Hovnanian Enterprises, Inc.

Good morning and thank you for joining us today for the Half-Name and End Prices Fiscal 2021 First 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 first quarter results and then open the line for questions. The company will also be web... casting a slide presentation along with the opening comments from management. The slides are available on the investors' page on the company's website at www.khov.com. Those listeners who would like to follow along should now log into the website. I will now turn the call over to Jeff O'Keefe, Vice President, Investor Relations. Jeff, please go ahead.

Thank you, Jonathan, and thank you all for participating in this morning's call to review the results for our first quarter, which ended January 31st, 2021. All statements in this conference call that are not historical facts should be considered as forward-looking statements within the meaning of the safe harbor provisions of the Private Security Mitigation 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 other factors are described in detail in the section entitled Risk Factors in Management Discussion and Analysis, particularly the portion of MD&A entitled Safe Harbor Statement in our annual report on Form 10-K for the fiscal year ended October 31, 2020. and subsequent filings with the Securities and Exchange Commission. Except as otherwise required by applicable securities 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, President, and CEO, Larry Soursby, Executive Vice President and CFO, and Brad O'Connor, Senior Vice President, Chief Accounting Officer, and Director. I'll now turn the call over to Ara. Ara, go ahead.

Thanks, Jeff. COVID-19 continues to present challenges from both a business and personal perspective, and I certainly hope all of you and your families remain safe and healthy. I'm going to review our first quarter results and then address the current market environment. As usual, Larry Sorsby, our CFO, will follow me with more details. I'll then make a few closing comments, and we'll follow with Q&As. On slide four, we compare our first quarter results to the guidance we gave on our fourth quarter conference call. Our total revenues were within the range that we gave. However, the adjusted gross margin, SG&A ratio, adjusted EBITDA, and adjusted pre-tax income were all better than the high end of the range. Fiscal 21 is off to a good start. On slide five, we show that our backlog at the end of the first quarter increased 71% to 3,795 homes, excluding unconsolidated joint ventures. You can also see that the dollar value of this backlog increased 85% to $1.67 billion, again, excluding joint ventures. The strength of this backlog sets us up nicely for strong results over the remainder of the fiscal year. Moving on to slide six, we show year-over-year comparisons for the first quarter performance metrics. We begin with total revenues in the upper left-hand portion of the slide. Our total revenues for the first quarter increased 16 percent to $575 million this year. compared to 494 million in last year's first quarter. Moving to the upper right-hand portion of the slide, you can see that our adjusted gross margin increased 340 basis points year over year. Adjusted gross margin was 20.7% this year compared to 17.3% in last year's first quarter. As we have said on previous calls, we pivoted to increasing home prices back in June. We've intensified our focus in the month of February. During the first quarter, we had some headwinds on lumber and cement costs, as well as some labor costs creeping up. But home price increases more than offset those headwinds, as evidenced by our increased margins in the first quarter. With housing demand remaining very strong, we believe that it's likely that the industry will see additional labor and material costs as well as longer cycle times. We continue to increase home prices to offset potentially higher material and labor costs to slow our sales pace as well as to improve our gross margins. In the lower left-hand quadrant of the slide, you can see that our total SG&A ratio improved by 110 basis points to 11.1 this year compared to 12.2% last year. As our revenues grow, we are leveraging our fixed SG&A and expect to see our SG&A expense ratio trend lower. In the lower right-hand quadrant of the slide, we show that adjusted EBITDA increased 111% from $30 million in last year's first quarter to $64 million this year. In the left-hand portion of slide 7, you can see there are pre-tax income in the first quarter increased $27 million from a $7 million loss last year to a $20 million profit in this year's first quarter. If you ignore land charges and the gain or loss from the extinguishment of debt, the adjusted pre-tax income improved $36 million to a $21 million profit this year from a $14 million loss in the first quarter of the previous year. The first quarter is typically our weakest, and we expect that this year will follow that pattern. Having said that, the strong improvement in this year's first quarter sets the stage for a very profitable full year. On the left-hand portion of slide eight, we show that our quarterly contracts increased 34% to 1,778 homes from 1,322 homes in last year's first quarter. The picture is even better on a contracts per community basis, which we show on the right-hand portion of the slide. We achieved a 74% increase to 16.9 contracts per community for the first quarter of this year, compared to 9.7 for last year's first quarter. The strength of the market has been widespread across product types and by geography. During the first quarter, Southeast Florida, Southern California, Northern California, and Dallas-Fort Worth had the largest year-over-year increases. Each of these divisions posted year-over-year increases in contracts per community