Hovnanian Enterprises Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 30, 2023

There are 8 speakers on the call.

Operator

Morning and thank you for joining us today for Hovnanian Enterprises Fiscal 2023 Third Quarter Earnings Conference Call. Only mode. Management will make some opening remarks about the 3rd quarter results and then open the line for questions. The company will also be webcasting a slide presentation along with the opening comments from management. The slides are available on the Investor page of the company's website at www.khov.com.

Operator

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, Investor Relations. Jeff, please go ahead.

Speaker 1

Thank you, Liz, and thank you all for participating in this morning's call to review the results for our Q3. 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. 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 Such forward looking statements include, but are not limited to, statements related to the company's goals and expectations with respect to 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, Tensions or expectations will be achieved. By their nature, forward looking statements speak only as of the date they are made, are not guarantees of future performance or results and are subject to risks, uncertainties and assumptions that are difficult to predict or quantify.

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 and our Annual Report on Form 10 ks for the fiscal year ended October 31, 2022, and subsequent filings with the Securities and Exchange Commission. Except as otherwise required by applicable security laws, we undertake no obligation I'll now turn the call over to Ara Hovnanian, our Chairman, President and CEO. Go ahead, Ara.

Speaker 2

Thanks, Jeff. I'm going to review our Q3 results and I'll Comment on the current housing market. Given that Larry Sorsby, our CFO, will be retiring at year end after 35 years at Hovnanian, We'll give an opportunity for Brad O'Connor, our upcoming CFO to present today. Brad has been with us for almost 20 years, 12 years as Chief Accounting Officer and also in the past few years as Treasurer and has participated on all our calls since that time. Also joining us on this call is David Mitraision, our Vice President and Corporate Controller.

Speaker 2

As usual, we'll open it up to Q and A after. Our Q3 results were excellent. However, as we review our results, keep in mind that comparisons to last year are challenging caused the entire industry's home sales to fall substantially in the second half of the year. To spur sales activity, Starting last summer, we and most of the industry offered increased incentives, which resulted in lower margins on new contracts at that time. As a result of those lower margins and the reduction in sales pace in the second half of twenty twenty two, Many of our Q3 profit metrics are challenging year over year comparisons.

Speaker 2

Fortunately, starting early this calendar year, Demand for new homes bounced back and we've seen strong sequential improvement in our profitability metrics And strong year over year performance on our net contract metrics. Based on the strong sales environment Right through last weekend in August, we are increasing our full year 2023 guidance, including a 20% increase in EPS. Additionally, while we're not ready to give a detailed guidance For the Q1 of 2024, we are confident that our Q1 of 2024, for which we are already building a very solid backlog, We'll show significant year over year improvements. On Slide 5, on the left side, You see our revenues of $650,000,000 were less than last year, but for and that's obviously for all the reasons I just On the left hand side of Slide 6, we show that total SG and A was 11.6% and was higher than last year. However, as we show on the right hand portion of the slide, our SG and A was also well within our guidance.

Speaker 2

The SG and A percentage was higher primarily due to lower delivery volume. On Slide 7, In the upper left hand portion of the slide, we show that our adjusted gross margin for the Q3 of 2023 Was strong at 23.2%. While this is down compared to last year's Q3, Keep in mind that last year's gross margin was historically one of our highest gross margin quarters. If you look to the upper right hand portion of the slide, you can see that gross margin increased 230 basis points from the Q2 to the Q3. And finally, on the bottom, you can see that our Q3 gross margin exceeded the high end of our guidance.

Speaker 2

Turning to Slide 8. In the top left hand corner of the slide, we show that adjusted EBITDA was $109,000,000 compared to $147,000,000 last year. Moving to the upper right hand portion of the slide. Again, while it was lower than last year, it improved 26% sequentially. On the bottom of the slide, you can also see that EBITDA was well above the guidance range of $85,000,000 to 95,000,000 In the upper left hand portion of Slide 9, you can see that our adjusted pretax income With $75,000,000 in the quarter compared to $113,000,000 last year.

