Full Year 2024 Hovnanian Enterprises Inc Earnings Call
Speaker Change: Good morning and thank you for joining us today for Ovnanian Enterprises Fiscal 2024 Fourth Quarter Earnings Conference Call. An archive of the webcast will be available after the completion of the call and run for 12 months.
Speaker Change: This conference is being recorded for rebroadcast and all participants are currently in a listen-only mode.
Speaker Change: Management will make some opening remarks about the 4 quarter results and open the line for questions.
Speaker Change: Those listeners who would like to follow along should now log on to the website. I would like to turn the call over to Jeff O'Keefe, Vice President, Investment Relations. Jeff, please go ahead.
Jeff O'keefe: Thank you, Marvin. And thank you all for participating in this morning's call to review the results for our fourth quarter and year-end.
Jeff O'keefe: All statements on this conference call that are not historical facts should be considered as forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
Jeff O'keefe: Such forward-looking statements include, but are not limited to, statements related to the company's goals and expectations.
Jeff O'keefe: with respect to its financial results for future financial periods. Although we believe that our plans, intentions, and expectations reflected and are suggested by such forward-looking statements are reasonable, we can give no assurance that such plans, intentions, or expectations will be achieved.
Jeff O'keefe: By their nature, forward-looking statements speak only as of the date they are made, are not guarantees of future performance results, and are subject to risks and certainties and assumptions that are difficult to predict or quantify.
Jeff O'keefe: Therefore, actual results could differ materially and adversely from those forward-looking statements as a result of a variety of factors. If such risk uncertainties and other factors are described in detail in the sections entitled
Jeff O'keefe: risk factors and management's discussion analysis, particularly the portion of MV&A entitled Safe Harbor Statement and our annual report on Form 10-K for the fiscal year ended October 31st, 2023 and subsequent filings with the Securities and Exchange Commission.
Jeff O'keefe: 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.
Speaker Change: Joining me today are Ara Hovnanian, Chairman, President and CEO, Brad OConnor, CFO and Treasurer, and David Michterson, Vice President, Corporate Controller. I'll now turn the call over to Ara.
Ara Hovnanian: Thanks, Jeff. I'm going to review our fourth quarter and year-end results, and I'll also comment on the current housing environment. Brad will follow me with more details, and of course, we'll open it up for Q&A afterwards.
Let me begin on slide 5.
Here, we show full-year guidance compared to our actual results.
Ara Hovnanian: Starting on the top of the slide, revenues were $3 billion, which was slightly better than the midpoint of our guidance.
Ara Hovnanian: Our income from unconsolidated joint ventures was $52 million, which was slightly below the guidance we gave due to delayed deliveries in three communities related to utility connections.
Ara Hovnanian: Adjusted EBITDA was four hundred and fifty six million dollars for the year which is above the high end of the range that we gave.
Ara Hovnanian: And finally, our adjusted pre-tax income was $327 million, which was also above the high end of the guidance range that we gave.
Ara Hovnanian: We're obviously pleased that our profitability for the full year was above the high end of the guidance range.
Ara Hovnanian: Starting in the upper left hand portion of the slide, you can see that our total revenues increased 9% to just over $3 billion.
Ara Hovnanian: Moving across the top to gross margin, our gross margin was 22% in fiscal year 24, which was slightly below the prior year's gross margin.
Ara Hovnanian: Moving to the bottom left, you can see that adjusted EBITDA increased 7% for the year to $456 million.
Ara Hovnanian: And in the bottom right-hand portion of the slide, we're excited about the adjusted pre-tax income improvement over the prior year, up 16% to $327 million.
Ara Hovnanian: If you go to slide 7, here we show our results compared to last year's fourth quarter.
Ara Hovnanian: Keep in mind that last year's fourth quarter was one of the strongest fourth quarters that we've had in a very long time, particularly for gross margin and pre-tax income. It makes the year-over-year comparisons for the quarter much more difficult.
Ara Hovnanian: Starting in the upper left-hand quadrant of the slide, you can see our total revenues increased 10% to just under $1 billion.
