Q1 2024 Hovnanian Enterprises Inc Earnings Call

February 22, 2024

Yeah.

Good morning, and thank you for joining us today for the Hovnanian enterprises fiscal 'twenty 'twenty four first quarter earnings conference call.

An archive of the webcast will be available after the completion of the call and run for 12 months.

This conference is being recorded for rebroadcast and all participants are currently in a listen only mode.

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

The company will also be webcasting, a slide presentation, along with the opening comments from management.

The slides are available on the investors page of the company's website at Www Dot K H O V Dot com.

Those listeners who would like to follow along should now log onto the website.

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

Thank you. Thank you all for participating in this morning's call to review the results for our first quarter, which ended January 31, 2024, 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 included without limitation statements relating to the company's goals and expectations with respect to its financial results for future financial periods.

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.

Grabbed the 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, 2023, and subsequent filings with the Securities and Exchange Commission.

Except as otherwise required by applicable securities laws, we undertake no obligation to publicly update or revise any forward looking statements.

Whether as a result of new information future events changed circumstances or any other reason.

Joining me on the call today are Ara Hovnanian, Chairman, President and CEO, Brad O'connor, CFO, and Treasurer, and David <unk>, Vice President corporate controller, I'll now turn the call over to Ara.

Thanks, Jeff I'm going to review, our first quarter results and I'll also comment on the current housing environment, Brad O'connor, our Chief Financial Officer will follow with more details and of course, we'll follow up with Q&A afterwards, starting on slide.

First quarter of 'twenty for our Q and life sales were about 63% of our sales versus 40% historically a significant increase.

We will continue to manage our start schedule per community with our current sales pace per community at each community.

Not only do we monitor our <unk>, but we continue to keep.

And I on the supply of <unk> in the market.

With the exception of a few communities from time to time, we do not get the sense that our peers are being overly aggressive or out of the ordinary under <unk> strategies.

While there is no perfect data set on total <unk> in the market slide 16 shows existing homes for sale and cure mice for all homebuilders as measured by the census Bureau.

The Blue line shows the number of existing homes for sale around the country remaining depressed at about 900000 homes.

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

The grey line on this slide represent existing homes, plus started and completed new homes. The measure that the U S census Bureau uses for spec homes or <unk> the <unk>.

And buying total today is $1 2 million homes that about half of the historical average of $2 3 million homes.

While not perfect. This data confirms our observations that inventory available for our homebuyers, regardless of whether it's new or existing homes remains at extremely low levels.

Consumers have fewer existing homes to choose from and as a result homebuyers are turning more to new construction that they have in the past <unk>.

Additionally, the ability to buy down mortgage rates Gibbs builders and advantage over existing rates.

Even if rates move down to 6% later in the year, we believe it's unlikely that it would create a surge of existing homes being lifted and increasing supply.

Moving to slide 17.

Due to the strength of demand for our homes, we were still able to raise net home prices and 37% of our communities during the first quarter of 'twenty four.

As you can see on this slide.

This percentage is lower than it had been for the previous three quarters, but it's unusual to raise prices over the slower winter holiday season.

We have already seen increases and 44% of our communities month to date for February.

Probably we will see even more increases as we get further into the spring selling season based on the early demand we received.

Slightly higher prices and lower lower mortgage rate buy down costs will certainly be helpful to margins. If this continues.

We monitor our contracts on a community by community basis. If we're ahead of our expected sales pace will generally make small incremental week by week increases keep in mind that these net home prices I'm, referring to are often reductions in incentives or concessions.

As a reminder, we do not assume any future home price increases in our guidance and we do not assume future home price increases when we underwrite land transactions.

The fundamentals remained strong with new home industry.

Our operating results and our recent sales pace reflect those results I'll now turn it over to Brad O'connor, our Chief Financial Officer and Treasurer.

Thank you Aaron.

Now beginning with slide 18, you can see that we ended the quarter with a total of 135 open for sale communities 118 of those communities were wholly owned we opened 19, new wholly owned communities and closed 14 wholly owned communities. During the first quarter. We also opened one unconsolidated joint venture communities during the first quarter.

This was the second quarter in a row, we saw a sequential growth in our total community count we expect our total community count to continue to grow further in fiscal 'twenty. Four however, it is difficult to give a projection because existing communities can sell out ahead of schedule and new community openings can be delayed for a variety of reasons.

But make no mistake about it we are extremely focused on attaining substantial community count growth this year and I feel like we are making solid progress.

Turning to slide 19, we ended the first quarter with 33576 control lots, which equates to a six seven year supply of controlled lots are lot count increased both sequentially and year over year.

Continue to be disciplined with respect to our underwriting process. Our land teams are actively engaging with land sellers and negotiating for new land parcels that meet these underwriting standards as a matter of fact, our land and land development spend was $230 million in the first quarter of fiscal 'twenty, four which was the highest quarterly land spend since 2010, when we first Ricky.

<unk> the data.

Our corporate land Committee calendar continues to be busy which is an indication that our lot count should 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 on.

Your writing standards automatically self adjust to any changes in market conditions. We are finding many opportunities and are very focused on growing our top and bottom lines for the long term.

On slide 20, we show.

The percentage of our lots controlled via option increased from 44% in the first quarter of fiscal 2014% to 77% in the first quarter of fiscal 'twenty for this increases intention on has been a focus of our land light high inventory turn land strategy. We are pleased with the progress we have made.

Turning now to slide 'twenty, one 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 median.

