Hovnanian Enterprises Inc (HOV) 2025 Q4 法說會逐字稿

Good morning and thank you for joining us for today's Hovnanian Enterprises fiscal 2025 fourth-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 rebroadcasts, and all participants are currently in a listen-only mode.

Management will make some opening remarks about the fourth-quarter results and then open the line for questions. The company will also be webcasting the slide presentation along with the opening remarks from management. The slides are available on the Investor page of the company's website at www.khov.com. Those listeners who would like to follow along should now log into the website.

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

Thank you, Michelle, and thank you all for participating in this morning's call to review the results for our fourth quarter Both 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. 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 factors are described in detail in the section entitled Risk Factors and Management Discussion Analysis, particularly the portion of MD&A entitled Safe Harbor Statement and our end report on Form 10-K for the fiscal year ended October 31, 2024, subsequent filings of the Securities and Exchange Commission.

Except as 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 are Ara Hovnanian, Chairman and CEO; Brad O'Connor, CFO; David Mitrisin, Vice President, Corporate Controller; and Paul Eberly, Vice President, Finance and Treasurer.

I'll now turn the call over to Ara.

Thanks, Jeff. I'll begin by reviewing our fourth-quarter results, and I'll discuss our strategic positioning in the current housing market after my remarks, Brad will follow with additional details and we'll open up the floor for your questions. Let me begin with slide 5.

Here we present our 4th quarter guidance alongside of our actual results. Despite persistent political and economic uncertainty at home and abroad our team delivered results meeting or beating our guidance across each of these key metrics. Beginning at the top of the slide, a revenues reached 818 million surpassing the midpoint of our guidance.

Adjusted gross margin came in at 16.3% for the quarter near the high end of our guidance. SG&A was 11.2% near the lower end of our guidance. Income from unconsolidated joint ventures totaled 13 million, slightly above our expectations. Adjusted EBITDA for the quarter was $89 million also exceeding our guidance range, and adjusted pretextcom was $49 million close to the midpoint of our guidance.

On slide 6, we show the 4th quarter results compared to last year. Year over year comparisons are challenging, to say the least, in almost all metrics in that 24 was an excellent year for us, and the environment became much more challenging in 25. In the upper left-hand portion of the slide, our total revenues declined by 17% year over year. Primarily driven by a 13% reduction in deliveries and the absence Of a significant land sale that occurred in the 4th quarter of last year.

Moving to the adjusted gross margin. We saw a year over year decline, primarily driven by higher incentives offered to support affordability. Our focus on pace over price and our short-term strategy to move through lower margin lots are laying the foundation for stronger performance when the market stabilizes, and as we open communities with our newer land acquisitions that factored in higher incentives while still achieving normal return metrics.

In the 4th quarter of this year, incentives accounted for 12.2% of the average sales price. The majority of this cost was attributed to mortgage rate buydowns an essential tool for unlocking affordability at the moment and driving demand.

This represents an increase of 60 basis points from the third quarter of 25, up 370 basis points compared to a year ago and higher by 920 basis points versus fiscal '22 before the mortgage rate spike began affecting margins on our deliveries. Were it not for the considerable cost of making homes affordable through mortgage rate buydowns, our gross margins would actually be quite robust.

Moving to the bottom left, you'll notice that our total interest expense ratio increased compared to last year. This is mainly due to other interests related to a few large communities in planning where interest is expensed immediately rather than capitalized.These communities were on our balance sheet before land banking, hence the increased interest.

Moving to the bottom right-hand section of the slide. Importantly, while our profitability stayed within guidance. It was certainly a big reduction from last year's strong performance. These results are consistent with our strategy of moving through older vintage lots, selling our QMIs, prioritizing sales pace over price and clearing our balance sheet to make way for new land contracts, which are projected to carry significantly higher margins and returns.

Turning to the sales environment on slide 7, we continue to use mortgage rate incentives to support our sales. Although the number of contracts in the 4th quarter fell by 8% compared to last year. It basically reflects the overall market conditions. Last year's 4th quarter was a particularly strong quarter for sales, making it difficult comparison for this year. Our use of incentives has helped soften some of the challenges and maintain steady activity.