Ara Hovnanian: The lower gross margin is primarily due to the continued use of mortgage rate buydowns which have been stubbornly high due to the elevated levels of mortgage rates as well as some other incentives.
Ara Hovnanian: It's also related to a greater conscious focus on pace versus price, which we will discuss more fully in a moment.
Ara Hovnanian: Going forward, we expect to continue to use mortgage rate buy-downs to help with buyer affordability.
Ara Hovnanian: During this year's fourth quarters, incentives were 8.5% of the average sales price.
Ara Hovnanian: This is up 120 basis points from a year ago, and up 500 basis points higher than fiscal 22, which was prior to the mortgage rate spike impacting deliveries.
Ara Hovnanian: because of the continued use of incentives and increased land like position
Ara Hovnanian: We expect gross margins to decrease further in the first quarter as we provided in our guidance.
Ara Hovnanian: We continue to emphasize pace over price, and we expect to report strong EBIT ROI again going forward.
Ara Hovnanian: As a side note, we utilize a comparable level of incentives in new land acquisitions and they must meet our IRR minimum hurdle rate of 20% even after the cost of these incentives.
Ara Hovnanian: Moving to the bottom left-hand portion of the slide, as a result of the lower gross margin percentage, you can see that our adjusted EBITDA decreased a bit to $159 million in this year's fourth quarter.
Ara Hovnanian: Finally, in the bottom right-hand portion of the slide, correspondingly adjusted pre-tax profits also decreased a bit to $126 million.
Ara Hovnanian: While the fourth quarter met our expectations and guidance, it would have been better if not for the hurricanes right toward the end of our fiscal year.
Ara Hovnanian: We ended up missing deliveries primarily due to a lack of meters installed in homes and a scarcity of subcontractor crews due to the shift toward rebuilding.
Ara Hovnanian: Our current communities were spared major damage, but there was a tornado that touched down recently in one of our completed communities in Florida's east coast, causing some damage to about a dozen homes.
Ara Hovnanian: I know that new orders and current levels of demand are very much in focus by investors and analysts, so I'm now going to discuss contracts from several different perspectives.
Ara Hovnanian: If you turn to slide 8, while the year was choppy from quarter to quarter, we ended the year with fourth quarter contracts increasing 48% year over year.
Ara Hovnanian: The contract pace continued in the month of November, following the fourth quarter, with our contracts up 55% year-over-year, as demand for our homes remained robust.
Ara Hovnanian: Regardless of one's politics, there does seem to have been a little post-election enthusiasm regarding the outlook, the economic outlook, at least for our home buyers.
Ara Hovnanian: If you turn to slide 9, you can see contracts per community for the fourth quarter increased to 10.4, a 25% year-over-year increase, and more than double the sales pace of Q4-22.
Ara Hovnanian: We're pleased with these results, especially given all the uncertainty with the presidential election, the impact of hurricanes, the volatility in mortgage rates, and the general economic and geopolitical uncertainty.
Ara Hovnanian: If you turn to slide 10, we show mortgage rate trends.
Ara Hovnanian: The gray line on this slide shows what happened to mortgage rates last year, between July of 22 and November of 23. The blue line shows what happened with mortgage rates this past year, between July of 23 and November of 24.
For most of the time shown,
Ara Hovnanian: They coincidentally followed a very similar pattern of monthly increases and decreases just at slightly higher rates this year.
Ara Hovnanian: However, beginning in July of this year, mortgage rates fell below the levels of the prior year for the same month and continued to decline until September, the end of September.
Ara Hovnanian: Mortgage rates have increased since the beginning of October but they still remain lower now than they were last year.
This trend makes me particularly optimistic about future demand.
Ara Hovnanian: On slide 11, we give even more granularity and show the trend of monthly contracts per community compared to the same month a year ago.
Ara Hovnanian: Other than the month of September when our sales pace was flat compared to the previous year, our contracts per community were up significantly compared to the same month the previous year.
Ara Hovnanian: As you can also see on the slide, BFRs were not very impactful in any of the months shown.
