Q1 2025 Hovnanian Enterprises Inc Earnings Call
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Speaker Change: Good morning and thank you for joining us today for Hovnanian Enterprises Fiscal 2025 First Quarter Earnings Conference Call.
Speaker Change: 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.
Speaker Change: The slides are available on the investor page of the company's website at www.khov.com. Those listeners who would like to follow along should now log on to the website.
Speaker Change: I would now like to turn the call over to Jeff O'Keefe, Vice President of Resolations. Jeff, please go ahead.
Speaker Change: Thank you, Livia, and thank you all for participating in this morning's call to review the results for our first quarter.
Speaker Change: 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
Speaker Change: of the Private Securities Litigation Reform Act of 1995. 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 forerunner's statements.
Speaker Change: Although we believe that our plans, intentions, and expectations reflected and or suggested by such forward-looking statements are reasonable, we give no assurance that such plans, intentions, or expectations will be achieved.
Speaker Change: Therefore, actual results could differ materially and adversely from these forward-looking statements.
Speaker Change: 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, change circumstances, or any other reason.
Speaker Change: Joining me today are Ara Hovnanian, Chairman, President and CEO, Brad OConnor, Chief Financial Officer, David Mikerson, Vice President and Corporate Controller, and Paul Eberle, Vice President, Finance and Treasurer. I'll now turn the call over to Ara.
Ara Hovnanian: Thanks, Jeff. I'm going to review our first quarter results, and I'll also comment on the current housing environment. Brad will follow me with more details as usual, and of course, we'll open it up for Q&A afterwards.
Let me begin on slide 5.
Ara Hovnanian: Here we show our first quarter guidance compared to our actual results.
Ara Hovnanian: Starting on the top of the slide, revenues were $674 million, which was near the low end of our guidance. This was due to about 50 fewer wholly-owned deliveries than we expected when we gave the guidance. As sales in December and January were a little lower than expected.
Ara Hovnanian: After November had been a very strong month. Additionally, there were some delays due to a variety of factors, including utility hookups. We'll talk about month-to-month volatility shortly.
Ara Hovnanian: Our adjusted gross margin was 18.3% for the quarter, which was near the high end of the guidance range that we gave. Our gross margins are typically lower in the first half of the year than the last half.
Ara Hovnanian: Our SG&A ratio was 12.9%, which was better than the low end of the guidance that we gave. Our income from unconsolidated joint ventures was $9 million, which was below the guidance we gave.
Ara Hovnanian: This was due primarily to 40 highly profitable deliveries in two joint venture communities that were expected to deliver in the first quarter but are now delayed until the second quarter. One community was delayed because of utilities, the other delayed for a change in requirements from the town regarding building codes.
Ara Hovnanian: Adjusted EBITDA was 72 million dollars for the quarter, which is above the high end of the range that we gave. And finally, our adjusted pre-tax income was 41 million dollars, which was also above the high end of the range that we gave.
Ara Hovnanian: We're obviously pleased that our profitability for the quarter was above the high end of the guidance range.
on slide 6.
Ara Hovnanian: We show how our first quarter results compared to last year's first quarter. Starting in the upper left-hand portion of the slide.
Ara Hovnanian: You can see that our total revenues increased 13% to $674 million. Moving across the top to gross margin, our gross margin was 18.3% in the first quarter of 25, which was near the high end of our guidance, but below last year as expected.
Ara Hovnanian: The year-over-year decrease in gross margin was primarily due to increased use of incentives.
Ara Hovnanian: The continued use of mortgage rate buydowns is the primary incentive being utilized by our buyers. It's also related to a greater focus on pace versus price, which we discussed in our last conference call.
Ara Hovnanian: Given the persistently high level of mortgage rates today, even though they've drifted down just a bit over the last few weeks, we expect to continue to use mortgage rate buy-downs to help with homebuyer affordability.
Thank you. Thank you.
Ara Hovnanian: During this year's first quarter, incentives were 9.7% of the average sales price. This is up 160 basis points from a year ago, and 670 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 our increased land like position, we expect gross margins to be at similar levels in the second quarter as we provided in our guidance.
Ara Hovnanian: You can see that contracts for the first quarter, including unconsolidated joint ventures increased 9% year over year.
Ara Hovnanian: However, as you can see on slide eight there was not steady growth throughout the quarter.
Ara Hovnanian: Here you can see that we started the quarter off with a bang and the month of November contracts increased 55% year over year.
