Q4 2023 Hovnanian Enterprises Inc Earnings Call

December 5, 2023

Yeah.

Good morning, and thank you for joining us today for her vignette enterprises fiscal 2023 fourth quarter earnings Conference call. An archive the webcast will be available after the completion of the call and run for 12 months. That's conference is being recorded for rebroadcast and all participants are current.

In a listen only mode.

Management will make some opening remarks about the fourth quarter results and then open the line for a question. The company will also be webcasting, a slide presentation, along with the opening comments from management that slides are available on the investor page of the company's website at Www Dot K H O V.

Dot com.

With a nurse who would like to follow along should now log into the website I would like to turn the call over to Jeff O'keefe Vice President Investor Relations. Just please go ahead.

Thank you Michelle and thank you all for participating in this morning's call to review the results for our fourth quarter and year ended October 31, 2023, 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 1095, such statements involve known and unknown.

Risks uncertainties and other factors that may cause actual results performance or achievements of the company to be materially different from any future results 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 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 the date Theyre made are not guarantees of future performance or results 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 uncertainties and other factors are described in detail in.

The sections entitled Risk factors, and management's discussion and analysis, particularly the portion of MD&A entitled Safe Harbor statement in our annual report on Form 10-K for the fiscal year ended October 31, 2022 and.

And subsequent filings with the Securities and Exchange Commission, except as otherwise required by applicable security 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, Brad O'connor, CFO, and Treasurer, and David <unk>, and Vice President Corporate controller, I will now turn the call over to Ara.

Thanks, Jeff.

To review, our full year and fourth quarter results and I'll comment on the current housing environment, Brad O'connor, our CFO will follow me with more details and of course, we'll open it up to Q&A afterwards.

Results from the fourth quarter benefited from strong demand for new homes, which is supported by strong demographic trends are resilient job market and the low supply of existing homes for sale on.

On slide five we show our full year guidance in the first column in our final results for all of fiscal 'twenty, three and the second column beginning.

Beginning at the top our total revenues were $2 76 billion above the high end of our guidance range. Our adjusted gross margin was 22, 7% for the quarter, which is towards the high end of the range. Our SG&A ratio was 11 one.

1%, which is at the very low end of the guidance.

The combination of revenues above the upper end of the guidance margins being near the top of the guidance and SG&A being very close to the bottom of the guidance contributed to a great year.

In addition, we had a great quarter for land sales and JV profits. The combination resulted in EBITDA and pretax income being significantly above the guidance we gave.

Our adjusted EBITDA was $427 million or.

Our adjusted pretax income was $283 million.

Our fully diluted EPS was $26 88 per share well above the high end of our guidance range and finally, our book value came in at $73 per common share also above the high end of our range.

Needless to say were pleased with our performance for the full year you could go back to this time last year when sales and the housing market has stalled due to quick climb in mortgage rates, we couldnt have imagined our performance would be this solid this year.

Any measure fiscal 'twenty three was a good year.

Turning now to slide six overall gross margins revenues and SG&A for the quarter were very similar to last year's results. The big improvement over last year and solid results were heavily influenced by land sales and JV profits that I described on the left hand portion of the slide.

You could see that land sale profits have been a regular part of our business for a long time on the right hand portion of the slide you can see that income from unconsolidated joint ventures has been an important part of our operations and have also been an important part for a long time.

Going forward both of these will continue to materially contribute to our bottom line, but certainly may vary from quarter to quarter. This quarter was a good quarter for both.

On slide seven we show three measures of profitability for our fourth quarter on the upper left hand portion of the slide we show that our adjusted EBITDA for the fourth quarter of 2003 was $181 million or 25% year over year increase.

In the upper right hand portion of the slide you can see that our adjusted pretax income was $144 million. This year, a 30% 38% increase over the prior year. Our strong profit was helped by a $21 million of land sale profits and over two.

<unk> thousand 100 homes delivered in our joint venture in Saudi Arabia, resulting in a $9 million profit.

Even without these two tailwind our adjusted pretax income would still have been up compared to last year by 9%.

And on the bottom of the slide we show that our net income was up 75% year over year to $97 million.

Net income from the quarter benefited from a $10 $9 million state tax valuation allowance reversal and as our strong performance resulted into using more of our existing deferred tax.

State tax credits, we were able to recognize that benefit.

On the other hand, 75% or 75% increase in net income to $97 million for the quarter was after a onetime $22 million loss on the extinguishment of debt related to our early debt redemption and refinancing.

Turning to slide eight on this slide you can see that contracts per community for the fourth quarter increased 66% year over year.

Last year was an easy comparison, the eight three contracts per community in the fourth quarter of 2003 was only slightly below the long term average of $8 eight contracts per community for the fourth quarter of 97 through the most recent quarter.

That doesn't sound exceptional.

Really got to consider what happened with mortgage rates during the fourth quarter.

As you can see on the Blue line on slide nine.

This all took place in an environment, where interest rates rose sharply from six 8% at the end of July to seven 8% at the end of October that's a 100 basis points and three months seven.

Seven 8% level was the highest mortgage rate since November of 2000.