Turning to slide A, the this this slide displays traffic per community for each month in the 4th quarter, as well as the month of November. Compared to last year, traffic increased significantly in 3 of the 4 months. The these results clearly highlight a positive trend. Buyer interest has grown compared to last year.

However, many potential buyers are still hesitant to move forward and enter contracts given a lot of economic and world uncertainty. You can see that contracts during the year on slide 9 Show that it was quite choppy every month. Looking a lien, you'll notice that quarterly contracts for community declined this year compared to the 4th quarter of last year.

Similar to our year over year monthly results are quarterly, year over year results were also volatile. These comparisons demonstrate how challenging the current environment is. The contracts per community in the 4th quarter of 25, where 16% below the level seen during the 97 to 02 period, one of the few that we consider a normal sales environment.

On slide 11, we provide a closer look at monthly contracts per community comparing each month in the fourth quarter to the same month last year. The this year, sales pay for each month in the 4th quarter was lower than the same month last year and below our normal levels.

If you refer to slide 12, we present contracts per community as they are quarter ended on September 30th, allowing for a direct comparison with all of our peers that report contracts for community on the calendar quarter basis, which is most of them. With 9.6% contracts per community our sales pace ranks as the 4th highest among all the publicly traded homebuilers.

As illustrated on slide 13, contracts per community declined year over year for a vast majority of the homebuilder reporting this metric. Although any decrease is less than ideal. Our performance, these comparisons are based on an adjusted quarter ending in September for us, which allows us to have a direct evaluation and comparison compared to our peers. The takeaway from these last two slides is clear.

Our focus on sales pace over price is delivering above average sales results and strengthening our margin position. I recognize, however, that it's sad to point out that we are one of the least bad in a difficult market, but that will eventually change. For the past 2 years, about 70% of our buyers have used mortgage rate buydowns.

As shown on slide 14. The total value of incentives and buydowns has grown considerably over the last 4 years. Incentives began to rise sharply in early 23, jumping from 3.9% in the fourth quarter of 22 to 7.4% in the first quarter of 23. While these higher incentives have put short-term pressure on our margins. They've helped us keep us sales, keep ourselves steady and move through lots with lower margin potential.

To further support homebuyers, we are maintaining a robust inventory of quick moving homes or QMIs as we call them, enabling customers to benefit from incentive programs and secure homes quickly and cost-effectively. On slide 15, we show that at the end of the 4th quarter, we had 6.5 QIs per community.

This marks the 3rd quarter in a row where the number of QMmis per community has gone down, reflecting our ability to align starts with sales pace and optimize inventory levels. QMIs are homes that we have started framing but have not yet sold.

On, as shown on slide 16, the number of QMIs fell from 1,163 at the end of January of 25 to 97 at the end of October of 25. This represents a 22% decrease over that period. It demonstrates our flexibility in aligning supply with current demand and optimizing our approach to meet buyer's needs while maintaining operational efficiency. In the 4th quarter, Q of my sales comprised 73% of our total sales down from the record of 79% in prior quarters, but still well above our historical norms of about 40%.

By focusing on QIs, we sign and deliver more contracts within the same quarter. This approach means we have fewer homes in backlog at the end of each quarter. But a higher rate of converting backlog to deliveries. In the 4th quarter of 25, 36% of our homes delivered were both contracted and delivered in the same quarter. While this makes it a bit harder to predict next quarter's results. It led to a backlog conversion ratio of 102%.

Much higher than the historical average of 66% for fourth quarters since '98. That was the, it also was the first time we've ever been above 100% in any quarter. We continue to closely manage our QMIs for each community, making sure the rate at which we start these homes matches the rate at which we sell them.

If you look at 7, slide 17, you'll see that despite higher mortgage rates and a slower sales pace nationwide, we managed to increase net prices in 36% of our communities during the 4th quarter. More than half of these price increases happen in Delaware, Maryland, New Jersey, South Carolina, Virginia, and West Virginia, some of our strongest markets. However, we've also been successful and have communities in some of our most challenging markets, typically in A amb locations that have great returns.

Our approach remains to prioritize sales pace, but when the market strength Is evident, we capitalize on opportunities to raise prices and reduce incentives.