Ara Hovnanian: Contracts growth slowed to 3% positive year over year in December and then Terry.
Speaker Change: Contracts were down 10% year over year, but that was a very tough comparison to last year's January when contracts were up 33% from the previous year.
Speaker Change: Turning to slide nine while total contracts for the quarter were up compared to last year. As you can see much of the year. In fact much of the last couple of years have been extremely volatile on a monthly basis, depending on world news inflation interest rate into.
Crist rates consumer sentiment and a variety of other factors may and June contracts were down to varying degrees July through December contracts were up between 3% and 82% and then January was down 10%.
Speaker Change: As we have seen one month does not a trend make either good or bad at the moment sales activity is slower than last year, we've learned not to get too rattled or too excited over a month and feel confident about the long term fundamentals for the new housing.
Speaker Change: Market.
Speaker Change: If we turn to slide 10, you can see contracts per community were the same in both this year's first quarter and last year at nine six.
Speaker Change: Even though it was flat year over year. This is a very solid sales pace is it significantly higher than our quarterly average for the first quarter since 97.
Speaker Change: And that average was eight contracts per community.
Speaker Change: Furthermore, if you exclude build for rent contracts from both periods.
This years first quarter had a nice improvement from nine 2% to nine six contracts per community.
On slide 11, we give more granularity and show the trend of monthly contracts per community compared to the same month a year ago.
Speaker Change: Once again, the only months with year over year increase is November but each month of the quarter exceeds the monthly average since 2008.
Speaker Change: Remember at three one compares favorably to the monthly average of two three the same holds true for December at $2 nine compared to $2 four and January at three five also compares favorably to a monthly average of 3.0.
Speaker Change: This illustrates that one reason contracts per community being down year over year is that these two most recent months is due to a tough comparison from a year ago. This year's contracts per community, our strong compared to historical levels. Nonetheless, they were lower than our expectations.
Speaker Change: Turning to slide 12, we show contracts per community as if we had a December 31 quarter end.
Speaker Change: This way, we can compare our results to our peers that report contracts per community on a calendar quarter end.
Speaker Change: At nine seven contracts per community our December quarterly sales pace is.
Speaker Change: Third highest among public homebuilders that reported at this time.
Speaker Change: On slide 13, you can see that our year over year growth in contracts per community for the same period was the highest among our peers again. This was as if our quarter ended in December so that we can compare to many other companies what we're trying to illustrate over these last two slides.
Speaker Change: Is that we're still selling and an above average number of homes compared to our peers.
Speaker Change: On slide 14, you can see that for sizable percentage of our deliveries our homebuyers continue to utilize mortgage rate buy downs.
Speaker Change: The percentage of homebuyers using buy downs in this year's first quarter was 74%.
Speaker Change: The buy down usage in our deliveries indicates that buyers continue to rely on these mortgage rate buy downs to combat affordability at the current mortgage rates.
Speaker Change: Given the persistently high mortgage rate environment, we assumed by downs will remain at similar levels going forward.
Speaker Change: In order to meet homebuyers desires to use cost effective mortgage rate buy downs, we're intentionally operating at an elevated level of quick move in homes or <unk> as we call them. So that we can offer affordable mortgage rate buy downs in the near term.
Speaker Change: On Slide 15, we show that we had $9 <unk> per community at the end of the first quarter, which is about one <unk> per community higher than where it's been for the last few quarters now we define <unk> as any unsold homes, where we have begun framing.
Speaker Change: In the first quarter of 'twenty five <unk> sales were 69% of our total sales.
Speaker Change: 69% of our <unk> sales that was the second highest quarter. Since we started reporting this number 10 quarters ago, historically that percentage was 40% obviously.
Speaker Change: Obviously, the demand for <unk> remains high so we're comfortable with the current level of <unk>.
Speaker Change: Due to slightly slower than expected sales pace.
Speaker Change: 319 finished <unk> at the end of the first quarter on a per community basis that puts us at two six finish <unk> per community and Thats up from one eight finished <unk> per community at the end of last year, but we've made adjustments to starts to make sure that we don't.
Speaker Change: Get too far ahead of ourselves, we targeted a slightly higher number of <unk> as we entered the spring selling season.
Speaker Change: Our goal with <unk>, obviously to sell them before completion.
Speaker Change: The focus on quick move in homes, resulting in more contracts that are signed and delivered in the same quarter, which leads to lower levels of backlog at quarter ends, but a higher backlog conversion.