of more than 175%. Having said that, every geography is rock solid right now. So far, our traffic Website visits and sales trends indicate that demand remains very strong early into this year's spring selling season. We have taken steps to slow the pace with much more substantial price increases, which I'll describe in a moment. To give further transparency, slide nine shows the number of consolidated contracts on a monthly basis for each month since January of 2020, just before the full impact of the pandemic took hold in the United States. Each month is compared to the same month a year before. As you can see on the slide, the housing market was extremely strong before the pandemic. Our contracts were up 44% in the month of February 2020, compared to the prior year, and again, this was before the pandemic shutdown. As the pandemic unfolded in the U.S., contracts in March and April dropped dramatically. Then, Americans' mindset regarding home purchases shifted significantly in May. Demand for housing gained further momentum in June. Through the end of our fiscal 21 first quarter, we reported year-over-year increases for each of the past nine months, including a very strong 52% increase in January. The same pattern followed in terms of contracts per community, only the increases were even more significant, with January contracts per community rising 100%. During our analyst call, we described our pivot in June to price and margin increases instead of volume. Since then, we continued that approach. From November 1st to the middle of January, we increased our average home prices by 3%. However, as evidenced by January's 100% increase in sales per community, Our price increases since June were not enough to slow our sales pace to a more manageable level. The higher pace causes several issues. First, it was a pace that was not aligned with our production pace and caused longer cycle times to both start and construct our homes. Second, it was a pace that would sell out of our existing communities too quickly. And finally, it could potentially put our margins at risk if construction costs increased further on homes that were sold and not yet started. Starting in the middle of January to the third week in February, on average, we raised prices an additional 5%, with some communities as high as 15% increases. This much more aggressive approach to price increases was consciously designed to slow our sales pace, further improve our margins, and reduce our exposure to potential construction cost increases. As you can see on slide 11, which shows the results for the month of February, our efforts to slow our sales pace have been successful. While February was still a very strong month, even compared to a very strong February last year, The year-over-year increases in contracts per community were up only 27%, compared to 100% year-over-year increases in the month of January. The absolute number of contracts were down 5%, but the dollar amount of contracts for the month of February were up 9%, primarily due to increases in home prices. We believe our margins from contracts sold during this recent period will prove to be among the best margins we've had in over a decade. I'll add that higher sales prices were not the only issue that slowed our February sales. Both our Houston and Dallas markets were certainly affected by the unusually bad winter storms in February. Most of our Texas sales offices were closed for one to two weeks, which negatively impacted our February sales results. Looking forward, we'll have the benefit of two easy months of comparisons in March and April when home sales were adversely impacted by the initial COVID shutdown last year. Housing demand rebounded in May of last year, so starting in May this year, sales comparisons will be a little more challenging. The fundamentals that are driving the housing market remain the same. One, extremely low mortgage rates, and I'll elaborate a little more on that later. Two, a significantly lower than normal supply of existing homes. Three, strong demographic trends, including a surge of millennials buying their first home and a desire by all demographic groups to upgrade or enlarge their homes. And four, there's a low supply of lots to construct new home construction. The combination of these factors has resulted in a supply and demand imbalance for the housing industry. Similar to trends in online shopping that accelerated after COVID-19, Many of these home buying trends existed before COVID-19 but accelerated after COVID-19. I think we've demonstrated that with a very strong result in February and January of last year, again before the COVID shutdown. We've now entered the spring buying season and we continue to see very strong traffic and contract trends throughout our markets. Additionally, slide 12 shows our website visits per day this year in blue compared to the same day last year in gray. As you can see, website visits continue to show significant increases compared to last year. In the month of January, we surpassed one million monthly website visits for the first time in our history. The strong website traffic trend continues through February. Further, slide 13 shows internet leads per day compared to last year. An internet lead is a potential customer that gives us their phone number or email information and has requested that we contact them about a particular community. Those leads also remain extremely high. We believe visits to the website and internet leads are both a leading indicator of demand for our homes, and both of these indicators remain very strong. Whether it's website traffic, internet leads, sales pace, or backlog margin, all indicate that our 2021 financial results are expected to be dramatically better than last year. I'll now turn it over to Larry Sorsby, our CFO.

