Hovnanian Enterprises Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 22, 2024

There are 6 speakers on the call.

Operator

Good morning and thank you for joining us today for Hovnanian Enterprises Fiscal 20 24 Second Quarter Earnings Conference Call. An archive of the webcast will be available after the completion of the call and run for 12 months. This conference is being recorded for rebroadcast and all participants are currently in a listen only mode. Management will make some opening remarks about the 2nd 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 Investors page of the company's website at www.khoff.com. 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, Carmen, and thank you all for participating in this morning's call to review the results for our Q2. 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 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 and are suggested by such forward looking statements are reasonable, we can give no assurance that such plans, intentions or expectations will be achieved.

Speaker 1

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. Therefore, actual results could differ materially and adversely from those forward looking statements as a result of a variety of factors. Such risks and 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 October 31, 2023, and subsequent filings with the Securities and Exchange Commission. Except as otherwise required by applicable security laws, we undertake no obligation to publicly update or revise any forward looking statements, whether as a result of new information, future events, changed circumstances or any other reason. Joining me today on the call are Ara Hovnanian, Chairman, President and CEO Brad O'Connor, CFO and Treasurer and David Meitersin, Vice President, Corporate Controller.

Speaker 1

I'll now turn the call over to Ara.

Speaker 2

Thanks, Jeff. I'm going to review our 2nd quarter results and I'll also comment on the current housing environment. Brad will follow me with more details and of course we'll follow-up with Q and A. Let me begin by saying what I just said at the John Burns Housing Conference in California last week, I feel like we're in a Goldilocks environment. The market is not too hot and it's not too cold.

Speaker 2

A hot market would challenge construction costs. It would create challenges with labor shortages and material shortages and would certainly make it even more difficult to purchase land. The challenges of a cold market are obvious, but the current environment feels balanced and more sustainable with higher rates keeping the resale supply limited and demand in check yet sufficient to have a good supply demand balance. We are assuming a higher for meaningfully, our budgets might be too conservative. I've got to add a comment that it feels like a lot of attention this morning went to existing home sales and listings.

Speaker 2

Existing home sales are low because there's no inventory of existing home sales And there was a lot of attention with listings going up, but they're up from record lows and people are losing sight of that and getting caught up in the headlines. Existing home listings are 1,200,000 listings. That's up from the record lows, but normal is 2,000,000 listings. The market is very jittery and overreacting in my view towards skewed headlines right now. Let me start on Slide 5.

Speaker 2

We show our Q2 guidance compared to our actual results. Starting on the top of the slide, revenues were $708,000,000 which was within the range of guidance we gave. Our adjusted gross margin was 22.6% for the quarter, which was at the upper end of the range that we gave. We're pleased to deliver such a strong gross margin given that mortgage rates climbed through the end of our second quarter. I'll add that we've been very focused on construction costs.

Speaker 2

Among many of our current initiatives, we have a multiyear effort to minimize and unify our SKUs across the country. This gives us the ability to truly hone in on costs by limiting the items that we negotiate with our suppliers and trades and buy in larger quantities. I'm proud to say that was one of my son's suggestions. Like the Goldilocks scenario, we are big enough to have clout with our suppliers, but small and nimble enough to rally all of our divisions around a smaller number of SKUs across the country and unifying them. Believe me that's not an easy task.

Speaker 2

Our average base construction cost per square foot in the Q2 of 2024 were down 6% year over year. The cost savings helped offset the cost of mortgage rate buy downs. We think there's a huge opportunity for much further cost reductions going forward and that we just scratched the surface. Our shift to more QMIs is certainly helping construction costs as well. And finally, our turbocharge focus on delivery growth and community count growth for the future will absolutely help with the additional volume.

Speaker 2

Our SG and A ratio was 11.2%. This was near the low end of the range that we gave. We anticipate growing the top line and we plan to leverage our current infrastructure without much in the way of additional headcount and we hope to make a lot of progress in lowering this ratio. As you'll see in a moment from our lots controlled and our record land spend over the past several quarters, where their balance sheet improved, we're very focused on growth and scale. Adjusted EBITDA was $102,000,000 for the quarter, which is significantly above the high end of the range that we gave.

