Hovnanian Enterprises Q2 2025 Earnings Report

Hovnanian Enterprises EPS Results

• Actual EPS: $2.43
• Consensus EPS: $2.45
• Beat/Miss: Missed by -$0.02
• One Year Ago EPS: N/A

Hovnanian Enterprises Revenue Results

• Actual Revenue: $686.47 million
• Expected Revenue: $733.20 million
• Beat/Miss: Missed by -$46.73 million
• YoY Revenue Growth: -3.10%

Hovnanian Enterprises Announcement Details

• Quarter: Q2 2025
• Date: 5/20/2025
• Time: Before Market Opens
• Conference Call Date: Tuesday, May 20, 2025
• Conference Call Time: 11:00AM ET

Hovnanian Enterprises (NYSE:HOV), Inc., through its subsidiaries, designs, constructs, markets, and sells residential homes in the United States. It offers single-family detached homes, attached townhomes and condominiums, urban infill, and active lifestyle homes with amenities, such as clubhouses, swimming pools, tennis courts, tot lots, and open areas. The company markets and builds homes for first-time buyers, first-time and second-time move-up buyers, luxury buyers, active lifestyle buyers, and empty nesters. It also provides mortgage loans, title insurance, and homeowner's insurance services. The company was founded in 1959 and is headquartered in Matawan, New Jersey.

Hovnanian Enterprises Q2 2025 Earnings Call Transcript

Key Takeaways

• In Q2, revenue was $686 million near the low end of guidance and adjusted gross margin fell to 17.3% (below guidance) as incentives rose to 10.5%.
• Contracts declined 7% year-over-year amid monthly volatility, yet at 11.2 contracts per community the company outpaced pre-COVID averages and ranked third among peers.
• Quick-move-in homes comprised 79% of sales (an 11-quarter high), driving a 30.9% same-quarter contract-to-delivery rate and an 80% backlog conversion.
• The land strategy is being refreshed by exiting underperforming 2022 vintages, controlling 42,440 lots (7.7-year supply, 85% via options) and securing new parcels at targeted returns, plus a new Saudi Arabia MoU to expand development.
• For Q3, the company guides revenue of $750 million–$850 million, gross margins of 17%–18%, SG&A of 11%–12% and adjusted pretax income of $30 million–$40 million.

Presentation

[Operator]

Good morning, and thank you for joining us at today for Albanian Enterprise Fiscal twenty twenty five Second Quarter Earnings Conference Call. An archive of the webcast will be available after the completion of the call and run for twelve 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 second quarter results and then open the line for questions. The company will also be webcasting a slide presentation along with opening remarks from management.

[Operator]

The slides are available on the Investors page of the company's website at www.khov.com. Those listeners who would like to follow along will now log on to the website. I'll now turn the call over to Jeff O'Keefe, Vice President of Investor Relations. Jeff, please go ahead.

[Jeffrey O'Keefe, Vice President - Investor Relations at Hovnanian Enterprises]

Thank you, Marvin, and thank you all for participating in this morning's call to review the results for our second quarter. 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 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 expectations will be achieved.

[Jeffrey O'Keefe, Vice President - Investor Relations at Hovnanian Enterprises]

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, 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 k for the fiscal year ended 10/31/2024 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 review any forward looking statements whether as a result of new information, future events, changed circumstances, or any other reasons. Joining me today are Ara Hovnanian, Chairman, President, and CEO Brad O'Connor, CFO David Mitrzan, Vice President, Corporate Controller and Paul Eberle, Vice President, Finance and Treasurer. Ara, I'll turn the call over to you now.

[Ara Hovnanian, President, CEO & Chairman of the Board at Hovnanian Enterprises]

Thanks, Jeff. I'm going to review our second quarter results, and I'll also comment on the current housing environment. Brad will follow me with more details as usual, and of course, we'll open it up to Q and A afterwards. Let me begin on slide five. Here we show our second quarter guidance compared to our actual results.

[Ara Hovnanian, President, CEO & Chairman of the Board at Hovnanian Enterprises]

Overall, we are satisfied that everything, except gross margin, was within or better than the guidance range that we provided. Needless to say, there was a lot of political and economic uncertainty during the quarter. Starting at the top of the slide, revenues were $686,000,000 which was closer to the low end of our guidance. This was primarily due to the mix of deliveries with some higher priced home deliveries slipping into future quarters. Our adjusted gross margin was 17.3% for the quarter, which was just below the low end of the guidance range that we gave.

[Ara Hovnanian, President, CEO & Chairman of the Board at Hovnanian Enterprises]

If incentives had remained at the then current levels, which averaged 9.7% in the first quarter, then we would have been around the midpoint of the guidance range. However, as the quarter went on, we had to increase incentives. For the second quarter, incentives increased 80 basis points sequentially to 10.5%. Our SG and A ratio was 11.7%, which was near the midpoint of the guidance we gave. Our income from unconsolidated joint ventures was $9,000,000 which was at the high end of the guidance that we gave.

