Q3 2021 Hovnanian Enterprises Inc Earnings Call
[music].
Good morning, and thank you for joining us today for the Hovnanian Enterprises fiscal 2021 third 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.
Good management will make some opening remarks about the third 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. These slides are available on the investors page on the company's website at Www Dot K H.
<unk> dot com those listeners who would like to follow along should now log onto the website.
Now I'll 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 of our third quarter, which ended July 31.2021.
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.
Statements involve known and unknown risks uncertainties and other factors that may cause actual results performance or achievements of the company to be materially different from any future results performance or achievements expressed or implied by the forward looking statements such forward. Looking statements include but are not limited to statements related to the company's goals and expectations with respect to the financial results for future financial.
Period.
Although we believe that 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 date fair made are not guarantees of future performance or results and are subject to risks uncertainties and assumptions that are <unk>.
To predict or quantify therefore actual results could differ materially and adversely from those forward looking statements as a result of a variety of factors such risks uncertainties and other factors are described in detail in the sections entitled risk factors and management discussion and analysis.
The portion of 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.
Sept 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 Ara Hovnanian, Chairman, President and CEO, Larry <unk> Executive Vice President and CFO and <unk>.
Had O'connor senior Vice President and Chief Accounting Officer and Treasurer.
Now I'll turn the call over to our CEO. Eric go ahead. Thanks, Jeff.
To review, our third quarter results and then address the current market environment as usual Larry <unk>. Our CFO will follow me with more details and then we'll open it up for a little Q&A.
On slide five we compare our third quarter results to the guidance, we gave on our last conference call.
Covid related supply chain disruption delayed the completion of some homes, resulting in slightly lower revenues. Nonetheless, our adjusted gross margin SG&A ratio adjusted EBIT and adjusted pretax income were all better than the guidance range that we gave.
During our second quarter conference call, we talked extensively about the impact of Phantom stock expense on our SG&A during the third quarter, our stock price declined which resulted in a $13.0 million reduction in Phantom stock expense.
In the third column, we show what our results would have been without the benefit from the Phantom stock expense reduction without that benefit we still beat our guidance for SG&A adjusted EBITDA and adjusted pretax profit gross margin was not affected.
Moving on to slide six we show year over year comparisons for our third quarter performance metrics, given the supply chain disruptions and labor shortages, we've all experienced as an industry. We're pleased with our strong performance in the third quarter start.
Starting in the upper left hand portion of the slide you can see that our total revenues for the third quarter increased 10% to $691 million.
Moving to the upper right hand portion of the slide.
You can see that our adjusted gross margin increased 460 basis points to 22, 1% this year compared to 17, 5% in last year's third quarter.
This clearly illustrates that we've been able to raise home prices more than enough to offset the higher labor and material costs that we've incurred.
Lumber prices have recently declined from the all time highs they hit a few months ago given.
Given the significant declines in random length contracts, we expect our price for lumber will continue to decrease further in future months.
While these lower lumber prices will not benefit margins on homes, we delivered this quarter starting in our second quarter of 'twenty. Two we expect our gross margins will see an additional benefit from the significant reduction in our lumber costs.
In the lower left hand quadrant of the slide you can see that our SG&A was eight 7% for the third quarter compared to nine 5% last year. If you ignore the benefit of the Phantom stock expense it would've been nine 7% for this year.
In the lower right hand quadrant of the slide we show that adjusted EBITDA increased 59% from $65 million in last year's third quarter to $103 million.
This year.
On slide seven you can see that our adjusted pretax income improved to $63 million compared.
Compared to $15 million of profit last year on.
On slide eight we show that our net income for the third quarter of 'twenty, one was $48 million compared.
Compared to $15 million in the same quarter last year.
Moving now to the sales environment on the right hand portion of slide nine we show contracts per community for the third quarter in each of the last three years, you can see that our sales pace jumped 75% from a historically normal pace in 2019 two way.
White Hot pace in 2020.
I remember this was just after the March and April low in sales because of Covid and before we started to increase prices aggressively and began to meet our sales.
Our contracts in this year's third quarter were better than 2019, but far below 2020, the sales pace. We achieved in the summer of 2020 was unsustainable we've been saying for some time now the comparisons would be very difficult because of the white house sales pace that we saw last year.
