Q4 2022 Hovnanian Enterprises Inc Earnings Call
Speaker 1: enjoyed watching!
Speaker 2: I would like to turn the call over to Jeff O'Keefe, Vice President, Investor Relations. Jeff, please go ahead. Jeff O'Keefe, Vice President, Investor Relations
Speaker 3: Thank you, the Chief, and thank you all for participating in this morning's call to review the results for our fourth quarter in the year, which ended October 31st, 2022. 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 provisions of the Private Securities Litigation Reform Act of 1995.
Speaker 4: Such statements involve known and unknown risks, uncertainties, and other factors that may cause actual results, performance, or achievements of the company to be materially different from any future results, performance, or achievements expressed or implied by the TDibbio.
Speaker 5: 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.
Speaker 6: Although we believe that our plans, intentions, and expectations reflected and are suggested by such forward-looking statements are reasonable, we can give no assurance that such plans, intentions, or expectations will be achieved. By their nature, forward-looking statements speak only as of the date they are made, are not guarantees of future performance or results.
If you exclude the last cycle the previous three cycles shown on this chart in the seventies eighties and nineties were painful but those downturns were brief and less severe in comparison to the great recession that we recently saw.
Most recently.
We were only above the long term starts average for one year in 'twenty, one and it looks like we'll certainly be below the average when the full year of 2002 as disclosed.
Another indicator that the duration. This time around should be shorter is that since the great housing recession recovery began the industry produced significantly fewer homes than the prior cycle and did not overbuild anywhere near the levels of the last housing.
Boom.
Slide 16 gives another data point that makes us comfortable that this down cycle will be shorter in duration than the prior down cycle.
On this slide we show that the number of existing homes for sale currently stands at $1 1 million homes, which is about half of the historical $2 1 million homes normally for sale on average yes. It has risen.
A bit in the last six months and that makes a lot of headlines, but its risen from some of the lowest levels in recent history.
Even after this small increase we're still at the lowest level of existing homes for sale and for decades.
To put this in perspective, there was three times the supply of existing homes for sale at the beginning of the great housing recession compared to now.
Three point home $3 4 million existing homes for sale, then $1 1 million now.
Given the low supply of both new and existing homes for sale. It's hard to believe that the current downturn will be as long or as painful as the great housing recession.
Another positive sign that the duration of this downturn maybe brief is our website visits continue to be strong.
We show our website activity on slide 17.
We believe this is a leading indicator of future demand.
Here, we show daily website visits per community with the Blue line near the bottom of the graph representing 2019 pushed Covid website visits the dark Green line in 'twenty and the Gray is 'twenty in the Gray line is 2021.
Both of these years were elevated during the time of extremely high demand for new homes during the Covid surge.
On Slide 18, you can see the 2022 daily website visits per community. It's shown in the bright yellow line.
For the past several months there have certainly been fewer website visits than the very high levels that we experienced in 2020, one, but there are definitely better than the more normalized 2019 pre COVID-19 levels.
This continued this continuation of high levels of website activity is encouraging.
Hi website traffic has not yet translated into normalized sales. However, the fact that so many people are taking their time to come to our website and spending time on it indicates that there is interest and quite possibly pent up home demand building. This.
<unk> is yet another reason that we believe the duration of the downturn should be sure.
We are hopeful that as mortgage rates and the economy stabilize more people will become comfortable enough to buy a home and we will see the healthy level of website visits convert to increased levels of contracts.
We have no illusion that the current state of new home sales or the housing market overall is not good it is.
Indeed bad however.
For the reasons that we've just cited we think that pain might be deep, but will last a relatively short period of time.
I will now talk about several of the steps, we're taking and other areas to address the current market.
The good news is that we have a very seasoned management team that is experienced necessary to successfully navigate through this downturn.
And this rising and uncertain mortgage rate environment consumers are seeking homes that they can close quickly.
As a result of that shift in consumer demand.
Temporarily pivoting to more quick move in homes or <unk> homes in order to provide our customers with more certainty on what their mortgage payment will be at closing with.
We consider a home to be a Q in my home the day, we begin construction.
If you turn to slide 19, you can see that our <unk> per community are consciously on the rise we have gone from three two <unk> per community in the third quarter to five six at the end of the fourth quarter.
This level of <unk> is higher than our historical average, but similar to levels, we had right before the COVID-19 surge in demand.