Speaker Change: During the first quarter of 'twenty, 534% of our homes delivered in the quarter were contracted in the same quarter.
Speaker Change: This resulted in a backlog conversion ratio of 76%.
Speaker Change: This is the highest backlog conversion ratio we've had in the first quarter for the last 27 years.
Speaker Change: We will continue to manage our <unk> community level and are highly focused to match our Q on my starts pace with our Q1 by sales pace will monitor the spring selling season, and we'll adjust accordingly.
Speaker Change: If you move to slide 16, you can see that even with higher mortgage rates, we were still able to raise net prices and 40% of our communities. During the first quarter, while we're focusing on pace versus price, we're still able to raise prices and a considerable percentage of our communities.
Speaker Change: <unk>.
Before I turn it over to Brad I want to emphasize that land light deliveries typically have lower gross margins than deliveries from wholly owned communities.
Speaker Change: Further.
Speaker Change: Our Q or my deliveries also typically have a lower gross margin than our to be built deliveries I want to illustrate how we can achieve a solid ROI with lower gross margins given our continued focus on growth and inventory turnover.
Speaker Change: Beginning in the fourth quarter, we emphasized pace versus price and we continued that strategy into the first quarter of 'twenty five and again now in the in the second quarter on Slide 17, we illustrate the impact a faster sales pace at a lower margin can have on our return.
Speaker Change: It's obviously a reasonably solid sales pace is key.
Speaker Change: The first column is a hypothetical scenario, where we use our historical normal gross margin and more wholly owned communities as opposed to land like communities.
Speaker Change: Some of the other assumptions, we make here are that our total revenues.
Speaker Change: SG&A expenses financial services income and unconsolidated joint venture income are similar to what we achieved in fiscal 2004.
Speaker Change: Alright.
Speaker Change: We also assume no contributions from land sales, which in reality have occurred often over the past few years.
Speaker Change: This scenario produces a 23% EBIT ROI.
Speaker Change: All of them on the right shows an alternative hypothetical scenario with an 18, 5% gross margin, which we believe could be our new normalized gross margin in the near term due to our increased use of lot options as part of our land light strategy and more incentives to get the sales pace.
Speaker Change: <unk>.
Speaker Change: Given our increased lot count, we're well positioned to drive delivery growth in excess of 10% on an annual basis over the next few years.
Speaker Change: So for this example, we used a 14% increase in total revenues.
Speaker Change: We assume that we get some efficiencies with the growth in revenues and our SG&A expenses only increased by half of the total revenue growth or 7% increase which could be conservative. We also assume that other revenues and profits from financial services and JV is growing.
La lockstep with our sales growth.
Speaker Change: This results in a slightly lower EBIT margin, but a modest increase in our pretax income dollars and assuming the same amount of capital our land light strategy, which has increased our option lot position to an all time high of 84% should run.
Speaker Change: <unk> and increased inventory turns.
Speaker Change: This scenario, we hold our average inventory levels flat, which drives inventory turns calculated using revenues to $2 five from $2 two.
Speaker Change: This increase in inventory turns more than makes up for the lower gross margin and results in a slightly higher ROI at 25%.
Speaker Change: If you compare that to the current rois for our peers, we would remain well above our medium the medium.
Speaker Change: The current monthly volatility makes it very difficult to project out a full year.
Speaker Change: But the hypothetical model shows you what our strategy is and what is possible even with the lower margin.
Speaker Change: Our growth in communities should sustain the growth we are targeting in the coming years and split in spite of a slower sales environment positioning us to deliver near industry, leading rois again.
Speaker Change: I'll now turn it over to Brad O'connor, our Chief Financial Officer. Thank.
Brad O'connor: Thank you Laura.
Brad O'connor: Turning to slide 18, you can see that we ended the quarter with a total of 148 open for sale communities, a 10% increase from last year's first quarter 125 of those communities were wholly owned.
Brad O'connor: During the first quarter, we opened 15, new wholly owned communities sold out of 16 wholly owned communities and contributed four wholly owned communities to a new joint venture.
Brad O'connor: Additionally, we had 23 domestic unconsolidated joint venture communities at the end of the first quarter. We opened three new on consolidated joint venture communities closed one during the quarter and added four previously wholly owned communities.
Brad O'connor: We continue to experience delays in opening new communities, primarily related to utility hookups and permitting delays throughout the country Needless to say the hurricanes and fires did not help the situation. This year, we expect community count to continue to grow further in fiscal 'twenty five.