Further to the left we show that the average for the third quarter from $116.0 through 2002 was 11 point for.
That was the time that was neither a boom nor bust for the housing industry, our sales pace in the third quarter of 'twenty, one slowed to a more historically typical pace, but at significantly better margins than last year.
This is more typical pace is certainly more sustainable.
As the industry sales pace returns to normal it should also help contain labor and material cost pressures.
On slide 10, we show contracts per community on a monthly basis from September through August.
The most recent months is in dark green the same month, a year ago in light Blue and the same month two years ago as shown in gray for the past four months, our contracts have been lower than last year's unsustainable pace. However, we compare favorably every month with 2019 is more typical.
<unk> contract pays.
It would be easy to become preoccupied with the sales pace this year compared to the higher COVID-19 demand surge levels that we experienced in 2020 on.
On slide 11, we focus in on the increases in the most recent months compared to the same months in 2019 pre COVID-19 when demand was closer to historical averages.
It's clear from this trend that the COVID-19 sales frenzy has given way to a more rational sales pace, we think the new sales paces healthy slightly above average and much more sustainable.
Let me take a moment to talk about increases in home prices on the left side of Slide 12, you can see that our average sales price on deliveries was up 13% year over year to $443000 in the third quarter.
On the right hand portion of the slide you can see that our average sales price on new contracts increased 27% from $396000 last year to $503000 in this year's third quarter. We believe these dramatic.
The higher prices dampen the COVID-19 sales for Mg that we experienced last year and as I said, a moment ago, we've transitioned to a more sustainable sales pace. That's in line with historical averages.
So that the higher home prices in our deliveries have already increased our gross margins. We expect these higher home prices in our new contracts to generate further increases in our gross margins.
The combination of higher gross margins along with our expected growth in community count should have a positive impact on our bottom line more than offsetting the return to a more normal sales pace per community.
On Slide 13, we show what our community count was at the end of every quarter over the last year.
As you can see primarily due to selling through communities that are significantly higher than normal pace. Our community count has been declining each quarter up until the most recent quarter. We ended the third quarter of July 21, with 120 communities. This was up slightly from <unk>.
Last quarter and is the first time, we had a sequential increase in community count since the fourth quarter of 2019.
Given no material changes in current market conditions, we expect our community count to grow to approximately 135 communities at the end of the fiscal year.
This was at the same level of communities that we had at the beginning of this fiscal year.
In fiscal 'twenty, two we expect further growth in our community count.
Our community count is likely to fluctuate due to the each quarter due to the opening of new communities and the timing of closing out of new or old communities.
The combination of a return to a more rational sales pace per community with a reduction in community count certainly impacted our absolute level of contracts this quarter, our upcoming community count growth should help that in the near future or contract dollars decreased to $609 million in the third.
Quarter of fiscal 'twenty, one compared to $882 million in the same quarter last year. This was due to a number of factors metering of sales in many of our communities selling out of communities ahead of schedule and COVID-19 related delays for new community openings and the unprecedented COVID-19.
Surge in demand last summer that make the comparisons very difficult all of these.
Heard many times before from us and many of our peers.
Much of our decline is related to community count we are making excellent progress in orland position, but theres a lag between a land contract and the first home sales and that certainly impacts our absolute level of contracts.
As we will discuss later in our presentation, we project a return to last year's community.
And our fiscal year end, and we increased our lots controlled by 20% over the past year.
We're pleased with our progress on land acquisition, and we plan to be able to grow our revenues in fiscal 'twenty, two and 'twenty three even with today's more normalized sales pace per community.
The supply chain disruptions, along with shortages of labor have led to longer cycle times. The cycle time increases vary from market to market and product to product, but when you look at the average for the entire company cycle times have increased about 30% to 45 days.
The average house that should take four months to build is now taking five to five five months to build but we've already built these new cycle times into our guidance.
All signs indicate that fiscal 'twenty, one is expected to be an outstanding year for us in fiscal 'twenty two should improve further I'll now turn it over to Larry <unk>, Our Chief Financial Officer.
Thanks Sarah.
Im going to start with the progress we've made in growing our lot position turning to slide 14, we added 4512 newly controlled consolidated lots during the third quarter.
During that same quarter, we had 587 deliveries and lot sales, resulting in a net increase of 2925 consolidated controlled lots for the 12 month period ending July 31, 2021, we added 11594 newly controlled lots delivered 6000.