As a result, the recent in the recent weeks <unk> sales account for 60% of our weekly sales versus about 40% historically.
In this rising rate environment, we are temporarily targeting approximately seven <unk> per community with a few just beginning construction in a few mid way through construction and we're certainly focused on selling those that are near the end of construction.
Once that level is achieved we will match our start schedules with our 2023 spring selling season pays.
This approach will ensure that we do not start an excessive level of unsold homes. Furthermore, we will focus on selling these homes before completion.
Second as we try to find the market in terms of home price and sales pace. We are closely monitoring our competitors use of incentives concessions and base price reductions on a community by community state by state basis.
Given the strong margins in our fourth quarter backlog, we decided not to be too aggressive with concessions on new contracts to minimize any potential disruptions to our fourth quarter deliveries.
Now that the fourth quarter is behind US we've increased our use of incentives and concessions.
In some cases, we even need to offer incentives to customers in backlog to get them to the closing table.
We've been offering our customers incentive choices, such as paying for permanent or temporary below mortgage market mortgage rates paying for closing costs offering discounts on options or upgrades or describe discounting home prices on select <unk>.
Homes, there is not a one size that fits all consumers. So we typically offer the consumer a choice on what incentives meet their needs the best.
For <unk> homes that are nearing completion, we can lock in a below market fixed interest rate.
Below market fixed interest rate is prohibitively expensive for to be built homes in general higher levels of incentives or reserve for a more challenging communities in a more challenging home sites.
The last thing that.
Homebuilder typically wants to do is lower their base prices across the board. This would only upset customers both in backlog and existing homebuyers. However.
However, when homebuilders open new communities Theyre generally starting with lower market, driven based prices rather than using large incentives and concessions.
November incentives under our new contracts had increased three from the 3% level that we averaged in the first half of fiscal 'twenty due to roughly nine 5%, which is higher than our historical average incentive rate.
Even after increasing our use of incentives the margin on most of the new homes that we're selling today remain in the low 20% range slightly above our historical average gross margin of 20%.
Let me repeat that.
Even after increasing our use of incentive or average margin on new homes that we're selling today remains in the low 20% range.
One reason our margins on new contracts remain this high is because we're selling more homes in the northeast and southeast where sales and margins are stronger and fewer homes in the west where sales and margins are weaker.
Another reason that margins continue to be high despite our increased use of higher incentives and concessions as lower lumber costs. In addition.
Given the housing market decline, we believe our trade partners and suppliers need to share the burden of declining home prices.
We have begun discussions with them to reduce their costs, which should soften the impact of margin declines in the future due to increased incentives.
Some other steps we've taken to deal with the slower market.
In general and the uncertainty includes postponing further debt reductions until the housing market stabilizes.
<unk> underwriting all of our existing land and lot option contracts to make sure that they still make sense, even if the market deteriorates a little further from the current market conditions.
Temporarily suspending most of our new land acquisitions.
Slowing land development spend on land that we already own on a community by community basis, where we don't want improvements to get too far ahead of our needs and reviewing our staffing needs on a division by division basis.
This is obviously an evolving situation and we will continue to reassert reassess the steps that we're taking to make sure. They are appropriate in light of changing market conditions I will now turn it over to Larry <unk>, Our Chief Financial Officer.
Thanks, Sarah I'm going to start with slide 20, you can see that we ended the year with 133 communities opened for sale if not for the supply chain and production delays in opening new communities that number would have been even higher we've been trying to grow our community count to our pre COVID-19 levels.
For several years after enduring long entitlement processes and slowed land development schedules. We project that we will finally be catching up during fiscal 2023.
Additionally, given the recent slower sales pace per community. The expected lifespan of our communities is lengthening while there are many factors that affect community count. We believe we will be able to return to our pre COVID-19 community count of approximately 160 by the end of fiscal 'twenty three.
About 70% of our expected community count growth will take place in our northeast and southeast segments, and 30% will come from the west as it turns out given the recent better sales and margin trends in our northeast and southeast segments that has a fortuitous ratio.
Turning now to slide 21.
On this slide we show that our lot count seems to have peaked in the second quarter of fiscal.
Fiscal 'twenty two at 33501 lots during each of the subsequent quarters, our lot count decreased and we ended fiscal 2022 with 31518 lots, reflecting our risk adverse land strategy, it's important to highlight that our owned land.
