Hovnanian Enterprises Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
December 5, 2023

There are 5 speakers on the call.

Operator

Good morning and thank you for joining us today for Huvainian Enterprises Fiscal 2023 4th Quarter Earnings Conference Call. An archive for the webcast will be available after the completion of the call and run for 12 months. This conference is being recorded for rebroadcast and all participants are currently in a listen only mode. Management will make some opening remarks about the 4th 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.

Operator

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 into the website. I would like to turn the call over to Jeff O'Keefe, Vice President, Investor Relations. Jeff, please go ahead.

Speaker 1

Thank you, Michelle, and thank you all for participating in this morning's call to review the results for our Q4 year ended October 31, 2023. All statements in this conference call that are not historical facts should be considered as forward looking statements within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 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 forward looking statements. Such forward looking statements include, but are not limited to statements related to the company's goals and expectations with respect to its financial results for future financial periods. Although we believe that our plans, intentions and expectations reflected in or suggested by such forward looking statements are reasonable, we can give no assurance that such plans, intentions or By their nature, forward looking statements speak only as of the date they are made, are not guarantees of future performance or results and are subject to risks, uncertainties and assumptions that are difficult to predict or quantify.

Speaker 1

Therefore, actual results could differ materially and adversely from those forward looking statements as a result of a variety of factors. Such risks, uncertainties and other factors are described in detail in the sections entitled Risk Factors and management's discussion and analysis, particularly the portion of MD and A entitled Safe Harbor Statement in our annual report on Form 10 ks for the fiscal year ended Joining me today on the call are Ara Hovnanian, Chairman, President and CEO Brad O'Connor, CFO and Treasurer and David Meitrisson, Vice President, Corporate Controller. I'll now turn the call over to Ara.

Speaker 2

Thanks, Jeff. I'm going to review our full year and 4th quarter results And I'll comment on the current housing environment. Brad O'Connor, our CFO, will follow me with more details and of course, we'll open it up to Q and A afterwards. Our results from the 4th quarter benefited from strong demand for new homes, which is supported by strong demographic trends, The resilient job market and the low supply of existing homes for sale. On Slide 5, We show our full year guidance in the 1st column and our final results for all of fiscal 'twenty three in the 2nd column.

Speaker 2

Beginning at the top, our total revenues were $2,760,000,000 above the high end of our guidance range. Our adjusted gross margin was 22.7% for the quarter, which is toward the high end of the range. Our SG and A ratio was 11.1%, which is at the very low end of the guidance. The combination of revenues above the upper end of the guidance, margins being near the top of the guidance And SG and A being very close to the bottom of the guidance contributed to a great year. In addition, we had A great quarter for land sales and JV profits.

Speaker 2

The combination resulted in EBITDA and pre tax income being significantly above the guidance we gave. Our adjusted EBITDA was $427,000,000 Our adjusted pre tax income was $283,000,000 Our fully diluted EPS was $26.88 per share, well above the high end of our guidance range. And finally, our book value came in at Needless to say, we're pleased with our performance for the full year. If you go back to this time last year when sales in the housing market stalled Due to a quick climb in mortgage rates, we couldn't have imagined our performance would be this solid this year. By any measure, fiscal 2023 was a good year.

Speaker 2

Turning now to Slide 6. Overall, Gross margins, revenues and SG and A for the quarter were very similar to last year's results. The big improvement over last year's solid results We're heavily influenced by land sales and JV profits that I described. On the left hand portion of the slide, You could see that land sale profits have been a regular part of our business for a long time. On the right hand portion of the slide, You can see that income from unconsolidated joint ventures has been an important part of our operations and have also been an important part Going forward, both of these will continue to materially contribute to our bottom line, but certainly may vary from quarter to quarter.

Speaker 2

This quarter was a good quarter for both. On Slide 7, We show 3 measures of profitability for our 4th quarter. On the upper left hand portion of the slide, We show that our adjusted EBITDA for the Q4 of 2023 was $181,000,000 a 25% year over year increase. In the upper right hand portion of the slide, You can see that our adjusted pre tax income was $144,000,000 this year, a 38% increase over the prior year. Our strong profit was helped by a $21,000,000 of land sale profits and over 2,100 homes delivered in our joint venture in Saudi Arabia resulting in a $9,000,000 profit.