On slide 22, we show year supply of owned lots for us and our peers with one five year supply we have one of the lowest year supply of lots at the previous three slide show. We are very focused on increasing the percentage of lots we controlled through options, which provides the benefit of higher inventory turn increased returns on capital and land risk.

Mitigation.

Turning now to slide 23, 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 our inventory turns and our returns on inventory in future periods.

Another way to improve our inventory turns as by shorten Eric our construction cycle times, we made good progress reducing our cycle times in the second half of fiscal 'twenty three from 190 days to 160 days our cycle times in the first quarter of 'twenty four were similar to the fourth quarter of 2003 at around 160 days.

However, it is a significant improvement from the 190 days in the first quarter of 2003, we still have some work ahead of us to get back to pre pandemic cycle times of about four months or 120 days.

Our ROI results will be boosted as our cycle times return to normal which is 25% better than what we're currently experiencing and positive momentum continues.

Turning to slide 24.

Even after $230 million of new land and land development spend which was the highest quarterly land spend since 2010, when we first reported the data and after using $114 million toward the early retirement of debt in our first quarter. We still ended the quarter with $313 million of liquidity above the high end of our targeted lift.

Quiddity range.

Turning now to slide 25.

This slide shows our maturity ladder as of January 31, 2024, we have taken significant steps to improve our maturity ladder over the past several years the latest debt reduction in the first quarter of 2004, and most recent refinancing down in the fourth quarter of 2003 shows that we remain committed to strengthening our balance sheet.

Turning to slide 26.

Here, we show the progress we've made to date.

Grow our equity and reduce our debt starting on the left hand portion of the slide we show the growth in equity over the past few years and on the right hand portion you can see the progress we've made in reducing our debt, including the redemption that we made in fiscal 'twenty three 'twenty four we reduced our debt by $650 million since the beginning of fiscal.

20.

Our net debt to net cap at the end of the first quarter of fiscal 'twenty four was 58%, which is a significant improvement from 146% at the beginning of fiscal 'twenty, but we still have more work to do to achieve our goal of a mid 30% level.

We have made significant progress and are well on our way 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.

Given our remaining $295 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 will accelerate our growth growth plans as well as our ability to pay down.

That.

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

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

Paired 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 $168 97 stock price at the end of the first quarter of fiscal 'twenty four.

Slide 27 shows our guidance for the second quarter of fiscal 'twenty. Four we expect total revenues for the second quarter of 24 to be between $675 million $775 million. We also expect adjusted gross margin to be in the range of 21, 5% to 23% and <unk>.

G&A as a percent of total revenue to be between 11% and 12%.

Our guidance for adjusted EBITDA is a range between $80 million $90 million and our adjusted pretax income for the second quarter of fiscal 'twenty four is expected to be between $45 million and $55 million of note. The second quarter of last year included a land sale profit of approximately $5 million.

Turning to slide 28 here you can see the positive trends from the first quarter of 'twenty for results to our guidance for the second quarter of 24 at.

All of the metrics show a sequential improvement at the midpoint total revenues would be up 22% adjusted gross margin would be up 45 basis points SG&A ratio declined 300 basis points and pre tax income would be up 61%.

Turning to slide 29 on this slide we show that compared to our peers. We have the highest return on equity at 41% over the last 12 months.

Turning to slide 30, we show compared to our peers that we have one of the highest consolidated EBIT returns on investment at 33%.

While our ROE was helped by our leverage our EBIT return on investment a true measure of pure homebuilding operating performance without regard to leverage was the highest among our mid sized peers.

Over the last several years, we have consistently had one of the highest EBIT rois among our peers slide 31 shows that for 2022, we had the fourth highest EBIT ROI and second highest among mid sized peers and for 2021, we had the sixth highest EBIT ROI overall and third highest among mid sized.

Tiers, we have an operating model that we don't speak about specifically, but it is clearly delivering superior results and our relative position as it has been improving over this three year period. Eventually investors will recognize our consistent superior returns on capital reduce the leverage and significantly improved balance sheet as.

A result of our stock price multiples should increase.

On slide 32, we show our price to book multiple compared to our peers given our rapidly growing book value. We think it would be appropriate to consider a variety of metrics, 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 when all our fundamental financial metrics are considered our stock is a compelling value.

Turning to slide 33, 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 596.

At yesterday's closing stock price of $164, we are trading at a 40% 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 higher leverage however, given our 40% return on equity our industry, leading growth in book value our top quartile EBIT return on investment combined with our rapidly improving balance sheet. We believe our stock continues to continues to be the most undervalued.

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.

Encouraged by our sales pace in January and the first few weeks of February there are two main factors that caused us to be optimistic about the spring selling season first.

<unk> trend and mortgage rates second the tightness of existing homes for sale third they're very favorable signs from the employment market.

There are strong demographic trends, including the millennials and finally, the overall growth in the broader economy. These same factors should continue to drive demand for new homes over the longer term.

After reducing debt for several years and refinancing much of our remaining debt last fall. We are in a position where we are now more focused on growing our revenues and achieving higher levels of profitability.

Rest assured that we're more focused on growth in the past, we're still extremely committed to reducing our leverage and are targeting about 30% net debt to cap ratio.

That concludes our formal comments and we will open it up now for Q&A.

Thank you.

The company will now answer questions. So that everyone has the opportunity to ask questions. We ask that you limit to two questions and a follow up and then get back into the queue.

To ask a question. Please press star one on your telephone keypad.