Speaker 2

In the upper right hand corner, like many other metrics, It has improved sequentially, up 62% from $46,000,000 in the Q2 of 2023. And at the bottom of the slide, you can see that our income before taxes was also well above the high end of our guidance range. On Slide 10, you can see that our net income for the Q3 of 2023 was $56,000,000 compared to net income of $83,000,000 in last year's Q3. Turning to Slide 11. On this slide, you can see that contracts per community for the Q3 increased 92% year over year.

Speaker 2

While last year was an easy comparison at 14.2 contracts per community, we are clearly above the levels that we achieved in any Q3 for many years other than the COVID surge in contracts in 2020. On the left hand portion of the slide, you can see that we averaged 11.4 contracts per community during the Q3 from 97 2002, a period we often refer to as a more normalized neither peak nor bust period. So the Q3 of 2023 also exceeded the levels we achieved in more normal times. On Slide 12, we give more granularity and show the trend of monthly contracts per community compared to the same months in 2022 N21 for May through July. The slide shows contracts per community, including and excluding Build for rent contracts.

Speaker 2

No matter how you look at it, our sales pace has improved significantly And even compares favorably to 2021 for 2 of the 3 months shown on this slide. That is somewhat surprising Given the strong sales during the COVID surge that we experienced in 2021. More recently, the sales pace for the past 2 months has leveled off, But at a very solid level, while August is not over, our contracts to date as of last Sunday are up 56 percent over last year. We continue to see demand in our build for rent opportunities. While build for rent opportunities reduce our normal for sale opportunities, the returns in this segment are very solid.

Speaker 2

Over the longer term, Build for rent should be additive to our total deliveries and will likely be a long term part of our strategy. Turning to Slide 13, You can see the month by month progression of our seasonally adjusted annualized contract pace per community. The chart shows that the contract pace bottomed out in the fall of 2022 and has improved steadily to current levels. Once again on this slide, you can see the impact of BFR contracts that predominantly fell in the month of June and the outperformance we achieved that month. But even without the BFR sales in the month of June, the seasonally adjusted Through July, our sales even without the benefit of BFR didn't have the typical summer Falloff and the sales pace in the months of May June were as strong as any month in the spring selling season, which is unusual and speaks to the continued strength in the market in spite of the raise in interest rates.

Speaker 2

Turning to Slide 14, we show annual contracts per community. On the far left hand side, you Our more normalized pace of 44 for that period I discussed before of 97 through 2002. In the middle of the slide, You can see our annual contracts per community for the past 9 fiscal years. And on the right hand portion of the slide, You can see our recent seasonally adjusted contracts per community by month for the past 3 months. I want to point out our annualized sales pace for the months of May through July exceeded the pace for the 6 years prior to the COVID surge.

Speaker 2

Turning to Slide 15. Here, we show our contracts per community As if our quarter ended on June 30, 23 and compared to our peers that report contracts per community On a June quarter end basis, at 15.7 contracts per community, we have the 2nd highest absorption rate among our peers during this period. On Slide 16, you can see that our year over year growth And contracts per community for the same period was also the 2nd highest among our peers. These last two slides Illustrate that we're not only competitive, but we're getting more than our fair share of contracts to be had in the strong new home market. Through this last weekend, weekly traffic in our communities and website visits are both continuing at very healthy levels, Surprisingly close to 21 levels indicating that future demand for new homes should remain strong.

Speaker 2

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 QMI's as we call them. The logic behind this pivot is that QMI's provide our customers With more certainty on what their mortgage payments will be at closing, we consider a QMI a home to be a QMI the day we begin vertical Construction. We're still evaluating whether this pivot will be a more permanent on a long term basis. We do Like the benefit right now of having a large number of QMIs along with build to order homes. In the interim, we've greatly reduced the complexity of choices for our customers and significantly increased the efficiencies for our trades and construction and purchasing teams.