Speaker 2

Even without these two tailwinds, our adjusted pre tax income would still have been up compared to last year by 9%. And on the bottom of the slide, we show that our net income was up 75% year over year to $97,000,000 Net income from the quarter benefited from a $10,900,000 state tax valuation allowance reversal And as our strong performance resulted in the using of more of our existing deferred tax State tax credits, we were able to recognize that benefit. On the other hand, 75% Our 75% increase to net income to $97,000,000 for the quarter was after a one time $22,000,000 loss on the extinguishment of debt related to our early debt redemption and refinancing. Turning to Slide 8. On this slide, you can see that contracts per community for the 4th quarter increased 66% year over year.

Speaker 2

While last year was an easy comparison, the 8.3 contracts per community in the Q4 of 'twenty 3 was only slightly below the long term average of 8.8 contracts per community for the Q4 of 97 through the most recent quarter. Well, that doesn't sound exceptional. You've really got to consider what happened with mortgage rates during the Q4. As you can see on the blue line on Slide 9, this all took place in an environment where interest rates rose Sharply from 6.8% at the end of July to 7.8% at the end of October. That's 100 basis points in 3 months.

Speaker 2

The 7.8% level was the highest mortgage rate since November of 2000. The gray line on this slide shows what happened to interest rates last year. We saw an even steeper increase in mortgage rates last year, which resulted in a precipitous drop in sales. However, once the rates came down from the highs, we experienced a pickup in sales in the late fall and winter and we had a much Stronger than expected spring selling season in 'twenty three. The encouraging news as it is that in the past few weeks, We've seen mortgage rates back off from the recent highs at the end of October.

Speaker 2

In addition, the interest rate outlook today is much brighter Given better results from inflation data, it feels like we could experience the same pattern as last year in the coming spring selling season. On Slide 10, we give more granularity and show the trend of monthly contracts per community compared to the same month in 2022 for each month of the quarter plus the month of November, the 1st month of fiscal 2024. The slide shows contracts per community including and excluding build for rent contracts. No matter how you look at it, our sales pace has improved significantly for each of the 4 months shown on this slide compared to the previous year. The amount of improvement was less in October and sales slowed more than we would expect seasonally, but sales bounced back a bit in November ending with an increase of 43% compared to last year.

Speaker 2

Finally, the sales pace in the 1st weekend in December has started off very strong and it's been much The month of November is typically a Slower seasonal month than October, but this year November has improved on a seasonally adjusted basis And November only had 4 Sundays versus 5 Sundays in October. Turning to Slide 11, We show annual contracts per community. On the far left side, you can see that our average pace of 44 for the normal period we've mentioned in the past of 'ninety seven through 'two. On the far right side, you can see we ended the year with 40.7 contracts per community, which is close to our historical normal levels, although a little below. Turning to Slide 12, we show our contracts per community as if the quarter ended on September 30, 'twenty 3 compared to our peers that report contracts per community on the September quarter end.

Speaker 2

At 10.5 contracts per community, Our sales pace per community is better than all but 3 of our peers that report community count for this time period. On Slide 13, you can see that our year over year growth in contracts per community for the same period was the 2nd highest among the peers. These last two slides illustrate that we're not only competitive, but we're getting more than our fair share of the contracts to be had in today's home market. Through this last weekend, weekly traffic In our communities and our website visits have both been continuing at very healthy levels indicating that future demand for new homes should remain strong. One of the reasons we've been able to maintain such a strong sales pace is due to our pivot to start more quick move in homes or QMIs as we call them.

Speaker 2

The logic behind this pivot is that QMIs give our customers more certainty regarding delivery dates and more certainty on what their mortgage rates will be at closing. QMIs allow us to offer customers mortgage rate buy downs that would be cost prohibitive on homes with longer delivery dates. For the full fiscal year, 62% of our customers that use the mortgage to purchase a home, use some form of interest rate buy down incentive. We're still evaluating whether this QMI pivot will be more permanent on a long term basis. One of the benefits of a greater supply of QMIs is that we've greatly reduced the complexity of Choices for customers and significantly increased efficiencies for our trades and construction and purchasing teams.