[Ara Hovnanian, President, CEO & Chairman of the Board at Hovnanian Enterprises]

Adjusted EBITDA was $61,000,000 for the quarter, which is slightly above the high end of the guidance range that we gave. And finally, our adjusted pretax income was $29,000,000 which was near the high end of the range that we gave. Again, given the challenging operating environment, we're satisfied with these results. On slide six, we show our second quarter results compared to last year's second quarter. Keep in mind that last year was a very strong second quarter from both a profitability and sales pace perspective.

[Ara Hovnanian, President, CEO & Chairman of the Board at Hovnanian Enterprises]

In today's operating environment, it's no surprise that all of these metrics experienced year over year declines. Starting in the upper left hand portion of the slide, you can see that our total revenues were down year over year despite flat deliveries. The year over year decline in revenues was primarily due to lower average sales prices. Moving across the top to gross margin, our gross margin was down year over year mainly due to increased incentives, which is somewhat related to the greater focus on pace versus price. I'll elaborate more on that shortly.

[Ara Hovnanian, President, CEO & Chairman of the Board at Hovnanian Enterprises]

During this year's second quarter, incentives were 10.5% of the average sales price. This is up two forty basis points from a year ago, 80 basis points from the first quarter of twenty twenty five, and seven fifty basis points higher than fiscal twenty two, which was prior to the mortgage rate spike impacting deliveries. Other than the extraordinary cost to buy down mortgages to make our homes affordable, our gross margins would have been very healthy. Moving to the bottom left, you can see that our total SG and A as a percentage of total revenue increased slightly. This was primarily due to the growth in our community count.

[Ara Hovnanian, President, CEO & Chairman of the Board at Hovnanian Enterprises]

And in the bottom right hand portion of the slide, you can see the negative impact that all of these metrics had on our year over year profitability. If you turn to slide seven, you can see that contracts for the second quarter, including domestic unconsolidated joint ventures, decreased 7% year over year. Once again, there were considerable differences in monthly sales, which you can see on slide eight. Contracts were down 17% in February, then bounced back with a 3% increase in March, and this was followed by a 9% decline in April. On slide nine, you can see that the most recent three months continued a trend of choppiness, and frankly, this volatility is not unique to this year as we've discussed before.

[Ara Hovnanian, President, CEO & Chairman of the Board at Hovnanian Enterprises]

If you turn to slide 10, you can see that contracts per community were lower this year compared to the second quarters of the past several years. But at 11.2 contracts per community, our contract pays compares well to pre COVID levels, and is higher than our quarterly average of 10.3 for the second quarter since 02/2008. On slide 11, we give more granularity and show the trend of monthly contracts per community compared to the same month a year ago. Here, you can see that this year's sales pace was lower than last year. However, you can also see the current sales pace in March and April was higher than the average pace for those months since 'eight, and even February was not that far off from the monthly average pace since 'eight.

[Ara Hovnanian, President, CEO & Chairman of the Board at Hovnanian Enterprises]

Turning to slide 12, we show contracts per community as if we had a March end. This way, we can compare our results to our peers that report contracts per community on a calendar quarter end. At 10.8 contracts per community, our sales pace is the third highest among the public builders. On slide 13, you can see that year over year contracts per community declined for all but one of our peers shown on this slide. We are right around the median.

[Ara Hovnanian, President, CEO & Chairman of the Board at Hovnanian Enterprises]

Again, this was as if our quarter ended in March, so that we could compare our results to these other companies. What we're trying to illustrate in these last two slides is that even though the spring selling season has not played out the way everyone had hoped, our focus on pace over price resulted in an above average number of contracts per community compared to our peers. Given the monthly volatility we've experienced, we don't get overly excited or concerned about the performance in any one month. We continue to monitor our sales on a community by community basis, and make adjustments in real time based on current sales data. We remain confident in both our strategy and the long term fundamentals of the new home market.

[Ara Hovnanian, President, CEO & Chairman of the Board at Hovnanian Enterprises]

On slide 14, you can see that considerable percentage of our deliveries, our home buyers continue to utilize mortgage rate buy downs. The percentage of home buyers using buy downs in this year's second quarter was 75%. The buy down usage in our deliveries indicate that buyers continue to rely on these rate buy downs to combat affordability at the current mortgage rates. Given the persistently high mortgage rate environment, we assume buy downs will remain at similar levels going forward. In order to meet home buyers' desires to use cost effective mortgage rate buy downs, we're intentionally operating at an elevated level of quick move in homes, or QMIs as we call them, so that we can offer affordable mortgage rate buy downs in the near term, and give more certainty in an uncertain market.