Speaker 2

If you turn to Slide 17, you can see that after a Significant shortage of QMIs during the COVID surge in demand, we've gone from 3.2 QMIs per community At the end of last year's Q3 to 6.7 QMIs at the end of the Q3 of 2023. The pickup in our sales pace has made it challenging to increase the number of QMIs as quickly as we wanted. However, we're very close to our goal of about 7 QMIs per community. Some investors have definitely Fear that homebuilders will over produce QMIs, that's been a fear for the last year. We just do not see that in the field.

Speaker 2

Our focus continues to be to sell these QMIs before they are completed. We're particularly pleased To see that even though we increased the absolute number of QMIs by 139 from the 2nd quarter to the 3rd quarter, The number of finished QMIs declined from 127 to 100. The demand for QMIs is particularly strong when they are between 30 60 days of completion. Since the beginning of the year, we've seen our QMI sales increase to about 56% of our sales versus 40% historically. At this point, we plan to match our start schedule with our current sales pace At each community and keep the overall level of QMI steady on a per community basis.

Speaker 2

On Slide 18, we show that the number of existing homes for sale around the country currently remains depressed At 980,000 homes, that's less than half of the historical average, which is over 2,000,000 homes. The lower level of existing homes for sale certainly helps our sales and validates our QMI strategy. Consumers have fewer existing homes to choose from and as a result, More homebuyers are turning to new construction than in the past. Having QMIs available for sale is also important Because just like existing homes, homebuyers can close much sooner on a QMI than on a to be built home and it allows Customers more certainty on mortgage rates. This strategy has clearly helped fuel our growth in contracts and our growth in contracts per community.

Speaker 2

Moving to Slide 19, due to the increasing strength of demand for our homes, We were able to raise net home prices in 30% of our communities during the Q1. We raised home prices Again, in 69% of our communities during the Q2 and we raised them again in 71% of our communities During the Q3, many of our communities raised prices multiple times this year. If demand remains strong, we expect to be able to continue to increase home prices moving forward. These net home price increase I'm referring to by the way include reductions in incentives and concessions. I want to emphasize that we have not assumed any further Home price increases in our guidance.

Speaker 2

We're optimistic about our future growth prospects. Furthermore, we believe that favorable demographics, persistently low supply of existing homes and a positive employment trend will support demand over the long term. I'll now turn it over to Brad O'Connor, Our Chief Accounting Officer and Treasurer.

Speaker 3

Thank you, Ara. I'm going to start with Slide 20. You can see that we ended the quarter with 122 During the quarter, we contributed 8 active wholly owned communities to a new joint venture. Our joint ventures are performing well and continue to be an ongoing part of our strategy and core operations. Moving E Day Communities to a new JV along with a faster than anticipated sales pace led us to only having 102 wholly owned communities at the end of the Q3.

Speaker 3

Our number of communities open for sale would have been higher. However, utility company delays continue to slow down our ability to open new communities. The entire industry is experiencing delays in land development, Particularly given the shortage of transformers, the only positive to these delays is that it keeps the supply of new developments in the market low. We expect our community count to grow in the Q4 of fiscal 2023 and further in fiscal 2024. Before I move on, I want to comment on the other expenses from our income statement.

Speaker 3

During the Q3, we assumed control of 1 of our unconsolidated joint ventures after our partner received their final cash distribution, But before the communities were finished, under GAAP, we were required to consolidate the joint venture at fair value and based on the extremely strong performance of these communities, We recorded a $19,000,000 gain in the other income and expense line upon consolidation. After the consolidation, The same three communities were put into a new unconsolidated joint venture at the higher fair value agreed to by the 3rd party partner. Turning to Slide 21. During the rapid increase in mortgage rates last summer, we suspended most of the land acquisitions for a few quarters. As a result, our lot count has declined slightly from the prior year.