The grey line on this slide shows what happened to interest rates last year, we saw an even steeper increase in mortgage rates last year, which resulted in a precipitous drop in sales. However, once the rates came down from the highs.

<unk> a pickup in sales in the late fall and winter and we had a much stronger than expected spring selling season in 'twenty three.

The encouraging news as it is that in the past few weeks, we've seen mortgage rates back off from the recent highs at the end of October. In addition, the interest rate outlook today is much brighter given better results from inflation data it feels like we could experience the same path.

As last year, and the coming spring selling season.

On slide 10, we give more granularity and show the trend of monthly contracts per community compared to the same month in 'twenty two for each month of the quarter plus the month of November the first month of fiscal 'twenty four.

The slide shows contracts per community, including and excluding build for rent contracts no matter. How you look at it our sales paces improved significantly for each of the four months shown on this slide compared to the previous year the amount of improvement was less than.

October and sales slowed more than we would expect seasonally but sales bounced back a bit in November ending with an increase of 43% compared to last year.

Finally, the sales pace in the first weekend in December has started off very strong.

And its been much better than we would normally expect seasonal seasonally.

The month of November is typically a slower seasonal months in October but this year in November has improved on a seasonally adjusted basis and November only had four Sundays versus five Sundays in October.

Turning to slide 11, we show annual contracts per community.

On the far left side, you can see that our average pace of 44 for the normal period, we've mentioned in the past of 97 through two on.

On the far right side, you can see we ended the year with 47 contracts per community, which is close to our historical normal levels, although a little below.

Turning to slide 12, we show our contracts per community as if the quarter ended on September 32003, compared to our peers that report contracts per community on a September quarter end.

At 10, five contracts per community our sales pace per community is better than all but three of our peers that report community count for this time period.

On slide 13, you can see that our year over year growth in contracts per community for the same period was the second highest among the peers.

These last two slides illustrate that we are not only competitive, but we're getting more than our fair share of the contracts to be had and today's home market.

Through this last weekend weekly traffic in our communities and our website visits have both been continuing at very healthy levels, indicating that future demand for new homes should remain strong.

One of the reasons, we've been able to maintain such a strong sales pace is due to our pivot to start more quick move in homes or cure mines as we call them.

The logic behind this pivot is that <unk> gives our customers more certainty regarding delivery dates and more certainty on what their mortgage rates will be at closing.

<unk> allow us to offer our customers mortgage rate buy downs that would be cost prohibitive on homes with longer delivery dates for.

For the full fiscal year, 62% of our customers that use the mortgage to purchase a home use some form of interest rate buy down incentive.

We're still evaluating whether this <unk> pivot will be more permanent on the long term basis, one of the benefits of a greater supply of <unk> is that we've greatly reduce the complexity of choices for customers and significantly increased efficiencies for our trays and construction and purchasing.

James.

We're certainly becoming more proficient at producing monitoring and selling a greater number of <unk> and our quick pivot is a testament to our team's nimbleness.

If you turn to slide 14, you can see that after a significant shortage of <unk> during the COVID-19 surge in demand we've gone from one five <unk> per community at the end of fiscal 'twenty, one to seven three <unk> at the end of the fourth quarter of 2003 with <unk>.

Reached our goal of about <unk> <unk> per community.

In fiscal 'twenty, three we have seen our <unk> sales increased to about 60% of our sales for the full year versus 40% historically, that's a 50% increase.

At this point, we plan to match our start schedule with our current sales pace in each community and keep the overall level of <unk> relatively steady on a per community basis.

Some investors have fear that homebuilders will overproduce <unk>, that's a field thats been going on for the last year or so, but we simply don't see that in the field. Our focus continues to be to sell these <unk> before they are completed.

On slide 15, we show existing homes for sale and <unk> of all the homebuilders.

The Blue line shows the number of existing homes for sale around the country remains depressed at 1 million homes.

It's less than half of the historical average of $2 1 million homes available for sale.

We added a grade line to this slide and the Gray line represents existing homes, plus started and completed new homes. The measure that the U S census Bureau uses for spec homes or <unk>. The combined total today is one 3 million homes, which is.

1 million homes less than the historical average of $2 3 million homes, frankly, I think the census Bureau estimate of spec homes is high compared to what we see in the marketplace, regardless, even with the addition of specs with their measure.

Inventory available for homebuyers as very very low.

Hopefully this alleviate some concern that there are too many <unk> on the market the lower level of existing homes plus <unk> for sales certainly helps our sales team.

Certainly helps our <unk> strategy.

Consumers have fewer homes to choose from whether they be existing homes or a combination of existing homes and <unk> and as a result.

Homebuyers are turning to more new construction than they have in the past.

Moving to slide 16, due to the strength of demand for our homes, we were able to raise net home prices and 71% of our communities during the third quarter. This year and in the fourth quarter that we just completed as mortgage rates increased rapidly we were still.

Able to raise prices again, and 54% of our communities.

During the fourth quarter, the average price increased 17%, which is 3% of our average revenues per home for the quarter. These increases were generally small incremental week by week increases.

If demand remains strong we expect to be able to continue to increase home prices moving forward.