Thanks, Sarah. Given the strong demand for new homes, we recognize that some analysts and investors are concerned about builders having sufficient land supply and community count to meet that demand. We are pleased to report we are in a strong position. Virtually all of the land and communities necessary to achieve further growth and profits during fiscal 2021 and fiscal 2022 are already under contract. Today, our land acquisition teams are primarily focused on obtaining control of land and communities for home deliveries in fiscal 2023 and beyond. We remain focused on growing our revenues. One scenario is that we sell fewer homes per community and therefore need to increase community count to grow revenues. Another scenario where we achieve both revenue growth and efficiencies of scale is when we sell at a faster pace per community from a smaller total community count. Previously, we thought the primary way we would achieve revenue growth would be through community count growth. More recently, we have been achieving remarkable increases in our sales pace per community and that higher sales pace rather than increased community count is fueling our anticipated revenue growth this year. Even at our current faster sales pace, we think our fiscal year-end community count will grow about 5% from our first quarter end levels. Again, we believe we can achieve this growth in community count even at our toward current sales pace. Ironically, if our sales pace were to slow down, our projected community count would increase. even more since we would not sell out of communities so quickly. On slide 14, we show despite the adverse impact of COVID-19, we added 2,140 newly controlled consolidated lots during the first quarter. During the same quarter, we had 1,407 deliveries and lot sales, resulting in a net increase of 733 consolidated controlled lots. After temporarily slowing new land acquisitions earlier this year due to the onset of COVID, our land acquisition teams are back in the market sourcing new deals. Keep in mind that due to the onset of COVID-19 last spring, we temporarily paused contracting for new properties. Slide 15 shows the lots we controlled at the end of each of the past three quarters. As you can see on this slide, even with the high level of deliveries in each of the past three quarters, we've been able to gradually control more new lots than homes we've delivered. At the end of our 2021 first quarter, we controlled 26,782 lots, which is 1,034 more than we controlled at the end of the 2020 third quarter last year. It bears repeating. We now control virtually all of the lots we need to achieve our expected growth and profits in both fiscal 21 and 22. Our land acquisition teams are now primarily focused on controlling lots for fiscal 2023 and beyond deliveries. While not affecting the total number of lots we control, we are pleased that during fiscal 2021, we will be unmultimaling and bringing into active status approximately half the lots representing multiple product lines in a large 1,400 home site master plan in Northern California. Reopening this community was delayed as we modified our site plans and entitlements that dated back to 2005. We took significant impairments on this master plan during the bottom of the last housing cycle, and today it has a book value of only $5 million. After a long period of redesign and re-entitlements, along with continued improvement in the Northern California housing market, we believe this community is positioned to perform quite well. If you turn to slide 16. You can see that our consolidated community count was 105 at the end of January this year. As you can see on the slide, the community count decreased by 11 communities sequentially from the end of October 2020 to the end of January 2021. As we said on our last call, our community count is likely to fluctuate from quarter to quarter. Throughout the remainder of fiscal 2021, we plan to replenish the communities we sell out and close this year with more new communities. Given no material changes in current market conditions, we expect our community count at the end of fiscal 2021 to grow roughly 5 percent from our first quarter end level. Turning to slide 17. During the first quarter of fiscal 2021, our land and land development spend was $179 million, a 51 percent increase over the same quarter a year ago. This is the most we spent in any first quarter during the past several years. Turning to slide 18, even with that significant increase in land spend, we ended the first quarter with $306 million of liquidity, above the high end of our liquidity targets. We have excess capital to invest, and we're busy contracting additional land parcels across the country today. We continue to find land opportunities that make sense at today's home prices, sales pace, and construction costs. Turning to slide 19. This was another strong quarter for our financial services division. Driven by historically low rates and strong home demand, our financial services first quarter pre-tax earnings increased 105% year-over-year to $9 million. Turning to slide 20. Compared to our peers, you can see that we still have the third highest percent of land controlled via options. We continue to use land options whenever possible in order to achieve high inventory turns, enhance our returns on capital, and reduce risk. We are pleased to control 61 percent of our land through options. Looking at our consolidated communities in the aggregate, including the $166 million of inventory not owned, We have an inventory book value of $1.3 billion, net of $176 million of impairments. Turning now to slide 21. Compared to our peers, you can see that we had the second highest inventory turnover rate for the trailing 12-month period. Our inventory turns are 46% higher than the next highest peer below us. High inventory turns are a key component of our overall strategy. We believe one of the key pure operating metrics for the homebuilding industry is EBIT to inventory. On slide 22, we show the trailing 12-month EBIT to inventory returns for us and our peers. This ROI metric measures pure operating performance before interest expense. We remain above median when compared to our peers on this metric. Given the recent increase in new home demand, We believe ROI returns will continue to improve for us and the