Speaker 2

We're certainly becoming more proficient at producing, monitoring and selling a greater number of QMIs And our quick pivot is a testament to our team's nimbleness. If you turn to Slide 14, You can see that after a significant shortage of QMIs during the COVID surge in demand, we've gone from 1.5 QMIs per community at the end of fiscal 2021 to 7.3 QMIs at the end of the Q4 of 2023. We've reached our goal of about 7 QMIs per community. In fiscal 'twenty three, we've seen our QMI sales increase to about 60% of our sales for the full year versus 40% historically, that's a 50% increase. At this point, we plan to match our start schedule with our current sales pace at each community and keep the overall level of QMIs relatively steady on a per community basis.

Speaker 2

Some investors have feared that homebuilders will over produce QMIs. That's a few that's been going on for the last year or so, but we simply don't see that in the field. Our focus continues to be to sell these QMIs before they are completed. On Slide 15, We show existing homes for sale and QMIs of all the homebuilders. The blue line shows the number of existing homes For sale around the country remains depressed at 1,000,000 homes.

Speaker 2

That's less than half of the historical average of 2,100,000 homes available for sale. We added a gray line to this slide And the gray line represents existing homes plus started and completed new homes, the measure that the U. S. Census Bureau uses for The combined total today is 1,300,000 homes, which is 1,000,000 homes less than the historical average of 2,300,000 homes. Frankly, I think the Census Bureau estimate of spec homes is high compared to what we see in the marketplace.

Speaker 2

Regardless, even with the addition of specs with their measure, inventory available for homebuyers is very, Very low. Hopefully, this alleviates some concern that there are too many QMIs on the market. The lower level of existing homes plus QMI for sales certainly helps our sales team and certainly helps our QMI strategy. Consumers have fewer homes to choose from, whether they be existing homes or a combination of existing homes and QMIs. And as a result, homebuyers are turning to more new construction than they have in the past.

Speaker 2

Moving to Slide 16, due to the strength of demand for our homes, we were able to raise net home prices In 71% of our communities during the Q3 of this year and in the Q4 that we just completed As mortgage rates increased rapidly, we were still able to raise prices again in 54% of our communities. During the Q4, the average price increased 17%, which is 3% of our average revenues per home for the quarter. These increases were generally small incremental week by week increases. If demand remains strong, we expect to be able to continue to increase home prices moving forward. Keep in mind that these net home price increases I'm referring to are typically reductions in incentives or concessions.

Speaker 2

As a reminder, we do not assume future home price increases in our guidance and we do not assume future home price increases in underwriting new land acquisitions. We remain optimistic about our future growth prospects. And as you'll see in a moment, We spent one of the highest amounts on land and land development this quarter than we have in a long time. We're very focused on using our significant cash flow to both reduce debt and to fund substantial growth in communities and ultimately in deliveries in the near future. Furthermore, we believe that favorable demographics, persistently low supply of existing homes and a positive employment trend will support demand over the long term.

Speaker 2

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

Speaker 3

Thank you, Ara. Before I get further along, I want to take a moment to talk about the 2,176 deliveries and $9,400,000 of profit from our unconsolidated joint venture in the Kingdom of Saudi Arabia. During the Q4, we delivered the vast majority of our backlog from one large project, which led to a significant profit. The project was done in conjunction with the Kingdom's Ministry of Housing and was structured such that the homes were recognized as deliveries all at once. That project is basically complete and we are beginning the start up phase on 2 new communities.

Speaker 3

Those 2 new communities, along with an additional community not yet started, will provide an opportunity for another 1,000 homes with several more in the works. The Saudi government is involved in all three projects. In fiscal 2024, we don't expect this unconsolidated joint venture to contribute significant deliveries or income Since the new communities are in start up mode, however, the housing market in Saudi Arabia is rock solid and is not exhibiting the same slowdown that we are seeing in the U. S. The reservations at our newest community, which opened recently, have been robust.

Speaker 3

Now beginning with Slide 17, you We ended the quarter with a total of 129 communities opened for sale. 113 of those communities were wholly owned. We opened 22 new wholly owned communities and closed 11 wholly owned communities during the Q4. We also closed out of 4 unconsolidated JV JV Communities during the Q4. We expect our community count to grow further in fiscal 2024.