<unk> declined by 10, 5% sequentially to just over 9000 lots I also want to point out that 62% of our total lots are located in our stronger northeast and southeast segments versus 38% in the west.
To make certain that land, we control by option continues to meet our underwriting hurdle rates. We've been re underwriting all previously approved land acquisitions with the assumption of further market deterioration.
During this year's fourth quarter, we walked away from about 2100 lots and $3 $9 million of lot option deposits and pre development cost. The 'twenty 100 lots, we walked away from in the fourth quarter were either during the due diligence period or we're at the point that our option agreement required us to take down land.
By using current home prices current construction cost and current sales pace to underwrite to a 20 plus percent internal rate of return our underwriting standards automatically self adjust to changes in market conditions.
In addition, we are building in an extra buffer to our underwriting returns to absorb some potential future home price deterioration.
I also want to comment on the impairment that we took in one community in southern California are particularly weak market.
We took an $8 million impairment on a single community that was originally bought before the great housing recession.
You had unmask ball that community and built through the first phase, which consisted primarily of finished lots with reasonable success. However, as we moved on to the later phases that the community, which was raw land. The market began the weekend and to make matters worse land development costs began to rise the combination of <unk>.
These negative factors resulted in this one formally mothballed community triggering an impairment.
I want to now give a brief update on our efforts and the build for rent space.
<unk> sales will be helpful in picking up a little of the slack in our traditional build for sale business with.
Currently have a few hundred homes under contract or closed with build for rent companies. Although this is not a significant portion of our business. All sales are helpful. In today's market environment.
We have been deliberately increasing our use of land options to increase our inventory turnover and our return on investment as well as to reduce risks associated with owned land on slide 22, we show our percentage of lots controlled by option increased from 46% in the fourth quarter.
<unk> fiscal 2015% to 66% in the fourth quarter of fiscal 'twenty, one and 71% by the fourth quarter of fiscal 'twenty. Two this has been a specific part of our strategy for many years and we continue to make progress a low percentage of owned lots strongly mitigates land risk and gives us.
<unk> ability.
And a shifting market to renegotiate land price and terms.
On slide 23, we show the vintage of our land position, 72% of our total 31518 lots controlled were put under contract before October 31, 2021, and 39% were controlled prior to October 31.
2020.
Majority of those lots were underwritten at lower home prices.
Then today's housing market, which provides us with the flexibility to increase concessions and incentives, while still delivering strong margins and returns.
Okay.
Yes.
We are looking very carefully.
At the lot, we put that were put under option during fiscal 'twenty two.
Many of those lots have not survived our rigorous re underwriting process with today's price and pace assumptions and then resulted in renegotiating option turned with sellers or walking away from that land parcel.
Turning to slide 24, after $205 million of land spend in the fourth quarter and paying off $100 million of senior notes during the second quarter. We ended the year with $457 million of liquidity well above the high end of our targeted liquidity range.
Our land spend in the fourth quarter increased from the prior year as we discussed earlier, our community count had been shrinking and some of the properties we option before the Covid surge to counter are shrinking community count. We're finally entitled ready for development are lot take downs during the fourth quarter.
And we move forward on most importantly, these communities continued to underwrite at yields above our 20% IRR hurdle rate even at today's lower sales pace and today's current net home prices.
Needless to say, we are only moving forward to land acquisitions, if they still meet our return hurdles in today's slower sales pace and declining net home price environment.
Fight, the slightly higher land and land development spend compared to last year's fourth quarter, we still have fewer owned lots and fewer open for sale communities than at the end of fiscal 2021.
Most of our new community openings are older vintage lots would still generate strong returns.
Turning now to slide 25.
Third to our peers you see that we still have the third highest percentage of land controlled via option. We continue to use land options whenever possible to achieve higher inventory turns enhance our returns on capital and to reduce risk.
Turning to slide 26, we show year supply of owned lots for us and our peers with one six year supply. We are tied for the second lowest year supply of owned lots, having a shorter supply of owned lots is a good way to reduce risk in a declining housing market.
On Slide 27, you can see that we also have five seven years supply of controlled land, both owned and optioned lots.
Focus on controlling land buy option and choosing not to be overly long owned land at this point in the cycle mitigates our risk from declining land values.
Turning now to slide 28.
<unk> to our peers, we continue to have the second highest inventory turnover rate.