[Ara Hovnanian, President, CEO & Chairman of the Board at Hovnanian Enterprises]

On slide 15, we show that we had 8.6 QMIs per community at the end of the second quarter, which is down sequentially from 9.3 in the first quarter of twenty five. We define QMIs as any unsold home where we've begun framing. In the second quarter of twenty five, QMI sales were 79% of our total sales. This was the highest quarter since we started reporting this number eleven quarters ago, and significantly higher than the previous highest quarter, which was 72% in the fourth quarter of twenty four. Historically, that percentage was 40%, about half.

[Ara Hovnanian, President, CEO & Chairman of the Board at Hovnanian Enterprises]

Obviously, the demand for QMIs remains high, so we're comfortable with the current level of QMIs. We ended the second quarter with three zero four finished QMIs on a per community basis. That puts us at 2.4 finished QMIs per community. That's down from 2.6 finished QMIs at the end of the first quarter. We've cut back on the number of homes we've started to match the current sales pace.

[Ara Hovnanian, President, CEO & Chairman of the Board at Hovnanian Enterprises]

Sequentially, when compared to the first quarter of twenty five, the total number of QMIs decreased by 8%, similar to the drop in our sales pace, and the number of our finished QMIs decreased by 5%. The focus on quick move in homes results in more contracts that are signed and delivered in the same quarter. That leads to lower levels of backlog at quarter end, but a higher backlog conversion. During the second quarter of twenty five, '30 '9 percent of our homes delivered in the quarter were contracted in the same quarter. This obviously makes it more challenging when providing guidance for the next quarter.

[Ara Hovnanian, President, CEO & Chairman of the Board at Hovnanian Enterprises]

It also resulted in a high backlog conversion ratio of 80%, which is significantly higher than the second quarter average backlog conversion ratio of 58% since 'ninety eight. We'll continue to manage our QMIs on a community level, and are highly focused on matching our QMI start space with our QMI sales pace. If you move to slide 16, you can see that even with higher mortgage rates and a slower sales pace, we're still able to raise net prices in 31% of our communities during the second quarter. '60 '3 percent of the communities with price increases were in Delaware, Maryland, New Jersey, North Carolina, Virginia, and West Virginia, which are our better performing markets. While the sales environment has been difficult, we've been focusing on pace versus price, but we're still raising prices and lowering incentives when our sales pace warrants it.

[Ara Hovnanian, President, CEO & Chairman of the Board at Hovnanian Enterprises]

Economic uncertainty, high mortgage rates, affordability, and low consumer confidence have caused many consumers to delay purchasing a new home. To increase our sales pace and make our homes affordable, we continue to offer mortgage rate buy downs. While our contract pace per community is consistent with historical averages, it remains lower than in the recent months. Further, our gross margins, ignoring the mortgage rate incentives, are actually quite strong. However, offering mortgage rate buy downs is expensive, and it certainly has impacted our gross margins in the current quarters.

[Ara Hovnanian, President, CEO & Chairman of the Board at Hovnanian Enterprises]

We've reviewed all land transactions to ensure that they remain economically viable. This did result in walking away from a few land option positions during due diligence that no longer met our return hurdles. Slide 17 illustrates the vintage of our land position. The percentage above each bar shows the percentage of lots controlled in each year compared to the total. The percentage below the bar shows the incentives for closing that year.

[Ara Hovnanian, President, CEO & Chairman of the Board at Hovnanian Enterprises]

On this slide, you can see that 74% of the land was originally controlled when we were using an elevated level of incentives to underwrite the land. These lots are typically performing near our pro form a metrics. As time has gone on, particularly in regard with land that was controlled in fiscal twenty five, we and the rest of the industry have been using more and more incentives, and the lots controlled then underwrote with a higher percentage of incentives. As far as underperformance goes, it's our '22 vintage that is the most impacted, as land prices had increased, but incentives had not yet fully kicked in. Some of the '21 vintage land, primarily on the West Coast, can also be margin challenged, but we're burning through the difficult vintages and replacing them with more current vintages with better returns.

[Ara Hovnanian, President, CEO & Chairman of the Board at Hovnanian Enterprises]

In this more challenging environment, we are working with some of our land sellers currently under option agreements to find win win solutions in a difficult market where we both share a bit of the pain in the slow market. We've made a strategic decision to burn through the less profitable land parcels at lower gross margins to clear the way for recent land acquisitions, which meet our target return metrics. Fortunately, we're finding plenty of new land opportunities that meet our return hurdles even with the current level of incentives and sales pace. While we're satisfied with our performance given the difficult environment, we expect that we will return to more favorable performance metrics as we replace certain land positions with newer land positions that we're finding today. Finally, as an update to our Saudi Arabian joint venture, last week we signed a memorandum of understanding with the Ministry of Housing in Saudi Arabia.