And wait to hear your name announced.

To withdraw your question. Please press star one again.

Please standby, while we compile the Q&A roster.

Our first question comes from the line of Jesse Letterman with Zelman and Associates. Your line is open.

Hey, Thanks for taking my questions.

My first one is just related to the <unk> share of the business could you maybe just remind us what percent of the business now whether on orders or deliveries is <unk>.

R R.

And in <unk>.

The first quarter versus maybe a year ago or pre COVID-19 and what the margin differential is on those <unk> versus the business average.

The <unk> business for the first quarter of 'twenty four was 63% of the deliveries.

I'm sorry of sales and the it's typically in the past if you went back to pre COVID-19 would've been typically 40% ish up or down but around 40%.

We arent really commenting on the on the margin differential.

Overall, the <unk> as we mentioned do get impacted with the rate buy downs that happened up until closing.

Which is why we mentioned we slightly missed our margin percentage.

But we're not providing the breakdown of our margin to be build versus your mines.

Understood.

Do you see that 63% of sales how high could you see that going is that kind of a comfortable range or or would you foresee that rising a little bit more.

Well.

It's probably a comfortable range right now on the West coast, it's higher than that average on the east coast is lower than that average.

We tend to sell more to be bills.

I think at the moment, the 60% to 70% range is probably a fair guesstimate.

Okay.

Helpful. And then just on the pivoting to cycle times.

What exactly are the bottlenecks preventing you from getting that's 40 days back to get you back to the four months.

The 160, where you are now.

I think it's.

Early on.

During the Covid craziness it was more of a challenge of material and labor and today the material shortages really window and it's really more about labor in the housing market has been strong heartbeat.

Construction was strong so there was.

A lot of demand on labor.

Luckily, while new home construction for sale has been strong apartment construction seems to be waning a bit. So I think there'll be a little less pressure on the labor side, and hopefully that will allow us to get back to more normal cycle times.

That's helpful.

If I could squeak in one more somewhat similar just on the land development side I know you're trying to ramp community count.

And could you talk a little bit about the horizontal development timelines and maybe some constraints there.

Cost inflation has that kind of leveled off or is that still accelerating whereas you know on the material side on the vertical construction, it's leveled off anything on the on the horizontal development would be helpful.

Yes.

First of all.

Land development has continued to be a little behind schedule for the whole industry.

The same sort of thing regarding them.

The general demand, but on top of that.

The one particular problem has been transformers for the entire industry.

And that has been delaying community openings for outside developers and for ourselves or internal developers.

Costs have.

Really been a material problem, it's just been.

Timing delays in it.

Very often related to transformers.

I will add I guess on.

The West Coast in California.

A particularly large amount of rain too so thats been a pickup in that.

Right.

Okay.

And do you think you are reliant on.

Third party developers given your optioning, a relatively high share of your loft.

Has had an impact on you know maybe your visibility into the community count.

Ramp here.

And any impact from those developers from the you know the regional banking crisis about a year ago or is that kind of settled itself out well.

I'd love to blame it on our outside developers, but.

We can be Lee as well so.

Theres just been a challenge.

For everyone on land development again, the transformer issue that I mentioned.

Thats part of what makes it difficult to project community count the other thing is.

No.

We have been selling out a little faster so depending on how fast that particular community sells out.

That would.

Be deleted from community count So that's what makes it.

Hard to measure suffice it to say, though that we're quite optimistic that we'll continue increasing.

The community opening pace.

Hopefully even more than we've seen over the last couple of quarters, but for all the reasons I just mentioned, it's always hard to predict accurately.

Understood. Thanks, so much for all the color.

Thank you.

You.

Please standby for around next question.

Our next question comes from the line of Alex Barron with housing Research Center. Your line is open.

Okay.

Yes, Thanks, gentlemen, and good job on the quarter and the year.

Wondering.

I saw that you guys paid down some debt can.

Can you help us with.

To get you guys paid down.

Okay.

The final payment that occurred in November.

It's really part of the transaction that we had announced in the fourth quarter.

And so we'll get you the specific tranche.

Yeah.

Okay.

Remember because we are disciplined.

Sure.

Yeah.

It was the.

10% senior secured one in 33 quarterly notes that were due in November of 2025.

October was a $114 million of book value.

Great Great and so going forward is there a plan to continue we do so.

Or are you switching gears, you know and not doing that going forward you know what.

We've tried to make clear is.

While our primary focus in the past was.

Bringing down debt, we brought it down enough that we feel we can focus on both significant growth and still reducing debt.

Sure.

The medical focus on inventory turn which is driven by our option lots and really focusing on the timing between taking down a lot and construction certainly helps that.

And going forward.

Yes.

The other thing that obviously helps us quite a bit as our NOL, because we're not having to pay taxes, even though we booked the taxes. So we feel confident that we can grow significantly and still continue to reduce debt to reach our target.

Around the mid 30% range.

Yes, just to add to that when we did the refinancing in the fourth quarter, we intentionally left.

If you look at the maturity ladder slide that we provided we intentionally left tranches of relatively small amounts of debt that's coming due in 'twenty six 'twenty seven and 28.

There for us to continue to pay down.

Okay, Yes that was going to be my next question.

Continue to pay down is there a specific order that you'd have to go down.

Well, we would likely look at it.

In order of where we don't have to make.

Significant prepayment penalties, but you have to balance that with whatever the rates are of the individual node. So.

We don't have.