High inventory turns are a key component of our overall strategy. We believe we have opportunities to continue to increase our use of land options and to further improve inventory turns and our returns on inventory in future years.
Turning now to slide 29 on this slide we show our debt maturity ladder at the end of the fourth quarter. We retired early $281 million of senior notes over the past two years early in the fourth quarter, we amended our revolving credit facility to extend the maturity date to June $32000.
24.
After that we don't have any debt maturing until the first quarter of fiscal 2026.
Due to the due to current market conditions, we have temporarily shifted our focus to preserving liquidity and paused our near term debt reduction plans, we remain committed to strengthening our balance sheet and intend to revisit our debt retirement initiatives once market conditions improve.
Given our $344 million deferred tax asset, we will not have to pay federal income taxes on approximately $1 $3 billion of future pre tax earnings. This will benefit this benefit will significantly enhance our cash flows in years to come and we will accelerate our progress of rapidly improve.
Our balance sheet once the market stabilizes.
Our financial guidance for the first quarter of fiscal 'twenty three assumes no adverse changes in current market conditions, including no further deterioration in our supply chain, our material increases in mortgage rates inflation or our cancellation rates our guidance assumes continued.
<unk> construction cycle times, averaging six to seven months compared to our pre COVID-19 cycle times for construction of approximately four months.
Further it excludes any impact to our SG&A expense from Phantom stock expenses related solely to the stock price movement from $40 30, <unk> stock price at the end of the fourth quarter of fiscal 'twenty two.
While we have met or exceeded most of our guidance metrics over many quarters. There is a greater degree of uncertainty in current environment given inflation the potential of an economic recession employment risk utility company delays and mortgage rate increases. Additionally, given the difficult.
Economic backdrop, and the resulting uncertainty in the housing market. The company will not be providing full fiscal year 2023 guidance at this time.
With those caveats in mind on Slide 30, we show our guidance for the first quarter of fiscal 'twenty. Three we expect total revenues for the first quarter to be between 500 $600 million. We also expect adjusted gross margins to be in the range of 21 to 22, 5%.
SG&A as a percent of total revenue is expected to be between 13 and 14% or.
Our guidance for adjusted EBITDA is between 42% and $57 million.
Adjusted pre tax income for the first quarter of fiscal 'twenty, three is expected to be between 5% and $20 million.
Our SG&A ratio is expected to increase over the prior year.
We anticipate opening additional communities as well as a higher than normal increase in wages as a result of inflationary pressures due to slow market conditions. We are also anticipating increasing our advertising spend over the prior year.
Spite lower levels of homebuilding debt our interest expense is expected to increase during fiscal 2020.
<unk> 23 for two reasons.
First <unk>.
Lower sales pace extends the average community lifespan and results in higher total interest cost. These interest costs are expensed in cost of sales interest on a per delivery basis. Therefore, the cost of sales expense per home will be higher in fiscal 'twenty three than physical 'twenty two.
Second our inventory not owned has increased from a year ago, which is a corresponding increase in interest costs.
Lastly in response to competitive pressure from outside lenders and in order to offer lower mortgage rates. So that more of our customers can qualify to purchase one of our homes. We also expect our financial service business will be significantly less profitable during fiscal 2023.
On slide 31, you can see how our credit metrics have significantly improved over the past few years total debt to adjusted EBITDA has declined from nine seven times in fiscal 19 to two seven times in fiscal 'twenty two net debt to adjusted EBITDA has declined from eight.
Nine times in fiscal 19 to two times in fiscal 'twenty to adjusted.
Adjusted EBITDA in the interest incurred coverage has increased significantly from one time and physical 19 to three six times coverage for fiscal 'twenty two.
Turning to slide 32.
Our shareholders' equity has increased from a deficit of $490 million in fiscal $19 million to $383 million at the end of fiscal 'twenty two.
Net debt decreased $588 million from 155 billion at the end of physical 19 to 965 million at the end of fiscal 'twenty two this.
This improvement in our equity position and net debt resulted in a net debt to capital ratio continuing to decline from 146% at year end fiscal 19% to 71, 6% at the end of fiscal 'twenty two over.
Over the long term, we expect to continue improving our balance sheet by reducing debt and growing equity. Our goal is to achieve a mid 30% net debt to capital ratio.
We are happy with progress we've made in improving these credits and balance sheet metrics over the past several years given the current housing environment and near term it will be difficult to achieve similar improvements. However, we remain committed to our long term balance sheet improvement goals.