340 homes and lots, resulting in a net increase of 5254 lots for the trailing 12 months. This represents us controlling new lots at a rate of 183% of home deliveries and bodes well for our expected future growth in community count and home deliveries.
Our land acquisition teams continue to find new land positions for us our recent land acquisitions were underwritten with contract paces that match, our current slower sales environment.
That pace is consistent with the sales pace, we achieved before the COVID-19 surge and home demand. Additionally.
Additionally, we underwrote those recent acquisitions with significantly higher lumber cost in effect at the time as a result of the recent declines in lumber prices, we now expect even higher margins on those land parcels.
We continue to feel very good about the land acquisitions, we've made over the last year.
On the left hand portion of slide 15, we show our community count for the past five quarters and as I mentioned earlier, our community count has been going down each quarter. The end of the third quarter of fiscal 2021, we finally change the tide and now have now achieved a sequential increase in.
The day Count we expect another sequential increase in the fourth quarter that is large enough to grow our community count back to roughly the same level, we had at the beginning of this fiscal year.
On the right hand portion of the slide we show the lot count at the end of the same five quarters for each quarter shown our lot count has increased sequentially.
Year over year, our lot count increased by over 5000 lots or by 20%.
We have been steadily increasing our lot position keep in mind, there's a lag between when we control the lots and when we can open a community the communities that we put under control. This quarter will be opened for sale in 2022 and beyond this is worth repeating our ability to increase our lot supply clearly.
Indicates the progress we've made towards growing community count in future periods.
Virtually all of the land and communities necessary to achieve expected further growth in profit during fiscal 2022 are already under contract.
Today, our land acquisition teams are primarily focused on obtaining control of land and communities for home deliveries in fiscal 2023 and beyond.
Under the assumption of a more historically normal housing demand market going forward, we are controlling new lots and planning for further revenue growth in future years.
Turning now to slide 16.
During the third quarter of fiscal 2021, our land and land development spend was $178 million, a 9% increase over the same quarter a year ago for the trailing 12 months, our land spend increased 36% to $761 million compared with five.
$558 million during the same period last year.
This further demonstrates that we're investing the money needed to grow our community count.
Turning to slide 17.
Even with that <unk>.
Kris and land spend and paying off $111 million of 2022 notes early we ended the third quarter with $308 million of liquidity well above the high end of our liquidity targets. We continue to have excess liquidity and our land teams are busy contracting additional.
Land parcels across the country today.
Turning to slide 18, compared to our peers you see that we still have one of the highest percentages 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're pleased to control, 66% of our land through options, which is up from 61% in the same quarter one year ago.
Looking at our consolidated inventories in the aggregate, including in the $98 million of inventory not owned we have an inventory book value of $4.0 billion net of $158 million of impairments.
Turning now to slide 19.
Impaired to our peers you see that we continue to have the second highest inventory turnover rate for the trailing 12 month period, our inventory turns were 20% higher than the next highest peer below us high inventory turns are a key component of our overall strategy.
Turning now to slide 20.
As we promised now that we've achieved a sustainable level of higher profitability. We are now focused on repairing our balance sheet on this slide we show our debt maturity ladder at the end of the third quarter on July 31, 2021, we paid off in full one year early 111.
<unk> million dollars of our 10% senior secured notes due July 2022 at par Adil.
Additionally on August 2nd 2021, we paid off in full three years early $70 million of our 10, 5% secured notes due July 2024 at the call price of 102 and five eights.
We believe that we should be able to refinance our currently undrawn revolving credit facility ahead of its maturity in the first quarter of fiscal 2023.
This facility is at the very top of our capital structure. After that we don't have any debt coming due until the first quarter of fiscal 2026.
Given our $447 million deferred tax asset, we will not have to pay federal income taxes on approximately $9.0 billion of future pre tax earnings.
This tax benefit will generate significant cash flow in the years to come and we will accelerate our progress and significantly improving our balance sheet.
As we continued to post strong results, we believe we should be able to refinance our debt structure at lower rates and better 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 21, we show that our total backlog, including domestic and unconsolidated joint ventures at the end of the third quarter increased 23% to 4072 homes. You can also see that the dollar value of this backlog increased 44% to $100.0
<unk>.
