net of $162 million of impairments.
Turning now to slide 19, compared to our peers you can see that we had the second highest inventory turnover rate for the trailing 12 month period.
Our inventory turns were 29% higher than the next highest peer below us high inventory turns are a key component of our overall strategy. Another area of discussion is related to our deferred tax asset.
During the second quarter, we reduced our valuation allowance by $469 million, we reduced all of the federal valuation allowance and a portion of the state valuation allowance as of April 32021, the remaining state portion of the valuation allowance.
And was $103 million and our deferred tax assets net of this valuation allowance was $459 million, we've taken numerous steps to protect their deferred tax asset, even though we will still be using GAAP taxes on our income statement, we will not have to use cash to pay federal income.
<unk> taxes on approximately $1.8 billion of future pre tax earnings and this helped strengthen our balance sheet more rapidly, particularly in an environment with higher corporate taxes are in discussion.
Turning now to slide 20 on this slide we show our debt maturity ladder at the end of the second quarter on June 2nd 2021, we set a redemption notice to call and full on July 31, 2021, the $111 million of our 10% senior secured notes due July 2022.
Additionally, we still intend to further improve our balance sheet by using cash to pay off the remaining $70 million principal amount of our 10, 5% senior secured notes due July 2020 for in advance of their maturity.
On slide 21, we show the key metric targets, we established in June 2018, and the Middle column on this slide you can see the progress we've made and achieving our key metric targets for the trailing 12 months ended April 2021 revenue was just shy of achieving the target.
And gross margins of 20% was above our 19, 5% target our SG&A ratio was slightly above target. However, if you ignore the 17 and a half million of incremental Phantom stock expense, our SG&A ratio would have been slightly better than the target lastly, even though the incremental.
Phantom stock expense, our adjusted EBITDA and our adjusted pretax profit were better than target on the far right column. We show. The further improvements we expect to report by year end on each component of our key metric targets as a matter of fact, we expect adjusted EBITDA and adjusted pretax earnings to be significantly above.
But the key metric targets.
Turning to slide 22, I want to spend a few moments talking about the goals of deleveraging and enhancing our debt structure looking at the bullets on the left hand portion of the slide achieving higher levels of profitability has allowed us to make progress towards our deleveraging goals given our.
<unk> improved results, we believe our current debt is too expensive or goals for comprehensive refinancing of our debt structure includes the following components first and ensure a multi year well lettered debt maturity.
Refinance our high cost of debt with lower cost of capital and Thats more in line with our industry peers.
And third issue no tranche sizes that would achieve high yield index inclusion and secondary market liquidity and price transparency and finally, we would want to reduce our reliance on secured debt.
Ultimately, resulting in an unencumbered balance sheet.
As we continued to post strong results. We believe we can refinance our entire debt structure with significantly improved terms and as always we will analyze and evaluate our capital structure and explore transactions to further strengthen our balance sheet and our financial performance.
On slide 23, we show that our total backlog, including domestic unconsolidated joint ventures at the end of the second quarter increased 63% for 373 homes. You can also see that the dollar value of this backlog increased 80% to $2.4 billion.
<unk>.
The strength of this backlog, including solid expected gross margins sets us up nicely for strong results over the remainder of this fiscal year.
Our financial guidance for both for the third quarter and the full year for fiscal 2021 assumes no adverse changes in current market conditions and excludes further impact to SG&A expense from Phantom stock expense related solely to stock price movements from the $132.5.
<unk> stock price.
At the end of our fiscal 2021 second quarter power.
However, our guidance for the quarter and for the year include Phantom stock impacts, we absorbed and the second quarter for every $4 that our stock price increases or decreases there is approximately $1 million increase or decrease respectively of.
Mental Phantom stock expense and yesterday's closing price of $136.81.
That would create roughly $1 million of incremental Phantom stock expense Ironically, if the stock price falls from that level, we actually create income.
On slide 24, we provide guidance for the third quarter of fiscal 2021, we expect reported total revenues for the third quarter of fiscal 2021 between $700.750 million.
We also expect gross margins to be and the range of 25% to 21, 5% up substantially compared to the 17, 5% and last year's third quarter and SG&A as a percentage of total revenues to be between 10, 5% and 11, 5% compared with $9.
5% last year.