Keep in mind that these net home price increases I'm, referring to are typically reductions in incentives or concessions.

As a reminder, we do not assume future home price increases in our guidance and we do not assume future home price increases in underwriting new land acquisitions.

We remain optimistic about our future growth prospects and as Youll see in a moment. We spent one of the highest amounts on land and land development. This quarter than we have in a long time, we're very focused on using our significant cash flow to both reduce debt and to fund substantial growth in community.

Fees and ultimately in deliveries in the near future.

Furthermore, we believe that favorable demographics, a persistently low supply of existing homes and a positive employment trends will support demand over the long term.

I'll now turn it over to Brad O'connor, our Chief Financial Officer and Treasurer.

Thank you Eric.

Before I get further along I want to take a moment to talk about the 3176 deliveries of $9 $4 million of profit from our unconsolidated joint venture and the Kingdom of Saudi Arabia. During the fourth quarter, we delivered the vast majority of our backlog from one large project, which led to significant project profit.

<unk> was done in conjunction with the kingdom's Ministry of housing and was structured such that the homes are recognized as deliveries all at once.

That project is basically complete and we are beginning to startup phase on two new communities. Those two new communities along with an additional community not yet started will provide an opportunity for another 1000 homes with several more in the works.

The Saudi government is involved in all three projects in fiscal 'twenty four we don't expect this unconsolidated joint venture to contribute significant deliveries our income since the new communities are in startup mode. However, the housing market in Saudi Arabia is rock solid and is not exhibiting the same slowdown that we're seeing in the U S. The reservations that are newer.

Community, which opened recently have been robust.

Now beginning with slide 17, you can see that we ended the quarter with a total of 129 communities opened for sale 113 of those communities were wholly owned we opened 22, new wholly owned communities and closed 11 wholly owned communities during the fourth quarter.

Also closed out of four unconsolidated JV communities during the fourth quarter, we expect our community count to grow further in fiscal 'twenty. Four however, we are not going to try to project. The number given given how existing kidneys can sell out ahead of schedule and new community openings can be delayed for a variety of reasons.

But we are focused on obtaining substantial community count growth this year.

Turning to slide 18 during their rapid increase in mortgage rates last summer, we suspended most new land acquisitions for a few quarters as a result, our lot count decline. However.

However, as housing demand recovered, we jumped back into the land market at the end of the third quarter of 2003, we saw a small sequential increase in total lots controlled in the fourth quarter of 2003, we saw an even bigger sequential increase as well as a modest year over year increase in total loss control in the last two quarters. Our lots controlled has increased by three.

1000 homes.

These transactions were underwritten in a challenging market with high interest rates, yet still met our underwriting hurdles.

We ended fiscal 'twenty three with 31726 lots controlled one interesting trend to point out on this slide is that while our total lots controlled grew in the last two quarters.

There was a sequential decrease in the number of own lives each and every quarter over the last year.

Our land teams are actively engaging with land sellers and negotiating for new land parcels that meet our underwriting standards, our corporate land Committee calendar. It continues to be busy which is an indication that our lot counts continue to increase over time, but not always in a straight line.

By using current home prices, including the cost of appropriate mortgage rate buy downs 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 any changes in market conditions. We are finding many opportunities and are very focused on growing our top line for the long term.

On slide 19, we show our percentage of lots controlled by option increased from 46% in the fourth quarter of fiscal 2015% to 77% in the fourth quarter of fiscal 2003. This increase is intentional and has been a focus of our land light high inventory turn land strategy.

We're pleased with the progress we have made.

Turning now to slide 20.

Compared to our peers you see that we continue to have one of the higher percentages of land controlled via option and we are significantly above media.

Next on Slide 21, we show year supply of owned lots for us and our peers with one five years' supply of owned lots, we have the third lowest year supply as the previous III slideshow were very focused on increasing the percentage of lots we control through option, which provides the benefits of higher inventory turns.

Increased return on capital and land risk mitigation.

Turning now to slide 22, compared to our peers. We continue to have the third 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 option and to further improve both inventory turns and our returns on inventory in future periods.

On Slide 23, you can see one way to improve our inventory turns as by shortening our cycle times.

Made good progress, reducing our cycle times in the second half of fiscal 'twenty three as you can see on this slide our cycle times have decreased to an average of 160 days.

Decrease through the year as meaningful progress and brings us closer to our pre pandemic cycle time of about four months or 120 days.

Turning to slide 24.

After $220 million of new land and land development spend in our fourth quarter, which was the third highest quarterly land spend since 2010, when we first reported the data and after retiring early $100 million of debt in August we ended the quarter with $564 million of liquidity more than twice as much as the high.

End of our targeted liquidity range. This is the highest level of liquidity, we ever reported since the third quarter of 2009, when we had a much larger revolver. After the quarter ended we use some excess cash for early retirement of $114 million of bonds.

Turning now to slide 25.

The top half of this slide shows our maturity ladder as of July 31, 2023 at the end of our third quarter.

On the bottom of this slide we show our debt maturity ladder at the end of the fourth quarter pro forma for the debt retirement in November that I. Just mentioned, we took a significant step to improving our maturity ladder during the quarter, we refinanced over $600 million of secured debt that was to come due during the first and second quarters of fiscal 2006, the new debt.