Speaker 2

Finally, our adjusted pretax income was $70,000,000 which is significantly better than the high end of the range that we gave. Given the rising mortgage rate environment, we're pleased that our profitability was higher than guidance. It's always challenging to give guidance in a market with fluctuating mortgage rates. We try to get ranges that we can meet or beat. On Slide 6, we show how our results compared to last year's Q2.

Speaker 2

Starting in the upper left hand quadrant of the slide, you can see that our total revenues were relatively flat at just over $700,000,000 In the upper right hand portion of the slide, you can see that our gross margin increased 170 basis points year over year to 22.6%. On a sequential basis, we also increased from 21.8% in last year's excuse me, in the Q1 of 2024. Moving to the bottom left hand portion of the slide, you can see that our adjusted EBITDA increased 18% to $102,000,000 in this year's Q2. Finally, in the bottom right hand portion of the slide, adjusted pretax profit increased 51% to $70,000,000 If you turn to Slide 7, on this slide, you can see contracts per community for the 2nd quarter increased 7% year over year to 13.9%. This is not an easy comparison because last year's Q2 was also quite strong.

Speaker 2

When you compare this to the historical averages, the 24 second quarter compares very well. We show average contracts per community from 97 to 24 in dark blue and it was 11.4%. So we're 22% better than our historical averages over that entire period. If you only look at the period between 'ninety seven and 'two, it's a time that we often use because it was neither a bust nor a boom, that average was 13.5%. We show that far off to the left in green.

Speaker 2

We're better than that average as well. If you turn to Slide 8, we show interest rate trends. The gray line on this slide shows what happened to interest rates last year between July May. During this period, whenever rates declined, we eventually saw a pickup in sales after a little delayed reaction. The blue line shows what happened with mortgage rates between July of 2023 this May.

Speaker 2

Interesting that they followed a very similar pattern just at slightly higher rates. The good news is that rates are drifting drifting down a little bit over the last several weeks, which typically gives an uptick in demand a little later. In general, what we've observed over the past few years is when there is an increase in rates or instability in international events or inflation numbers being volatile or about to be released by the Fed, homebuyers typically step to the sideline for a short period to see how things settle down. As their expectations and outlook adjust, they eventually reenter the market. On Slide 9, we give more granularity and show the trend of monthly contracts per community compared to the same month a year ago.

Speaker 2

What jumps out at you on this slide is the spring selling season has been strong for each of these 2 years. Underpinning this strength has been a low supply of existing homes for sale, a strong jobs market and the overall health of the economy. When you layer in positive demographic trends, you get a very favorable environment for new home sales. While build for rent can create some fluctuations month to month, core consumer sales have been steady and solid compared to last year. Contracts post immunity in April were strong, though not quite as strong as they were in March of 2024 or April of 2023, but both of these months had an advantage of 5 Sundays compared to this year's April, which only had 4 Sundays and that certainly makes a difference.

Speaker 2

Turning to Slide 10, we show our contracts per community as if the quarter ended on March 31, 24 so that we can compare our results to our peers that report contracts per community on a March quarter end. At 13.9 contracts per community, our sales pace per community is the 4th highest among the public homebuilders that reported for this time period and well above the median. We recently introduced a new design concept in our home designs we refer to as looks. 50% of our new community openings this year feature our new looks designs. Suffice it to say they're being well received with good margins.

Speaker 2

Want to give credit where credit is due, I'll mention the looks design was also one of my Sun's strategy suggestions. On Slide 12, you can see that our year over year growth in contracts per community for that same period and ours was the 3rd highest among peers and again well above the median. The last two slides illustrate that we're not only competitive, but we continue to get more than our fair share of contracts. Turning to Slide 13, website visits and foot traffic at our communities remain extremely strong, which should lead to sustained healthy levels of demand going forward. Total website visits in April of 2024 were 936,000.