Speaker 3

However, at the end of the Q3, we saw a very modest sequential increase in total lots control. We ended the Q3 of fiscal 2023 with 29,487 lots. You will notice that while our total lots controlled increased This quarter, lots owned continued to decrease as we continue to focus on lot options and high inventory terms. Given the strength of the new home market over the past 7 months, our land teams are once again actively engaging with land sellers and Negotiating for new land parcels that meet our underwriting standards. Our corporate land committee calendar continues to fill up, which is an indication that our lot count should bottom out here.

Speaker 3

By using current home prices, current construction costs and current sales pace to underwrite to a 20 plus percent internal rate of return, Our underwriting standards automatically self adjust to changes in market conditions. On Slide 22, We show our percentage of lots controlled by option increased from 46% in the Q3 of fiscal 2015 to 73% in the Q3 of fiscal 23. This has been a focus of our land strategy and we continue to make progress. A low percentage of owned lots strongly mitigates land risk. Turning now to Slide 23.

Speaker 3

Compared to our peers, you see that we have one of the higher percentages of land controlled via options And we are significantly above median. We continue to use land options wherever possible to achieve higher inventory turns, Enhance our returns on capital and to reduce risk. Turning now to Slide 24. We show year's supply of owned lots for us and our peers. With 1.6 year supply of owned lots, we have the 3rd lowest year supply.

Speaker 3

Having a shorter supply of owned lots combined with a strong supply of option lots An effective way to mitigate land risk. On Slide 25, including both owned and option lots, you can see that we have 5.9 years supply of controlled land, Slightly above median for our group. Turning now to Slide 26. Compared to our peers, we continue to have the 3rd highest inventory High inventory turns are a key component of our overall strategy. We believe we have opportunities to continue to increase our use of land options and To further improve both inventory turns and our returns on inventory in future periods, one way to improve our inventory turns is by shortening our cycle times.

Speaker 3

We made good progress in doing this from April through July when our cycle times came down by 37 days. Turning to Slide 27. After $169,000,000 of new land and land development spend in our 3rd quarter And retiring early $100,000,000 of bonds in May, we ended the quarter with $456,000,000 of liquidity, More than $200,000,000 above the high end of our targeted liquidity range. Turning now to Slide 28. On this slide, we show our debt maturity ladder at the end of the Q3.

Speaker 3

During last year's Q4, we amended our revolving credit facility to extend the maturity date To June 30, 2024. After that, we don't have any debt maturing until the Q1 of fiscal 'twenty 6. Given our high liquidity position at the end of the Q3, we announced in our press release this morning that we redeemed an additional $100,000,000 Of our 7.75% senior secured notes due 2026 in August, we have reduced total debt by $668,000,000 since beginning of fiscal 2020, this latest debt reduction shows that we remain committed to strengthening our balance sheet. Given our remaining $325,000,000 of deferred tax assets, we will not have to pay federal income taxes on approximately $1,200,000,000 of future pre tax earnings. To put that into perspective, at the midpoint of our guidance for fiscal 2023, We will have earned $566,000,000 of adjusted pretax income in the last 2 years.

Speaker 3

So the DTA should offset payment of cash taxes Several more years, if the market holds somewhat steady to the current conditions, this benefit will continue to significantly enhance our cash flow in Our financial guidance for the full year of fiscal 2023 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 6 months compared to our pre COVID cycle times for construction of approximately 4 months. Further, it excludes any impact to SG and A expenses from our phantom stock related solely to the stock price movement from our $106.62 stock price at the end of the Q3 of fiscal 2023. On Slide 29, we show guidance for fiscal 2023. We have improved our guidance again in virtually every metric.

Speaker 3

We expect total revenues for fiscal 2023 to be between $2,600,000,000 $2,700,000,000 We also expect adjusted gross margins to be in the range of 22% to 23%. SG and A as a percent of total revenues is expected to be between 11% 12%. We increased our guidance for adjusted EBITDA by $30,000,000 to a range between $350,000,000 $370,000,000 We also increased our expectations for adjusted annual pretax income for fiscal 2023 by $35,000,000 be between $215,000,000 $235,000,000 We expect our diluted earnings per share to be in the range of 21 Dollars to $24 Book value per common share is expected to be between $66 $0.68 at the end of the 4th quarter. Turning to Slide 30. Here we show the progress we've made to date to reduce debt and our net debt to cap.