<unk> made up of two tranches. The first is $225 million of 8% secured debt that comes due in the fourth quarter of 28, and the second is $430 million of 11% and three quarter percent secured debt that comes due in the fourth quarter of 2009, not only did we extend the maturities on this debt, but we did so with only non.

<unk> a nominal increase in annual interest incurred.

Furthermore, and as important we also extended the maturity on our revolver by two years until the third quarter of fiscal 2006 delayed.

The latest debt reduction and refinancing shows that we remain committed to strengthening our balance sheet.

Given our remaining $303 million of deferred tax assets, we will not have to pay federal income taxes on approximately $1 1 billion.

<unk> pre tax earnings this benefit will continue to significantly enhance our cash flow in years to come and we will accelerate our progress paying down debt and improving our balance sheet, while simultaneously growing our top line.

Our financial guidance for the first quarter of fiscal 'twenty four assumes no adverse changes in current market conditions, including note further deterioration in our supply chain or material increases in mortgage rates inflation or cancellation rates.

Our guidance assumes continued extended construction cycle times, averaging 5% to six months compared to our pre.

Covid cycle time for construction of approximately four months.

Further it excludes any impact to SG&A expenses from our Phantom stock expense related solely to the stock price movement from our $69 48 stock price at the end of the fourth quarter of fiscal 2003.

Slide 26 shows the guidance shows our guidance for the first quarter of fiscal 'twenty. Four we expect total revenues for the first quarter of 2004 to be between $525 million and $625 million. We also expect adjusted gross margin to be in the range of 22% to <unk>.

<unk> 23, 5% and SG&A as a percent of total revenues to be between 12, 5% and 13, 5%.

Our guidance for adjusted EBITDA is a range between $55 million and $70 million and our adjusted pre tax income for the first quarter of fiscal 'twenty four is expected to be between $25 million $40 million.

Turning to slide 27 here, we show the progress we've made to date to reduce debt and our net debt to cap.

Starting in the upper left hand portion of the slide we show the growth in equity over the past few years and in the upper right hand portion you can see the progress we have made in reducing our net debt.

Including the redemptions, we made in fiscal 'twenty, three we reduced our net debt by $844 million since the beginning of fiscal 'twenty.

On the bottom of the slide you can see that net debt to net cap at the end of fiscal 2003 was 54, 9%, which is a significant improvement from where we were at the beginning of fiscal 'twenty. We still have more work to do to achieve our goal of a mid 30% level, but we've made significant progress and are well on our <unk>.

To getting there our balance sheet has improved significantly over the last five years and we expect to continue to make significant progress moving forward.

Turning now to slide 28.

It shows the compounded annual growth rate of our book value per share from the end of 2021 through the fourth quarter of fiscal 2003, our compounded annual growth rate was 238%.

Slide 29 shows our book value growth rate compared to our peers helped by the fact that we started at a low number our growth rate is much higher than our peers. We think it is important to consider how rapidly our book value is increasing.

<unk>, an appropriate price to book ratio compared to our peers. This is part of the reason that we think it is inappropriate to only look at our price to book compared to our peers.

Turning to slide 15, not only has our book value per share have been growing at an extremely strong rate, but on this slide we show that compared to our peers. We had the second highest return on equity at 42, 9% over the last 12 months.

Turning to slide 31, we show compared to our peers that we have one of the highest consolidated EBIT returns on investment at 34, 3%, while our ROE was helped by our leverage our EBIT return on investment a true measure of pure homebuilding performance with our without regard to leverage was the highest among our bids.

Sized peers.

Over the last several years, we have consistently had one of the highest EBIT roy's among our peers eventually investors will recognize our consistent superior returns on capital reduced leverage and significantly improved balance sheet as a result, our stock price multiple should increase.

On slide 32, we show our price to book multiple compared to our peers. We currently trade near the median of our peers given our rapidly growing book value would think it would be appropriate to consider a variety of metrics included including EBIT return on investment enterprise value to EBITDA and our price to earnings multiple when establishing a fair value.

For our stock we believe on all our financial metrics are considered our stock is a compelling value.

Turning to slide 33 here you can see that when we compare our enterprise value to adjusted EBITDA, We had the lowest ratio. Despite our outperformance on a return basis and on slide 34, We show the trailing 12 month price to earnings ratio for Us and our peer group based on our price earnings multiple of three six to eight times.

Yesterday's closing stock price of $98 90.

We are trading at 56% discount to the homebuilding industry average p/e ratio.

We recognize that our stock may trade at a discount to the group because of our our higher leverage however, given our 42, 9% return on equity our industry, leading growth in book value our top quartile EBIT return on investment combined with a rapidly improving balance sheet. We believe our stock continues to be the most undervalued in the.

Entire universe of public homebuilders, we remain focused on further strengthening our balance sheet, including further reduction in our debt levels I will now turn it back to Ara for some brief closing remarks.

Thanks, Brad.

Here, we are reporting our year end results and in many regards it feels an awful lot like it did exactly a year ago. The most recent sales pace is down from where it was earlier in the year, but we are reporting a strong fourth quarter and year end. This.