Speaker 2

This is one of the highest months we have had in over 5 years, even higher than any April, even including the COVID surge in demand. Potential homebuyers are definitely out in the market and looking. Given stretched affordability, we continue to utilize a high percentage of rate buy downs on homes that we're closing. On the top of Slide 14, you can see that the percentage of customers that use buy downs was 73% in the 2nd quarter compared to 70 9% in the 1st quarter. On the bottom, to give more granularity, we show monthly trends over the same period.

Speaker 2

For the last 4 months, the usage of on our deliveries has been around 72%, which seems to indicate homebuyers have reached a comfort level with these higher levels of mortgage rates. We assume buy downs will remain at similar levels going forward and the cost of buy downs will not be decreasing. In order to meet strong demand for new homes, elevated levels of quick move in homes or QMIs as we call them remain part of our operating philosophy. On Slide 15, we show that we had 7.2 QMIs per community at the end of the second quarter. Once again, our level of QMIs are of finished QMIs are low at 144 finished homes or 1.3 per community and that's down sequentially from 219 finished QMIs at the end of the Q1.

Speaker 2

We continue to hone our skills at selling QMIs before completion. In the Q2 of 2024, QMI sales were about 65% of our sales versus 40% historically, It's obviously a very significant increase for us. We'll continue to manage our QMI's at the community level. We track our start schedule per community with our current sales pace per community. At the present time, we're very comfortable with our current level of 7.2 QMIs per community.

Speaker 2

Customers have fewer existing homes to choose from and as a result, homebuyers are turning more to new construction than they have in the past. Additionally, the ability to buy down mortgage rates gives homebuilders like ourselves an advantage over existing homes. And finally, our looks designs are significantly different than the homes that are typically listed as a resale. If you move to Slide 16, you can see that due to the strength of demand for our homes, we are still able to raise net prices in 59% of our communities during the Q2 of 2024. Given the fact that rates have continued to rise throughout the Q2, this is still a healthy percentage of communities where we are able to raise prices.

Speaker 2

All in all, the current level of demand should support the growth that we hope to achieve over the next several years. I'll now turn it over to Brad, our Chief Financial Officer.

Speaker 3

Thank you, Ara. Now beginning with Slide 17, you can see that we ended the quarter with a total of 132 open for sale communities. 109 of those communities were wholly owned. During the Q2, we opened 11 new wholly owned communities sold out of 17 wholly owned communities and contributed 3 to a new unconsolidated joint venture. We also opened 4 new unconsolidated joint venture communities and closed 1 during the Q2.

Speaker 3

Total communities of 130 2 were up slightly compared to the Q2 last year when we had 128. However, it was down sequentially from 135 communities at the end of the Q1. This sequential shortfall in communities is a result of 2 prevailing trends. 1st, with continued growth in contracts, we sold through communities faster than we anticipated. The other factor continues to be delayed due to utility hookups throughout the country.

Speaker 3

We currently expect our total community count to increase by about 5% to 10 percent by the end of the Q3 of 2024 and then grow at least another 5% by the end of fiscal 2024. We expect community count to continue to grow in fiscal 2025. Predicting community count can be challenging given a variety of factors. The reason we are expecting community count growth is shown on Slide 18. We ended the 2nd quarter with 36,841 controlled lots, which equates to a 7.3 year supply of controlled lots.

Speaker 3

Our lot count increased 10% sequentially and 29% year over year. We optioned 6,300 lots in 63 communities during the Q2. That is the most we have optioned in 1 quarter since we started tracking the data in the Q1 of 2016. Our lot count increased sorry, our land teams are actively engaging with land sellers and negotiating for new land parcels that meet these underwriting standards. As a matter of fact, our land and land development spend was $231,000,000 in the Q2 of fiscal 2024.

Speaker 3

This is slightly higher than the Q1 spend of $230,000,000 making it the highest quarterly land spend since 2010 when we first reported the data. Keep in mind that land and land development spend was $220,000,000 in the Q4 of 2023. So that is 3 quarters in a row with higher than historical levels of land and land development spend. 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. We are using current home prices, including the current level of mortgage rate buy downs, current construction costs and current sales base to underwrite to a 20% plus internal rate of return.