On slide 33, we show that at 37, 5%, we have the third highest consolidated EBIT return on investment compared to our peers. We believe this is the most accurate measure of pure homebuilding performance without regard to leverage.
On slide 34, we.
So the trailing 12 month price to earnings ratio for us and our peer group the entire homebuilding industry is being valued as if there will be another long duration downturn like the great housing recession, we believe that is the scenario very unlikely to occur.
We recognize that our stock should trade at a discount to the group because of our higher leverage however.
However, given our returns on equity and our EBIT return on inventory compare favorably to our peers and given how rapidly we've been improving our balance sheet. We believe our stock is the most undervalued of the entire universe of public homebuilders based on our price earnings multiple of 166 times and yesterday's close.
<unk> stock price of $48.14.
We're trading at a 12% discount to the next lowest peer and a 62% discount to the industry average.
We remain focused on further strengthening our balance sheet standard <unk> Poor's and Moody's Moody's both upgraded our credit ratings during fiscal 'twenty two.
At some point the stock market will give us credit for superior performance as well and now I'll turn it back to Ara for some brief closing remarks.
Thanks, Larry.
Fiscal 'twenty two was a phenomenal year of growth and profits as we discussed the new home sales market shifted dramatically in may of this year and remains challenging although we've been pleasantly surprised by a slight pickup in contracts over the last three weeks. The good news is that.
We've been through worse, and we've taken steps to address the current market environment.
Our initiatives to pay down debt early were well timed and put us in a position with a much more solid financial footing today than at any time since the great housing recession.
We reduced our net debt outstanding as Larry described by about half a billion dollars since the end of fiscal 19, just before this pandemic began.
There is no doubt that these are challenging times, we have an experienced management team in place 22 was a great year of returns for all homebuilders. Nonetheless, we're proud of the fact that we were the third highest among all homebuilders for return EBIT return on.
And the absolute highest among our mid sized peers.
We have a proven record of industry, leading return on investment and we will take the steps necessary to navigate through this current difficult market.
That concludes our formal comments and we'll be happy to turn it over to Q&A.
The.
We 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 up the call to questions to queue up at this time. Please press star one one.
And your telephone again Thats star one one on your telephone to ask a question.
Please standby as we compile the Q&A roster.
Our first question comes from the line of Alan Ratner of Zelman and Associates. Your question. Please.
Hey, guys. Good morning, Thanks, as always for the right information in detail.
My first question I'd love to just kind of dig in a little bit more on the incentives.
The disclosure you gave up to 9% of price in November .
Compare that to your order numbers for November .
November was down a little bit from October and still at pretty low levels. Overall. So at first glance. My my takeaway there is that the higher incentives really have not had much of an impact in terms of finding at that point the price elasticity, but I'm sure there's more to it than that.
So just curious if you could talk a little bit about what you're seeing when you do offer. These incentives is it helping to pull people into the market you feel like you need to maybe you know kind of.
Shift around the types of incentives in order to better find that point to be elasticity and any color you can give around that would be very helpful. Thank you.
Sure Alan.
Address a few points first we report our net contracts.
In.
The ones, you're focusing or are in November .
October was obviously, our highest closing months of deliveries that's when a lot of cancellations came through because consumers were forced to close and many were certainly nervous a lot of those cancellations get processed.
In November you have to process it properly in order to keep customers deposits, if we're entitled to it.
So I'd say overall, we feel like our incentives are making a difference particularly for <unk>.
We mentioned one of the nice incentives you can offer today for.
For homes that are closing soon our fixed mortgage rate buy downs and that is attractive. The other thing to consider obviously is November is a slower seasonal months and we expect December will be even slower.
Alan I think as a piece you wrote that came out yesterday you'd noted.
Surprisingly.
Better sales it might've been on the West coast.
You are speaking of in your report.
Just over the last few weeks, we've kind of felt the same thing and again, mostly focused on our gross sales.
So thats a little encouraging but this is the time as you know well that's a very slow in general so we don't get overly excited overly depressed by sales right now what's going to be critical as what happens starting to begin in the middle of January .
That's really helpful. Additional color there I appreciate it.
Second and maybe this is for Larry or you are.
On the disclosure of the your land vintage it that's very helpful. So we appreciate that.