The strength of this backlog, including a solid expected gross margin sets us up nicely for strong results over the remainder of this fiscal year and into fiscal 2022.
Our financial guidance for both the fourth 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 is related solely to stock price movements from the $143.0
Stock price at the end of our fiscal 2021 third quarter.
However, our guidance for the quarter and for the year include Phantom stock impacts, we already absorbed in the second and third quarters.
$4 that our stock price increases or decreases there is approximately $1 million increase or decrease respectively of incremental Phantom stock expense.
On slide 22, we provide guidance for the fourth quarter of fiscal 2021.
We expect to report total revenues for the fourth quarter of fiscal 2021 to be between $1710 million.
We also expect gross margins to be in the range of 21, and a half to 22, 5% up substantially compared to the 22% in last year's fourth quarter <unk>.
SG&A as a percent of total revenue is expected to be between eight five and nine 5% compared with nine 6% last year.
Excluding land related charges and gains or losses on extinguishment of debt, we expect adjusted EBITDA to be between 101 hundred $15 million. The high end of our guidance. This represents a 32% increase compared to the same quarter last year.
Finally, we expect our adjusted pre tax profit for the fourth quarter of fiscal 2021 to grow to between $135 million compared.
Compared to a $45 million profit in the same period last year.
Turning now to slide 23.
We are increasing our full year guidance, we expect to report total revenues.
Two eight and $87.0 billion up from 234 billion last year. We also expect gross margins to be in the range of 21% to 22% compared to 18, 4% last year and SG&A as a percentage of total revenues to be between <unk>.
I never have and 10, 5% compared with 10, 3% in the prior year. This includes the $18.0 million of incremental Phantom expense that from the second and third quarters.
Excluding land related charges and gains and losses on extinguishment of debt, we expect adjusted EBITDA to be between $705 million up between 47, and 54% compared to last year. Finally, we expect our.
Justin pre tax profit for fiscal 2021 to grow to between $365 million up an amazing 243% to 273%.
Compared to last year's earnings. This is an increase from our previous guidance of $150 million to $170 million.
Assuming a 25% tax rate similar to what we saw in the third quarter of fiscal 2021, our trailing 12 month P/e ratio for the closing stock price of $93.83 yesterday was five point too significantly below the average pay.
<unk>.
For the homebuilders of eight seven.
Additionally, we are currently trading at four five times our earnings guidance for this fiscal year.
As we look forward to fiscal 2022, we expect that today's slower contract pace, which is more in line with historical norms combined with our with higher home prices higher gross margins and increases in community count should lead to further growth in both total <unk>.
Revenues and adjusted pre tax profit in fiscal 2022.
Expect to begin in fiscal 'twenty, two with a very strong first quarter compared to the first quarter of last year or really this year fiscal 2021, especially with respect to improvements in our adjusted pre tax profit.
Turning now to slide 24 here, we illustrate the growth we've seen in adjusted EBITDA on a left hand portion of the slide you can see that our fourth quarter.
Estimate for adjusted EBITDA is 23% more than the fourth quarter of 2020 on the right hand portion of the slide we show EBITDA for 2019, 2020, and our expectation for 4041, we achieved a 35% growth in adjusted EBITDA.
In 'twenty, one we now expect to achieve an additional 50% growth in EBITDA. These increases are representative of the progress we've made and materially improving our operating results.
On slide 25.
You can see how our key credit metrics have improved over the past few years.
Total debt to adjusted EBITDA has declined from $10 one times in fiscal 2019 to three nine times projected for fiscal 2021.
Net debt to adjusted EBITDA declined from nine three times in 2019 to three four times projected for fiscal 2021.
Adjusted EBITDA to interest incurred has more than doubled from one time in 2019 to two two times projected for fiscal 2021.
Assuming we hit the midpoint of our physical 2021 guidance for pretax profit.
Our shareholders' equity will grow by $661 million from 2019 fiscal year in level, given our expectations to once again grow profit in fiscal 2022, our book value will continue to very rapidly grow.
Both Moody's and S&P have recently recognized our improved performance with upgrades to our positive outlook and Moody's also upgraded our credit rating by one notch as we achieve our fiscal 2021 guidance and continued to generate improvements in revenues and profit going forward, we expect further <unk>.