Excluding land related charges and gains or losses on extinguishment of debt, we expect adjusted EBITDA to be between 80 and $90 million up between 24% and 39% compared to the same quarter last year. Finally, we expect our adjusted pre tax profit for the third quarter of fiscal.
2021 to grow between 35 and $45 million compared to a $15 million profit and the same period last year.
Turning to slide 25, I will discuss our increased guidance for the full year. We expect to report total revenues between $2.6 5 and $2.8 billion from $234 billion last year. We also expect gross margins to be and a range of 20.
And 5 to 21, 5% compared to 18, 4% last year and SG&A as a percentage of total revenues to be between 10, 5 and 11, 5% compared with 10, 3% and the prior year. This includes the $17.5 million of incremental Phantom expense discussed earlier.
Excluding land related charges and gains and losses on extinguishment of debt, we expect adjusted EBITDA to be between $310 million and $350 million up between 32% and 49% compared to last year. Finally, we expect our adjusted pre tax profit for fiscal 2020.
1 to grow to between 150, and $170 million up 195% to 234% compared to $51 million and pre tax earnings last year. This is a $10 million increase from our previous guidance of $140 million to $160 million.
Were it not for the $17.5 million of incremental Phantom stock expense and the second quarter. Our guidance would have increased by 27.5 million.
Given our pretax profit guidance for the second half of the year, our shareholders equity should double from today's level by October 31, 2021, assuming no changes and current market conditions, our expected earnings growth and fiscal 2022 from fiscal.
2021 levels should also significantly further enhance shareholders' equity by the end of 2020 two's fiscal year.
Turning now to slide 26.
Here, we illustrate the growth we've seen and adjusted EBITDA on the left hand portion of the slide you can see that our third quarter for estimated for adjusted EBITDA is 31% more than the third quarter of 2020 and that was after a 76% growth from the year before that.
And you can see a similar trend on the right hand portion of the slide where we show adjusted EBITDA for 2019, 2020, and our expectation for 2021 and 2020, we achieved a 35% growth and adjusted EBITDA and and 2021, we're now expect to achieve and additional <unk>.
And 1% growth and EBITDA. These.
These increases are representative of the progress we've made and materially improving our operating results. We've taken numerous steps to achieve our improved results on slide 27, we show some of the strategies, we're utilizing to achieve long term profitability and more importantly value creation for all.
All of our stakeholders.
This slide shows the growth oriented strategies on the top of the slide with the actions undertaken listed below the individual strategies beginning on the far left hand portion of the slide we start with growth.
Grow revenues to improve scale and enhance margin profile in order to achieve this strategy. We are focused on higher inventory turns to allow for growth regarding margins. We've actively manage the sales pace through home price increases and limiting the number of homes for sale and each community longer term we're focused on.
Reducing cost further and streamlining our organization moving to the right. We show risk adverse land strategy, our preferred method of controlling losses through the use of options, which only require minimal cash deposits ideally we'd like to have less than 18 months of owned land and then control as much land as.
Practical through option contracts.
We remain extremely focused on utilizing high inventory turnover to be more efficient and to increase our returns on capital.
And finally by achieving significantly improved operating results, we generate excess cash flow, which helped significantly improve our balance sheet flexibility.
The combination of our expected improved financial performance this year.
And the deferred tax asset valuation allowance reversal will meaningfully increase our year and book value per share those increases to book value combined with executing on a net reduction strategy. This year should significantly improve our balance sheet at year and assuming no changes and current mark.
And conditions are expected earnings growth and fiscal 'twenty 2 from fiscal 'twenty..1 levels should also significantly further enhance shareholders' equity by the end of fiscal 2022.
That concludes our prepared remarks, and I'll be happy now to turn it over for Q&A.
The company will now answer questions.
And 1 has an opportunity to ask questions participants will be limited to 1 question and a follow up afterwards, and we'll have to get back in the queue to ask another question.
If you'd like to ask a question at this time. Please press the star and the number 1 key on your Touchtone telephone to withdraw your question press the pound key.
Our first question comes from Alan Ratner with Zelman.
Hey, guys. Good morning, Thanks for taking my questions.
So yes.
First 1 I'd love to dig in on you guys mentioned several times. This notion of trying to match your sales to starts pace, which I think a lot of builders and the industry are doing right now. So if we look at your absorption rate going from 7 months, a few months ago down to 4 plus here and May what is your.