This year I feel like we're in a better position than we were last year instead of skirting aiming to buildup of supply of <unk> for the spring selling season. Our construction teams have ramped up our starts and we already have a healthy level of <unk> at our communities throughout the country for the spring.

<unk> season. Additionally.

Our mortgage company, along with our sales and marketing teams have various below market rate mortgages that we're currently offering to our buyers. Our gross margins are high enough to absorb costs of these mortgage rate buy downs. This is partially due to the year over year reductions in more in lumber.

Costs.

We're about to enter a seasonally slow time of the year for home sales. There is a lot that we've learned over the last year and our balance sheet is stronger than it was a year ago, we're going to be ready to hit the ground running coming into the spring selling season, rather than playing catch up like we did last year rates seem to be trending down early.

Year than last year, which will be helpful for buyer psychology, we're hopeful that this preparation will lead to some strong results for the upcoming spring selling season.

Turning to slide 35.

I understand that some have been skeptical about our ability to produce superior results. We hope that our continued results create a few more believers that recognize the risk return opportunity.

Fourth quarter pretax profit was almost 40% higher than last year.

Our contracts were up 56% compared to last year and up 43% compared to November of 'twenty three.

We had an 80% increase in year over year book value per share.

We've reduced net debt by $844 million since the beginning of 'twenty.

The high end of our first quarter 'twenty four adjusted pretax guidance result in more than a 100% increase in our from our first quarter 'twenty three results.

And our excess liquidity at the end of the year was one of the highest we have had in more than 14 years and positions us for strong growth and continued balance sheet improvements.

We hope that our continued strong results turned some skeptics into believers that concludes our formal comments and we will be happy to open it up for Q&A.

Thank you the company will now answer questions. So that everyone has an opportunity to ask questions participants will be limited to two questions and a follow up after which you will have to get back into the queue to ask another question to ask a question at this time. Please press star one on your telephone and wait for your name to be.

Announced to withdraw your question. Please press star one again, please standby, while we compile our Q&A roster.

Our first question is going to come from the line of Alan Ratner with Zelman. Your line is open. Please go ahead.

Hey, guys. Good morning, congrats on the great quarter and year and all the progress on the.

Operations and balance sheets they are impressive.

So I think that you went through a lot there in terms of the balance sheet and the cash flow and.

I guess as you think about the go forward and kind of putting aside what the market's going to do.

Clearly the last decade, or so you're you've been trying to balance those two objectives kind of maintaining.

A certain volume pace, while paying down debt, but if I look at your top line of your closings generally held pretty steady over the last decade or so in that four to 5000 closings per year range do you think the company's position now at a point, where you can more aggressively target volume growth.

And market share gains or should we kind of expect over the next several years more of kind of the balance between those two objectives.

That's a good question Alan.

And we have certainly been focused on taking our excess cash flow and reducing leverage and we've accomplished a lot with the last few years of making about $1 billion pre tax has certainly helped us a lot.

Especially since we're not paying cash.

Taxes right now so we feel like we've really made substantial progress in debt reduction we've made substantial progress in equity increases so we're definitely going to get more aggressive.

Topline growth in the coming years significantly more aggressive.

And I think youre going to see that in the results.

We found a formula we don't talk a lot about our actual home strategy, but we think we've got one that's working quite well.

And I think our EBIT to Rois results year after year, beating our peers shows that and now we want to take that same result.

Add to it some top line growth and we think thats, even going to turbocharge the results that we've been producing.

Great.

Are you seeing that.

And then second I guess, just more on kind of the current market conditions.

Hurt a little bit of a conflicting message in terms of what's going on in the pricing side you kind of gave that very helpful chart in terms of the percentage of communities that you are raising prices in the press release, you kind of alluded to it was hard to tell whether youre actually increasing incentives or whether you're more just kind of viewing that as a lever that you could pull.

If rates.

Rates were to remain volatile and go back up again, so how have incentive it's been trending over the last call. It six to eight weeks and what are you doing specifically on the rate by downside in terms of fueling additional sales.

Yes, and I think the way to think about the incentives.

Immunity by community, where we need to make adjustments. So we talk about the price increases that happened in some of the 54% of the communities.

And that's basically net of <unk>.

But there are communities, where we've had to increase incentives or whether that's through mortgage rate buy downs or other forms of concessions in the remarks, we told you that the deliveries for this fiscal year about 62% of those.

<unk> had mortgages use some form of rate buy down.

I know that for the month of October as contracts it was about 70% so.

It will vary with what's going on with rates that doesn't surprise me in October when rates jumped up that we saw more use of rate buy downs.

As rates come back down maybe that will taper off so we have to think and consider all of those things as we do our projections.

Theres also a change in the mix of communities that deliver in the first quarter versus the fourth so all of those things together it can cause the.

The decline in margins that we're expecting for the first quarter compared to the fourth.

That being said, we are selling more selling more <unk> and delivering them in the quarter. So theres still some sales to go debt.

We have to project, what the margins will be as opposed to having it in backlog.

That's really helpful.

Color.