Ara Hovnanian: We continue to believe that many of the fundamentals that led to our outperformance remain intact, such as the low supply of existing homes for sale and the good jobs report.
Ara Hovnanian: Furthermore, the overall health of the economy and positive demographic trends remain solid.
Ara Hovnanian: Turning to slide 12, we show contracts per community as if we had a September 30th quarter end. That way we can compare our results to our peers that report contracts per community on a calendar quarter end.
Ara Hovnanian: At 10.7 contracts per community, our September quarterly sales pace is the third highest among public homebuilders that reported at this time. This occurred despite September being one of the slower months in the quarter as I showed you on the previous slide.
Ara Hovnanian: 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 our peers.
Ara Hovnanian: What we're trying to illustrate on these last two slides is that we are still selling an above number of homes compared to our peers, above average number of homes, excuse me.
On the top of slide 14.
Ara Hovnanian: You can see that for a sizable percentage of our deliveries, our homebuyers continue to utilize mortgage rate buydowns. The percentage of customers that used buydowns in this year's fourth quarter was 72%.
Ara Hovnanian: The buy-down usage in our deliveries indicates that buyers have been consistently relying on these mortgage rate buy-downs to combat affordability at the current mortgage rate levels.
Ara Hovnanian: Given the persistently high mortgage rate environment, we assume buy-downs will remain at similar levels going forward.
Ara Hovnanian: We are budgeting the cost of these same buy-downs to remain constant.
Ara Hovnanian: As I said earlier, this includes the analysis of any new land acquisitions.
Ara Hovnanian: We continue to find land opportunities for growth even with these high levels of incentives.
Ara Hovnanian: On slide 15, we show that we had 7.9 QMI's per community at the end of the fourth quarter, which is consistent with where it was at the end of the third quarter. We define QMI's, by the way, as a home once we start the building.
Ara Hovnanian: In the fourth quarter of 24, QMI sales were 72% of our total sales, an increase from 67% in the third quarter of 24. Historically, that percentage was about 40%.
Ara Hovnanian: Obviously, demand for these QMIs remains high, so we're very comfortable with the current level of QMIs per community.
Ara Hovnanian: Due to the increase in community count in the quarter, it's not surprising that our finished QMI's increased to 233 finished homes.
Ara Hovnanian: on a per-community basis, that puts us at 1.8 finished QMIs per community. That's up slightly from 1.5.
Ara Hovnanian: QMIs per community at the end of the third quarter, but it's lower than the 1.9 QMIs at our first quarter.
Ara Hovnanian: Our goal with QMI's is obviously to sell them before completion.
During the fourth quarter, we emphasized pace versus price.
Ara Hovnanian: We're pleased with the significant increase in sales pace and the effect on ROI.
Ara Hovnanian: This did result in a lower gross margin for the fourth quarter and an even lower margin in our guidance for the first quarter of 2025. But again, the trade-off of pace versus price resulting in lower margin is producing great returns on inventory for us.
Ara Hovnanian: The decrease in gross margin is primarily due to increased use of incentives, particularly in the West.
Ara Hovnanian: The focus on quick move-in homes results in more contracts that are signed and delivered in the same quarter, which leads to higher backlog conversion.
Ara Hovnanian: This resulted in a backlog conversion ratio of 86%. This is the highest backlog conversion ratio we've had for the past 14 years.
Ara Hovnanian: We'll continue to manage our QMIs at a community level. We track our start schedule at a community level, and we make sure that there is a match with our current sales pace per community so that we don't get too far ahead of ourselves.
Ara Hovnanian: While we are focusing on pace versus price, we are still able to raise prices in about a third of our communities.
Turning to slide 17.
Ara Hovnanian: We also attribute part of our performance metric to the introduction of our new national portfolio of home designs that we refer to as LOOKs.
Ara Hovnanian: The new designs feature curated interiors with simple and honest pricing that reduced the complexity of the selection process for the home buyers and the building process for us.
Ara Hovnanian: There are significant other advantages to our LOOKS programs, but we'll discuss that at some point in the future.