<unk> upgrades from both credit agencies.
These improved credit statistics and rating upgrades should help us refinance our debt structure at lower rates and improved terms now.
Now I'll turn it back over to Ara for some brief closing remarks.
Thanks, Larry as you just heard we expect to close fiscal 'twenty, one with a solid fourth quarter, which would make the full year. Our most profitable year. Since 2006, we're pleased that we've been able to raise our full year guidance and more importantly, we expect further growth and profitability.
In fiscal 'twenty two.
Heading into the COVID-19, frenzy that the entire homebuilding industry experienced we clearly did not have enough new communities and our land pipeline to open fast enough to replace the communities. We sold out much more rapidly than we expected. However, as we just illustrated with the.
20% year over year increase in our lot count community count growth is coming and it's coming soon as we discussed our margins are increasing during.
During the fourth quarter of fiscal 'twenty, one we have a large number of homes to deliver as well as a big slug of communities that will be opening for sale. There is always a possibility of further COVID-19 related delays during our fourth quarter, but we believe we factored in reasonable assumptions for the current environment.
Into our guidance I know that I can count on all of our associates to execute our plans for the fourth quarter, which would show that set us up nicely to be in an advantageous position to grow both revenues and adjusted pre tax profit further in fiscal 'twenty two I look forward to sharing our improved results in.
Future periods that concludes our formal remarks, and we'll be happy to open up for Q&A.
Yes.
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 be able to get back into the queue to ask other questions. We will now open the call to questions. If you have a question at this time. Please press Star then one on your Touchtone telephone if 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 Alex Barron from housing Research Center. Your question. Please.
Yeah.
Hey, guys.
Thanks for taking my question and obviously, Barry congratulations on the turnaround and everything that you guys have done to date.
Thank you I wanted to ask about the prospects of refinancing some of your debt, which obviously right now yes.
Yes. It is very low rates for most other builders kind of wondering you know that's something that's already.
In the works and if so are you.
Are you also planning potentially to raise equity as part of some transaction like that.
Alex we continue to explore the potential of refinancing.
Our capital structure, we believe that we could do so.
Today at lower rates than we have now what we're kind of.
Struggling with is as we continue to improve our results.
We think we deserve even lower rates than what we think we could actually do today.
Today.
So we're kind of balancing the timing of when to do it.
With respect to potentially issuing equity as a component of.
Doing some kind of refinancing and debt structure would not rule that out.
And if we could issue a modest amount of equity.
Good.
Significantly lower rate.
And we.
Refinance our entire capital structure I think it's something we would.
Give serious consideration to.
I'll just add that we're obviously forecasting very solid cash flow and as we discussed and Larry discussed are our debt maturity ladder. It gives us a long runway. So we don't have to rush and we can play the market right and look for the right rate for us.
Yes.
Makes sense I mean your <unk>.
Your equity is obviously going in the right direction.
I guess the other question I had was.
Your community count projection seems to imply a pretty big jump in the fourth quarter.
And I'm just kind of curious on a couple of things one is is that going to be more.
Near term or is that going to be more towards the end of the quarter I guess, what I'm trying to figure out is what impact it might have on.
On orders and the other thing related to orders as many other builders, including yourselves I think have been.
Kind of with holding the level of orders or homes that youre willing to release to the market to kind of adjust the backlog and so forth. So you guys feel that you are already past that adjustment period, where you can start taking the Philadelphia breaks a little bit in your comments on that.
Sure well first.
I think we mentioned I think we're back to a more normalized sales pace per community. We've been we've gotten there by balancing metered releases and price increases.
Last year.
In our third quarter, we had just this burst of sales and frankly following what happened in March and April in the middle of the Covid shutdown. We were very hesitant as were many builders to turn off the spigot, but it was an unsustainable number so.
Feel like we're in a good position right now we are still metering some sales.
Want to match, our ability to start homes sell homes and deliver homes. So we are still metering in many communities across the country, but we feel that's healthy and we're in a pretty solid position.
Okay, and then the timing of the communities do you feel it's more backend weighted or more.
I mean, we're halfway through the quarter so.
We're not giving specific guidance, but we are comfortable we will get that really have a month and a half left to go.
We feel like.
We're comfortable that we'll meet them either.