In order that we need to take out the near term maturity that we can do it in whatever order, we want but it has to do with what it would cost us to take out each piece and one.

Okay.

The good news is you know your <unk>.

Leverage is coming down pretty quickly.

At the end of the year, you should be pretty similar to <unk>.

Most of the other builders.

So.

That's very.

Absolutely that's the progress we're making there for sure.

Yes, most definitely.

Now in terms of your margin outlook.

As it pertains to incentives.

I think you guys noted you've seen.

<unk> been in sales so far in January and February. So are you guys more likely to pursue higher sales pace and maintain the incentives. The same or are you guys more likely to you know.

Except the lower sales pace, but try to reduce the incentives.

I would say pace is very important to us, but we look at every community community by community and.

While main trying to maintain the pace of activity, we will tweak pricing or reduce concessions small amounts to continue to improve our margin without shutting off the sales pace.

It's a balancing act, but pace is definitely important to us.

Okay.

If I could ask one last one as far as the Phantom stock.

Expense globe forward, that's basically impacted by the movement in your stock price relative to each previous quarter correct. That's exactly right. So when we count each quarter and we adjust the Phantom stock expense based on the stock price on the last day of the quarter.

And so the guide to as we've said the guidance again for the second quarter assumes that the stock price stays the same as it was on January 31 at the $1 68.

I think it was so if it moves up or down from there we either can get a benefit or additional expense associated with that stock price movement that's right.

And is that.

Indefinite or win win with those.

Pluses and minuses sort of.

The most recent grant that has Phantom stock expense was in December of 'twenty, three so that particular grant will have.

<unk> exposure to the stock price over the next few years.

We did have one of the early ones was 2019 that one is now completed so the exposure to that one ended actually in this first quarter. The final payout was made so it just depends on the grant.

And when that grant that gets paid out.

I'll add that given the stock price has been much healthier recently, it's very likely and possible that will reduce our use of Phantom stock.

In the future and our older ones are expiring.

Yes, I was going to say is there any benefit either.

This method versus giving people.

Yes.

Some other compensation the benefit is.

We foresaw our earnings increasing and didn't think it would be a good idea to delude. Our current shareholders. We felt the benefit more from the.

Lack of dilution than the small expense on a given quarter again, if you go back quarter by quarter I believe the data is in the appendix.

See on an annual basis, it really hasnt amounted to much it's been up and down one quarter was up $5 million, one quarter was down $5 million.

But on any individual quarter, yes, it makes a difference on the quarter.

Okay, Great I'll get back in the queue. Thank you.

Okay.

Thank you.

Ladies and gentlemen, as a reminder to ask the question Lisa.

Press Star one on your telephone.

I'm showing no further questions in the queue.

I would now like to turn the call back over to al for closing remarks.

Thank you very much.

As we said we've been pleased with the results and the.

The market overall, just feels like it's continuing to strengthen so we're looking forward to a very good 24 and look forward to reporting more good news next quarter.

Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.

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Good morning, and thank you for joining us today for the Hovnanian Enterprises fiscal 2024 first quarter earnings Conference call.

An archive of the webcast will be available after the completion of the call and will run for 12 months.

This conference is being recorded for rebroadcast and all participants are currently in a listen only mode.

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

The company will also be webcasting and flat presentation, along with the opening comments from management.

The slides are available on the Investor page of the company's website at Www Dot K Hlv dotcom.

Those listeners who would like to follow along should now log onto the website.

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

Thank you to Andreas Thank you all for participating in this morning's call to review the results for our first quarter, which ended January 31, 2024, 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.

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.

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 <unk>.

Entitled Safe Harbor statement in our annual report on Form 10-K for the fiscal year ended October 31, 2023, and subsequent filings with the Securities and Exchange Commission.

Sept as otherwise required by applicable securities laws, we undertake no obligation to publicly update or revise any forward looking statements.

Whether as a result of new information future events changed circumstances or any other reason.

Joining me on the call today are Ara Hovnanian, Chairman, President and CEO, Brad O'connor, CFO, and Treasurer, and David Mike Johnson, Vice President Corporate controller, I will now turn the call over to Ara.

Thanks, Jeff I'm going to review, our first quarter results and I'll also comment on the current housing environment, Brad O'connor, Our Chief Financial Officer will follow me with more details and of course, we will follow up with Q&A afterwards, starting on slide five we show how our results compared to last year.

First quarter, starting in the upper left hand quadrant of this slide you can see that our total revenues increased 15% to $594 million.

In the upper right hand corner of this slide our gross margin held steady year over year at 21, 8%.

In the bottom left hand portion of the slide you can see that our EBITDA increased 30% to $65 million in this year's first quarter. If you adjust the impact from the incremental Phantom stock expense EBITDA would have increased 45% to 72.

Million.

Finally in the bottom right hand portion of the slide pretax profit increased 80% to $33 million.

And if you ignore the impact of the incremental Phantom stock expense pretax profit would have increased 122% to $40 million.

By all of these measures we're off to a strong start for fiscal 'twenty four.

On slide six we show our first quarter guidance in the first column our actual results in the second column and because of our guidance, specifically excluded positive or negative impact from the incremental Phantom stock expense, we added a third column that shows.

Our results adjusted for the $7 5 million.

Incremental Phantom stock expense for the quarter.

The impacts of fluctuated positive or negative on a quarter over quarter basis for the past several years, but with all the ups and downs in the quarter. It hasn't had much of a significant impact on an annual basis, but it can have a little more impact.