Speaker 3

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 made in reducing our net debt, Including the redemption in August and assuming we have the same liquidity at the end of fiscal 2023 that we did at the end of the Q3, We will have reduced our net debt by $804,000,000 since the beginning of fiscal 2020. In the middle, on the bottom, you can see that Net debt to net cap at the end of fiscal 2023 is expected to be 57.8%, which is a significant improvement We still have more work to do to achieve our goal of a mid-thirty percent level, but we have made significant progress and are well on our way Getting there. Given the return to a more normalized sales pace and the overall strength of the housing market today, We are encouraged that our year over year comparisons for the Q1 of fiscal 2024 should show significant improvement. Our balance sheet has improved significantly over the last 5 years, and expect to continue to make significant progress moving forward.

Speaker 3

Turning now to Slide 31. It shows the compounded annual growth rate of our book value Slide 32 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's important to consider how rapidly our book value is increasing when evaluating an appropriate price to book ratio compared to our peers. Turning to Slide 33.

Speaker 3

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 have the 2nd highest return on equity at 38% over the last 12 months. Turning to Slide 34, we show compared to our peers that we have one of the highest consolidated EBIT returns on investment at 30.4%. 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 ROI among our peers. Eventually, investors will recognize our Assisted superior returns on capital, reduced leverage and significantly improved balance sheet.

Speaker 3

As a result, our stock price multiples should increase. On Slide 35, we show our price to book multiple compared to our peers. While we currently trade above We still trade below 5 of our peers and have lower book value growth rates. 4 of these peers also have lower returns on equity than us. Given our rapidly growing book value, we think it would be appropriate to consider a variety of metrics, including EBIT return on investment And our price earnings multiple when establishing a fair value for our stock.

Speaker 3

We believe when all our financial measures are considered, our stock is a compelling value. Turning to Slide 36. Here you can see that when we compare our enterprise value to adjusted EBITDA, we have just about the lowest ratio despite our outperformance on a return basis. And on Slide 37, we show the trailing 12 month price to earnings ratio for us and our peer group Based on our price earnings multiple of 4.55 times at yesterday's closing stock price of $100.38 We're trading at a 38% discount for the homebuilding industry average PE ratio. We recognize that our stock may trade at a discount to the group because of our Higher leverage.

Speaker 3

However, given our 38% return on equity, our industry leading growth in book value, our top quartile EBIT return on investment, Combined with our rapidly improving balance sheet, we believe our stock continues to be the most undervalued of the entire universe of public homebuilders. We remain focused on further strengthening our balance sheet, including further reductions in our debt levels. I will now turn it back to Aaron for some brief closing remarks.

Speaker 2

Thanks, Brad. The market for new homes remains strong due to the positive demographics and employment trends combined with a low supply of existing homes for sales. Given the rising mortgage rate environments, new homebuilders are in a unique position where we can buy down mortgage rates for our customers, something that existing home sellers cannot offer to buyers. Our recent pivot Having more QMIs available allows us to offer these below market mortgage rates on more homes Than we otherwise would have been able to do and that gives us the confidence that our sales pace should remain fairly steady at these healthy levels. While the recent rise in mortgage rates have caused concerns for investors regarding sales going forward, Our August contracts month to date are up 56% over August of last year.

Speaker 2

The sales pace has slowed somewhat in August compared to a blazing comparison for the Q3, but the year over year comparison is very strong And customers seem to be adjusting their expectations to the current interest rates. I'm optimistic that we'll be able to finish this year With a strong Q4, while we're not prepared to give detailed guidance for the Q1 of 2024, We do expect to follow-up with a Q1 that should show significant year over year improvements to last year's Q1. We look forward to reporting our progress in these future periods. Assuming sales remain similar to the last few months, it should set us up Nicely for a solid performance for the full year of 2024. That concludes our formal comments and we'll be happy to open it up for Q and A.