[Ara Hovnanian, President, CEO & Chairman of the Board at Hovnanian Enterprises]

This will expand our activities and our partnership in Saudi Arabia, increasing housing for a growing population of young middle class families. I'll now turn it over to Brad O'Connor, our Chief Financial Officer.

[Brad O'Connor, CFO at Hovnanian Enterprises]

Thank you, Era. Let me start with slide 18, where we show the progress we've made in reducing our base construction cost per square foot. Here we show that from the first quarter of fiscal twenty three, when we first started attacking costs from our suppliers and trade partners until the second quarter of twenty twenty five, we have lowered our base construction cost per square foot by 7%. Much of the progress was made in the first few quarters analysis and we have been holding fairly steady since then. As the market has softened, we are digging in and looking for additional savings.

[Brad O'Connor, CFO at Hovnanian Enterprises]

Turning to slide 19, you can see that we ended the quarter with a total of 148 open for sale communities, a 12% increase from last year's second quarter. '1 hundred and '20 '5 of those communities were wholly owned. During the second quarter, we opened 11 new wholly owned communities and sold out of 11 wholly owned communities. Additionally, we had 23 domestic unconsolidated joint venture communities at the end of the second quarter. We opened three new unconsolidated joint venture communities and closed three during the quarter.

[Brad O'Connor, CFO at Hovnanian Enterprises]

We continue to experience delays in opening new communities, primarily related to utility hookups and permitting delays throughout the country. We expect community count to continue to grow further in fiscal 'twenty five. The leading indicator for further community count growth is shown on slide 20. We ended the quarter with 42,440 controlled lots, which equates to a seven point seven year supply of controlled lots. Our lot count increased 15% year over year.

[Brad O'Connor, CFO at Hovnanian Enterprises]

If you include lots from our unconsolidated joint ventures, we now control 45,582 lots. We added 3,000 lots in 46 future communities during the second quarter. Our land teams are actively engaging with land sellers negotiating for new land parcels that meet our underwriting standards even with high incentives and the current sales pace. In fiscal 'twenty four, we began talking about our pivot to growth. This followed a stretch of several years where we had used a significant amount of the cash generated to pay down debt.

[Brad O'Connor, CFO at Hovnanian Enterprises]

It's significant to note that while our total lots controlled grew over the two years, our lot options grew by more than 15,000 and our lots owned shrunk by more than 1,800 as we focus on our land life strategies. On the far right side of Slide 21, you can see that our lot count decreased sequentially this quarter. This is partially due to being more selective with the new lots that we controlled during the quarter, as well as walking away from two thousand hundred and sixty three lots primarily during the due diligence period. We are re underwriting deals right before land takes with current levels of incentives included. On slide 22, we show our land and land development spend for each quarter going back five years.

[Brad O'Connor, CFO at Hovnanian Enterprises]

You can see how that pivot to growth has impacted our land and land development spend. However, during the second quarter of twenty five, our land and land development spend was the lowest it has been in three quarters. This is another indication of our increased focus on ensuring it makes sense to move forward with existing land deals. Again, we are using current home prices, including the current high level of mortgage rate buy downs and other incentives, current construction costs, and current sales pace to underwrite to a 20% loss internal rate of return. And then right before we are about to acquire the lots, we are re underwriting them based on the then current conditions just to be sure that it still makes sense to go forward with the land purchase.

[Brad O'Connor, CFO at Hovnanian Enterprises]

We feel good that our new acquisitions will yield solid IRRs since we are building in huge incentives and slower paces. Our underwriting standards automatically self adjust to any changes in market conditions. We are finding many opportunities in our markets and are very focused on growing our top and bottom lines for the long term. And this growth in lots controlled proceeds growth in community count, which proceeds growth in deliveries. We are very pleased with the trends.

[Brad O'Connor, CFO at Hovnanian Enterprises]

On slide 23, we show the percentage of our lots controlled via option increased from 45% in the second quarter of fiscal 'fifteen to 85% in the second quarter of fiscal 'twenty five. This is the highest percentage of option lots we've ever had, continuing our strategic focus on LandLite. Turning now to slide '24, you see that we continue to have one of the highest percentages of land controlled via options compared to our peers. Needless to say, with the fourth highest percentage of option lots, we are significantly above the median. I want to clarify a point about our land position.

[Brad O'Connor, CFO at Hovnanian Enterprises]

If we were to exclude our own lots and backlog in QMIs, as some of our peers do, our percentage would increase to 91%. On slide 25, compared to our peers, we have the third highest inventory turnover rate. High inventory turns are a key component of our overall strategy. We believe we have opportunities to continue to increase our use of land options and further improve our inventory terms in future periods. Our focus on pays versus price is evident here.