On an individual quarter, obviously, a little difficult to predict.

Beginning at the top our total revenues were $594 million.

Which was toward the upper end of the guidance range. Our adjusted gross margin was 21, 8% for the quarter, which was slightly lower than the range. We gave was partly due to fluctuating mortgage rate buy down costs. The final bite out of cost of hard to estimate until rates are locked just before.

<unk>.

Additionally, we had more <unk> that are sold and closed during the second quarter than we did historically.

Having said that we do not expect any margin compression for the second quarter generally our newer sales are taking less buyout costs for example for February contracts.

Sessions, including buy downs, where more than 100 basis points lower than they were for the full first quarter of 'twenty four will show you more about trends.

Trends in a moment.

Our SG&A ratio was 14, 5%. This was above the range. We gave however, before the $7 $5 million of incremental Phantom stock expense. It would've been 13, 2%, which is right in the middle of the range we gave.

Adjusted EBITDA was $63 million and was within the range, we gave but again before the $775 million from Incrementals Phantom stock expense.

Above the high end of the range at $71 million.

Finally, our adjusted pretax income was $31 million, which was also within our guidance range. However, without the $7 $5 million from the incremental Phantom stock expense. We are at the very high end of the range at $39 million.

Needless to say, we are pleased that our total revenues and profitability.

Was within or above the guidance that we gave.

Turning to slide seven on this slide you can see the contracts per community for the first quarter increased 48% year over year.

That was an easy comparison, the nine six contracts per community in the first quarter is 12% higher than the average of eight six contracts per community for the first quarter between 97% note too we use that time, often because it was a period of neither bust nor boom.

The $9 six was also about the equivalent of the first quarter of 'twenty, which was the most recent period before the effect of Covid.

Turning to slide eight we show interest rate trends.

Great line on this slide shows what happened to interest rates last year between July 22, and February of 'twenty three.

During this period when rates declined we saw a pickup in sales pace.

A year later the Blue line shows what happened with these rates this year during the same time.

The monthly rate pattern is very similar to the prior year.

Even though rates are incrementally higher this year, we have once again seen an increase in sales as people adjusted their expectations regarding rates.

To say the slow decline of rates has been helpful.

Okay.

Even though interest rates are higher than last year. During the same period, our sales are far greater than last year. During this period on slide nine we give more granularity and show the trend of monthly contracts per community compared.

Third to the same month, a year ago for each month of the quarter as well as the last month of the fourth quarter.

This slide shows contracts per community, including and excluding build to rent contract no matter. How you look at it our contract pace has improved significantly for each of the four months shown on this slide.

As far as February goes were three weekends deep into the months and while last February sales pace was excellent at 4.1 contracts per community. This year. Its February sales pace. So far has been even better.

Turning to slide 10, we show annual contracts per community on the far left hand side, you can see our average sales pace of 44 four that normal period.

And between 97 and note too on the far right hand side, you can see that for the past 12 months. The annual contracts per community was 43.9, it's not as good as the post COVID-19 sales boom pace of 2020, one, but it could puts our current sales pace at our normal.

Annualized sales pace.

Turning to slide 11, we show our contracts per community as if our quarter ended on December $31 23, compared to our peers that report contracts per community on a December quarter end.

At eight four contracts per community our sales pace per community is the fourth highest among the public homebuilders that reported for this time period.

On slide 12, you can see our year over year growth in contracts per community for that same period and it was the third highest among peers.

The last two slides illustrate that we are not only competitive but we continue to get more than our fair share of contracts.

Turning to slide 13.

On the left hand portion of the slide we show total website visits during the month of January for 'twenty, three and 'twenty four.

As you can see total website visits are up more than 100000 year over year for January.

Total website visits were also up 43% month over month from December.

On the right hand portion of this slide you can see Internet leads those are customers that gave us their E mail address or phone number the internet leads per community were up 13% year over year and they were up 31% month over month.

No seasonality as to be expected, but it certainly is great to see the best improvement over last year.

Of note both total website visits and Internet leads per community for January were also above the levels back in January of 19 in January of 'twenty, which was before the COVID-19 surge in demand.

Anecdotally, we're seeing similar strong levels of activity.

In February as well through this last weekend, we traffic in our communities has also been continuing at healthy levels. These trends indicate that future demand for new homes should remain strong.

One of the reasons, we've been able to maintain a strong sales pace is related to our pivot to start more quick move in homes or <unk> as we call them.

Having more <unk> allows us to offer customers mortgage rate buy downs that would be cost prohibitive on to be built homes, which have longer delivery days.

If you turn to slide 14 on this slide you can see that customers that used to buy down declined from 87% in the month of November to 82% in December and down further to 72% in the month of January we averaged 79% for the quarter.

<unk>.

Based on sales so far in February the expectation is that it will continue to decline in February.

For the foreseeable future elevated <unk> remain part of our operating philosophy.

One of the benefits of a large <unk> suppliers that are greatly reduces complexity for our customers and increases efficiencies for our trade partners. It also makes it easier for our internal construction and purchasing teams were certainly becoming much more proficient at producing monitoring and selling it.

Greater number of <unk>.

If we turn to slide 15, which shows <unk> by community you can see that after a significant shortage of <unk> during the COVID-19 surge in demand we've gone from a trough of one four <unk> per community at the end of the second quarter of 'twenty, one to $6 three <unk>.

At the end of the first quarter of 'twenty four.