entire industry. We continue to work hard to get further to the right on this chart. On slide 23, another area of discussion is related to our deferred tax asset. Our deferred tax asset is very significant, and because it is fully reserved for by evaluation allowance, it is not currently reflected on our balance sheet. We've taken numerous steps to protect this asset. As of January 31, 2021, our deferred tax estimates in the aggregate were $572 million. We will not have to pay federal income taxes on approximately $1.8 billion of future pre-tax earnings. We show that we ended the first quarter with a shareholder's deficit of $416 million. If you add back the valuation allowances we've done on this slide, our shareholders' equity would be a positive $156 million. Given the strong housing market, all public builders will likely see their book values grow this year. What some analysts and investors may not understand is given the smaller beginning book value we have, we expect our book value will grow much faster and as a percentage grow much more significantly than our peers this year. As our profitability continues to improve, we will evaluate and may reverse much of the DTA valuation allowance at some point in fiscal 2021. Our total DTA consists of $376 million related to federal tax deferrals and $196 million related to state tax deferrals. Due to the long period of time left to utilize it, we are confident 100% of the federal DTA valuation allowance will ultimately be reversed. However, there's a shorter period of time to utilize state DTAs. At the time we determine it is appropriate to reverse our federal valuation allowance, we will complete an analysis to estimate how much of the state DTA valuation allowance can be reversed at that time. If federal corporate income taxes are increased in the future, which has certainly been discussed recently, the book value benefit from reversing a deferred tax asset would be even greater. Turning now to slide 24. On this slide, we show our debt maturity ladder at the end of the first quarter. In July 2021, one year prior to maturity, we expect to pay off in full the $111 million of our 10% senior secured notes through July 2022. Additionally, we also intend to pay off early the remaining balance of $70 million of our 10.5% senior secured notes through July 2024 in advance of their maturity. Considering that our revolver sits at the very top of our secured capital structure, we believe we will be able to refinance and extend our revolver on or prior to its maturity in fiscal 2023. As always, we will continue to analyze and evaluate our capital structure and explore transactions to further strengthen our balance sheet and our financial performance. On slide 25, we provide guidance for the second quarter of fiscal 2021. Before I review our second quarter guidance, I will state that while we remain optimistic regarding our Texas Division's ability to claw back the delays caused by their recent extreme winter weather conditions, the final impacts are just not known at this time. For the second quarter, we are assuming no adverse changes in current market conditions. We expect to report total revenues between $700 and $750 million. up almost 40% at the high end of the range from $538 million in the same period last year. We also expect gross margins to be in the range of 20.5% to 21.5%, up substantially compared to the 18.2% in last year's second quarter. And SG&A has percentage total revenues to be between 9.5% and 10.5% compared with 10.4% last year. Excluding land-related charges and gains or losses on extinguishing a debt, we expect adjusted EBITDA to be between $75 and $90 million, up between 44 and 73 percent compared to the same quarter last year. This 44 to 73 percent adjusted EBITDA increase comes on top of 116% increase we achieved in adjusted EBITDA during the second quarter last year. Finally, we expect our adjusted pre-tax profit for the second quarter of fiscal 2021 to grow between $30 and $45 million compared to a $5 million profit in the same period last year. Turning now to slide 26. Back in June 2018, we first talked about our multi-year key metric targets. At that time, we said that we expected that we could hit them within a couple, three years. Those key metric targets are on the far right side of this slide. The trailing 12-month financial results we were achieving at the time we set these targets are shown on the left-hand portion of the slide. On our last conference call in December 2020, We said that we had an opportunity to achieve the key metric targets by the end of fiscal 2021. Based on the guidance we're now giving you for our second quarter, we now expect to achieve on a trailing 12-month basis our multi-year targets by the end of our second quarter, ahead of our earlier timeframe. Assuming we achieve the midpoint of our second quarter guidance, the middle column on this slide indicates how both our trailing 12-month adjusted EBITDA and adjusted pre-tax earnings performance would exceed our key metric targets. Turning to slide 27, we show guidance for the full fiscal 2021 year. For the full year, assuming no adverse changes in current market conditions, we expect to report total revenues between $2.65 and $2.8 billion, up from $2.34 billion last year. We also expect gross margins to be in the range of 20.5% to 21.5% compared to 18.4% last year, and SG&A's percent of total revenues to be between 9.5% and 10.5% compared with 10.3% in the prior year. Excluding land-related charges and gains and losses on extinguishing the debt, we expect adjusted EBITDA to be between $300 and $340 million dollars, up between 28 and 45 percent compared to last year. And again, that would be on top of achieving a 35 percent increase in adjusted EBITDA last year. Finally, we expect our adjusted pre-tax profit for fiscal 2021 to grow between $140 and $160 million, up 175 to 214 percent compared to $51 million pre-tax earnings last year. The combination of our expected improved financial performance this year and the potential DTA valuation allowance reversal will meaningfully increase our year-end book value per share. Those increases to book value combined with executing on our debt reduction strategy this year would significantly improve our balance sheet. Now I'll turn it back to Eric for some brief closing remarks.