Speaker 3

However, we are not going to try to project the number Given how existing communities can sell out ahead of schedule and new community openings can be delayed for a variety of reasons, but we are focused on attaining For a few quarters, as a result our lot count declined. However, as housing demand recovered, we jumped back into the land market. At the end of the Q3 of 'twenty three, we saw a small sequential increase in total lots controlled and in the Q4 of 'twenty three, we saw an even bigger sequential increase as well as a modest year over year increase in total lots control. In the last two quarters, our lots control has increased by 3,000 homes. These transactions were underwritten in a challenging market with high interest rates yet still met our underwriting hurdles.

Speaker 3

We ended fiscal 'twenty three with 31,726 lots controlled. One interesting trend to point out on this slide is that while our total lots controlled grew in the last two quarters, There was a sequential decrease in the number of owned lots each and every quarter over the last year. Our land teams are actively engaging with land sellers and negotiating for new land parcels that meet our underwriting standards. Our corporate land committee calendar continues to be busy, which is an indication that our lot 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 base to underwrite to a 20 plus On Slide 19, we show our percentage of lots controlled by option increased From 46% in the Q4 of fiscal 2015 to 77% in the Q4 of fiscal 2023.

Speaker 3

This increase is intentional and 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 20. Compared to our peers, you see that we continue to have one of the higher percentages of land controlled via option And we are significantly above median. Next on Slide 21, we show year's supply of owned lots for us and our peers.

Speaker 3

With 1.5 years supply of owned lots, we have the 3rd lowest year supply. As the previous three slides show, We are very focused on increasing the percentage of lots we control through option, which provides the benefits of higher inventory turn, Increased return on capital and land risk mitigation. Turning now to Slide 22. Compared to our peers, we continue to have the 3rd highest inventory turnover rate. High inventory turns are a key component of our overall strategy.

Speaker 3

We believe we have opportunities to continue to increase our use of land option and to further improve both inventory turn and our returns on inventory in future periods. On Slide 23, you can see one way to improve our inventory turns is by shortening our cycle times. We made good progress reducing Our cycle times in the second half of fiscal twenty twenty three, as you can see on this slide, our cycle times have decreased to an average of 160 days. The decrease through the year is meaningful progress and brings us closer to our pre pandemic cycle times of about 4 months or 120 days. Turning to Slide 24.

Speaker 3

After $220,000,000 of new land and land development spend in our 4th quarter, which was the 3rd highest quarterly land spend since 2010 when we first reported the data and after retiring early $100,000,000 of debt in August, We ended the quarter with $564,000,000 of liquidity, more than twice as much as the high end of our targeted liquidity range. This is the highest level of liquidity we have reported since the Q3 of 2009 when we had a much larger revolver. After the quarter ended, we used some excess cash for early retirement of $114,000,000 of bonds. Turning now to Slide 25. The top half of this slide shows our maturity ladder as of July 31, 2023, the end of our Q3.

Speaker 3

On the bottom of this slide, we show our debt maturity ladder at the end of the 4th quarter, pro form a for the debt retirement in November that I just mentioned. We took a significant step to improving our maturity ladder during the quarter. We refinanced over $600,000,000 of secured debt that was to come due during the 1st and second quarters of fiscal 'twenty 6. The new debt is made up of 2 tranches. The first is $225,000,000 of 8 percent secured debt that comes due in the Q4 of 'twenty eight and the second is $430,000,000 of 11.75 percent secured debt that comes due in the Q4 of 'twenty nine.

Speaker 3

Not only did we extend the maturities on this debt, but we did so with only nominal a nominal increase and annual interest incurred. Furthermore, and as important, we also extended the maturity on our revolver by 2 years until the Q3 of fiscal 'twenty 6. The latest debt reduction and refinancing shows that we remain committed to strengthening our balance sheet. Given our remaining $303,000,000 of deferred tax assets, We will not have to pay federal income taxes on approximately $1,100,000,000 of future pretax earnings. This benefit will continue to We'll enhance our cash flow in years to come and will accelerate our progress of paying down debt and improving our balance sheet while simultaneously growing our top line.