Operator

The company will now answer questions. So that everyone has an opportunity to ask questions, participants will be limited to 2 questions and a follow-up, After which, they will have to get back into the queue to ask another question. We will open the call to questions. Please standby while we compile the Q and A roster. Our first question comes from the line of Alan Ratner with Zelman and Associates.

Speaker 4

So far, and nice job in the quarter. Ara, you kind of touched on it towards the end there, but I feel like because there is so Attention on kind of the real time activity, I was hoping just to first ask about kind of what you are seeing in August up to this point. And Yes, 56% growth, very impressive. If I'm doing the math, it probably implies an absorption pace somewhere in the low 3s, which is obviously very healthy. A bit lower than you've done the last few years in August and I'm looking at your monthly Cadence chart on Slide 40, which is very helpful.

Speaker 4

I'm curious, is there anything we need to consider as far as BFR sales that could be either A headwind or tailwind to the results in August and thinking about the quarter as a whole. And I guess just more broadly on that, Given the high percentage of communities you're raising prices in, if you were to see that sales pace dip, say, below 3% in September October, would you maybe take your foot off the gas a little bit on incrementally raising price?

Speaker 2

I'll start with the First one, the answer is yes, definitely. If we saw sales slow down as a result of our Home price increases, yes, we definitely take our foot off the pedal and not slow as much. And of course, we've demonstrated in the past, we'll Happily, increase incentives if necessary to keep individual communities on pace. Regarding BFRs, there's nothing extraordinary. I'd say in general, there's still a lot of interest and demand and discussions going And for us to do more BFRs and we're very pleased with the results.

Speaker 2

The returns are solid and We think it's going to be a core part of our earnings. Just like by the way, Alan, I'll mention this to you specifically, Joint ventures have been for 20 years a core part of our operations. And the profits are an important part of how we achieved some very good returns.

Speaker 4

Understood. No, I appreciate that on the JV side. The gross margin, just looking at your guidance for the full year, it implies Pretty wide range of potential outcomes in the 4th quarter, 100 basis points spread on the full year. Could Get me if I'm plugging the numbers in here. 4th quarter either being down sequentially as much as 100 basis points or up Potentially a couple of 100 basis points.

Speaker 4

So I'm not looking for an exact number here, but can you talk just generally about the Trend on margin in your backlog, is it stable? Is it moving higher? And what is the price versus cost spread looking like today?

Speaker 2

I'd say in general, it's feeling pretty good. We didn't talk a lot about costs, but We've made some great progress on a national purchasing blitz. And I'd say prices Overall, putting lumber aside, have been trending slightly lower and certainly holding Steadily right now and that has been helpful.

Speaker 3

The other comment I would make to your question about margin for the 4th quarter is as we transition to more QMIs and we saw a lot of QMIs In the same quarter that we have the deliveries, there's a little less visibility to what we've had in the past through our margins. But I would echo what Harris said that I would say the trends have continued to be similar to what we saw in the Q3.

Speaker 2

The other thing I've mentioned and We recognize that it's a big spread, but as you saw, there was a big spread in our actuals for the Q3. We definitely Perform what we thought and part of that is it's very hard to project every single community in this environment. You never know which what the mix is going to be. Do our higher margin communities run into a transformer problem, which Happens all over the place and you substitute it in another part of the country with maybe a lower margin or maybe a higher margin. It's just Very difficult to be super precise in this environment plus the QMIs as Brad mentioned.

Speaker 2

But in general, I'd say we feel very good about gross margins right at this moment.

Speaker 4

Perfect. If I could just squeeze in one follow-up, Ara, just going back to the first question. You mentioned you wouldn't hesitate to adjust incentive levels if you felt like Sales pace had retreated below a certain level. Is there an absorption pace we should think about? Obviously, there's seasonality in it, but is there a level where if Sales were to drop below a certain point, for example, where you would get potentially more aggressive on discounting?