In the first quarter of 'twenty for our Q and life sales were about 63% of our sales versus 40% historically a significant increase.

We will continue to manage our start schedule per community with our current sales pace per community at each community.

Not only do we monitor our <unk>, but we continue to keep.

On the supply of <unk> in the market with.

With the exception of a few communities from time to time, we do not get the sense that our peers are being overly aggressive or out of the ordinary under <unk> strategies.

Well there is no perfect data set on total <unk> in the market slide 16 shows existing homes for sale and <unk> for all homebuilders as measured by the census Bureau.

The Blue line shows the number of existing homes for sale around the country remaining depressed at about 900000 homes.

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

Gray line on this slide 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 $1 2 million homes that about half of the historical average of $2 three.

Million homes.

While not perfect. This data confirms our observations that inventory available for our homebuyers, regardless of whether it's new or existing homes remains at extremely low levels.

Consumers have fewer existing homes to choose from and as a result, homebuyers are turning more to new construction than they have in the past. Additionally, the ability to buy down mortgage rates gives builders and advantage over existing rates.

Even if rates move down to 6% later in the year, we believe it's unlikely that it would create a surge of existing homes being listed and increasing supply.

Moving to slide 17, due to the strength of demand for our homes, we were still able to raise net palm prices and 37% of our communities during the first quarter of 'twenty four.

As you can see on this slide.

This percentage is lower than it had been for the previous three quarters, but it's unusual to raise prices over the slower winter holiday season.

We have already seen increases and 44% of our communities month to date for February.

Probably we will see even more increases as we get further into the spring selling season based on the early demand that we're seeing.

Slightly higher prices and lower lower mortgage rate buy down costs will certainly be helpful to margins. If this continues.

We monitor our contracts on a community by community basis. If we are ahead of our expected sales pace will generally make small incremental week by week increases keep in mind that these net home prices I'm, referring to are often reductions in incentives or concessions.

As a reminder, we do not assume any future home price increases in our guidance and we do not assume future home price increases when we underwrite new land transactions.

The fundamentals remained strong with new home industry.

Our operating results and our recent sales pace reflect those results I'll now turn it over to Brad O'connor, our Chief Financial Officer and Treasurer.

Thank you Sarah.

Now beginning with slide 18, you can see that we ended the quarter with a total of 135 open for sale communities 118 of those communities were wholly owned.

Opened 19, new wholly owned communities and closed 14 wholly owned communities. During the first quarter. We also opened one unconsolidated joint venture communities. During the first quarter. This was the second quarter in a row, we saw a sequential growth in our total community count we expect our total community count to continue to grow further in fiscal 'twenty. Four however, it is difficult.

To give a projection because existing communities can sell out ahead of schedule and new community openings can be delayed for a variety of reasons.

But make no mistake about it we are extremely focused on attaining substantial community count growth this year and I feel like we are making solid progress.

Turning to slide 19, we ended the first quarter with 33576 control lots, which equates to a six seven year supply of controlled lots are lot count increase both sequentially and year over year, we continue to be disciplined with respect to our underwriting process. Our land teams are actively engaging with land sellers in.

<unk> for new land parcels that meet these underwriting standards as a matter of fact, our land and land development spend was $230 million in the first quarter of fiscal 2004, which was the highest quarterly land spend since 2010, when we first reported the data.

Our corporate land Committee calendar continues to be busy which is an indication that our lot count should 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 costs and current sales pace to underwrite to a 20 plus percent internal rate of return on.

Your writing standards automatically self adjust to any changes in market conditions. We are finding many opportunities and are very focused on growing our top and bottom lines for the long term.

On slide 20, we show the percentage of our lots controlled via option increased from 44% in the first quarter of fiscal 2014% to 77% in the first quarter of fiscal 'twenty for this increases intention on has been a focus of our land light high inventory turn land strategy. We are pleased with the progress we.

My.

Turning now to slide 'twenty, one 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 median.

On slide 22, we show year supply of owned lots for us and our peers with one five year supply we have one of the lowest year supply of owned lots at the previous III slideshow were very focused on increasing the percentage of lots we controlled through options, which provides the benefit of higher inventory turn increased returns on capital and land.

Risk mitigation.

Turning now to slide 23, 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 our inventory turns and our returns on inventory in future period.

Yes.

Another way to improve our inventory turns as by shorten Eric our construction cycle times.

Made good progress, reducing our cycle times in the second half of fiscal 'twenty three from 190 days to 160 days our cycle times in the first quarter of 2004, where similar to the fourth quarter of 2003 at around 160 days power.

However, it is a significant improvement from the 190 days in the first quarter of 2003, we still have some work ahead of us to get back to pre pandemic cycle times of about four months or 120 days.

Our our ROI results will be boosted as our cycle times return to normal which is 25% better than what we're currently experiencing and positive momentum continues.

Turning to slide 24.

Even after $230 million of new land and land development spend which was the highest quarterly land spend since 2010, when we first reported the data and after using $114 million towards the early retirement of debt in our first quarter. We still ended the quarter with $313 million of liquidity above the high end of our targeted lift.

Quiddity range.

Turning now to slide 25.

Turning to slide 26 <unk>.

Here, we show the progress we've made to date to grow our equity and reduce our debt starting on the left hand portion of the slide we show that growth in equity over the past few years and on the right hand portion you can see the progress we've made in reducing our debt, including the redemption that we made in fiscal 'twenty three and 'twenty four.