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

Thank you, Ara.Before I get to the next slide, I want to comment on the other income line on our incomesav. During the 4th quarter of fiscal 2025, we assumed control of two previously unconsolidated joint ventures. After our partners received their final cash distributions, achieving their preferred return requirements. As a result, we consolidated the remaining assets and liabilities of the successful joint ventures at fair value, recording a gain of $18.9 million in other income.

This type of consolidation has become more common and we anticipate another similar event in the 1st quarter of fiscal '26. Importantly, these communities continue to meet our standard return metrics even after the step up to fair value and after current incentives.

Turning slide 18 We finished the quarter with 156 communities open for sale. Reflecting steady growth as we focus on expanding our top-line. We expect newer communities to outperform older vintages supporting our growth strategy. Unfortunately, the difficult market is currently a headwind to our growth. But the larger higher community account is allowing us to generally maintain our volume.

Slide 19 details our land position. We ended the 4th quarter with 35,883 controlled lots equivalent to a 6.5 year supply. Including joint ventures, we now control 38,742 lots. Our lot count decreased 14% year over year reflecting discipline, land acquisition, and a willingness to walk away from or postpone less attractive opopportunities. Even when you were loss, we re we remain well positioned to increase our home deliveries in the coming years.

On the far right side of the slide you can see that our lock count decreased sequentially for the third quarter in a row. These recent declines are reflective of the operating environment. We walked away from almost 15,000 lots during fiscal 25, including almost 6,000 lots in the fourth quarter.

Having said that, our land teams remain active, securing 9,600 lots under contract in the last three quarters. $3100 in the fourth quarter, all meeting or exceeding our margin and I Hurdles even after factoring in current high incentives.

Slide 20 shows the age of our lot position both owned and optioned, broken down by year, by the year each lot was controlled. The number above each bar represents the percentage of total loss that were controlled in that year. The number below each bar indicates the percentage of incentives used on homes delivered during that year.

This slide illustrates that by the 4th quarter of this year, 62% of our land was initially controlled in either 2024 or 2025. By which time we were assuming more significant incentives in our underwriting of land acquisitions. However, 87% of our deliveries in the fourth quarter were from lots of vintages from 2023 or earlier.

Those vintages are more challenging from a margin perspective because we were assuming much lower incentives when they were underwritten. We are working through those lots, as you can see on the slide, but it is a gradual transition. The process of shifting our land position toward lots that were purchased with greater incentives. It's slow and ongoing.

We are working through the older, less profitable lots and replacing them with newer land. Today's challenge, we're also working with some land sellers who we have option agreements with to find mutually beneficial solutions where we bolster a little bit of the pain in a difficult market. Strategically, we decided to sell through lower margin lots to make room for new li acquisitions that meet our IR targets.

The good news is we're still finding new land opportunities that meet our underwriting criteria even with current high incentives and the current sales pace. Given our recent land acquisitions that begin delivering in 2026, we expect gross margin percentage to bottom in the first quarter of fiscal '26 and to gradually improve in the following quarters.

On slide 21 We show our land and land development spend for each quarter of fiscal '25 and the quarterly average for all of 2024. Land and development spend has decreased in response to market conditions reflecting disciplined capital allocation and rigorous evaluation of every acquisition, factoring in current prices, incentive levels, construction costs, and sales space.

To ensure IRR is above 20%. We continue to identify compelling opportunities in our markets and remain laser focused on revenue and profit growth for the long-term. Our commitment to discipline, underwriting, and strategic investment will drive continued success.

Turning to slide 22, we ended Q4 with $404 million in the quidity, well above our target range even after spending $199 million on land and land development. We completed a significant refinancing during the 4th quarter which is highlighted on slide 23. The top of the slide shows our maturity ladder as of July 31st, 2025. This refinaning showed on the bottom portion of the slide marks a major milestone for us.

For the first time since 2008, all of our debt, except for our revolving credit facility is now unsecured This change strengthens our bound going forward, providing us with greater financial flexibility, reducing risk and positioning us for future growth. The successful refinancing underscores our disciplined approach to managing debt and emphasizes our commitment to maintaining a strong and stable financial foundation.