Thanks, Larry. I'd like to close by making a brief macro commentary on the housing market. I want to take a step back in time and remind everyone of what was going on in the housing market before COVID-19. On slide 28, we show that from 2014 through 2019, we had seen a steady increase in contracts per community each and every year. The compounded annual growth rate over that period of time was 6%. On slide 29, you can see the dramatic increases in sales pace over the last year by month. The point I want to emphasize here, again, is that prior to COVID-19, the market was already turning and already gaining strong momentum COVID-19 only accelerated many long-term trends that were already present in an improving market. Given the significant improvements that we've experienced recently, it would be easy to assume that we're entering a housing bubble, but it's important to put the overall housing market into perspective. Slide 30 shows annual housing starts dating back to World War II. Much like the trends I talked about regarding our contracts per community, housing starts were growing steadily for the past several years through the end of 2020. On this slide, we show average starts per decade with a horizontal black line going from the 1950s through the 2010 decade. If you throw out the highs of the 1970s, and the lows of the most recent decade where we averaged only a million housing starts per year, the long-term average has been over 1.4 million starts per year. While it has grown steadily last decade, you can see the average production during the most recent decade was by far the lowest level since World War II. Even 2020, With 10 incredible months, housing starts were below historical decade averages. On slide 31, we show the annualized start pace for the most recent month of January. It's only one month, but you can see a significant jump. However, it's important to note that even now, with one of the most robust housing markets we've seen in a long time, housing production is only just above the historical decade averages. Further, a shortage of developable lots will likely keep the start pace somewhat moderated. You can see that annualizing the 2021 January start space would indicate total housing production of about 1.58 million homes per year. This level of starts is nowhere near the peak levels that we've seen in the past decades, which were plus or minus 2 million starts. It's especially impactful when you consider the historically low level of housing starts over the last decade. The last decade produced almost 4 million fewer homes than a normal decade. It's also important to note that today's home buyers are users, not speculators that we've seen in prior housing peaks. I'd be remiss not to comment on the recent increase in mortgage rates over the past two weeks. The increase in rates was sudden and not generally expected, and this is especially true given the Fed said that it intends to keep rates low for the foreseeable future. However, rates are still incredibly low. If you look at slide 32, it puts our current interest rates into perspective by comparing them over the last 20 years. And more importantly, higher mortgage rates don't necessarily mean that someone's going to change their decision whether to buy a home or not. It might mean that they buy a smaller home or add fewer design options or buy a home further out. As homebuyers reset their expectations to the current rates, I don't foresee the recent increase in rates will have much of a long-term impact. A reminder, the United States built more homes in 1982 with mortgage rates in the teens than were built last year. While we're cautious regarding our outlook, we believe that demographics, the shortage of an existing housing stock, and a shortage of developable land for new housing, interest rates that remain near all-time lows, and the likelihood of further economic stimulus all bode well for the near-term outlook for housing. I'll also mention that the baby boom generation is in their prime second home buying age, a trend that's likely to increase post-COVID. That concludes our prepared remarks, and I'd now be happy to turn it over for Q&A.