Speaker 3

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. The growth in lots control proceeds growth in community count, which proceeds growth in deliveries. On Slide 19, we show the percentage of our lots controlled via option increased from 45% in the Q2 of fiscal 2015 to 80% in the Q2 of fiscal 2024. This increase is intentional and has been a focus of our land light high inventory turn land strategy.

Speaker 3

We are pleased with the progress we have made. Turning now to Slide 20, you see that we continue to have one of the higher percentages of land controlled via option compared to our peers, and we are significantly above median. On Slide 21, 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. We believe we have opportunities to continue to increase our use of land options and to further improve our inventory turns and our returns on inventory in future periods.

Speaker 3

Another way to improve our inventory turns is by shortening our construction cycle times. We made good progress reducing our cycle in the second half of fiscal twenty twenty three from 190 days to 160 days. Our cycle times in the first and Q2 of 2024 were similar to the Q4 of 2023 at around 160 days. However, it is a significant improvement from the 190 in the Q2 of 2023.

Speaker 1

We still have

Speaker 3

some work ahead of us to get back to pre pandemic cycle times of about 4 months or 120 days. We are also focused on shrinking the time between lot takedown and construction start to further improve our inventory turnover. We still have more opportunity. Turning to Slide 22. Even after spending $231,000,000 on land and land development and $15,000,000 to repurchase stock, We still ended the 2nd quarter with $311,000,000 of liquidity above the high end of our targeted liquidity range.

Speaker 3

Turning now to Slide 23. The top of this slide shows our maturity ladder as of April 30, 2024. The bottom portion of the slide shows the debt reduction from the debt exchange we completed yesterday. We paid $31,500,000 in cash plus accrued interest and issued $94,000,000 of 10% senior secured 1.75 lien term loan due in the Q1 of fiscal 2018 to retire $169,000,000 of debt. The exchange lowered the face value of our debt by $75,000,000 and reduced our annual cash interest by $4,600,000 and our annual interest expense by approximately $8,500,000 It is yet another example of the steps we have taken to improve our maturity ladder over the past several years.

Speaker 3

We remain committed to further strengthening our balance sheet. Turning to Slide 24. Here we show the progress we've made to date to grow our equity and reduce our debt. Starting on the left hand portion of the slide, we show the growth in equity over the past few years. And on the right hand portion, you can see the progress we've made in reducing our debt, including the redemptions we made in fiscal 2023 2024 and the most recent debt reductions in exchange, we reduced our debt by $741,000,000 since the beginning of fiscal 2020.

Speaker 3

With the exchange yesterday, our debt is now below $1,000,000,000 a significant milestone considering the $2,500,000,000 of debt we had at the peak. Our net debt to net cap at the end of the second quarter form a for the debt exchange was 55%, which is a significant improvement from 146% at the beginning of fiscal 2020. But we still have more work to do to achieve our goal of a mid-thirty percent level. We have 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.

Speaker 3

Given our remaining $280,000,000 of deferred tax assets, we will not have to pay federal income taxes on approximately $1,000,000,000 pretax earnings. This benefit will continue to significantly enhance our cash flow in years to come and will accelerate our growth plans as well as our ability to pay down debt. I believe we have significantly more NLO remaining than most of our peers. Our financial guidance for the Q3 of fiscal 2024 and for the full year of 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 per construction of approximately 4 months.

Speaker 3

It also assumes that we continue to be more reliant on QMI sales, which makes forecasting gross margins more difficult. Our guidance assumes continued use of mortgage rate buy downs similar to recent months. Further, it excludes any impact to SG and A expense from our phantom stock expense related solely to the stock price movement from the $147.83 stock price at the end of the 2020. Slide 25 shows our guidance for the Q3 of fiscal 2024. We expect total revenues for the Q3 to be between $675,000,000 $775,000,000 We also expect adjusted gross margin to be in the range of 21.5 percent to 23.5 percent and SG and A as a percent of total revenues to be between 11% 12%.