Ara Hovnanian: The current high levels of demand should support the growth that we're focused on achieving over the next several years.
Speaker Change: I'll now turn it over to Brad OConnor, our Chief Financial Officer.
Thank you, Ara.
Brad OConnor: On slide 18, you can see that we ended the quarter with a total of 147 open for sale communities, a 14% increase from last year. 130 of those communities were wholly owned. During the fourth quarter, we opened 21 new wholly owned communities and sold out of 17 wholly owned communities.
Brad OConnor: We had 17 unconsolidated joint venture communities at the end of the fourth quarter. We opened one new unconsolidated joint venture community and closed four unconsolidated joint venture communities during the quarter.
Brad OConnor: Even with the growth in community count this quarter, we still experience delays in opening new communities, primarily due to utility hookups throughout the country. We expect community count to continue to grow further in fiscal 25. The leading indicator for further community count growth is shown on slide 19.
Brad OConnor: We ended the quarter with 41,891 control bots, which equates to a 7.8-year supply of control bots.
Brad OConnor: Our lot count increased 6% sequentially and 32% year over year. If you include lots from our unconsolidated joint ventures, we now control 44,720 lots.
Brad OConnor: We added 5,500 lots and 56 future communities during the fourth quarter. Our land teams are actively engaging with land sellers negotiating for new land parcels that meet our underwriting standards.
Brad OConnor: In fiscal 24, we began talking about our pivot to growth. This followed a stretch of several years where we used a significant amount of the cash regenerated to pay down debt.
Brad OConnor: On slide 20, we show our land and land development spend for each quarter going back five years. You can see how that pivot to growth has impacted our land and land development spend. During the fourth quarter of 24, our land and land development spend increased 45% year over year to $318 million.
Brad OConnor: You can clearly see that the land and land development spend in every quarter of fiscal 24 was the highest over the five years shown on this slide. Our fourth quarter represented the highest quarterly spend since 2010 when we started reporting that metric.
Brad OConnor: Our corporate land committee 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.
Brad OConnor: We are using current home prices, including the current level of mortgage rate buy-downs and other incentives, current construction costs, and current sales base to underwrite to a 20-plus percent internal rate of return.
Brad OConnor: Our underwriting standards automatically self-adjust to any changes in market conditions. We are finding many opportunities in our markets and are very focused on growing our top and bottom lines for the long term. And this growth and loss control precedes growth in community count, which precedes growth in deliveries. We are very pleased with the trends.
Brad OConnor: On slide 21, we show the percentage of our lots controlled via option increase from 46% in the fourth quarter of fiscal 15.
Brad OConnor: to 84% in the fourth quarter of fiscal 24. This is the highest percentage of option loss we've ever had, continuing our strategic focus on land light.
Brad OConnor: Turning now to slide 22, you see that we continue to have one of the higher percentages of land controlled via option compared to our peers.
Brad OConnor: Needless to say, with the second highest percentage of option loss, we are significantly above the median. On slide 23, compared to our peers, we have the second highest inventory turnover rate. High inventory returns are a key component of our overall strategy.
Brad OConnor: We believe we have opportunities to continue to increase our use of land options and further improve our terms on inventory in future periods. Our focus on pace versus price is evident here.
Brad OConnor: Turning to slide 24, even after spending a record $318 million on land and land development, we ended the fourth quarter with $338 million of liquidity, which is above the high end of our targeted liquidity range.
Turning now to slide 25.
Brad OConnor: This slide shows our maturity ladder as of October 31, 2024. Over the past several years, we have taken a number of steps to improve our maturity ladder and we remain committed to further strengthening our balance sheet going forward.
Brad OConnor: In February of 2025, one year prior to maturity, we plan to pay off all of the remaining $27 million of the 13.5% notes, which is our highest coupon debt.
Brad OConnor: Starting on the upper left-hand part of the slide, we show the $1.3 billion growth in equity over the past few years.
Brad OConnor: During the same period, on the upper right-hand portion, you can see the $700 million reduction in debt.