I'll add is we tend to see more.

Incentives on the west coast than the East Coast and the East Coast is certainly an important part of our business.

The other thing is we see a little more incentive in the entry level buyer.

And the entry level product very dependent on qualifying so the mortgage rate buy downs really help.

But those more incentives. We also have a significant part of our business, which is active adult.

There, we used far fewer incentives most of our active adult buyers get a.

No mortgage or a very small mortgage and they're not worried about giving up a 3% mortgage because they'd probably paid up paid off they're all 3% mortgage.

So we're seeing a lot less incentive there compared to the first time and we've got a sizable chunk in the middle.

<unk>.

Move up homes. So overall, we're feeling pretty good about the trend in incentives.

Got it if I could just squeeze in one one follow up then on that margin point and Brad. Thank you for all the moving pieces there I know youre not guiding beyond <unk>, but is it fair to assume you did roughly at 23% gross margin.

Year as a whole that's kind of roughly where your <unk> guidance is it safe to assume that that's kind of where you see the business for the foreseeable future plus or minus absent any significant changes in market conditions or are there any significant mix factors that we should be aware of.

Alan I would say there is no significant mix.

Factors, we are trying to introduce a few more active adults, but it's not meaningful enough.

To make a huge difference.

Frankly, the market has moved around a lot and the rates have moved around a lot. So we're extremely hesitant to provide.

More guidance.

Then, we're providing I think a quarter out.

Is fairly reasonable.

Margins are going to be very dependent on.

What we have to do with incentives what happens with lumber costs in a variety of other factors, but on the whole.

Don't know what we can tell you fourth quarter, our sales were up dramatically compared to last year, and we're giving you our first quarter, which is almost double last year. So you can reach whatever conclusions you want our crystal ball is not so clear to give.

Longer guidance in the quarter.

Understood I appreciate that guys. Thanks a lot.

Thank you.

As a reminder to ask a question. Please press star one on your telephone and wait for your name to be announced.

And im showing no further questions and I'd like to turn the conference back over to Ara Hovnanian for any further remarks.

Great well. Thanks, so much we're pleased with a good quarter, we think we.

We've got some more good news in quarters to come and look forward to sharing those with you. Thank you.

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

Okay.

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Good morning, and thank you for joining us today for her vignette enterprises fiscal 2023 fourth quarter earnings conference call and archived for 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.

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Management will make some opening remarks about the fourth quarter results and then open the line for questions.

Company will also be webcasting, a slide presentation, along with the opening comments from management that slides are available on the investor page of the company's website at Www Dot K H O V. Dotcom, those listeners who would like to follow along should now log into the website.

I would like to turn the call over to Jeff O'keefe, Vice President Investor Relations. Jeff. Please go ahead.

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 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 the date. They are made are not guarantees of future performance or results 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 uncertainties and other factors are described in detail in the sections entitled risk factors and management's discussion and analysis, particularly the portion of MD&A entitled Safe Harbor.

Statements in our annual report on Form 10-K for the fiscal year ended October 31, 2022 and.

<unk> filings with the Securities and Exchange Commission, except as otherwise required by applicable security 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.

Thanks, Jeff.

Going to review, our full year and fourth quarter results and I'll comment on the current housing environment, Brad O'connor, our CFO will follow me with more details and of course, we'll open it up to Q&A afterwards.

Our results from the fourth quarter benefited from strong demand for new homes, which is supported by strong demographic trends are resilient job market and the low supply of existing homes for sale.

On slide five we show our full year guidance in the first column in our final results for all of fiscal 2003 in the second column beginning.

Beginning at the top our total revenues were $2 76 billion above the high end of our guidance range.

Adjusted gross margin was 22, 7% for the quarter, which is towards the high end of the range. Our SG&A ratio was 11, 1%, which is at the very low end of the guidance the.

The combination of revenues above the upper end of the guidance margins being near the top of the guidance and SG&A being very close to the bottom of the guidance contributed to a great year.

In addition, we had a great quarter for land sales and JV profits. The combination resulted in EBITDA and pretax income being significantly above the guidance we gave.

Our adjusted EBITDA was $427 million, our adjusted pre tax income was $283 million.

Our fully diluted EPS was $26 88 per share well above the high end of our guidance range and finally, our book value came in at $73 per common share also above the high end of our range.

Needless to say were pleased with our performance for the full year. If you go back to this time last year when sales and the housing market has stalled due to quick climb in mortgage rates. We couldnt have imagined our performance would be this solid this year by any measure fiscal 'twenty three.

A good year.

On the left hand portion of the slide you can see the land sale profits have been a regular part of our business for a long time.

On the right hand portion of the slide you can see that income from unconsolidated joint ventures has been.

An important part of our operations and have also been an important part for a long time.

Going forward both of these will continue to materially contribute to our bottom line, but certainly may vary from quarter to quarter. This quarter was a good quarter for both.

In the upper right hand portion of the slide you can see that our adjusted pre tax income was $144 million. This year, a 30% 38% increase over the prior year. Our strong profit was helped by a $21 million of land sale profits and over two.

<unk> thousand 100 homes delivered in our joint venture in Saudi Arabia, resulting in a $9 million of profit.