On slide 24, we highlight how we've successfully increased our equity and reduced our debt over the past few years. Over that time, equity has grown by $1.3 billion and the debt has been reduced by $754 million. That, that's the capital is now 44.2%, a substantial improvement from 146.2% at the start of fiscal 2020. While we still have work to do, we remain on track toward our 30% net debt. Target. With $230 million in deferred tax assets.

We will not pay federal income taxes on approximately $700 million of future pre-tax earnings, enhancing cash flow and supporting growth. Given the current volatility and challenges with predicting margins, we are only providing financial guidance for the next quarter.

Our outlook assumes that marketing conditions remain stable with no major increases in mortgage rates, tariffs, inflation, cancellation rates, or construction cycle times. As we rely more on QMI sales forecasting profits is tougher while we performed at the top of our guidance for many quarters. Our goal is to provide realistic guidance that we can meet. Or be if conditions are favorable.

Our forecast includes ongoing use of mortgage rate buydowns and similar incentives, and it does not include any changes to SGA expenses from phamom stock cost tied to stock price changes from the $120.23 closing price at the end of Q4 fiscal 2025.

Slide 25 shows our guidance for the first quarter of fiscal '26. Our expectation for total revenues for the first quarter is between $550 million and $650 million. Adjusted gross margin is expected to be in the range of 13% to 14%. This is lower than our typical gross margin, particularly because of increased cost of mortgage rate buydowns and our focus on pace versus price. Assuming no further deterioration in the market, we expect our gross margin to bottom in the first quarter of 26 with margins gradually increasing each quarter in the remainder of 26.

We expect the range of best G&A, the percentage of total revenues to be between 13.5 and 14.5%. Which is still higher than usual. One of the reasons the SA ratio is running a little high is that we are expecting community count growth, and we have to make new hires in advance of those communities. In addition, we are making significant investments to improve processes and technology in many areas to significantly increase our efficiency in future years.

We expect income from joint ventures to be between break even and $10 million and our guidance for adjusted da between $35 million and $0.45 million dollars. Our expectation for adjusted pretaxed income for the first quarter is between $10 million and $0.20 million dollars. This includes the expectation of other income from the consolidation of a joint venture in the 1st quarter when the partners expected to reach their full return of all capital as prescribed and the JB agreement.

As a reminder, this has become a normal part of the life cycle of our joint ventures is that we have had other income from JV related transactions 4 times in the past 10 quarters. Our first quarter got its also includes proceeds from a land sale. We expect to close in the 1st quarter.

On slide 26 we show 85% of our lots controlled via option up from 46% in fiscal 2015, reflecting our strategic focus on land li. Looking at slide 27, we we remain strong compared to our peers in controlling land through options. In fact, we have 4 highest percentage of option lots. Placing us well above the industry median of 58%.

On slide 28, we have the second highest inventory turnover rate among our peers. This is an important part of our strategy because it means we sell and replace our inventory more quickly than most competitors demonstrating a more efficient use of our capital. This reflects many other factors in addition to land light. We see more opportunities to use land options as well as reduce Lotur to construction start and construction start to completion cycle times, which would further help us improve our inventory turnover.

On slide 29, we show that compared to our mid sized peers, we have the second highest adjust Ebi returns on investment. It's 17.7%. On slide 30, we have the 5 larger builders and we still ranked fifth highest overall. Our adjusted Ebi return on investment is a true measure of pure home building, operating performance. Over the last several years we've consistently had one of the highest ROIs among our peers.

On slide 31, we show our price to book value compared to our peers. You're trading slightly above book value and just below the median for all the peers shown on the slide. These last given her a high return on investment combined with our rapidly improving balance sheet. We believe our stock continues to be undervalued.

I'll now turn it back to Ara for some brief closing comments.

Thanks, Brad. 5 years ago, we were above median compared to our mid-sized peers in Ebi RY, which we believe is the true key operating metric for homebuilers from our perspective. 4 years ago, we were also above median in ROI. For the past 3 years, we have been number one or the #2 performer in ROI. Our operating model is yielding industry leading results. It's true that we have a high debt to cap ratio and higher interest rates than many of our peers, which means that we have been more sensitive to margin compression.