Brad O'connor: The leading indicator for further community count growth as shown on slide 19.
Brad O'connor: We ended the quarter with 43254 controlled lives, which equates to a seven eight year supply of control bonds.
Brad O'connor: <unk> count increased 3% sequentially and 29% year over year.
Brad O'connor: You include blocks from our unconsolidated joint ventures, we now control 46603 logs.
Brad O'connor: We added 5800 lots and 41 future communities during the first quarter. Our land teams are actively engaged in with land sellers negotiating for new land parcels that meet our underwriting standards, even with high incentives and the current sales pace.
Brad O'connor: In fiscal 'twenty, four we began talking about our pivot to growth. This followed a stretch of several years, where we used a significant amount of the cash generated to pay down debt. It's significant to note that while our total lots controlled grew over the two years a lot of options grew by 16000 lots owned shrunk by <unk> hundred.
Brad O'connor: As we focus on our land light strategy.
Brad O'connor: 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.
Brad O'connor: During the first quarter of 2005, our land and land development spend increased 7% year over year to $248 million you can clearly see that the land and land development spend has increased over the five year shown on this slide our first quarter land and land development spend represented the highest first quarter spend since 2010, when we started reporting that.
Brad O'connor: Metrics.
Brad O'connor: 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 O'connor: Again, we are using current home prices, including the current level of mortgage rate buy downs and other incentives.
Brad O'connor: Current construction cost and current sales space to underwrite to a 20 plus percent internal rate of return and then right before we were about to acquire a loss we are re underwriting their base.
Brad O'connor: <unk> said that in current conditions just to be sure that it still makes sense to go forward with the land purchase we feel good that our new acquisitions will yield solid rois. Since we are building in huge incentives and quicker pace.
Brad O'connor: 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.
Brad O'connor: And this growth in lost control of proceeds growth and community count which received growth in deliveries. We are very pleased with the trends.
Brad O'connor: On slide 21.
Brad O'connor: So the percentage of our lots controlled via option increased from 44% in the first quarter of fiscal 2015% to 84% in the first quarter of fiscal 25. This is the second quarter in a row, 84% option and it has the highest percentage of option lots we've ever had continuing our strategic focus on landmark.
Brad O'connor: Turning now to slide 22, you see that we continue to have one of the highest percentages of land controlled via options compared to our peers.
Brad O'connor: Needless to say with the second highest percentage of option lots, we are significantly above the median.
Brad O'connor: On slide 23, compared to our peers, we have the second highest inventory turnover rate high inventory turns are a key component of our overall strategy. We believe we have opportunities to continue to increase our use of land options and further improve our turns on inventory in future periods, our focus on pace versus price is evident here.
Brad O'connor: Turning to slide 24, even after spending $248 million, Atlanta, and land development as well as $18 million on repurchasing common stock. We ended the first quarter with $222 million of liquidity, which is finally within our targeted liquidity range. This is the first quarter in years that we have been fully invested.
Brad O'connor: Turning now to slide 25. This slide shows our maturity ladder as of January 31, 2025 during the second quarter, we intend to pay off early the remaining $27 million of the 13, 5% notes our highest cost debt that mature in February of 2026.
Brad O'connor: This is an example of the steps we have taken over the past several years to improve our maturity ladder and reduce our interest costs. We remain committed to further strengthening our balance sheet going forward.
Brad O'connor: Turning to slide 26, we show the progress we've made to date to grow our equity and reduce our debt starting on the upper left hand part of the slide we show the one $3 billion growth in equity over the past few years during the same period on the upper right hand portion you can see the $703 million reduction in debt.
On the bottom of the slide you can see that our net debt to net cap at the end of the first quarter of fiscal 'twenty. Five was 52, 2%, which is a significant improvement from our 146, 2% at the beginning of fiscal 'twenty, while our net debt to cap increased sequentially due to less cash our gross debt to cap continued to decline during the first.
Brad O'connor: Quarter, we still have more work to do to achieve our goal of 30%, but we're comfortable that we're on a path to achieve our targets.
Brad O'connor: Given our remaining $206 million of deferred tax assets, we will not have to pay federal income taxes on approximately $700 million of future pre tax earnings. This benefit will continue to significantly enhance our cash flows in years to come and we will accelerate our growth plans.