And peace running at currently and at what point do you think you can maybe open up the spigot, a little bit more and perhaps let that absorption rate Ron.
A bit hotter than it is today or is for kind of the new normal that youre kind of solving for at this point.
I would say Alan.
Part of that is dependent on.
When we can get our new communities on pace.
On on the market.
We're being cautious we don't want to GAAP out so to speak and sell out too quickly as we get more storefront open and as you saw our option positions growing a lot our land spend positions are growing a lot. We just got to get those communities open.
And as we get them open then we can feel a little more comfortable letting the absorption pace grow more rapidly and go to a higher pace and the 4 and a half.
Got it okay. That's helpful.
Second question just in terms of the margin on homes sold and May you mentioned, it's the highest level and in a decade.
A bit surprised just looking at your margin guidance for the back half of the year. It doesn't really imply much improvement from the second quarter level. So can you talk a little bit about what the absolute margins are on homes youre selling today and presumably when that would begin to filter through to the P&L flow.
Yes first.
The homes that we're selling today are not really going to be delivering this fiscal year. Most of what we're delivering this fiscal year has already been and backlog.
You'll begin to see these.
Higher margins from our current contracts in next fiscal year, beginning with our first quarter. Obviously, we havent started all over those just at this moment. So we are still subject to potential cost increases.
But the margins and our current contracts are substantially higher so we feel pretty confident we're going to generate some pretty good margins.
And we deliver those cells.
I appreciate that Ara I guess, what I was thinking you didn't just start raising prices and may be and raising prices for for several months and I think you even mentioned starting January February and where you really started to get aggressive there. So presumably some of those homes would deliver before the end of the year. So that's where I was referring to being a little bit surprised.
Some of them will we're obviously being fairly cautious on margin guidance given that it is a very challenging environment with cost increases in general.
You know, what's happened with lumber up and down and other material costs and and labor costs. So we're trying to be on the conservative side.
On our guidance.
Understood. Okay. Thanks, a lot appreciate it and good luck.
Thanks.
As a reminder that is star then 1 if you'd like to ask a question at this time.
Our next question comes from Alex Barron with housing Research Center.
Yes, thanks, guys.
And.
I wanted to ask about the deferred tax asset.
And what drove the fact that you didn't get the whole.
Staying on the state side and is that expected to get done later in the year or how does that work.
And the way we have when you evaluate the valuation allowance.
States you have to look at the state individually.
And states all have.
Current rules in terms of how long you can carry forward and net operating losses. We also have states that since those Nols regenerated, we're no longer operating and or we have significantly reduced our operations and and as an example were.
Winding our business down and Chicago.
Currently we are non operating in Pennsylvania. So we've got markets that we've lost and therefore unlikely to at least at the moment.
We are unable to forecast that we would use those nols and.
And time before they would expire.
And it's something we would continue to evaluate but I wouldn't anticipate that valuation allowance currently on our books and $103 million to change dramatically in the coming certainly the rest of this year and maybe not much.
<unk> much going forward it will depend on changes and our operations and those states, where we currently cant forecast using those Nols.
Got it and for.
For modeling purposes, what kind of tax rate do you suggest using going forward.
I would say.
Hi, its enrollment high for 128% and 29% something in that range.
For federal and Okay.
Great and then on the Phantom stock keep in mind.
And then just nothing.
And Larry said.
And while that will be our tax expense, we won't be paying.
Taxes, especially for federal taxes, because of our deferred tax assets and make sure that was clear.
Correct, yes.
And then on the fence and stock issues Hulu.
Is that.
It seems like it's going to be and ongoing issue based on your stock price is.
There are certain amount of stock that was issued and that's it or is there going to be more issuance, it's coming down the road.
No. It was a 1 time event.
And.
And.
Just to keep in mind, it does go up and down.
Today, our stock price is down as all homebuilders are down and it would actually result, and a lowering of expense and an increase of profit of about $2.5 million at the moment. So.
And it goes and in both directions.
Got it.
And ask 1 last 1 I think you said your contracts or more.
<unk> were 413.
Because you are raising prices and maximizing margins and is that roughly you think the run rates.
For the remainder of the year or is this.
Likely to go up from here based on other factors.
Well I think.