Keep in mind, it is very difficult to be precise because if you sell a couple too many in one community that drops that community count once it falls below 10, if there is a two week delay in opening a new community.
Can throw it into the next quarter. So it's always very tricky too.
Yeah.
So Alex I'll try to give you a little clarity if I were sitting in your shoes.
And we're not giving you specific guidance on this point I'd waited a little bit to the second half of the quarter and the first half.
Got it.
If I could ask one more obviously supply chain issues have been a big deal in the last few months.
Just curious as to whether you guys think.
Today, where you sit today on supply chain.
Problems in shortage and so forth is it better the same or worse than three months ago.
I would say is.
And generally it's a different problem with a different product in a different market every week.
It's like the classic whack a mole problem.
Different problem raises its head and we jump on it that's been a major focus of our company.
So I'd say, it's still kind of with US we've tried to incorporate that into our guidance and projections.
Our cycle time is still running higher as we mentioned earlier, we expect at some point as all of the builders catch up on their starts and as sales for everyone start to return to normal levels that some of the shortages in the labor shortages as well as material shortages.
<unk> will calm down and returned to normal and that will be able to get back to regular cycle times.
Okay I'll get back in the queue. Thank you.
Thank you.
Thank you once again, ladies and gentlemen, if you have a question at this time. Please press Star then one on your Touchtone telephone.
And our next question comes from the line of Vincent fully for Barclays. Your question. Please good.
Morning, guys.
Larry when when we're talking about a refinancing of the capital structure here and you are sort of waiting on borrowing costs come down.
Should we think about a refinancing in the context of going from a secured to unsecured or is your priority right now and a refinancing just.
Interest savings and then as a follow on can you give us a sense of how longer term.
You think about <unk>.
A balance between secured debt and unsecured debt.
Or are you planning on sort of a more plain vanilla capital structure over the longer term.
Thank you your last question first and we absolutely want to have a more plain vanilla capital structure I mean, it's been an interesting last decade.
But we'd love to get back to doing plain vanilla deals rather than interesting intriguing and exciting deals.
And our focus I think our primary focus is on lowering the rate.
But we believe that our improved performance does justify.
Being able to do a refinance on an unsecured basis.
So we balance it and im not ruling out.
Something that is still secured but.
Not too distant future.
Expect the totally unsecured and if we can't get unsecured today, we may wait until we can so.
It's just a balance of how much lower rates can we get.
And different alternative structures.
Yeah.
And then as a follow up I guess one of the biggest questions. We get asked is.
Why why the wait here and when I look at your slides and where leverage is gone.
And two years six turns lower leverage 2021 is going to be the best year in the company's history next year could be even better.
But a year from now who knows what the housing cycle is going to look like where inflation is going to be what the economy is going to look like.
So why not do something sooner rather than later.
And take advantage of it.
I think we would do something sooner rather than less.
Later, if we felt.
That we were getting a rate of <unk>.
Similar to <unk>.
Peers that are similarly positioned to us.
So it's not something we're rolling out.
At all were.
We're interested in refinancing that.
Materially lower rates than what we have.
Today.
And as Aaron mentioned, we don't have a gun pointed at or ahead. The has to do it right. This second.
But I understand the risks that you're pointing out that if we wait the high yield market.
Mike run away from Us. So we certainly are very conscious of the trade offs.
That are out there in that regard.
We believe as we continue to post very strong results, including this third quarter and now with a fourth quarter projection of the full year is going up.
That.
The debt market should be giving us additional credit and as we see that additional credit come in the form of being able to do a deal.
At more attractive rates, we're not rolling that out at all.
Well do so.
So it's just a matter of getting rates comparable to what we think similar situated peers have today.
I'll also add that our call premiums will drop substantially in the coming months. So that's certainly something that we look at as well.
Great. Thanks very much.
Thank you. Our next question comes from the line of Alan Ratner from Zelman and Associates. Your question. Please.
Hey, guys. Good morning, Thanks for taking my question.
So just curious are moving away from the balance sheet a little bit. Just curious are you guys involved at all in the build for rent space. Several of your peers have announced either ventures in that that area or are actively selling homes to single family rental operators. I'm curious if you are partaking and more broadly what impact you're seeing from <unk>.
Rent in your in your overall markets either from competition on land labor materials demand et cetera.