[Brad O'Connor, CFO at Hovnanian Enterprises]

Turning to slide 26, even after spending $220,000,000 on land and land development, dollars 27,000,000 to retire our highest coupon debt and $12,000,000 on repurchasing common stock, we ended the second quarter with $2.00 $2,000,000 of liquidity, which is within our targeted liquidity range. This is the second quarter in a row that we have been fully invested. Turning now to Slide '27. This slide shows our maturity ladder as of 04/30/2025. During the second quarter, we paid off early the remaining $27,000,000 of the 13.5% notes, our highest cost debt that was scheduled to mature in February of twenty twenty six. This is the latest example of the steps we have taken over the past several years to improve our maturity ladder and reduce our interest costs. We remain committed to further strengthening our balance sheet going forward. Turning to Slide 28, we show the progress we have made to date to grow our equity and reduce our debt. Starting on the upper left hand part of the slide, we show the $1,300,000,000 growth in equity over the past few years. During the same period on the upper right hand portion, you can see the $742,000,000 reduction in debt.

[Brad O'Connor, CFO at Hovnanian Enterprises]

On the bottom of the slide, you can see that our net debt to net cap at the end of the second quarter of fiscal 'twenty five was 51.4%, which is a significant improvement from our 146.2% at the beginning of fiscal 'twenty. We still have more work to do to achieve our goal of 30%, but we are comfortable that we are on a path to achieve our target soon. Given our remaining $225,000,000 of deferred tax assets, we will not have to pay federal income taxes on approximately $700,000,000 of future pre tax earnings. This benefit will continue to significantly enhance our cash flow in years to come and will accelerate our growth plans. Regarding guidance, given the volatility and the difficulty in projecting margins with moving interest rates and volatility in general, we will focus our guidance only on the next quarter.

[Brad O'Connor, CFO at Hovnanian Enterprises]

Our financial guidance assumes no adverse changes in current market conditions, including no further deterioration in our supply chain or material increases in mortgage rates, tariffs, inflation or cancellation rates. Keep in mind, some materials have already increased in cost in anticipation of tariffs. Our guidance assumes continued extended construction cycle times averaging five months compared to our pre COVID cycle times for construction of approximately four months. 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 and other incentives similar to recent months.

[Brad O'Connor, CFO at Hovnanian Enterprises]

Further, it excludes any impact to SG and A expense from our Phantom stock expense related solely to the stock price movement from the $96.8 stock price at the end of the second quarter of fiscal twenty twenty five. Slide 29 shows our guidance for the third quarter of fiscal twenty twenty five compared to actual results for the second quarter of twenty twenty five. Our expectation for total revenues for the third quarter is between $750,000,000 and $850,000,000 The midpoint of our total revenue guidance would be up 17% compared to the second quarter. Adjusted gross margin is expected to be in the range of 17% to 18%. At the midpoint, it would be up slightly compared to the second quarter.

[Brad O'Connor, CFO at Hovnanian Enterprises]

This is lower than a typical gross margin, particularly because of the increased cost of mortgage rate buy downs and our focus on pace versus price. We expect the range of SG and A as a percentage of total revenues to be between 1112%, which is still higher than usual. One of the reasons our SG and A is running a little high is that we are gearing up for significant community count growth and we have to make new hires in advance of those communities. Our expectations for adjusted pre tax income for the third quarter is between $30,000,000 and $40,000,000 which would be higher than the second quarter. Moving to slide 30, we show all of the guidance we gave for the third quarter.

[Brad O'Connor, CFO at Hovnanian Enterprises]

The only two lines on here that we have not mentioned are income from unconsolidated joint ventures and adjusted EBITDA. We expect income from joint ventures to be between $15,000,000 and $25,000,000 and our guidance for adjusted EBITDA is between $60,000,000 and $70,000,000 Turning to Slide 31, we show that our return on equity was 27%. Over the last twelve months, we are the second highest amongst our midsized peers shown in the dark green on the slide and the third highest including the larger peer group. Obviously, this is helped by our higher leverage. On slide 32, we show that compared to our peers, we have one of the highest adjusted EBIT returns on investment at 26.1%.

[Brad O'Connor, CFO at Hovnanian Enterprises]

On this basis, we are the highest amongst the mid sized peers and fourth highest overall. While our ROE was helped by our leverage, our adjusted EBIT return on investment is a true measure of pure homebuilding operating performance, With the highest among our mid sized peers and among the highest of all peers regardless of size, we believe we are striking a good balance between pace and price, which is delivering industry leading ROIs and ROEs. As our leverage continues to come down, we believe we will not only have industry leading EBIT ROIs, but also have one of the leading pretax ROIs as well. Over the last several years, consistently had one of the highest EBIT ROIs among our peers. Eventually, investors will recognize our consistent superior returns on capital and significantly improved balance sheet.