Even without these two tailwind our adjusted pretax income would still have been up compared to last year by 9%.

And on the bottom of the slide we show that our net income was up 75% year over year to $97 million.

Net income from the quarter benefited from a $10 $9 million state tax valuation allowance reversal and as our strong performance.

<unk> into using more of our existing deferred tax state.

State tax credits, we were able to recognize that benefit on.

Turning to slide eight on this slide you can see that contracts per community for the fourth quarter increased 66% year over year.

Last year was an easy comparison, the eight three contracts per community in the fourth quarter of 2003 was only slightly below the long term average of eight eight contracts per community for the fourth quarter of 97 through the most recent quarter.

That doesn't sound exceptional you really got to consider what happened with mortgage rates during the fourth quarter.

As you can see on the Blue line on slide nine.

All took place in an environment, where interest rates rose sharply from six 8% at the end of July to seven 8%.

End of October that's a 100 basis points in three months.

Seven 8% level was the highest mortgage rate since November of 2000.

<unk> a pickup in sales in the late fall and winter and we had a much stronger than expected spring selling season in 'twenty three.

As last year, and the coming spring selling season.

Yes in October and sales slowed more than we would expect seasonally but sales bounced back a bit in November ending with an increase of 43% compared to last year.

Finally, the sales pace in the first weekend in December has started off very strong.

And its been much better than we would normally expect seasonal seasonally.

The month of November is typically a slower seasonal months in October but this year in November has improved on a seasonally adjusted basis.

November only had four Sundays versus five Sundays in October.

Turning to slide 11, we show annual contracts per community.

On the far left side, you can see that our average pace of 44 for the normal period, we'd mentioned in the past of 97 through two on.

On the far right side, you can see we ended the year with 47 contracts per community, which is close to our historical normal levels, although a little below.

Turning to slide 12, we show our contracts per community as if the quarter ended on September 32003, compared to our peers that report contracts per community on a September quarter end.

At 10, five contracts per community our sales pace per community is better than all but three of our peers that report community count for this time period on.

On slide 13, you can see that our year over year growth in contracts per community for the same period was the second highest among the peers.

These last two slides illustrate that we're not only competitive but we're getting more than our fair share of the contracts to be had in today's market.

Through this last weekend weekly traffic in our communities and our website visits have both been continuing at very healthy levels, indicating that future demand for new homes should remain strong.

One of the reasons, we've been able to maintain such a strong sales pace is due to our pivot to start more quick move in homes or <unk> as we call them. The logic behind this pivot is that <unk> gives our customers more certainty regarding delivery dates and more certain.

Anti on what their mortgage rates will be at closing.

<unk> allow us to offer our customers mortgage rate buy downs that would be cost prohibitive on homes with longer delivery dates.

For the full fiscal year, 62% of our customers that use the mortgage to purchase a home use some form of interest rate buy down incentive.

James.

We are certainly becoming more proficient at producing monitoring and selling a greater number of <unk> and our quick pivot is a testament to our team's nimbleness.

Our goal of about <unk> <unk> per community.

In fiscal 'twenty, three we have seen our <unk> sales increased to about 60% of our sales for the full year versus 40% historically, that's a 50% increase.

At this point, we plan to match our start schedule with our current sales pace in each community and keep the overall level of <unk> relatively steady on a per community basis.

On slide 15, we show existing homes for sale and <unk> of all the homebuilders.

The Blue line shows the number of existing homes for sale around the country remains depressed at 1 million homes.

Less than half of the historical average of $2 1 million homes available for sale.

We added a grade line to this slide and the Gray line represents existing homes, plus started and completed new homes. The measure that U S census Bureau uses for spec homes or <unk>. The combined total today is one 3 million homes, which is.

<unk> 1 million homes less than the historical average of $2 3 million homes, frankly, I think the census Bureau estimate of spec homes is high compared to what we see in the marketplace, regardless, even with the addition of specs with their measure.

Inventory available for homebuyers as very very low.

Hopefully this alleviate some concern that there are two men and <unk> on the market the lower level of existing homes plus <unk> for sale certainly helps our sales team.

Certainly helps our <unk> strategy.

Consumers have fewer homes to choose from whether they be existing homes or a combination of existing homes and <unk> and as a result.

Homebuyers are turning to more new construction than they have in the past.

Moving to slide 16, due to the strength of demand for our homes, we were able to raise net home prices and 71% of our communities during the third quarter of this year and in the fourth quarter that we just completed as mortgage rates increased rapidly we were still.

Able to raise prices again, and 54% of our communities.

During the fourth quarter, the average price increased 17%, which is 3% of our average revenues per home for the quarter. These increases were generally small incremental week by week increases.

If demand remains strong we expect to be able to continue to increase home prices moving forward.

Keep in mind that these net home price increases I'm, referring to are typically reductions in incentives or concessions.

As a reminder, we do not assume future home price increases in our guidance and we do not assume future home price increases in underwriting new land acquisitions.

And ultimately in deliveries in the near future.

Furthermore, we believe that favorable demographics, a persistently low supply of existing homes and a positive employment trends will support demand over the long term.