We have one transaction that we're finalizing now of a couple of hundred homes.
And that will be our first it's not our primary focus.
We feel like our capital is well served right now and our primary business and we're trying to stay focused on replenishing.
I'm not saying, we're ruling it out and we're certainly taking a putting our foot in the water.
But we're not ready to dive in full force just yet.
I would just add one more thing Alan is certainly over the last year.
Man from traditional sources have been so strong.
That's where our focus is has been we've had.
And the industry has had trouble getting homes started as fast as we've got demand.
For rent market is a nice balance longer term and something that I think if we could actually find a relationship on a longer term basis.
Is something that we find intriguing.
Got it I appreciate your comments there.
As you can on the pricing you know really strong increase in your average order price this quarter.
Sure how much of that 27% with like for like versus mixed driven but just curious when you kind of are seeing a balance now with absorptions pulling back to what you consider to be more normal levels would you expect to take the foot off the gas a little bit on pushing price or is that something where you still feel like there is an opportunity to drive price higher.
<unk> given how strong demand is today.
I would say we're back to more normalized pricing reviews.
There was a point in the last six months we would.
Need to raise prices every week or two.
Even every sale or two.
Because lumber costs were going up and that was really a cost concern I'd say right now we're back to a normal environment. So I don't think I would expect the kind of price increases that we've witnessed over the last year.
On the flip side or are you starting to see any incentivizing going on in your markets from other builders that you I know, it's very early up from that standpoint, but a few have mentioned that's a possibility as you get into the third and fourth quarters, which always happens. This time of the year. It didn't happen last year, but just curious if you're starting to see any of that.
We're seeing very little thus far but we are not primarily a spec builder were more than the majority is built to order. So we're not as influenced by people doing end of the year spec discounts.
I'm sure it will return at some point to some normalcy in terms of concessions.
And you would think that might hurt margins on the other hand, our primary building materials lumber has been dropping and will likely drop quite a bit more.
So we feel pretty comfortable about margins given those two factors.
Got it alright, thanks, a lot appreciate it.
<unk>.
Thank you. Our next question is a follow up from the line of Alex Barron from housing Research Center. Your question. Please.
Yes. Thanks.
So one of the things that.
That we've been we've been.
I wanted to ask is.
Is this issue about the Phantom stock and is this accounting doesn't go on for many many quarters or is it just kind of constrained through this year and then it kind of once it's frozen into place that's it.
The.
That works is as the.
After this fiscal year the performance will be set but it's paid over the subsequent.
Three years, so it will trail off 60% of it is paid in January so a lot more than half of the variability goes away.
And this coming January and then a year later, another I think it's 22% and then 20% the following year.
Okay got it.
The other question I had was on your margins, obviously you guys did.
Had a good increase in the last few quarters, especially this quarter.
A few other builders have expressed.
Confidence in the direction of margins I think you guys did too.
I think you mentioned that you expect the margins to improve.
By second quarter relative to lumber costs, but.
<unk>.
As some other builders have seen even larger margin increases do you feel like there's more potential here.
Is there something that would.
The number of expense from allowing margins to improve like just any thoughts around margins that you can answer yes, I think we're optimistic about the outlook for further margin growth.
Part of it is driven by the lumber costs of course that will be offset with some of the other materials that are in shortages and sometimes you have to pay a premium for that but as we pointed out.
The price of our contract was higher than the average price of our deliveries per home.
So we feel good about what the margins in our backlog look like compared to what we just delivered having said that as you can appreciate and I think as everyone. Appreciates. It is a very difficult market to project there are supply chain issues popping up all over the place and.
Unfortunately, sometimes you have to deal with them by paying a high price. So we're not going to be too accurate or to specific margin guidance, but we're feeling very comfortable right now that we will see some growth coming up.
Okay great.
I think that's it for me for now thank you.
Okay.
Thank you. Our next question comes from the line of Brian from Emerson Your question. Please.
Hey, guys.
Great quarter, great execution.
Thanks for taking my question.
First question. It was kind of on ESG initiatives, you might be working on and the timing that you might have.
Kind of go into that and then.
A clarification when.
When you look at your multiples Youre based on.
We are you can fully tax multiples I believe I think you're more like three times cash EPS for this year and next is that correct.
Well two questions one on.
Yes.