Speaker 3

Our financial guidance for the Q1 of fiscal 2024 assumes no adverse changes in current market conditions, including no further deterioration in our supply chain or material increases in mortgage rates, inflation or cancellation rates. Our guidance assumes continued extended construction cycle times averaging 5 to 6 months compared to our pre COVID cycle time for construction of approximately 4 months. Further, it excludes any impact to SG and A expenses from our phantom stock expense related solely to the stock price movement from our $69.48 stock price at the end of the Q4 of fiscal 'twenty 3. Slide 26 shows the guidance shows our guidance for the Q1 of fiscal 2024. We expect total revenues for the Q1 of 2024 to be between $525,000,000 $625,000,000 We also expect adjusted gross margin to be in the range of 22% to 23.5 percent and SG and A as a percent of total revenues to be between 12.5% 13.5%.

Speaker 3

Our guidance for adjusted EBITDA is a range between $55,000,000 $70,000,000 and our adjusted pre tax income for the first Quarter of fiscal 2024 is expected to be between $25,000,000 $40,000,000 Turning to Slide 27. Here we show the progress we've made to date to reduce debt and our net debt to cap. Starting in the upper left hand portion of the slide, we show the growth in equity over the past few years. And in the upper right hand portion, you can see the progress we have made in reducing our net debt. Including the redemptions we made in fiscal 'twenty three, we reduced our net debt by $844,000,000 since the beginning of fiscal 2020.

Speaker 3

On the bottom of the slide, you can see that net debt to net cap at the end of fiscal 2023 was 54.9%, which is a significant improvement from where we were at the beginning of fiscal 2020. We still have more work to do to achieve our goal of a mid-thirty percent level, but we've made significant progress and are well on our way to getting there. Our balance sheet has improved significantly over the last 5 years, and we expect to continue to make significant progress moving forward. Turning now to Slide 28. It shows the compounded annual growth rate of our book value per share from the end of 2021 Through the Q4 of fiscal 2023, our compounded annual growth rate was 238%.

Speaker 3

Slide 29 shows our book value growth rate compared to our peers. Helped by the fact that we started at a low number, our growth rate is much higher than our peers. We think it is important to consider how rapidly our book value is increasing when evaluating an appropriate price to book ratio compared to our peers. This is part of the reason that we think it is inappropriate to only look at our price to book compared to our peers. Turning to Slide Not only has our book value per share been growing at an extremely strong rate, but on this slide, we show that compared to our peers, we had the 2nd highest return on equity at 42.9% over the last 12 months.

Speaker 3

Turning to Slide 31, we show compared to our peers that we have one of the highest consolidated EBIT returns on investment at 34.3 percent, while our ROE was helped by our leverage, our EBIT return on investment, A true measure of pure homebuilding performance without regard to leverage was the highest among our midsized peers. Over the last several years, we have consistently had one of the highest EBIT ROIs among our peers. Eventually, investors will recognize our consistent superior returns on capital, reduced leverage and significantly improved balance sheet. As a result, our stock price multiple should increase. On Slide 32, we show our price to book multiple compared to our peers.

Speaker 3

We currently trade near the median of 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 were establishing a fair value for our stock. We believe when all our Financial metrics are considered, our stock is a compelling value. Turning to Slide 33. Here you can see that when we compare our enterprise value To adjusted EBITDA, we have the lowest ratio despite our outperformance on a return basis.

Speaker 3

And on Slide 30 4, we show the trailing 12 month price to earnings ratio for us in our peer group. Based on our price earnings multiple of 3.68 times At yesterday's closing stock price of $98.90 we are trading at a 56% discount to the homebuilding industry average PE ratio. We recognize that our stock may trade at a discount to the group because of our higher leverage. However, Given our 42.9% return on equity, our industry leading growth in book value, our top quartile EBIT return on investment combined with our rapidly improving balance We believe our stock continues to be the most undervalued in the entire universe of public homebuilders. We remain focused on further strengthening our balance sheet, including further reduction in our debt levels.

Speaker 3

I will now turn it back to Ara for some brief closing remarks.