However, as we've shown you, we have been steadily increasing our equity and decreasing the amount of debt. With our recent refinancing, we've decrease the cost of our debt. Our 4th quarter pre-tax was significantly impacted by the heavy fees to pay off our debt early during the refinancing back the, and the longer maturities give us the flexibility to deal with market uncertainties. We have plenty of work ahead of us, but the key is that we have the right operating model that is producing top results on an ROI basis.

As Brad mentioned, we're making heavy investments in business process redesign, technology, and in searching for a new opportunities and cost reductions that will make us even more competitive in the future. Our land position as shown on slide 32 is heavily weighted to the northeast, which is over 53% of our lots controlled, and that's important because the Northeast is one of our most profitable segments.

In the, in, it is lowest in the southeast, a more challenging market at the moment where we only control 17% of our total loss. Finally, the West has 130, 30% of our lives. While our short-term sales have been below last year, as I mentioned earlier, traffic per community is up fairly significantly over last year in recent months. Buyers are definitely out there looking, but with all the world and economic uncertainty, they are hesitating at the moment. But that will eventually pass.

Our new land acquisitions, particularly the land and lot contracts in the last year have been underwritten with significant incentives that should yield dramatically better gross margins and returns. In addition, on Monday morning, I can look back and say we were too heavily invested in the more affordable tertiary markets with entry-level homes. This has been the more challenging segment of the housing market, and we've been staying clear of these locations in our new land acquisitions.

Conversely, our active adult segment has been performing quite well. And we are focusing more on this segment, which is currently only about 19% of our deliveries. Regarding our move up product, clearly the A and the locations are performing the best all over the country, and that's where we're concentrating our efforts on new land acquisitions.

By focusing on pace over price, maintaining a higher inventory of quick moving homes, we're able to sign and deliver more contracts each quarter convert backlog at a higher rate and keep our communities active and burned through our older land that has lower embedded margins. This clears our balance sheet for newer land acquisitions underwritten to provide solid returns even with the current high incentives.

As Brad mentioned, our internal guidance suggests that margins should bottom out in the 1st quarter and begin to steadily increase in subsequent quarters if the market conditions remain similar to current conditions. That concludes our formal comments and we're happy to turn it over for Q&A now.

(Operator Instructions) Natalie Kulasekere, Zelman.

Hey, good morning and thanks for taking my question. Are you doing anything to offset some of the pressure from gross margins. Have you seen any cost improvements, maybe direct cost perment. Have you been able to negotiate anything lower with your vendors, yeah, just any color on that would be great.

I mean, we have consistently gone back In existing communities and certainly for new communities to rebid with suppliers, trade partners, etc. We've had some success, controlling costs and reducing costs in some places, we're down,

Pretty significantly in costs, on a per square foot basis from two years ago, over the last over this year we're basing the holding steady, so any increases are being caused by tariffs or other things have been offset by savings elsewhere, so we've been able to to manage costs, flat, and we'll continue to pursue ways to reduce cost either trades or change in material suppliers, etc.

I'll mention one additional thing. We have, we've seen several of our peers, have success with buying down a seven-year arm versus a 30-year fixed, that has two benefits. One, you can qualify buyers at a lower rate and at the same time actually save cost, which helps margins. So we're going to begin, advertising and promoting that program more aggressively starting this weekend and if it as successful as we're seeing, that incremental portion of our buyers that use a seven-year arm, will help our margins.

Okay, that's helpful. Thank you. And when you expect gross margin to take higher next year. Is that driven by a mixed impact or is it because you think you will be done selling through underperforming assets at that point. Because you're working through the older stuff.

So yeah, as we continue to work through the older, more challenging property and bring on Deals we identified in 2024 and 2025 that mix shift to newer Land will help our margins improve.

Okay, thank you

(Operator Instructions) I am showing no further questions at this time, and I would like to have the conference back to Ara Hovnanian for closing remarks.

Thank you very much. Well, needless to say, we're pleased that we met or beat all of our guidance metrics, disappointed in the absolute results, but we look forward to our performance bottoming out in this upcoming quarter and then beginning our improvement from there. Thanks so much and we look forward to reporting better and better results in future quarters.

This concludes today's conference call. Thank you for participating, and you may now disconnect, everyone. Have a great day.