Our focus on cash multiples, but we do after tax EPS and that's the.
The number we referred yes, so after Apple.
After tax EPS with the multiple you gave it like four ish five ish.
Next year initiatives.
Yes.
On a.
Given your tax shield you reduce it by the tax rate so you're more like kind of like okay, yes, not cash flow from operations, but yes.
And.
I understand where you're going we haven't done that exact count, but directionally, you're correct, yes, our cash flow is far higher than our after tax income because we're not as good as a proxy for what I call cash EPS.
Which is simply just your.
Pre tax plus your tax rate.
I get you at close to a 33% free cash flow what would be free cash flow yield.
And I don't mean to say that that cash flow, because you're obviously growing communities and doing good things to grow the business.
Benefit shareholders. So if you didn't grow you have the free cash flow. If you did you might let free cash flow. So is that I guess, that's the way I look at it.
Yeah.
Thank you you're going to not hear us subject to you, saying that you think will even cheaper than what we said on a after tax basis, we do not believe the market.
On either the equity or the debt side as yet given us credit for our dramatically improved performance.
But I think as we continue to improve we.
We will make believers out of both the debt and the equity market and there is upside.
Yeah.
Two other points.
The Pea is one focus some analysts are focused on price to book.
Our book value, we've obviously increased our projection for this year that will increase our book value at year end, if we perform there and we're giving guidance that we expect to improve on that next year.
It's the law of small numbers to some extent our book value is going to be rising rapidly and we think we will be an opportunity from that perspective by the time, we complete 22, and we've got $2 billion of backlog. So we're well on the way for fiscal 'twenty two.
I think you had a second part to your question, Yes, yes, yes.
Yes.
E S.
G I.
Chase and go one step further on a on a present value basis, it's hard pressed for me to find before this quarter's report, but with your guidance.
A value less than 150 and more reasonably about 200, just based on different discount rates in <unk>.
Pretty moderate assumptions for cash flow beyond the three years that were.
Looking at providing it holds up so I mean, I get more like a 300 dollar P V.
Easily based on just how you transport things in the last five years I was out there for you guys.
Five years ago, I think you had $7.0 billion in debt and Youre looking like youre going to be closer to $1. Two five net by year end October couple months right.
Anyway, the ESG the ESG great job great job.
The easy question.
As people or investors are still concerned about.
ESG these days.
You guys are you guys going to be talking in the future about any of your initiatives and what would that look like especially given your opportunities here something green on the green side, given you're a builder.
Thats.
A well timed question its actually something were very focused on its own.
Our agenda for the full board to discuss then I think you'll be seeing a lot of information about our ESG efforts in this year's proxy.
And soon in the near future as well on our website.
Perfect.
Getting back in the queue for a follow up unless you wanted to take it off the cuff right now.
You can download mark.
Okay.
Follow up.
Given that youre kind of getting clear.
For rental partnerships and I know your assets are best suited as youre utilizing them currently but given the high demand finding someone like a blackrock or a big investor to even backstop, a refi at a market rate, which we know is much lower on your debt.
As for interest.
Mike is to create a possibility for you got to a JV that could.
No.
Refi or even eliminate dead for a multi year partnership that would probably be something larger where they commit capital which wouldn't stretch your balance sheet. It seems like Mannar is interesting thing everyone seems to be moving on to anything I guess you guys have 120.
Community that youre working on but.
Just thinking outside the box a question on financing and partnering.
I think maybe what you're touching on is is.
I mean, what we've been.
Doing historically continued to do and perhaps will grow as land banking to where it takes less and less.
Of our capital, meaning that we can do more with the same capital and grow we've not really explored.
A joint venture that at least that we've thought of any way that would transform our ability to refinance our debt structure at lower rates, but but if there was someone interested in having that discussion with us we'd love to have.
Sounds great guys, thanks, keep executing incredible quarter and thanks for the guidance.
You bet. Thank you.
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.
Thanks very much.
<unk>.
We're pleased with the quarter were amazed at what our team has been able to accomplish all around the country.
Particularly given all the chaos and turmoil that Covid has created.
We're proud of our results, we look forward to giving better results and we'll look forward to entering 'twenty two with the bank. Thank you.
This concludes our conference call for today. Thank you all for participating and have a nice day all participants may now disconnect.
Yeah.
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Yes.
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