Speaker 2

Thanks, Brad. Here we are reporting our year end results and in many regards it feels an awful lot like it did exactly a year ago. The most recent sales pace is down from where it was earlier in the year, but we're reporting a strong Q4 and year end. This year, I feel like we're in a better position than we were last year. Instead of scurrying to build up a supply of QMIs For the spring selling season, our construction teams have ramped up our starts and we already have a healthy level of QMIs at our communities throughout the country for the spring selling season.

Speaker 2

Additionally, our mortgage company along with our sales and marketing teams Have various below market rate mortgages that we're currently offering to our buyers. Our gross margins are high enough to absorb costs This is partially due to the year over year reductions in lumber costs. We're about to enter a seasonally slow time of the year for home sales. There's a lot that we've learned over the last year and our balance sheet is Stronger than it was a year ago. We're going to be ready to hit the ground running come the spring selling season rather than playing catch up like we did last year.

Speaker 2

Rates seem to be trending down earlier than last year, which will be helpful for buyer psychology. We're hopeful that this preparation will lead to some Strong results for the upcoming spring selling season. Turning to Slide 35. I understand that some have been skeptical about our ability to produce superior results. We hope that our continued results Create a few more believers that recognize the risk return opportunity.

Speaker 2

Our 4th quarter pre tax profit was almost 40% higher than last year. Our contracts were up 56% We had an 80% increase in year over year book value per share. We've reduced net debt by $844,000,000 since the beginning of 2020. The high end of our Q1 2024 adjusted pre tax Guidance results in more than 100% increase in our from our Q1 'twenty three results And our excess liquidity at the end of the year was one of the highest we have had in more than 14 years and positions us for strong growth and continued balance sheet improvements. We hope that our continued strong results Turn some skeptics into believers.

Speaker 2

That concludes our formal comments and we'll be happy to open it up for Q and A.

Operator

Thank you. The company will now answer to questions and a follow-up, after which you will have to get back into the queue to ask another question. Please standby while we compile our Q and A roster. Our first question is going to come from the line of Alan Ratner with Zelman. Your line is open.

Operator

Please go ahead.

Speaker 4

Hey, guys. Good morning. Congrats on the great quarter and year and all the progress on the operations and balance sheet, very impressive. So I think that you went through a lot there in terms of the balance sheet and the cash flow. And I guess as you think about the go forward and kind of putting aside what the market is going to do, clearly the last decade or so you've been Trying to balance those two objectives, kind of maintaining a certain volume pace while paying down debt.

Speaker 4

But If I look at your top line or your closings, you've generally held pretty steady over the last decade or so in that 4000 to 5000 closings per year range. Do you think the company is positioned now at a point where you can more aggressively target volume growth and market share gains? Or should we kind of expect over the next several years more of kind of the balance between those two objectives?

Speaker 2

That's a good question, Alan. And we have certainly been focused on taking our excess cash flow and reducing leverage, And we've accomplished a lot with that. The last few years of making about $1,000,000,000 pretax has certainly helped us a lot, Especially since we're not paying cash taxes right now. So we feel like we've really made substantial progress In debt reduction, we've made substantial progress in equity increases. So we're definitely going to get more aggressive in top line growth in the coming years, significantly more aggressive.

Speaker 2

And I think you're going to see that in the results. We found a formula. We don't talk a lot about our actual home strategy, Well, we think we've got one that's working quite well. And I think our EBIT to ROI results Year after year, meeting our peers shows that. And now we want to take that same result and add to it Some top line growth and we think that's even going to turbocharge the results that we've been producing.

Speaker 4

Great. We look forward to seeing that. And then second, I guess, just more on kind of the current market conditions. Yes. I heard a little bit of a conflicting message in terms of what's going on in the pricing side.

Speaker 4

You kind of gave that very helpful chart in terms of The percentage of communities that you're raising prices in. The press release you kind of alluded to, it was hard to tell whether you're actually increasing incentives or whether you're more just kind of Doing that as a lever that you could pull if rates were to remain volatile and go back up again. So how have incentives been trending over the last, Call it 6 to 8 weeks and what are you doing specifically on the rate buy down side in terms of fueling additional sales?