I guess on the 28% of lots that are that were underwritten or were tied up in 'twenty. Two I would imagine the vast vast majority of those are held under option contracts just given your your land acquisition strategy are you able to talk a little bit about how much capital is tied up in those deals currently and I know.
Assumption is you're probably working to renegotiate the terms on those whether it's price or takedown schedules, but.
Any kind of thought on how we should think about those 28% of the lot count how many of those are likely to be ultimately walked away from or what the timing of those walkaways could deep. Thank you.
What's the average deposit we have on land options.
I know, we have $181 million in deposits higher than they get the average for you I don't have that right at my fingertips.
Yeah, but as he's looking that up.
I don't have anything specifically broke out just under 22. So I can give you the the average deposit. So it gives you a perspective of what we've historically.
Invested on average as a percent of <unk>.
Land value.
But some of those lots are obviously, we're in the early stages just during due diligence. So that we can actually walk away with it without even losing our deposit so not all of those 20 twos or even back.
About at at risk.
Risk, but clearly.
The lots that we controlled.
22 are the riskiest land land deals that we have we're not going to move forward in <unk>.
Even if we do have the rest of the entire deposit to walk away.
Do that and continue to invest.
Money and it develop it and <unk>.
At the market if it doesn't pencil at today's home prices construction costs and sales pace.
But if it doesn't as you mentioned.
Try to renegotiate and most sellers.
Understand that the Mark controller changed some are willing to to alter terms some art.
So we don't know how many of those 22 will ultimately make it to the finish line or not.
Alan.
You did ask a good question about the ownership were actually chatting about that yesterday, the vintage by ownership versus the vintage by option or again is like yours that when we actually calculated what we own is generally of older vintage what we.
The option is newer.
But we're going to follow up certainly by our next call, we'll try to get that broken out because it is an interesting point I will add that.
Fairly decent number of our new options in 'twenty two.
In our northeast or southeast segments, and a lot of those are longer term entitlement land contracts and land options. So while it's controlled in 'twenty two it's very likely on at least several of the ones that we actually approved in the lab.
Six months that actual land purchase will not be for multiple years as we go through some of the difficult entitlement processes.
And John a follow up on the.
The question is 95% is that it's.
The deposits are yes.
The average deposit averaged.
Average spud got anything.
Gotcha, and then before I hang up I guess since you are following up maybe on the split.
What there of owned versus option, if it's possible to follow up maybe just with the gross order trends for October and November given your response to my question earlier or I don't know if you have that at your fingertips or not but I'll hang up and if you do have that and it could supply it that would be great. Thank you.
We don't have it at our fingertips and we typically just report net.
But we'll take that in consideration as we report our next quarter.
Great. Thanks, a lot guys.
Thank you as a reminder to ask a question. Please press star one on your telephone again Thats Star one one on your telephone to ask a question.
Our next question comes from the line of Alex Barron of housing Research Center. Your question. Please.
Yes. Thank you good morning.
I have a few.
Many of you will allow us not I'll get back in the queue, but.
Yes, I wanted to ask first.
We've heard that several builders are talking about.
Getting incoming phone calls from front end trades I'm, assuming you guys are experiencing the same thing my question is.
Are those calls expecting to get paid the same thing and just getting work or are they willing to give significant concessions.
Concessions to you guys. So that you would have an incentive to start building new houses.
Where do things.
Dan any color you can give on that.
First.
You are correct, we like other builders have been receiving inbound calls.
Youre also correct. They are typically on the front end trades.
Most of our trades are not new to this rodeo and have been through housing downturns before.
No they enjoy the price appreciation.
Their price appreciation during the upturn and I believe most are fully expecting.
To be.
To have lower pricing.
On new communities going forward, regardless of whether their inbound or not.
We are definitely working on a national effort to rediscover pricing in light of the.
Environment with all of our subcontractors and suppliers to reduce our pricing and I wouldn't say, thus far with any of our vendors are particularly shock I think it's something that.
All are expecting and they are seeing it with other homebuilders as well.
Got it now.
I guess along those fronts can you talk about how many homes do you guys have.
Under construction and how does that split between specs and.
Build to order I guess, well I guess, the build to order would be close to your backlog but.
I'm just curious on the spec side, how many homes do you guys have and how many of those are completed specs.
Brian I think we have a slide on that.
The completed specs completed specs is 142.
As of October 31.
Total I don't know, Jeff do you have your back.
The total I know you have what's the average per community.