Brad O'connor: Regarding guidance, our internal plan, given our significant new community openings and current sales as a substantial growth in deliveries and revenues in fiscal 'twenty. Five however, given the volatility and the difficulty in projecting margins, we're moving interest rates and volatility in general we will focus our guidance on the next quarter.
Brad O'connor: Our financial guidance assumes no adverse changes in current market conditions, including no further deterioration in our supply chain or material increases in mortgage rates tariffs inflation, our cancellation rates keep in mind. Some materials have already increased and costs in anticipation of tariffs our guidance assumes continued extended construction cycle.
Brad O'connor: Averaging five months compared to our pre COVID-19 cycle time for construction of approximately four months.
Brad O'connor: It also assumes that we continue to be more reliant on <unk> sales, which makes forecasting gross margins more difficult. Our guidance assumes continued use of mortgage rate buy downs and other incentives similar to recent months.
Brad O'connor: Further it excludes any impact to SG&A expense from our Phantom stock expense related solely to the stock price movement from the 130 to $32 29 stock price at the end of the first quarter of fiscal 'twenty five.
Brad O'connor: Slide 27 shows our guidance for the second quarter of fiscal 25 compared to actual results for the first quarter of 2005, our expectation for total revenues for the second quarter to be between $675 million and $775 million.
Brad O'connor: The midpoint of our total revenue guidance would be up 8% compared to the first quarter <unk>.
Brad O'connor: Adjusted gross margin is expected to be in the range of 17, 5% to 85% at the midpoint it would be down slightly compared to the first quarter. This is lower than a typical gross margin, particularly because of the cost of the mortgage rate buy downs and our focus on pace versus price as we mentioned earlier, our gross margin margins are typically lower in the first half of the year.
Brad O'connor: And improve in the latter part of the year part of that is driven by the higher volume in the latter half compared to the first half which helps regarding the indirect overhead part of gross margin.
Brad O'connor: We expect a range of SG&A as a percentage of total revenues to be between 11% and 12%, which is still higher than usual one of the reasons. Our SG&A is running a little high but we are gearing up for a significant community count growth and we have to make new hires in advance of those communities, yes coming growth is evident from our land acquisition and land spend in SG&A.
Brad O'connor: The ratio would improve 140 basis points at the midpoint of this guidance.
Brad O'connor: Our expectations for adjusted pre tax income for the second quarter is between $20 million and $30 million.
Brad O'connor: During the first quarter of 2005, we contributed four wholly owned communities to a new consolidated joint venture and booked a 23 million $23 million of income on the sale of those assets. This shows up on the other income line on our income statement, we were carrying the land on our books at a substantial discount to its current fair value.
Brad O'connor: Even after recognizing a stepped up value in our quarterly earnings. We now have four oncotype joint venture communities that should provide significant profits for the next few years out of at or above our hurdle rates.
Brad O'connor: Because of the $22 $7 million of income the high end of the adjusted pre tax income guidance for the second quarter would be at lower levels than our first quarter.
Brad O'connor: Moving to slide 28, we show all of the guidance, we gave for the second quarter. The only two lines on here that we have not mentioned our income from unconsolidated joint ventures, and adjusted EBITDA, We expect income from joint ventures to be between $5 million $10 million and our guidance for adjusted EBITDA is between 50 million.
Brad O'connor: $60 million.
Brad O'connor: Turning to slide 29, we show that our return on equity was 33% the second highest over the trailing 12 months compared to our peers. Obviously this is helped by a higher leverage.
Brad O'connor: On slide 30, we show that compared to our peers. We have one of the highest adjusted EBIT returned on investment at 29, 8%, while our OE was helped by our leverage our adjusted EBIT return on investment as a true measure of pure homebuilding operating performance without regard to leverage and was the highest among midsized peers and.
Brad O'connor: And among the highest of all peers, regardless of size. We believe we are striking a good balance between pace and price, which is delivering industry, leading ROI and Roe.
Brad O'connor: As our leverage continues to come down we believe we will not only have industry, leading EBIT ROI, but also have one of the leading pre tax rois as well.
Brad O'connor: Over the last several years, we have consistently had one of the highest EBIT rois among our peers. Eventually investors will recognize are consistent superior returns on capital and significantly improved balance sheet.
Brad O'connor: 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 and establishing a fair value for our stock.
Brad O'connor: We believe on all of the <unk> fundamental financial metrics are considered our stock as one of the most compelling values in the industry.
Brad O'connor: On slide 31, we show our price to book multiple compared to our peers and we are right at the median.