Brad OConnor: On the bottom of the slide, you can see that our net debt to net cap at the end of Fiscal 24 was 49.3 percent, which is a significant improvement from our 146.2 percent at the beginning of Fiscal 20.
Brad OConnor: We still have more work to do to achieve our goal of a mid-30% level, but we are comfortable that we are on a path to achieve our target soon.
Brad OConnor: We've made considerable progress, which is evidenced by the credit rating upgrades we received from both S&P Global and Moody's during fiscal 24. Our balance sheet has improved significantly over the last five years, and we expect to continue to make noteworthy progress moving forward.
Brad OConnor: Given our remaining $241 million of deferred tax assets, we will not have to pay federal income taxes on approximately $800 million of future pre-tax earnings. This benefit will continue to significantly enhance our cash flows in years to come and will accelerate our growth plans.
Brad OConnor: Regarding guidance, our internal plan given our significant new community openings and current sales base is for substantial growth and deliveries and revenues in fiscal 25, which is off to a spectacular start.
Brad OConnor: However, given the volatility and the difficulty in projecting margins with moving interest rates and volatility in general, we will focus our guidance on the current quarter, the first quarter of fiscal 25.
Brad OConnor: Our financial guidance for the first quarter of 2025 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.
Brad OConnor: Our guidance assumes continued extended construction cycle times averaging 5 months compared to our pre-COVID cycle time for construction of approximately 4 months. It also assumes that we continue to be more reliant on QMI sales, which makes forecasting gross margins more difficult.
Brad OConnor: Our guidance assumes continued use of mortgage rate buy-downs and other incentives similar to recent months.
Brad OConnor: Slide 27 shows our guidance for the first quarter of Fiscal 25. Our expectations for total revenues for the first quarter is to be between $650 million and $750 million.
Brad OConnor: Adjusted gross margin is expected to be in the range of 17.5% to 18.5%. This is lower than a typical gross margin, particularly because of the cost of mortgage rate buy-downs and our focus on pace versus price.
Brad OConnor: Keep in mind that all else being equal, first quarter gross margins are lower than the rest of the year.
Brad OConnor: is to be as a result of a lower volume given there are some period costs and cost of sales.
Brad OConnor: We expect the range of, for SG&A, the percentage of total revenue to be between 13.5% and 14.5%, which is still higher than usual.
Brad OConnor: One of the reasons our SG&A is running a little high is that we are gearing up for significant community count growth and we have to make new hires in advance of those communities.
Brad OConnor: The upcoming growth is evident from our land position and land spend. In addition, as we have said before, our first quarter is typically our lowest volume quarter, and therefore SG&A's percent of revenues is often the highest in the first quarter.
Brad OConnor: We expect income from joint ventures to be between $15 million and $30 million. Our guidance for adjusted EBITDA is between $55 million and $65 million, and our expectations for adjusted pre-tax income for the first quarter is between $25 million and $35 million.
Turning to slide 28.
Brad OConnor: We show that our return on equity was 34.6%, the second highest over the trailing 12 months compared to our peers. And on slide 29, we show that compared to our peers, we have one of the highest consolidated EBIT returns on investment at 30.7%.
Brad OConnor: While our ROE was helped by our leverage, our EBIT return on investment is a true measure of pure home building operating performance without regard to leverage and was the highest among our midsize peers.
Brad OConnor: We believe we are striking a good balance between pace and price, which is delivering industry-leading ROIs and ROEs.
Brad OConnor: Over the last several years, we have consistently had one of the highest ROIs among our peers. Eventually, investors will recognize our consistent superior terms on capital and significantly improve balance sheet.
Brad OConnor: 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 EBIT, and our price-to-earnings multiple when establishing a fair value for our stock.
Brad OConnor: We believe when all of the fundamental financial metrics are considered, our stock is one of the most compelling values in the industry.
Brad OConnor: On slide 30, we show our price to book multiple compared to our peers, and we are just above the median.
Brad OConnor: On slide 31, we show the trailing 12-month price-to-earnings ratio for us and our peer group.
Brad OConnor: Based on our price, earnings multiple of 5.98 times at yesterday's stock price of $189.96.