The company will now answer questions. So that everyone has an opportunity to ask questions, participants will be limited to one question and one follow-up, after which they will have to get back in the queue to ask another question. We will open the call for questions. If you have a question at this time, please press star then 1 on your touchtone telephone. If your question has been answered and you'd like to remove yourself from the queue, please press the pound key. Our first question comes from the line of Alan Ratner from Vellman & Associates. Your question, please.

Hey, guys. Good morning. Congrats on the great performance and results. I appreciate the commentary, especially around that price and volume equation, and I think it's a really interesting dynamic right now. If I look at your absorption pace really since COVID, you've been selling somewhere in the five and a half per month range over the last three quarters. And it sounds like, when I'm hearing from you, and correct me if I'm wrong, that perhaps that might be hitting a little bit of an upper bound in terms of how quickly you could actually get those homes built. So I guess my question is, what is the ideal sales pace today that you're trying to solve for with these price increases? And what happens if you cross that line on the low end? If you push too hard on price, how low are you willing to take that before you have to actually roll back some of these increases?

Alan, it's really a balance that varies depending on how soon we see our new communities coming online. What we don't want to do is gap out, so to speak, and let our community count go down. So we're trying to balance the right pace and margin, and part of that is affected by what we see as our new communities coming online. We're feeling pretty good about communities coming online, and we're un-mothballing a lot of communities as well that we talked about. So we feel like we can keep up with a pretty good pace and still show some really fabulous margins. But we don't have a specific target. We're adjusting it based on what we can see in our production capabilities, and that varies. We're adjusting it based on some ebbs and flows of material shortages. We're adjusting it based on what we're seeing on cycle times and adjusting it based on when we're getting some new replacement communities online. So we're varying it really month to month.

Got it. That's helpful. So it sounds like there's not a hard number there, and it might fluctuate based on whatever the bottleneck is at the moment, whether it's land or labor, materials, etc., Second question, just on the balance sheet, certainly good news that it sounds like you're accelerating some of the debt pay down there. Just curious, with the stock trading close to three times book now, if you adjust for the full DTA, is there any thought about tapping the equity markets to even further accelerate debt reduction? Because clearly there's an opportunity to bring down the interest expense if you were to do that.

Yeah, Alan, I want to start by reminding you that we expect our book value to grow dramatically by year end. I mean, it's the law of small numbers. All home builders are going to have increases, but we really expect ours to increase very significantly. Further, we think we've got a lot of opportunity – to improve our equity and reduce our debt even without any selling of any stock. Based on what we're seeing out on the horizon, we think it's a little early to sell stock. Also keep in mind one other thing that we didn't mention in the call. As we reduce debt early, and we're really focused on that, and as we increase our performance, we think there's a great opportunity to refinance our debt. Most of our debt is at very high rates right now. We think there will be an opportunity at some point to refinance. at significantly lower rates, and that would really boost our earnings since our interest is a huge part of our operating results. So I think we're going to wait and consider our options a little later in the cycle. Larry, do you want to add anything to that?

You nailed it perfectly. I don't think I need to add anything.

No, that was very helpful. Can I just sneak in one just fact-checking question? I might have missed it, but did you give the 2024 notes that you said you intend to pay down early, is that something you expect to do this year, or are you just signaling it's going to happen before the actual maturity date?

We just said it was going to happen in advance of the maturity date. We did not make a specific projection precisely when, but we are committed to reducing debt.

Got it. Okay. That's very helpful.

Thanks a lot, guys. Thank you. Our next question comes from the line of Alex Barron from Housing Research. Your question, please.