Brad O'connor: On slide 32, we show the trailing 12 month price to earnings ratio for Us and our peer group based on our price earnings multiple of 375 times at Friday's stock price of 121, and 57% we are trading at a 55% discount to the homebuilding industry average p/e ratio. If you consider all public bill.
Brad O'connor: There is any 45% discount when considering our midsized peers, 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 trailing rapidly.
Brad O'connor: On slide 33, we show that despite our extremely high Roe.
Brad O'connor: 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 a very similar result exist when looking at ROE to price to earnings on Slide 34, you can see an even more glaring disconnect.
Brad O'connor: With our high EBIT ROI and RPE, we have the third highest EBIT ROI and yet our stock trades at the lowest multiple the earnings of the group.
Brad O'connor: These last four slides further emphasize our point that given our high return on equity and return on investment combined with a rapidly improving balance sheet. We believe our stock continues continues to be the most undervalued in the entire universe of public homebuilders that concludes our formal comments and we are happy to turn it over for Q&A now.
Brad O'connor: Thank you the company will now answer questions. So that everyone has an opportunity to ask questions participants will be limited to two questions and a follow up after which they will have to get back into the queue to ask another question.
Brad O'connor: We'll now open the call to questions.
Speaker Change: To ask a question you will need to press star, one one and wait to be announced.
Brad O'connor: One question.
Speaker Change: No first question coming from the line of Alan Ratner.
Brad O'connor: <unk> <unk> with Zelman <unk> Associates. Your line is now open.
Alan Ratner: Hey, guys. Good morning, Thanks for all the great interest so far I appreciate it.
Speaker Change: Yeah first question just in terms of kind of what youre seeing on <unk>.
Alan Ratner: Demand.
Alan Ratner: You mentioned the softer start to the spring so far.
Alan Ratner: Look at rates were down about 25 basis points yourself from the recent highs at the beginning of the year.
Alan Ratner: Which not a huge move but at least it's moving in the right direction. So.
Alan Ratner: What do you attribute the recent choppiness to it because it's clearly not.
Alan Ratner: Worsening rate environment are you starting to see more concern over the employment outlook or is it.
Alan Ratner: A tougher time getting buyers to qualify any any color you can give us just to kind of understand the more recent activity would be great.
Alan Ratner: Sure.
Alan Ratner: Honestly, it's the flavor of the month concern is what we've been seeing and feeling that there is nothing to specifically measure it but one month it might be concerned about tariffs and the effect that is going to have on inflation for consumers.
Alan Ratner: One month it may be about interest rates another month, it may be about World War.
Alan Ratner: Awesome abilities it.
Alan Ratner: Honestly varies all over the place.
Alan Ratner: To demonstrate with full transparency.
Much variation, we have seen in from one month to another month to another month. One month is good there is some good news and sales are great. Another month. There is some bad news sales are bad and then it keeps going up and down and up and down and it's been the pattern for a while now so I can't say at the moment.
Alan Ratner: Any specific news that stands out other than Theres, just so many moving parts in general there is constantly something for consumers to be worried about.
Alan Ratner: And definitely kind of feels like a whack a mole environment a little bit.
Alan Ratner: Things can settle down a little bit here.
Alan Ratner: On that point, Alright, I'd love your thoughts on on the DC market you guys have a pretty nice business, there and theres a lot of headlines coming out there related to the federal government.
Alan Ratner: Lay offs and what impact that could have on the DC market in general so any thoughts you you'd be willing to share in terms of the near term and intermediate term outlook for D C and so sure yet.
Alan Ratner: The broader D C market includes Delaware, Maryland, Northern Virginia, and West Virginia.
Alan Ratner: I'd say in general the Delaware market has been very strong and it's really not related to employment theres more retiree and our active adult business and second home business has been very healthy there its a low tax environment low cost environment, that's been very.
Alan Ratner: Strong the Virginia market is a little more tech and defense oriented.
Alan Ratner: And that market generally remains strong more of the government and by the way West Virginia is much the same.
Alan Ratner: Just west of the defense capital so to speak around.
Alan Ratner: The Dulles Airport area.
Alan Ratner: The Maryland market and most specifically Baltimore and North is the one that theoretically could get most affected by some of the government reductions in workforce.
Alan Ratner: So we'll be looking at that closely of those markets, maybe west Virginia is the smallest in Maryland is the second smallest Delaware and northern Virginia or larger for us. So I think thats good news even with the.