Brad OConnor: We are trading at a 45% discount to the home building industry average P.E. ratio if you consider all public builders and a 36% discount when considering our mid-sized peers.
Brad OConnor: We recognize that our stock may trade at a discount to the group because of our higher leverage, but our leverage has been shrinking and our equity has been growing rapidly.
Brad OConnor: On slide 32, we show that despite our extremely high ROE, there are a number of peers that have a higher price-to-book ratio than us. This slide more visually demonstrates how much we are undervalued relative to the other builders when looking at the relationship between ROE and price-to-book.
Brad OConnor: A very similar result exists when looking at ROE to price-to-earnings. On slide 33, you can see an even more glaring disconnect with our high EBIT ROI and our PE.
Brad OConnor: These last four slides further emphasize our point that given our high return on equity and return on investment, combined with our rapidly improving balance sheet, we believe our stock continues to be the most undervalued in the entire universe of public homeowners.
Ara Hovnanian: I will now turn it back over to Ara for some brief closing remarks.
Ara Hovnanian: Thanks, Brad. I just wanted to wrap up the call by saying that we're very excited about the growth we hope to achieve in fiscal 25. Our recent sales have been fantastic. In the fourth quarter again, contracts increased 48 percent.
Ara Hovnanian: And then we follow that up with a 55% growth in contracts in November.
Ara Hovnanian: These are very strong year-over-year improvements, and these are improvements over last year, which was a great year for us.
Ara Hovnanian: Some of you might be concerned about our gross margin guidance for the first quarter.
Ara Hovnanian: Although these contracts are at a lower gross margin, I want to repeat that we've made a conscious effort on trading pace for margin, given our focus on inventory turns, EBIT ROIs, and QMIs.
Ara Hovnanian: The improved sales pace and the expected corresponding growth in revenues should result in continued industry-leading inventory turns, EBITROI, and ROE over the coming year.
Ara Hovnanian: In closing, the housing market continues to show positive fundamentals, notwithstanding the affordability challenges.
Given the growth in our lot count.
Ara Hovnanian: Our community count and our land and land development spend, we think we're really well positioned to drive delivery growth in excess of 10% on an annual basis over the next few years, and we expect to continue to deliver top-tier industry returns for our shareholders.
Ara Hovnanian: That concludes our formal comments and we're happy to turn it over for Q&A now.
Speaker Change: 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 will they have to go back in the queue to ask another question.
Speaker Change: We will open the call to questions. To ask a question, you will need to press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster.
Speaker Change: Our first question comes from Alan Ratner of Zalman Associates. Your line is now open.
Speaker Change: Hey guys, good morning. Thanks for all the commentary so far. Very helpful. You know, Ara, I'd love to drill in a little more on the strategy. Shift might be too strong of a word, but just the kind of the pace versus price kind of decision right now and clearly.
a bit of a change this quarter.
You know
Speaker Change: I think we had always expected margins to gradually pull back from the recent levels we've seen, but admittedly, it's happening a lot quicker than even we would have expected, and I know this is intentional on your part, but...
Speaker Change: 18% gross margin, plus or minus, is kind of back to where you were pre-pandemic. And it kind of brings your even margin levels down to something in that kind of mid, maybe high single-digit range. And I'm just curious, if you think about the outlook for 25, it doesn't sound like you're anticipating much change in incentives.
Speaker Change: You do have some unknowns out there with tariffs and labor costs and things like that. Is there a level of gross margin if you were to see some cost creep where you would perhaps
Speaker Change: shift back to maybe more of a price over pace dynamic, maybe pull back a little bit on the QMI or the start base in order to try to preserve that margin? Or do you feel like there's enough?
Speaker Change: in the bag here that you can kind of maintain this level 18% plus or minus and drive that 10% growth regardless of what happens on cost.
Speaker Change: just post-pandemic. But I do want to remind you of two things. Number one, as Brad said,
Speaker Change: And while that may seem counterintuitive, as Brad mentioned, there are some fixed costs, particularly construction overhead, that are time related. So it's not just cost subtracted from price.