Speaker 3

Yes, Allen. I think the way to think about the incentives is community by community where we need to make adjustments. So We talk about the price increases that happened in some of the in 54% of the communities, and that's basically net of incentives. But there are communities where we've had to increase incentives or whether that's through mortgage rate buy downs or other forms of concessions. In the remarks, we told you that the deliveries for this fiscal year, about 62% of those that Had mortgages use some form of rate die down and I know that for the month of October's contracts, It was about 70%.

Speaker 3

So it will vary with what's going on with rates. That doesn't surprise me in October when rates Jumped up that we saw more use of rate buy downs. As rates come back down, maybe that will taper off. So we have to think and consider all of those things as we do our projections. And there's also a change in the mix of communities that deliver in the Q1 versus the 4th.

Speaker 3

So all of those things together can cause The slight decline in margin that we're expecting for the Q1 compared to the 4th. That being said, we are Selling more QMI's and delivering them in the quarter, so there's still some sales to go that we have to project what the margins will be as opposed to having it in backlog.

Speaker 2

That's really the additional color I'll add is we tend to see more Incentives on the West Coast than the East Coast and the East Coast is certainly an important part of our business. The other thing is we see a little more incentive in the entry level buyer And the entry level product who's very dependent on qualifying. So the mortgage rate buy downs really help, But those mean more incentives. We also have a significant part of our business, which is active adult. There we use far fewer incentives.

Speaker 2

Most of our active adult buyers get a No mortgage or a very small mortgage and they're not worried about giving up a 3% mortgage because they probably paid up Paid off their old 3% mortgage. So we're seeing a lot less incentive there compared to the first time. And we've got a sizable chunk in the middle on our move up homes. So overall, we're feeling pretty good about the trend in

Speaker 4

Got it. If I could just squeeze in one follow-up in on that margin point. And Brad, thank you for all the Moving pieces there. I know you're not guiding beyond 1Q, but is it fair to assume you did roughly a 23% gross margin This year as a whole, that's kind of roughly where your 1Q guide is. Is it safe to assume that that's kind of where you see the business For the foreseeable future, plus or minus, absent any significant changes in marketing conditions?

Speaker 4

Or are there any significant mix factors that we should be aware of?

Speaker 2

Alan, I'd say there's no significant mix factors. We are trying to introduce a few more Active adults, but it's not meaningful enough to make a huge difference. I mean, frankly, the market Has moved around a lot and the rates have moved around a lot. So we're extremely hesitant to provide More guidance than we're providing. I think a quarter out is Fairly reasonable.

Speaker 2

Margins are going to be very dependent on what we have to do with incentives, what happens With lumber costs and a variety of other factors. But on the whole, I don't know what we can tell you. 4th quarter, our sales are up compared to last year and we're giving you a Q1 which is almost double last year. So you can reach whatever conclusions you want. Our crystal The ball is not so clear to give longer guidance than that quarter.

Speaker 4

Understood. I appreciate that guys. Thanks a lot.

Speaker 2

Thank you.

Operator

Thank you. Be

Speaker 2

announced.

Operator

I'm showing no further questions, and I'd like to turn the conference back over to Erezavnadian for any further remarks.

Speaker 2

Great. Well, thanks so much. We're pleased with a good quarter. We think we've got some more good news in quarters to come and look forward to sharing those with Thank you.

Operator

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

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Key Takeaways

  • Huvainian delivered a standout Q4 and fiscal 2023, with total revenues of $2.76 billion, adjusted EBITDA of $427 million, and EPS of $26.88, all well above prior guidance.
  • Despite mortgage rates spiking 100 bps to 7.8%, quarterly contracts per community rose 66% year-over-year, and recent rate declines combined with historically low existing-home supply underpin continued strong demand.
  • The company’s pivot to Quick Move-In homes has driven efficiency, with QMIs per community rising from 1.5 in FY21 to 7.3 in Q4 and accounting for about 60% of full-year home sales, reducing construction cycle times and incentive costs.
  • Balance sheet strength improved markedly—Q4 land and development spend was $220 million, controlled lots rose to 31,726 (77% via options), liquidity reached $564 million, and net debt was cut by $844 million since 2020, lowering net debt-to-capital to 54.9%.
A.I. generated. May contain errors.
Earnings Conference Call
Hovnanian Enterprises Q4 2023
00:00 / 00:00