Speaker 3

Our guidance for adjusted EBITDA is a range between $97,000,000 $107,000,000 and our adjusted pretax income for the Q3 of fiscal 2024 is expected to be between $65,000,000 $75,000,000 Slide 26 shows our guidance for all of fiscal 2024. We expect total revenues for the full year to be between 2 $750,000,000 $3,000,000,000 We also expect adjusted gross margin to be in the range of 21.5% to 23% and SG and A as a percent of total revenue to be between 11% 12%. Our guidance for adjusted EBITDA is a range between $395,000,000 $430,000,000 and our adjusted pretax income for the full year is expected to be between $265,000,000 $300,000,000 Keep in mind that when comparing this guidance to the prior year actuals, 2023 included $19,700,000 of profit from Elantso and a $19,100,000 gain on consolidation of a joint venture, neither of which are assumed to repeat in 2024. Excluding those items, adjusted pretax income in 2023 would have been $244,000,000 which means the midpoint of our guidance would be a 16% increase year over year. We expect our diluted earnings per share for the full year to be in the range of $25.29 At the midpoint of our guidance, we anticipate our common book value per share to increase by 45% at October 31, 2024 to approximately $106 per share compared to last year's value at year end of $73 per share.

Speaker 3

Turning to Slide 27. We show that our return on equity was 39.5%, which is the highest over the trailing 12 months compared to our peers. And on Slide 28, we show compared to our peers that we have one of the highest consolidated EBIT returns on investment at 33.5%. While our ROE was helped by our leverage, our EBIT return on investment is a true measure of pure homebuilding operating performance without regard to leverage and 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.

Speaker 3

We have an operating model that we don't speak about specifically, but it's clearly delivering superior results. Eventually, investors will recognize our consistent superior returns on capital, reduced leverage and significantly improved balance sheet. Given our rapidly growing book value, we think it would be appropriate to consider a variety of metrics, including EBIT return on investment, enterprise value to EBITDA and our price to earnings multiple when establishing a fair value for our stock. We believe when all our fundamental financial metrics are considered, our stock is a compelling value. On Slide 29, we show our price to book multiple compared to our peers.

Speaker 3

We do compare more favorably on this metric. Based on the midpoint of our guidance, we expect to end October with a book value of approximately $106 per share. On Slide 30, we show the trailing 12 month price to earnings ratio for us and our peer group based on our price earnings multiple of 5.6 9 times at yesterday's closing stock price of $169.10 We are trading at a 42% discount to the homebounding 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 39.5% return on equity, our top quartile EBIT return on investment combined with our rapidly improving balance sheet, we believe our stock continues to be the most undervalued in the entire universe of public homebuilders.

Speaker 3

On Slide 31, we compare some of our statistics to one of our peers that is often touted as a superior performer by analysts. Dream Finders is an excellent homebuilder and warrants high valuations. As you can see on the top of the table, many of our metrics are similar. Our option loss percentage and inventory turnover are very close to Dreamfinders. However, they do have a slightly lower net debt to cap.

Speaker 3

It is 44% compared to our 55%. Again, Dream Finders is an excellent homebuilder, but our ROE and EBIT ROI, which ignores the benefit of leverage, compares very favorably. Hence, our frustration in our valuation, which can be seen on the last two rows on this slide. Our PE is 44% lower than DreamFinders and our price to book multiple is 38% lower than theirs. Again, we think Dream Binders is an exceptional homebuilder.

Speaker 3

We are simply frustrated by our market multiples given our performance. We think our valuations are compelling opportunity and our rapidly improving balance sheet makes it even more appealing. We remain focused on further strengthening our balance sheet primarily through growth in equity as we grow our top line and profitability. I will now turn it back to Ara for some brief closing remarks.