Speaker Change: We do expect improvement over the quarters from that level, but you know given the volatility we're just going to project a quarter at a time.
Brad OConnor: The second point, you know, I just lost my train of thought. Brad, do you want to jump in on a second point on margin? Sure. I think one of the things I'll add, Alan, is as we
Brad OConnor: even margin through the volume. So if gross margin comes down a little, you can make room for it with better SG&A percentage with growth.
Brad OConnor: You know, as we move to more land light and by rolling lot takes, et cetera, we can consider whether we would continue in those communities or not at the point where it doesn't make economic sense to move forward. But so the last thing we want to do is sit on an existing asset we own.
Brad OConnor: So we have to consider all those components when deciding whether we would
Speaker Change: I'll focus on the point I was going to enunciate that Brad just touched on. We are shifting to a greater land life. It's always been part of our strategy. It's becoming even more of our strategy, as you saw from some of the graphs.
Speaker Change: Land-like gross margins are inherently lower than wholly owned gross margins.
Speaker Change: which is what we were pre-pandemic that you're comparing to. If everything was perfect, our gross margin should go down because you pay more for a land like lot than you do for a wholly owned lot that you carry for two or three years.
Speaker Change: But what we've done a lot of analysis and we think our ROI and earnings are much better off with lower margins and higher turnover and a higher sales pace.
Speaker Change: I want to focus, Alan, on a 55% increase in sales last month, following a 48% increase in sales for the quarter.
That
Speaker Change: Along with what Brad mentioned, the benefits of FG&A, we feel very comfortable, are going to offset the margin decrease, and it's a trade-off that's very well worth it.
Speaker Change: We don't currently expect our gross margins to fall. We actually expect them to be up from the first quarter for all the reasons that we mentioned.
Speaker Change: Great, now I appreciate all that added color and understood on all those points and I think it makes a lot of sense.
Speaker Change: Fred, you know, my second part was going to be kind of on the topic you ended with, which is, you know, kind of the asset-light, land-light strategy and how it gives you that flexibility to either attempt to renegotiate or maybe walk away from deals that no longer make sense.
Speaker Change: I'm just curious if you've started that process in any markets or any communities at this point, are there any deals where, you know, they're no longer making economic sense of the prior underwriting, or is that still kind of a ways off into the future?
Speaker Change: Yeah, we haven't had to do that yet, Alan. Certainly something we look at with every community as it's performing. But fortunately, we haven't had to walk away or, frankly, renegotiate anything at the moment. As you can see in our numbers, we did have...
Speaker Change: a couple of impairments for stuff that we did own where we were underperforming and we had to take an impairment, but our walkaways have been very normal, which is typically walkaways that happen during the due diligence period, as opposed to something that happens once we've gotten going. So fortunately, so far, no, we have not had to.
Do that.
Alan, I'll mention one other.
Speaker Change: and I'm going to be talking about a fact that's interesting and has not been focused on very often and that is that
As we go more toward a land-wide
Speaker Change: strategy, and as you saw, we're one of the leaders in that area.
Speaker Change: compared to work in process. And I mention that because it really is a risk reducer because if the market slows down,
Speaker Change: It's much easier to turn a finished home into liquidity than it does a raw or developed lot into liquidity. So, we feel like one of the side benefits of the QMI strategy is more safety as well, because you could get liquidity extremely fast, even faster than we were able to in prior cycles.
Speaker Change: It makes a lot of sense. And one last quick housekeeping question. The joint venture guide for $15 to $30 million, is that kind of just straight profitability from JVs, or are there any consolidations contemplated within that guide like you had last quarter?
Speaker Change: That that's just straight normal JV income. There's no consolidations considered in that
and the
Speaker Change: Great. All right. Thanks a lot, guys. Appreciate it. Good luck and happy holidays. Okay. Thank you. Same to you, Allen.
Speaker Change: Our next question comes from a line of Alex Barron of Housing Research Center. Your line is now open.