[Brad O'Connor, CFO at Hovnanian Enterprises]

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 of the fundamental financial metrics are considered, our stock is one of the most compelling values in the industry. On slide 33, we show our price to book multiples compared to our peers and we are right around the median for midsize homebuilders. On slide 34, we show the trailing twelve month price to earnings ratio for us and our peer group based on our price to earnings multiple of 3.89 times at Monday's stock price of $109.85 We are trading at a 53% discount to the homebuilding industry average PE ratio if you consider all public builders and a 41% discount when considering our mid sized peers. We recognize that our stock may trade at a discount to the group because of our higher leverage, but our leverage has been shrinking and our equity has been growing rapidly.

[Brad O'Connor, CFO at Hovnanian Enterprises]

On slide 35, we show that despite our extremely high ROE, there are a number of peers that have a higher price to book ratio than us. This slide more visually demonstrates how much we are undervalued relative to other builders when looking at the relationship between ROE and price to book. A very similar result exists when looking at ROE to price to earnings. On Slide 36, you can see an even more glaring disconnect with our high EBIT ROI and our PE. We have the fourth highest EBIT ROI and yet our stock trades at the lowest multiple to earnings of the group.

[Brad O'Connor, CFO at Hovnanian Enterprises]

These last four slides further emphasize our point that gives our high return on equity and return on investment combined with our rapidly improving balance sheet, we believe our stock continues to be the most undervalued in the entire universe of public homebuilders. I'll now turn it back over to Era for some closing remarks.

[Ara Hovnanian, President, CEO & Chairman of the Board at Hovnanian Enterprises]

Thanks Brad. While we met most expectations this quarter, we remain vigilant given the uncertainty in the broader economy. We're closely monitoring our communities and adjusting our local strategies accordingly. One particular area of focus that we talked about quite a bit is burning through assets that are underperforming because of when we control the lots and replacing them with lots being underwritten with current levels of incentives. Those should produce better returns.

[Ara Hovnanian, President, CEO & Chairman of the Board at Hovnanian Enterprises]

While we're we are still performing well compared to our peers, whether you look at sales absorption levels, ROE, or ROI. As we move forward, we continue to be very disciplined in our underwriting process for all new land deals. Fortunately, with 85% to 91% of our lots controlled through options, we have the ability to find win win alternatives with our land sellers. We're rapidly replenishing our land lot supply with more profitable new communities. You have to look at our historical ROIs and believe that we can replenish our land with good returns.

[Ara Hovnanian, President, CEO & Chairman of the Board at Hovnanian Enterprises]

We're continuing to monitor and adjust home pricing on a community by community basis. We're hyper focused on improving our inventory turnover and continuing to deliver strong ROE and ROI. That concludes our formal comments, and we'll be happy to turn it over for Q and A.

[Operator]

The company will now answer questions. So that everyone has the opportunity to ask a question, participants will be limited to two questions and a follow-up. After which, will have to get back into the queue to ask another question. We'll open the call to questions. To ask a question, you will need to press 11 on your telephone and wait for your name to be announced.

[Operator]

To withdraw your question, please press 11 again. Please stand by while we can pause the Q and A roster. And our first question comes from the line of Nelly Goluszewski of Zelman. Your line is now open.

[Ivy Zelman, EVP & Co-Founder at Zelman & Associates]

Hey. Good morning. Thanks for all the detail on vintage land relative to incentive. So I understand that you're now assuming a higher level of incentives on recent land purchases, but does this mean you've actually seen lower land prices on recent acquisitions? Because that's been a little surprising based on the commentary we've gotten from other builders about land prices still remaining sticky.

[Ivy Zelman, EVP & Co-Founder at Zelman & Associates]

Otherwise, it seems that you would have a tough time making deals meet your underwriting hurdles.

[Ara Hovnanian, President, CEO & Chairman of the Board at Hovnanian Enterprises]

No. Land sellers are definitely the last to adjust prices, but we're able to find enough opportunities to replenish our land supply at dramatically better returns. It obviously varies by market, it's tougher in some markets, it's easier in other markets, so we're focused on getting a good geographic mix. But we're definitely able to find parcels that meet our historic return hurdles, which are still our current return targets in new land acquisitions, even with our assumed 10 and a half percent average incentive and with the current sales pace.

[Ivy Zelman, EVP & Co-Founder at Zelman & Associates]

Okay. Yeah. Thanks. That makes sense. Are you able to maybe provide a bit more detail on what markets you're specifically seeing, like, easier terms, I guess, with the land sellers?