Alan Ratner: Good potential government layoffs.
Alan Ratner: Absolutely I appreciate that and then it's obviously very early on but have you seen any kind of data points that give you pause either resell inventory starting to rise or slips in your traffic data that would suggest that.
Alan Ratner: Mines are starting to bleed into the demand trends.
Alan Ratner: Yes, so resale data is tweaking up just a bit.
Alan Ratner: You have to put it in perspective, it's still way below our historical norms, the country's historical norms well below so.
Alan Ratner: A little increase off the bottom is not something that concerns us overall, it does vary quite a bit by market still.
Alan Ratner: Our worst markets might be a five month supply, which would be pretty close to normal frankly, our best markets are still at like a one five month supply. So it's definitely very different in different markets.
Alan Ratner: There was a second part of that question I've forgotten it just traffic.
Alan Ratner: Three out of a few different potential data point.
Alan Ratner: SE website traffic has been very solid.
Alan Ratner: But actual foot traffic was a little lower than our expectations. So people are looking more than they have.
Alan Ratner: But actually jumping over the finish line a little in terms of actually visiting a little less than what we expected the only thing I'd add to.
Alan Ratner: The very most rate that we could just ended we did see it.
Alan Ratner: <unk>, yes, so maybe that's the beginning of a good time.
Alan Ratner: It's the only one week.
Alan Ratner: Great Alright, but we'll keep our fingers crossed thanks, a lot guys.
Alan Ratner: Okay.
Alan Ratner: Thank you.
Speaker Change: Our next question coming from the line of Alex Barron with housing Research Center with your line is now.
Alex Barron: Yes. Good morning, Thank you gentlemen.
Alex Barron: Was hoping you could comment on the level of incentives you guys are.
Alex Barron: Operating today versus say two quarters ago or a year ago.
Alex Barron: Well I think Alex.
Alex Barron: Our script prepared remarks.
Speaker Change: Commented 94, 7% in a year ago of $6 seven ish something like that so 300 basis points increase year over year and then if you went back another year.
Alex Barron: One seven.
Speaker Change: 715, something like that so.
Speaker Change: Significant increase over two years ago 300 basis points over last year, which is still a.
Speaker Change: Most of this growth obviously in incentives.
Speaker Change: And as.
Speaker Change: You've heard us comment mostly.
Speaker Change: Through some form of mortgage rate buy down along with potential other incentives closing cost things like that.
Speaker Change: So what does the generally translate into what kind of interest rate you guys are having to offer to I guess the competitive because I'm sure. It's not for any other reason.
Speaker Change: Yes.
Speaker Change: There is.
Speaker Change: Market by market community by community.
Speaker Change: It is primarily geared towards Q1 mines.
Speaker Change: So where we have older cure mice will advertise and offer four 9% mortgages thats more typical.
Speaker Change: Where we don't have as many <unk> minds, we might offer a 575 mortgage rate.
Speaker Change: Reviewing that right now.
Speaker Change: And.
Speaker Change: Depending on our.
Speaker Change: A final analysis, we may increase or decrease slightly those targets.
Speaker Change: Got it and then in terms of that.
Speaker Change: What is your finished Q in mind count look like right now versus.
Speaker Change: So a year ago, and what how does that impact your starts.
Speaker Change: Spec start strategy. So we ended the quarter with 319 finish.
Speaker Change: <unk> finished <unk>.
Speaker Change: Which was up from the fourth quarter I think it works out to two six or something like that for community.
Speaker Change: So a little higher than we would like up from one eight at the end of the fourth quarter on the other hand, we were starting our had did start more homes in preparation for the spring selling season, So I think.
Speaker Change: <unk> would have to come down some going into the by the end of the second quarter and the other thing to note and we I think we've made this comment is that we have.
Speaker Change: Certainly slowed down starts in communities, where we have extra <unk>.
Speaker Change: So we don't get ahead of ourselves. So it's something we look at community by community every week.
Speaker Change: Make sure we don't get too many <unk> teed up at one time in a particular community.
Speaker Change: Just two.
Speaker Change: Clarify brad's earlier comment about the use of incentives directionally. It was a 100% on the exact numbers.
Speaker Change: First quarter were nine 7% and Thats up 160 basis points from a year ago.
Speaker Change: But it is up 670 basis points from 22, when those deliveries preceded the big Spike in interest rates.
Speaker Change: So theoretically if.