Alex Barron: Thanks guys, great job in the quarter. I'm glad to see the growth is coming. I wanted to ask about, is there any thought or possibility that you guys could be taking out the debt earlier than its maturity and able to swap it for a lower interest rate debt?
Speaker Change: Yeah, I mean, something that we're looking at, as you probably know, a lot of that currently has pretty high
Speaker Change: Pre-payment penalties so it's a balance of considering what the you know lower rate might be Versus the cost of doing that as I mentioned we're going to pay off the 27 million dollars
Speaker Change: Coming due in 2026. We'll do that in a year early. So just in a few months here, we're going to pay that off.
Speaker Change: But otherwise, we are monitoring, you know, as the call premiums reduce versus
what we expect we might be able to.
Speaker Change: should do that. So it's something we're definitely paying attention to.
significant.
Speaker Change: with the current levels. When we do refinance, there will be significant savings in our interest costs, and it's not way out in the future. The opportunities are going to be coming pretty soon as our call premiums reduce rapidly.
Speaker Change: Yeah, I mean that's the hope. As far as share buybacks, I couldn't figure out if you guys bought any this quarter. I know you did in the last couple quarters.
We did not have any in the fourth quarter.
Speaker Change: Okay, and as far as your shift towards increasing sales pace, is there like a average target you guys are trying to aim at?
Speaker Change: No, we don't. We just look at pricing and pace on a community-by-community basis. So, we don't have a specific target.
Speaker Change: That's something we'd certainly consider is in many cases because we've moved to more land like we've got scheduled land take requirements
Speaker Change: lot take requirements per month or per quarter. So we want to at least make sure we're hitting a sales pace that hits those requirements. If we go faster, we can buy the lot faster, but so we would consider doing that. But we certainly want to make sure we're at least hitting the pace we need to hit the minimum lot takedowns.
Speaker Change: I saw some homes advertised with a 3.5% mortgage rate, and I was wondering if that was just a temporary thing that led to the lowered guidance. In other words, if you're no longer offering that, is there a chance that margins could bounce back in the back half of the year?
Speaker Change: There's certainly a chance that margins could get better in the back half of the year, it all depends on what happens with mortgage rates, what happens with the...
Speaker Change: Mark it and what it takes them to sell the homes and maintain the pace we want to maintain
Speaker Change: and I'm going to be talking about the community-based policy. I think it's a great example of one or two communities that might have been very low rate while other communities wouldn't have been as low. So it's certainly something we look at at every community, how that community is performing, and how they're doing in the community. So I'm going to start off by talking about the
decreases. So that's certainly a possibility.
I'll add that, you know, similar to retail stores,
Speaker Change: Even if a community offers a 3.5% 30-year fix, it doesn't mean every home in the community is. It's usually for a select number of homes that have been finished and are ready to deliver. It's not an across-the-board offering.
Speaker Change: Got it. Yeah, I assume that. Okay, guys, well, best of luck for 2025. Thanks.
Thank you.
Thank you. One moment for our next question.
Speaker Change: Our next question comes from Austin Hopper of AWH Capital. Your line is now open.
Austin Hopper: Hey guys, thanks for taking my question and you answered several of them already. You talked about SG&A.
potentially offset some amount of gross margins.
Speaker Change: I think as we grow, we've talked about the fact that we've had to invest ahead in some of that growth, but as we intimated in the remarks, we said we think we're positioned for 10 plus percent growth over the next
Speaker Change: And if we can achieve that, I think SG&A goes from 11.4 to something
Speaker Change: south of 10% ultimately, which still would put us at the high end of the range of our home building peers. So we're continuing to look at ways to drive that further. But just pure growth should get us into single digits over the next couple of years if we can grow the way we anticipate.
Great, thank you.
Speaker Change: Thank you I'm showing no further questions at this time. I would now like to turn it back to Ara Hovnanian for closing remarks.
Ara Hovnanian: Thank you very much. We are pleased with the results for our last quarter and we look forward to giving you continued great results during fiscal 25. Thank you.
Speaker Change: This concludes our conference call for today. Thank you for all participating and have a nice day. All parties may disconnect.
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