[Ara Hovnanian, President, CEO & Chairman of the Board at Hovnanian Enterprises]

Well, markets that I mentioned that historically, well, I shouldn't say historically, that currently are yielding better results include Delaware, Virginia, Southeast Coastal Charleston areas, New Jersey, and Maryland as examples. Definitely finding it easier to pencil opportunities there at the moment. But having said that, even the more difficult markets, we're finding opportunities that yield appropriate returns.

[Ivy Zelman, EVP & Co-Founder at Zelman & Associates]

Okay. Got it. Thank you. And your margin guidance for next quarter into a flat to up trend. But given that the demand environment has not materially improved since the previous quarter, and I'm guessing your incentives are still running at even levels.

[Ivy Zelman, EVP & Co-Founder at Zelman & Associates]

Is there anything besides the typical seasonal uplift in margins that gives you the confidence to achieve this?

[Ara Hovnanian, President, CEO & Chairman of the Board at Hovnanian Enterprises]

Well, I mean, part of it is based on community by community analysis, looking at our backlog, and also knowing our efforts in cost reduction, which is definitely an opportunity right now.

[Brad O'Connor, CFO at Hovnanian Enterprises]

But keep in mind, range we gave is 17 to 18% and the quarter that we just ended with 17.3. So it's not like that midpoint is significantly different than what we just performed. I think what you said is probably the right way to think about it. It's kind of stayed where it's been. It's running where it's where you've seen it for the second quarter.

[Brad O'Connor, CFO at Hovnanian Enterprises]

Maybe a slight uplift in the next, but not much.

[Ivy Zelman, EVP & Co-Founder at Zelman & Associates]

Right. Okay. Thank you.

[Operator]

Thank you. One moment for our next question. And our next question comes from the line of Alex Barron of Housing Research Center. Your line is now open.

[Alex Barron, President at Housing Research Center, LLC]

Thank you, gentlemen. And congrats on a good performance, I guess, in a tough environment. Thank you. I wanted to ask about the the current incentive structure that you guys have. Is it primarily still, like, closing costs and rate buy downs, or are you guys doing some price adjustments as well?

[Ara Hovnanian, President, CEO & Chairman of the Board at Hovnanian Enterprises]

All of the above. The mortgage rate buy downs are typically on homes that can deliver in ninety days for homes that are because, by the way, it becomes cost prohibitive to do it further out. But on homes that do deliver out beyond the ninety days, we offer a price reduction or some other kind of incentive on upgrades and options in lieu of a mortgage rate buy down. So it's typically one or the other, but in some cases, we offer no incentives in some of our prime properties.

[Alex Barron, President at Housing Research Center, LLC]

Okay. And I know a couple of years ago, you guys kinda switched to focus more heavily on spec building than in the past. Has that thought process, changed? Are you guys moving back towards more balance between build to order? Or are you guys sticking with, you know, heavy focus on spec building and what's the thought process there?

[Ara Hovnanian, President, CEO & Chairman of the Board at Hovnanian Enterprises]

As we mentioned, we actually hit our peak, our highest level of QMI sales, we call them QMIs, quick move in homes at 79%. And that is still part of our strategy going forward. And one of the main reasons is that, you know, when it's within ninety days of delivery, you can affordably pay for a mortgage rate buy down. It's difficult if you can't deliver it in ninety days, and looking at a new build contract that's difficult to achieve in ninety days. So I'd say at the moment, it's still absolutely part of our strategy.

[Alex Barron, President at Housing Research Center, LLC]

Got it. If I could ask one more, as far as the impairments, even though it was only 3,000,000, how how many communities were involved and and what what markets if you can, you know, answer that?

[Brad O'Connor, CFO at Hovnanian Enterprises]

David, you wanna answer that one?

[David Mitrisin, VP - Corporate Controller at Hovnanian Enterprises]

Yeah. It was just one community in Ohio was the impairment for a million and the rest was related to walkaways throughout the

[Brad O'Connor, CFO at Hovnanian Enterprises]

e two bar the walkaways were primarily during the due diligence periods.

[Alex Barron, President at Housing Research Center, LLC]

Okay. Sounds good. Alright, guys. Well, best of luck for the rest of the year. Thank you. Thank you. Thank you.

[Operator]

One moment for our next question. Our next question comes from the line of Jay McCanless of Wedbush. Your line is now open.

[Jay McCanless, SVP - Equity Research at Wedbush Securities]

Hey, good morning. Thanks for taking my questions. First one, could you give us a little commentary on what you've seen so far in May and any improvements or otherwise relative to what you saw in April?

[Ara Hovnanian, President, CEO & Chairman of the Board at Hovnanian Enterprises]

I'd say overall, May is pretty much status quo with what we reported for April.