Speaker Change: Rates were to start coming down towards 6%, one would assume you wouldn't need to.
Speaker Change: And then 9% niche points I'm buying down the rate that much which would in turn translate to.
Speaker Change: Margins going back up significantly right.
Speaker Change: That is theoretically possible and what we're hoping for.
Speaker Change: I mean, the other way the second way out Alex So as you could buy the rates down even further for the same cost and hopefully make it that much more affordable for customers. So it's a play as to what drives sales at the end of the day, we need to drive base. So.
Speaker Change: Right, Okay, guys best of luck. Thank you.
Speaker Change: Thank you.
Speaker Change: Thank you.
Speaker Change: And as reminder to ask a question. Please press star one one and wait for your name to be announced.
Speaker Change: Our next question coming from the line of Jay Mccanless with Wedbush. Your line is now open.
Jay Mccanless: Hey, good morning, everyone.
Jay Mccanless: First question I had the comments you guys made on slide 17, where you talked about the $18 five push that hypothetical gross margins.
Jay Mccanless: Potentially being the adjusted gross margin level going forward I mean, how long do you all expect.
Jay Mccanless: Adjusted gross margin to sit at that level do you think the rest of the year, given current conditions or possibly longer than that.
Jay Mccanless: I wish we could answer it but.
Jay Mccanless: But.
Jay Mccanless: The Crystal ball gets very foggy and as we tried to demonstrate with full transparency the volatility in sales month to month has been extraordinary over the last couple of years.
Jay Mccanless: Again, one month, great one month's bad if you asked me in November I would've said, while we're going to.
Jay Mccanless: Much greater sales and we're not going to have to offer much in the way of incentives. If you asked me in January I'd say the opposite so it just depends on the month net net though we're still very bullish on the long term fundamentals and we recognize we're just going to have month to month vol.
Jay Mccanless: <unk>, depending on the news Thats out there at the moment.
Jay Mccanless: Okay, great. Thanks.
Speaker Change: Second question I had that's 40% of raising prices is there any geographic color behind that more in the west or anything you can talk about where you are able to push price yes.
Jay Mccanless: Yes, it's certainly obviously, it's community by community.
Jay Mccanless: It's certainly what I would say of our stronger markets, which continues to be more on the east and northeast.
Jay Mccanless: Mid Atlantic Delaware.
South East coastal Carolina, those are probably the strong they are the stronger markets and where we're seeing more of those price increases then.
Jay Mccanless: West where I would say it's.
Jay Mccanless: Still.
Jay Mccanless: The challenge just to get the sales space.
Jay Mccanless: Understood.
Jay Mccanless: And then the last one I had.
Jay Mccanless: Was there did you all have any direct impact from the fire other than maybe utility hookup southwest or anything we need to be thinking about either from a volume or gross margin perspective.
Jay Mccanless: As they recover from those buyers out west.
Jay Mccanless: Well obviously.
Jay Mccanless: And it's a good question.
Jay Mccanless: There are a lot of trades that have been drawn to helping.
Jay Mccanless: The region in California, the recover from the fire. So that's not helpful to new home construction because there.
Jay Mccanless: There is a limited pool of trade. So if they are drawn one area temporarily to either cleaned debris repair minor problems et cetera, and certainly the utility companies. It does hurt from the standpoint of the overall pool of labor the same is true.
Jay Mccanless: Although it proceeded by a month or so.
Jay Mccanless: The hurricanes.
Jay Mccanless: In Southeast, Florida also has the same effect. So we saw it on both coasts in a very short period, but we've seen these temporary aberrations before in <unk>.
Jay Mccanless: Eventually they stabilize.
Speaker Change: Okay. That's all I have thanks for taking my questions.
Jay Mccanless: Sanjay.
Jay Mccanless: Yes.
Jay Mccanless: Yes.
Jay Mccanless: Thank you.
Speaker Change: And I'm showing no further questions in the queue. At this time I will now turn the call back over to Mr. IRA.
Jay Mccanless: <unk> for any closing remarks.
Speaker Change: Thank you very much.
Jay Mccanless: No we're all anxious to see what.
Jay Mccanless: The next month's hold as the spring selling season unfolds more.
Jay Mccanless: But again, we're very optimistic about our trends our growth and our long term fundamentals of the housing market. We will look forward to giving you an update next quarter. Thank you.
Jay Mccanless: This concludes our conference call for today. Thank you all for participating and have a nice day all parties may now disconnect.