Yes, we give the total slide on that slide it's 680.
October 31.
So Alex to put the finished spec some call them <unk> into perspective.
<unk>, it's a little over one per community across the country on average.
Got it okay that makes sense.
I think I heard you say that on pricing and incentives. It seems like you guys are more willing to or have been up until fiscal year, and we're less willing to upset the backlog and maybe were more willing to do that on new communities coming out of the ground, but now that you're kind of in the law.
In the new fiscal year and other guys are.
Currently trying to get some salespeople year and I'm sure you're seeing more price.
Thats from me.
Are you guys kind of engaging in those similar ways or you're still waiting maybe more of a spring selling season.
And still trying to protect the backlog just trying to I would say in good time.
Not in the phase of.
Protecting backlog in the majority of our communities. There are a few exceptions, where we've got a lot of backlog and we don't want to disrupt it but in general good times Bad times rising prices lowering prices, we're always very aware of what our competitors are doing.
I think the thing to focus on is with the incentives that we are currently offering and again, we have dialed them up since fiscal year end.
Our current sales have margins above 20%.
And that's not as good as what we just delivered.
But certainly better than one might expect at this time in the housing cycle.
One other comment I'd make.
Not really.
Is that we historically had been a build too.
Super builder, a build to order builder rather than.
Having a bunch of quick move in homes or specs, we announced in our last quarter that the demand for homes that were kind of move in ready have increased we didn't have much.
So as we monitor what our competitors are doing.
We're seeing more demand on that.
The homes that are kind of move in ready. So we are continuing to produce more and we think that will also help sales.
As we get more homes.
Can meet that kind of demand.
From a consumer wanting to move quickly so that they can lock in affordable mortgage rates.
Yeah, correct, okay, great. Thanks.
Thanks, I'll get back in the queue appreciate it.
Okay.
Alex if you'd like to ask another question or two I think we've got time.
Sure.
I guess you know.
Since you just mentioned you are mostly built to order what is the typical deposit you guys yet.
From consumers from customers to build a home in other words, how much how much money do they typically have at risk if.
If they cancel.
It's a good question it varies quite a bit by geographic region.
The east coast tends to be higher I think on base price.
Higher divisions have about 10% of purchase price deposit on top of that if they're doing a lot of options and upgrades, we take a higher deposit on those options and upgrades on the west coast, we tend to have lower.
Deposits I think somewhere close to 3%.
Very typical on the west coast, sometimes when its higher than.
3%.
It's a negotiation around 3% so those are kind of it to.
Goalposts.
It's interesting yet.
I think there is a pretty decent correlation between the level of.
Deposits in cancellation rates. So that's why I was kind of.
We agree with it.
Agree.
But at the same time, it seems I guess competitive pressures are shifting.
We're just talking about people moving towards.
Thats building.
To try to get people more.
Payment certainty in that type of thing.
In terms of.
In terms of the seasonality.
Yes.
This past year was anything but normal with demand super strong at the beginning of the year low rates and then the opposite at the end of the year.
What is your I guess your crystal ball or your expectation for this year do you think we're going to see more normal seasonality or do you think it's still going to be largely driven by interest rates that if interest rates start to stabilize or come down you'll see an acceleration on the backend or how do you think things could play out.
But I think if I was to guess that acceleration we'll have.
Excuse me interest rates will have a big effect on the seasonality and if rates jumped considerably in the spring selling season, I think that will dampen the normal rise you would see in the spring selling season.
Rates level off or even go down toward the end of the year when you'd normally see seasonality bring down sales.
Heightening the impact of sales at that time.
So I do agree with I think what you're expecting that rates will impact normal seasonality.
Got it thanks, Darren and thanks, Larry appreciate it I'll get back in the queue.
Yes.
Thank you at this time I'd like to turn the call back over to our chairman and CEO Ara Hovnanian for closing remarks, Sir thanks very much.
We've said before there are great things about our quarter and things were not so happy about particularly regarding new contracts, but we've been down this road before we'd steer through far more difficult situation and we are in the best Financial Foundation that we've had in many many years so.
We look forward to producing good results considering the environment and we look forward to reporting our first quarter in the not too distant future. Thank you.
Okay.
This concludes our conference call for today. Thank you all for participating and have a nice day all.
All parties may now disconnect.
The conference will begin shortly to raise your hand during Q&A you can dial one one.
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