I'll now turn it over to Brad O'connor, our Chief Financial Officer and Treasurer.

Thank you Eric.

Before I get further along I want to take a moment to talk about the 2176 deliveries at $9 $4 million of profit from our unconsolidated joint venture and the Kingdom of Saudi Arabia. During the fourth quarter, we delivered the vast majority of our backlog from one large project, which led to significant project profit.

<unk> was done in conjunction with the kingdom's Ministry of housing and was structured such that the homes are recognized as deliveries all at once.

That project is basically complete and we are beginning to startup phase on two new communities. Those two new communities along with an additional community not yet started who will provide an opportunity for another 1000 homes with several more in the works.

As community, which opened recently have been robust.

We also closed out of four unconsolidated JV communities during the fourth quarter, we expect our community count to grow further in fiscal 'twenty. Four however, we are not going to try to project the number given.

How existing kidneys can sell out ahead of schedule and new community openings can be delayed for a variety of reasons.

But we are focused on obtaining substantial community count growth this year.

Turning to slide 18 during their rapid increase in mortgage rates last summer, we suspended most new land acquisitions for a few quarters as a result, our lot count decline.

However, as housing demand recovered we jump back into the land market at the end of the third quarter of 2003, we saw a small sequential increase in total lots controlled in the fourth quarter of 2003, we saw an even bigger sequential increase as well as a modest year over year increase in total loss control in the last two quarters our loss control has increased by three.

3000 homes.

These transactions were underwritten in a challenging market with high interest rates, yet still met our underwriting hurdles.

We ended fiscal 'twenty three with 31726 lots controlled one interesting trend to point out on this slide is that while our total lots controlled grew in the last two quarters.

There was a sequential decrease in the number of own lives each and every quarter over the last year.

Our land teams are actively engaging with land sellers and negotiating for new land parcels that meet our underwriting standards. Our corporate land Committee calendar continues to be busy which is an indication that our lot counts continuing to increase over time, but not always in a straight line.

We're pleased with the progress we have made.

Turning now to slide 20.

Compared to our peers you see that we continue to have one of the higher percentages of land controlled via option and we are significantly above media.

Next on Slide 21, we show year supply of owned lots for us and our peers with one five years' supply of owned lots, we have the third lowest year supply as the previous III slideshow were very focused on increasing the percentage of lots we controlled through option, which provides the benefits of higher inventory turn.

Increased return on capital and land risk mitigation.

Turning now to slide 22, compared to our peers. We continue to have the third 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 both inventory turn and our returns on inventory in future periods.

On Slide 23, you can see one way to improve our inventory turns as by shortening our cycle times.

Made good progress, reducing our cycle times in the second half of fiscal 'twenty three as you can see on this slide our cycle times have decreased to an average of 160 days the decrease through the year as meaningful progress and brings us closer to our pre pandemic cycle time of about four months or 120 days.

Turning to slide 24.

Turning now to slide 25.

The top half of this slide shows our maturity ladder as of July 31, 2023 at the end of our third quarter.

Made up of two tranches. The first is $225 million of 8% secured debt that comes due in the fourth quarter of 28, and the second is $430 million of 11% and three quarter percent secured debt that comes due in the fourth quarter of 2009, not only did we extend the maturities on this debt, but we did so with only.

A nominal increase in annual interest incurred.

Furthermore, and as important we also extended the maturity on our revolver by two years until the third quarter of fiscal 2006.

The latest debt reduction and refinancing shows that we remain committed to strengthening our balance sheet.

Given our remaining $303 million of deferred tax assets, we will not have to pay federal income taxes on approximately $1 $1 billion of future pre tax earnings. This benefit will continue to significantly enhance our cash flow in years to come and we will accelerate our progress on paying down debt and improving our balance sheet while simultaneously.

<unk> growing our topline.

Our financial guidance for the first quarter of fiscal 'twenty four assumes no adverse changes in current market conditions, including no further deterioration in our supply chain or material increases in mortgage rates inflation or cancellation rates.

Our guidance assumes continued extended construction cycle times, averaging 5% to six months compared to our pre co.

Covid cycle time for construction of approximately four months.

Further it excludes any impact to SG&A expenses from our Phantom stock expense related solely to the stock price movement from our $69 48 stock price at the end of the fourth quarter of fiscal 2003.

23, 5% and SG&A as a percent of total revenues to be between 12, 5% and 13, 5%.

Turning to slide 27, where we show the progress we've made to date to reduce debt and our net debt to cap star.

Starting in the upper left hand portion of the slide we show the growth in equity over the past few years and in the upper right hand portion you can see the progress we've made in reducing our net debt.

Including the redemptions, we made in fiscal 'twenty, three we reduced our net debt by $844 million.

Since the beginning of fiscal 'twenty.

On the bottom of the slide you can see that net debt to net cap at the end of fiscal 'twenty three.

Four 9%, which is a significant improvement from where we were at the beginning of fiscal 'twenty. We still have more work to do to achieve our goal of a mid 30% level, but we've made significant progress and are well on our way.

Q4 2023 Hovnanian Enterprises Inc Earnings Call

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