Speaker 2

I mean, generally, Monthly sales pace with a 3 handle is what we'd shoot for. An annualized pace of 36 to 40 homes would be a typical number, but we also, as we've discussed, Are very focused on inventory turnover. So we also look at what is the pace Of the underlying lot takedown pace, and we feel it's very important to Get our sales pace to equal the lot takedown pace. In some cases, the lot takedown pace is only 2 a month. In other cases, it's 3 a month, 4 a month or 5 a month.

Speaker 2

So we really look by community And ideally, and we're not there yet, we would the day we take down a lot, we'd start construction either because it was already sold and in backlog or we're beginning a new QMI based on the pace?

Speaker 5

And just I'll make one comment and that is I don't believe some analysts and the market in general Really recognizes our land light strategy and it's not we hope to get to land light just as Eric described Trying to match up our takedowns to our sales absorption pace as well as our high inventory turnovers, high return on invested capital, we are land Similar to not as good as NBR, but certainly similar to Dreamfinders, which Some are really touting as a landline company. They get much higher multiples than we do. And I just don't think the market and analysts understand We're also landline.

Speaker 4

Appreciate that guys. Thanks a lot.

Speaker 6

Thank

Operator

you. Our next question comes from Luis Oliva with Housing Research Center. Luis, your line is open.

Speaker 7

Hi. Glad to see you paid down

Speaker 6

the $100,000,000 of debt this quarter. Do you have any plans to continue to pay down debt over the next few quarters? And is there anything that limits how much you

Speaker 2

pay down debt? I'm sorry. Can you speak just a little more Slowly, it's hard to understand.

Speaker 7

Yes. I was just saying, Galactica,

Speaker 4

you paid down the $100,000,000 of debt per quarter. Is there anything that limits how much you can pay down per quarter? And do you plan to pay any more over the next few quarters?

Speaker 2

We don't have any specific limits on what we can pay down per quarter. So As I think we've demonstrated, we're very serious about improving our balance sheet and reducing our debt. We've been doing this fairly regularly. We expect if things hold steady, we can continue to do that in the future, but we're not giving any specific guidance. I mean, we just paid down $100,000,000 last quarter and $100,000,000 we just paid off last week.

Speaker 2

So we're making great progress.

Speaker 6

Okay. Thank you very much.

Operator

Thank you. That concludes today's question and answer session. I'd like to turn the call back to Ara Hovnanian for closing remarks.

Speaker 2

Thank you very much. I know it's an interesting time with rates moving as they are in all of the different world events, Particularly with what's been going on with the Fed and concerns about rates. As I mentioned, customers Seem to be adjusting. Our offerings are being well received. Our sales are very good.

Speaker 2

Our margins are good. We feel very optimistic about the outlook going forward and we'll look forward to giving you more good news in future quarters. Thanks so much.

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Key Takeaways

  • Hovnanian reported Q3 revenue of $650 million with a 23.2% adjusted gross margin—above the high end of guidance—and adjusted EBITDA of $109 million, a 26% sequential improvement.
  • The company raised its full-year 2023 outlook, boosting EPS guidance by 20% to a range of $21–$24 per share on the strength of its sales rebound.
  • Contracts per community climbed 92% year-over-year to 15.7 in Q3—second highest among peers—and August contracts are up 56% year-over-year, driven by scarce existing home supply.
  • Hovnanian is expanding its pivot to Quick Move-In homes and build-for-rent projects, increasing QMIs to 6.7 per community to give buyers rate certainty and sustain pace.
  • The builder has paid down over $668 million of debt since fiscal 2020, reducing net debt-to-capital to 57.8% and strengthening its balance sheet for future growth.
A.I. generated. May contain errors.
Earnings Conference Call
Hovnanian Enterprises Q3 2023
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