[Jay McCanless, SVP - Equity Research at Wedbush Securities]

And then, Ari, you were talking about some of the older vintage land. I guess, at the current sales pace, assuming no change in incentives or rates, how long do you think it's gonna take you to clear out the '22? And I think you said West Coast for '21. How long to clear that out, you think?

[Ara Hovnanian, President, CEO & Chairman of the Board at Hovnanian Enterprises]

Oh, we haven't done that exact analysis. Obviously, in some geographies, we're already cleared out. In others, we may have two or three years out. So it's a community by community thing, and to be honest, we just haven't looked at how that clears the system and when. But needless to say, I mean, it's only, I believe the '22 vintage was about 10% of our lots, somewhere around that number.

[Brad O'Connor, CFO at Hovnanian Enterprises]

That's right.

[Ara Hovnanian, President, CEO & Chairman of the Board at Hovnanian Enterprises]

It's just not a huge part. '21 on the West Coast is a lower percentage than 10%. So, we're just balancing and looking to burn through those. Now, having said that, the '23 and '20 '4 vintages were typically underwritten at close to 8% margin.

[Brad O'Connor, CFO at Hovnanian Enterprises]

8%

[Ara Hovnanian, President, CEO & Chairman of the Board at Hovnanian Enterprises]

incentives, yes, versus our 10%. So they're a little bit below our target ROI, but not dramatically below.

[Jay McCanless, SVP - Equity Research at Wedbush Securities]

And as part of that and part of the reason I asked that is is, you know, we're all, I think, not only for Hovnanian, but for the group, looking for when gross margins might bottom and just any type of commentary you could give on that. And and especially, I know it's tough because y'all are doing QMIs and a lot of option deals. But is there any visibility in sight for a bottom in gross margins for for HomeManion?

[Ara Hovnanian, President, CEO & Chairman of the Board at Hovnanian Enterprises]

Well, I would hope that we're near a bottom now. And then, we've kind of given our guidance for next quarter, which is pretty flat with our second quarter in terms of gross margins, up slightly at the midpoint. So if you could call that a bottom, then we're there. But as you pointed out, with a QMI strategy and with a quarter like this, where we sell almost 40% of our quarterly deliveries in the quarter, it's hard to really accurately project. And as you get further out a quarter or beyond a quarter, it's even more difficult.

[Ara Hovnanian, President, CEO & Chairman of the Board at Hovnanian Enterprises]

So right now we're just doing the same playbook that we've done for years, underwriting at current levels and we're marking to market to move the older inventory if it's performing under our current target levels.

[Jay McCanless, SVP - Equity Research at Wedbush Securities]

Great. And if I could sneak one more in, kind of thinking about the back half of calendar year, potential increases in lumber prices may be coming, but at the same time, we're hearing from some of your competitors that labor costs are getting cheaper. We saw drywall prices came down today. Guess, you guys have done a great job getting the build costs down, but with some of these cross currents, and I think especially with the lumber one probably being most likely to occur, How are y'all thinking about construction costs in the back half of the year?

[Ara Hovnanian, President, CEO & Chairman of the Board at Hovnanian Enterprises]

I think other than the unknown of lumber, we feel pretty good about it. Some of the material costs may be impacted by tariffs. On the other hand, labor recognizes the slower market, so we're making some gains on that. So at the moment, I'd say we're optimistic that other than lumber, which is a big unknown, that we can continue to slightly reduce our construction costs.

[Jay McCanless, SVP - Equity Research at Wedbush Securities]

Okay, great. That's all I have. Thank you.

[Ara Hovnanian, President, CEO & Chairman of the Board at Hovnanian Enterprises]

Okay.

[Brad O'Connor, CFO at Hovnanian Enterprises]

Thank you.

[Operator]

Thank you. I'm showing no further questions at this time. I'll now turn back to Errol Mannion for closing remarks.

[Ara Hovnanian, President, CEO & Chairman of the Board at Hovnanian Enterprises]

Great. Well, you very much. Again, we are satisfied with the quarter given the difficult environment, but we look forward to producing higher returns more in keeping with our historic standards as we replenish our land supply underwritten at today's market. Thank you, and we look forward to reporting better results. Thanks.

[Operator]

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

Participants

Executives

• Jeffrey O'Keefe, Vice President - Investor Relations
• Ara Hovnanian, President, CEO & Chairman of the Board
• Brad O'Connor, CFO
• David Mitrisin, VP - Corporate Controller

Analysts

• Ivy Zelman, EVP & Co-Founder at Zelman & Associates
• Alex Barron, President at Housing Research Center, LLC
• Jay McCanless, SVP - Equity Research at Wedbush Securities