Reduced our debt by $650 million since the beginning of fiscal 'twenty.

Given our remaining $295 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'll accelerate our gross growth plans as well as our ability to pay down.

On debt.

Financial guidance for the second quarter of fiscal 'twenty four assumes no adverse changes in current market conditions, including no further deterioration in our supply chain or a 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 $168 97 stock price at the end of the first quarter of fiscal 'twenty four.

Slide 27 shows our guidance for the second quarter of fiscal 'twenty. Four we expect total revenues for the second quarter of 24 to be between $675 million and $775 million. We also expect adjusted gross margin to be in the range of 21, 5% to 23% and <unk>.

G&A as a percent of total revenue to be between 11% and 12%.

Of note the second quarter of last year included a land sale profit of approximately $5 million.

Turning to slide 28 here you can see the positive trends from the first quarter of 'twenty for results to our guidance for the second quarter of 'twenty four.

All of the metrics show a sequential improvement at the midpoint total revenues would be up 22%.

Adjusted gross margin would be up 45 basis points SG&A ratio declined 300 basis points and pre tax income would be up 61%.

Turning to slide 29 on this slide we show that compared to our peers. We have the highest return on equity at 41% over the last 12 months.

Turning to slide 30, we show compared to our peers that we have one of the highest consolidated EBIT returns on investment at 33%.

While our ROE was helped by our leverage our EBIT return on investment a true measure of pure homebuilding operating performance without regard to leverage was the highest among our mid sized peers.

Over the last several years, we have consistently had one of the highest EBIT rose among our peers slide 31 shows that for 2022, we had the fourth highest EBIT ROI.

Second highest among mid sized peers. After 2021, we had the sixth highest EBIT ROI overall and third highest among mid sized tiers. We have an operating model that we don't speak about specifically, but it is clearly delivering superior results and our relative position has been has been improving over this three year period event.

<unk> investors will recognize our consistent superior returns on capital reduce the leverage and significantly improved balance sheet as a result of our stock price multiples should increase.

We believe when all our fundamental 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 596 time.

At yesterday's closing stock price of $164, we are trading at a 40% discount to the homebuilding industry average p/e ratio.

Thanks, Brad.

<unk> by our sales pace in January and the first few weeks of February there are two main factors that caused us to be optimistic about the spring selling season first there is a downward trend in mortgage rates second the type of existing homes for sale.

Third there are very favorable signs from the employment market fourth there are strong demographic trends, including the millennials and finally, the overall growth in the broader economy. These same factors should continue to drive demand for new homes over the longer term.

Rest assured that while we're more focused on growth in the past, we're still extremely committed to reducing our leverage and are targeting about 30% net debt to cap ratio.

That concludes our formal comments and we will open it up now for Q&A.

Thank you.

The company will now answer questions. So that everyone has the opportunity to ask questions. We ask that you limit to two questions and a follow up and then get back into the queue.

To ask a question. Please press star one on your telephone keypad.

And then wait to hear your name announced.

To withdraw your question. Please press star one again.

Please standby, while we compile the Q&A roster.

Our first question comes from the line of Jesse Letterman with Zelman and Associates. Your line is open.

Hey, Thanks for taking my questions.

My first one is just related to the <unk> share of the business could you maybe just remind us.

What percentage of the business now whether on orders or deliveries is <unk>.

R R.

And.

Your first quarter versus maybe a year ago or pre COVID-19 and what the margin differential is on those <unk> versus the business average thanks.

The <unk> business for the first quarter of 'twenty four was 63% of the deliveries.

Im sorry of sales in the.

It's typically in the past if you went back to pre Covid would have been typically 40% ish copper down at around 40%.

And.

We arent really commenting on the on the margin differential.

Overall, the <unk> that we mentioned do get impacted with the rate buy downs that happened up until closing.

Thats why we mentioned, we slightly missed our margin percentage.

But we're not providing the breakdown of our margin to be build versus <unk>.

Understood do you see that 63% of sales.

Hi could you see that going is that kind of a comfortable range or would you foresee that rising a little bit more.

Well it is.

Probably a comfortable range right now on the West coast, it's higher than that average on the east coast is lower than that average.

We tend to sell more to be built.

But I think at the moment.

60% to 70% range is probably a fair guesstimate.

Okay. That's helpful. And then just on the pivoting to cycle times, what exactly are the bottlenecks preventing you from getting those 40 days back to get you back to the four months from the $1 60, where you are now.

I think it's.

Early on during the Covid craziness.

It's more of a challenge of material and labor and today the material shortages of really.

Window, and it's really more about labor.

Housing market has been strong apartment construction was strong so there was.

A lot of demand on labor.

That's helpful.

If I could squeak in one more somewhat similar just on the land development side I know you are trying to ramp community count.

And could you talk a little bit about the horizontal development timelines and maybe some constraints there.

Cost inflation has that kind of leveled off or is that still accelerating whereas on the material side on the vertical construction, it's leveled off anything on on the horizontal development would be helpful.

Yes.

First of all.

Land development has continued to be a little behind schedule for the whole industry.

The same sort of thing regarding them.

The general demand, but on top of that.

The one particular problem has been transformers for the entire industry.

And that has been delaying community openings for outside developers and for ourselves for internal developers.

Costs have not.

Really been a material problem, it's just been.

Timing delays in it.

Very often related to transformers.

I will add I guess on the West coast in California.

A particularly large amount of rain too so thats been a bit of.

In effect.

Okay.