As Eric mentioned during the prepared remarks, and even for years on 1 of the responses as our.
Additional community and to open later this year that we've talked about we should obviously serious and get additional contracted and be at a faster pace and we're currently running and Matt.
And we also mentioned right now we're essentially restricting sales.
Because of our ability to produce and get caught up on our existing backlog. So I think as that frees up and we get those fees open you might see us increase sales pace even on the existing.
Sure.
Okay great.
Okay. Thanks, I'll get back from the queue.
Okay.
Our next question comes from Jordan, Hymowitz with Philadelphia financial.
Thanks, guys a couple questions on the debt refinancing.
Refinancing and pay down.
And is the earliest first of all you could pay down the 2020 for us.
Well, it's dependent upon us achieving.
Secured net leverage ratio.
Results and.
So.
We're not there yet and we are monitoring that each quarter and we're not projecting that at the moment.
But if you look and the indentures, you probably could get a pretty good estimate on that yourself.
But it looks like around the September October time period, and I guess would your goal to be the refinance those as soon as possible.
I don't think we've made any decisions on precisely when we're going to.
To do that we certainly intend.
To do it and.
And in advance of maturity and hopefully well in advance of maturity, but I don't think we put a fine point on precisely.
And in addition at the current moment, our plan is not to refinance but rather just have a reduction and our the amount of our debt pay it off.
Perfect and are you once that occurs I assume the ratings agencies that would take a look at upgrading the rating for your company overall.
You would assume that and we hope that that is true and we intend to meet with the rating agencies.
And then lastly, just and future.
Further update them on our improved performance.
And different topic.
The adjusted EBITDA add back for $17 million of SG&A expense.
Because it's not taxes interest depreciation and amortization.
SG&A expenses.
I know you are trying to do it as a non cash.
Items that theoretically could do that and your own book from our definition of EBITDA and not any of those credit.
Adjusted EBITDA by nature is a noncash definition and it's a noncash item.
Feel free to add it back.
Okay and final question is what do you think card coupons are.
And then if you were able to refinance the 2020.
And Thats a difficult question too.
The answer.
Given the.
Lack of liquidity and our and our current bonds and you really just don't trade, but if look at what similarly rated homebuilders for us are trading at yield wise from.
<unk> lower than our current coupon.
But the fact that that is occurring versus us our ability to actually.
Refinance our whole structure.
We've got some work to do to reeducate, the high yield market on our improved performance.
Optimistic as we do that.
The coupons that we can refinance that or materially lower and much closer to what our similarly situated peers.
And what are you. Similarly, situated peers have for those of us and are less familiar with the debt markets.
They are less and 6%.
Okay. Thank you.
Our next question comes from Alex Barron with housing Research Center.
Yeah. Thanks I.
And I was wondering if you could talk about.
Bill times have those been extended to.
Various supply chain disruptions and if so by how much roughly.
They have been extended.
Partly due to supply chain disruptions and partly due to <unk>.
Pressures on labor.
Many builders are experiencing what we're experiencing most builders with a dramatically improved sales, which means a lot of strain on legacy labor.
The labor capacity.
Depending on the geography, and the moment, we've seen delays of 30 to 60 days in many locations and product types and and we factored those delays into our guidance.
Got it and.
In terms of your spec strategy, given the ryzen and cost and delays and so forth how has that shifted if anything.
And when you guys are how many specs you starting versus at what point in the construction cycle you guys are selling their homes.
Yeah, and I know the strategy varies quite a bit by builder. Some builders are almost 100% spec. Some builders are still almost 100% build to order.
Somewhere in between at the moment frankly sales have been so robust there.
Net.
All of our capabilities are going into starting the sold homes, we have which leaves a little less capacity for starting specs.
And extremely active right now so I would say in general.
We're starting fewer specs than we did a.
A year or 2 ago.
Okay. Thanks, a lot and best of luck.
Thank you.
I'm showing no further questions in queue I'd like to turn the call back to Ara Hovnanian for closing remarks.
Great well, thank you very much.
And we're pleased with our results overall.
And we're excited about what we're going to be reporting and future quarters. So we look forward to sharing some good news in the upcoming quarters. Thank you.
This concludes our conference call for today. Thank you all for participating and have a nice day.
All parties may now disconnect.
[music].
[music].
[music].
[music].