Speaker 2

Thank you, Brad. I have to add that our stock price today is a scratch head scratcher. Our profits went up 50% and we're one of the leaders in EBIT ROI and we're trading at about 1.4 times our year end book value, which ends in 5 months. But we'll continue to put our head down and do what we do best and perform with exceptional returns and build beautiful homes for our customers. We are encouraged by the recent demand for homes, which is evident in our contracts and our traffic, both foot traffic at our communities and visits to our websites.

Speaker 2

These two trends should definitely keep our contracts per community above normal levels. 1st, a substantial percentage of homes that we sell are in the active adult or active lifestyle category. In fiscal 2023, it was 21% of our deliveries and I could see that inching up over the future. This is a category where that many of our homebuilding peers do not focus on and we have made it one of our specialties. We've been building active adult lifestyle homes for decades.

Speaker 2

This buyer demographic is not as concerned about mortgage rates as many of these are cash buyers. In the first half of twenty twenty four, 51% of our active adult buyers purchased all cash and many of the others took a small mortgage and didn't really need a mortgage to qualify to purchase. By the way, they have no problem selling their existing home and giving up a mortgage because in most cases they've already paid off their mortgage. 2nd, our backlog conversion ratio has increased significantly over the past 2 years due to our focus on QMIs. Our and then increased further to 68% in this year's Q2.

Speaker 2

An increased sales and increased backlog conversion ratio adds a layer of complexity for forecasting, but it does have a positive impact on our bottom line. I'll add that our strategy shift to building more QMI Homes allows us to be more even and predictable and starts, which helps our pricing with our subcontractors. If we take a step back and look at this home sales market in totality, we find ourselves in a Goldilocks scenario as I said at the outlook at the beginning of our conference call today. While existing home supply has increased in some markets a little bit, it's still extraordinarily strong even in the highest markets and it's very restrictive in most of the markets that we build in. Mortgage rates are higher than they've been in a very long time, but homebuyers realize that they're not likely to see mortgage rates with a 4% or even or 3% handle anytime soon.

Speaker 2

And of course, we can offer below market rate mortgages to our customers. The job market has cooled down a bit from its feverish pace, which should help inflation in the long run, but there are still jobs being created and that's been helpful. The housing market seems not too hot and not too cold and feels very balanced and normal today. We believe that we can thrive in this market. We've grown our lot count substantially over the past year.

Speaker 2

And while land development delays have plagued the entire industry, our growth in community count will eventually follow. And this will lead to revenue growth, greater SG and A efficiency and higher levels of profitability. We'll continue to strive to deliver top tier industry returns to our shareholders, while delivering beautiful homes for our customers. I want to conclude by thanking each and every one of our associates for all of their efforts. The growth and stellar returns don't come about by happenstance, but are the result of our entire team focusing on executing our business plans and strategies and having all of us pull in the same direction.

Speaker 2

That concludes our formal comments and we're happy to turn it over for Q and A.

Operator

Thank you. So we will now answer questions. And everyone that has an opportunity to ask questions, Please limit your questions to 3 and a follow-up after which please get back into the queue to ask further questions. All right. And it comes from the line of Nathalie Koulas Serkke with Zelman.

Operator

Please go ahead.

Speaker 4

Hey, nice job during the quarter and thanks for taking my questions. Could you maybe talk a little bit about how May is doing so far in terms of absorptions month to date compared to April?

Speaker 2

Sure. I'll take that. Well, first of all, obviously, we only have 2 full weeks in April so far excuse me, in May so far. One of those was Mother's Day. So it's a little early frankly to give much color on May.

Speaker 2

But I'd say in general, it's been choppy as it often is choppy with changes in the environment. We just had mortgage rate reductions over the last 3 weeks. We've had a lot of focus on the Fed I can say this that our website traffic is outstanding right through last week. If you compare, it's not the highest week since the COVID surge, but it's a very high week. And I think we beat every week other than 1 week during the COVID surge with our website visit.

Speaker 2

So hopefully, that will translate like it has done to good sales in the future.

Speaker 4

Got it. Thank you so much. And one more question. So is there an overarching theme on the 40% of communities that you did not raise price in? For example, are they in the similar price point or similar markets?