And do you think you are reliant on.

Third party developers given your optioning.

Relatively high share of your loft.

<unk> had an impact on maybe your visibility into the community count.

Ramp here.

And any impact from those developers from the regional banking crisis about a year ago or is that kind of settled itself.

Well I'd love to blame it on our outside developers, but.

We can be Lee as well so.

There's just been a challenge for everyone on land development again, the transformer issue that I've mentioned.

That part of what makes it difficult to project community count the other thing is.

No.

We have been selling out a little faster so depending on how fast that particular community to sell down.

That would.

We deleted from community count So that's what makes it.

Hard to measure suffice it to say, though that we're quite optimistic that we'll continue increasing.

Yes.

Community opening pace.

Hopefully even more than we've seen over the last couple of quarters, but for all the reasons I just mentioned, it's always hard to predict accurately.

Understood. Thanks, so much for all the color.

Thank you.

Please standby for our next question.

Our next question comes from the line of Alex Barron with housing Research Center. Your line is open.

Okay.

Yes, Thanks, gentlemen, and good job on the quarter and the year.

Wondering.

I saw that you guys paid down some debt.

Can you help us with.

To get you guys paid down.

Okay.

The final payment that occurred in November.

It was really part of the transaction that we announced in the fourth quarter.

And so we will get you the specific tranche.

Okay.

Remember because we disagree.

Sure.

Yes.

It was the.

Uh huh.

10% senior secured 133 quarterly notes that were due November of 2025.

October was a $114 million of book value.

Great Great and so going forward is there a plan to continue we do so.

Or are you switching gears and not doing that going forward.

We've tried to make clear is.

While our primary focus in the past was.

Bringing down debt, we brought it down enough that we feel we can focus on both significant growth and still reducing debt or.

The medical focus on inventory turn which is driven by our option lots and really focusing on the timing between taking down a lot and construction certainly helps that.

And going forward.

Yes.

Around the mid 30% range.

Yes, just to add to that when we did the refinancing in the fourth quarter, we intentionally left.

Look at the maturity ladder slide that we provided we intentionally left tranches of relatively small amounts of debt thats coming due in 'twenty six 'twenty seven and 28.

That's there for us to continue to pay down.

Okay, Yes that will still be my next question.

Can you pay down is there a specific quarter like you'd have to go down.

Well, we would likely look at it.

In order of where we don't have to make.

Significant prepayment penalties, but you have to balance that with whatever the rates are of the individual node. So.

We don't have.

In order that we need to take out the near term maturity that we can do it in whatever order, we want but it has to do with what it would cost us to take out each piece Edwin.

Okay.

Well the good news is your leverage is coming down pretty quickly.

At the end of the year should be pretty similar to most other builders.

So.

That's very helpful.

Can you talk about the progress, we're making there for sure.

Yes, most definitely.

Now in terms of your margin outlook.

As it pertains to incentives.

I think you guys noted you've seen.

<unk> been in sales so far in January and February.

So are you guys more likely to pursue higher sales pace and maintain the incentives the same or are you guys more likely to.

I accept the lower sales pace, but try to reduce the incentives.

I would say pace is very important to us, but we look at every community community by community and while main trying to maintain the pace in that community, we will tweak pricing or reduce concessions small amounts to continue to improve our margin without.

Shutting off the sales pace.

It's a balancing act, but pace is definitely important to us.

Yes.

Okay, and if I could ask one last one as far as the Phantom stock.

Expense globe forward, that's basically impacted by the movement in your stock price relative to each previous quarter correct.

Right. So when we count each quarter and we adjust the Phantom stock expense based on the stock price on the last day of the quarter.

And so the guided to as we've said the guidance again for the second quarter assumes that the stock price stays the same as it was on January 31 at the $1 68.

I think it was so if it moves up or down from there we either can get a benefit or additional expense associated with that stock price movement that's right.

And is that.

Indefinite.

And with those.

Pluses and minuses sort of.

And then I'll go away.

Recent grant that has Phantom stock expense was in December of 2003, So that particular grant will have.

Exposure to the stock price over the next few years.

We did have one of the early ones was 2019 that one is now completed so the exposure to that one ended actually in this first quarter. The final payout was made so it just depends on the grant.

And when that grant gets paid out.

Ill add that given the stock price has been much healthier recently, it's very likely and possible that will reduce our use of Phantom stock and.

In the future and our older ones are expiring.

Yes, I was going to say is there any benefit either.

This method versus giving people.

Yes.

Some other compensation the benefit is.

We force our earnings increasing and didn't think it would be a good idea to delude. Our current shareholders. We felt the benefit more from the <unk>.

Lack of dilution than the small expense on a given quarter again, if you go back quarter by quarter I believe the data is in the appendix.

See on an annual basis, it really hasnt amounted to much it's been up and down one quarter was up $5 million, one quarter down $5 million.

But on any individual quarter, yes, it makes a difference on the quarter.

Okay, Great I'll get back in the queue. Thank you.

Okay.

Thank you.

Ladies and gentlemen, as a reminder to ask a question. Please press star one on your telephone.

I'm showing no further questions in the queue.

I'd now like to turn the call back over to al for closing remarks.

Great. Thank you very much.

As we said we've been pleased with the results.

The market overall, just feels like it's continuing to strengthen so we're looking forward to a very good 24 and look forward to reporting more good news next quarter. Thank.

Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.

Q1 2024 Hovnanian Enterprises Inc Earnings Call

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