Speaker 4

Like is there any trend that you're seeing there that you can share

Speaker 2

us? No, I'd say it's been fairly uniform in terms of price increases. It might be a little more challenged in our lowest price homes, the Aspire Homes, as we call them, where they're struggling more for qualification and we tend to have more mortgage rate buy downs, which affects net pricing. But other than that, I'd say it's been very uniform both geographically and price point.

Speaker 4

Got it. Thank you so much.

Operator

Thank you. Our next question is from Alex Barron with Housing Research Center. Please proceed.

Speaker 5

Yes. Thank you. And great job on the quarter guys. I wanted to focus on the margin guidance and just the upper range and lower range. I mean, you're kind of halfway into the quarter.

Speaker 5

So what would drive the lower range, I guess, at

Speaker 2

this point? I'm

Speaker 3

sorry, I missed the question. Alex, could you repeat it?

Speaker 2

The question was, what drives since we're 1 month into the quarter, why do we have such a wide range? And I'd say given the volatility in mortgage rates, we reserve costs in our back pocket for closing and qualification challenges. And that makes it very difficult to know for sure until toward the end, especially as we're selling more and more QMI. So we give ourselves a little wider spread than we did in our pre QMI days. And we strive to give guidance that we can meet or beat consistently.

Speaker 3

Yes. And I would just add, Alex, we saw that in the Q2 actuals. We were at the high end of our range because of just the amount of ultimately how much mortgage rate buy down and other concessions end up getting used on the homes as they close.

Speaker 5

Got it. And as far as the share buyback, it seems you guys hadn't done that in a while. So can you just give us your thoughts on going forward how you're thinking about share buybacks in general?

Speaker 3

I mean, I would say that we felt like after our earnings call, I think our stock price was around $1.69 ish, I think, last at the end of the Q1, the stock price started to go down. And we felt like we feel very strongly about our growth and where our earnings are headed and where our stock price should be headed. And when the stock was down in the $140,000,000 range, we felt like it was a good opportunistic time to take some shares out of the market. We could do that again in the future. We'll continue $10,000,000 to $10,000,000 to $15,000,000 remaining on an approval that we could do.

Speaker 3

So we're just looking when it's opportunistic and stock prices drop to something we think makes sense, we might consider doing it.

Speaker 5

Okay. Well, best of luck for the rest of the year. Thanks, guys.

Speaker 3

Thanks, Alan. Thank you.

Operator

And as I see no further questions in the queue, I will turn it back to Ara Hovnanian for his final comments.

Speaker 2

Thank you very much. As I've mentioned, we're very excited about our performance. We're very excited about our prospects. We are still scratching our head about valuations, but we think that only spells opportunity. And we look forward to giving you more good news in quarters to come.

Speaker 2

Thank you very much.

Operator

Thank you. And this concludes our conference call for today. Thank you all for participating and have a nice day. You may now disconnect.

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Key Takeaways

  • Hovnanian reported Q2 revenues of $708 M with an adjusted gross margin of 22.6%, and delivered adjusted EBITDA of $102 M and pretax income of $70 M, all above guidance ranges.
  • The company reduced average base construction costs by 6% year-over-year through a nationwide SKU unification initiative and increased reliance on quick move-in homes (QMIs) to support further cost savings.
  • Land control expanded to 36,841 lots (a 7.3-year supply) with a record $231 M land and development spend in Q2, and 80% of lots now secured via options to drive future community growth.
  • Balance sheet strength improved significantly, with debt reduced by $741 M since FY 2020, net debt to net capital at 55%, $311 M of liquidity above target, and a recent debt exchange lowering annual cash interest by $4.6 M.
  • Management describes a “Goldilocks” housing market—balanced demand, limited resale inventory, robust website visits (936 K in April) and foot traffic—and maintains that rate buy-downs (≈72% of deliveries) are sustaining customer activity.
A.I. generated. May contain errors.
Earnings Conference Call
Hovnanian Enterprises Q2 2024
00:00 / 00:00