Good morning, gentlemen. Great job in the quarter. And I just want to congratulate you all around. Thank you. I have a question regarding your comment about Texas and the snowstorm and all that stuff. I mean, I'm just curious, you know, are things back up 100%, you know, at this point, and if there is any impact on deliveries, roughly how many units do you think would shift into the next quarter?

Right now, first of all, I think, I believe 100% of our communities are back up in terms of sales, and construction is pretty much getting back to norm. The one wild card, of course, is how the utilities are affected and how long they might slow things down to repair some of the outages. And in addition, when insurance carriers start preparing or giving reimbursements, how much of the trade base gets sucked away into that. But at the moment, really, we really have believe we'd only slip a few deliveries in the month, and we think we can actually make that up in the quarter. So thus far, we're feeling pretty good. But we don't know everything just yet.

Got it. And then I'm not sure if I missed it, but did you guys give revenue guidance for the OIP in your new month? Okay. In terms of the gross margins, it sounds like you guys are, at this point, shifting more towards raising prices. Do you feel like the gross margins have further upside than the range you've given us for next quarter in the back half of the year?

The ink's not even dry on the guidance we just gave us, and you're asking if there's upside to it. You know, anything's possible, I guess, but we're going to stick to the range we just put out.

Okay. Now, correct me if I'm wrong, but if you reverse the BPA later this year, that will show up on your income statement, right, not just on your balance sheet?

Brad, I'll let you handle it.

That's correct. The reversal comes through the tax expense line item on the income statement.

All of the tax expense. Okay. Got it.

And Alex, I will add the comment that we mentioned. I'll mention it one more time. There is a lot of talk in Washington of raising federal income taxes. While that's not a great thing for most home builders, that because we have this large NOL and a large deferred tax asset, it would actually increase our income and we have an opportunity to increase that reversal in the future. We don't know. We'll see what happens, but we're uniquely positioned and because we haven't used up our tax credit, it will have the opposite effect on us compared to our peers.

Correct. Now, as far as, you know, I know it's kind of looking up to next year, but I'm going on the assumption that you probably will reverse the tax credit this year. If that's the case, should we assume a tax rate for next year of, what, 25% or something like that for modeling purposes?

Yeah, given current rates, that's a good effective rate to estimate, yes.

Okay. And if I could ask one more, on the diluted share count, I noticed it went down from $6.7 million last quarter to $6.3 million. What was the reason for that? Did you guys buy back stock or what happened there?

It was related to unvested compensation shares. So they changed. So if nothing with the outstanding shares, it all had to do with the non-vested compensation shares.

So for modeling reasons, should we assume 6.3 going forward or the 6.7 or what? The 6.3. Okay. Okay. All right. And I guess, you know, it sounds like you guys are pretty good on track to pay down debt, which is going to be great. So at some point, if you do pay down the 2022 and 2024s, are you guys expecting to just let the leverage go? they, you know, or are you guys expecting to replace that debt eventually with other, you know, lower cost of debt? In other words, are you trying to just lower the overall amount outstanding, or are you thinking you'll eventually replace that with some lower cost debt?

We are trying to lower the amount of debt outstanding, so we're not intending to replace the 22s or 24s by refinancing them or by later replacing it with additional debt. We want to lower the debt and really focus on repairing the balance sheet.

Okay, great. I'll let somebody else ask, and good luck for the year. Thank you.

Thank you. Thank you. As a reminder, ladies and gentlemen, if you have a question at this time, please press star then one. Our next question comes from the line of Jordan Himowitz from Philadelphia Financial. Your question, please.

Thanks, guys. Just checking math, with the guidance you provided, it comes out to almost $25 per share next year. And I guess my question is that $25, a little less, $24-something, assumes the debt is outstanding for the first half of the year. Now, it's a back-half loaded earnings company, but the run rate the following year would be a higher number because you would have a much lower cost of debt. Is that a way to think about it at this point?

I can't argue with your math. I didn't actually do the math on EPS, but I think your math is accurate, and certainly it's accurate to state that as we pay off debt, there will be less interest in subsequent years.

And so I'll use the fine gentleman who asked the question of three times a book before and maybe should take advantage of that. At under three times this year's earnings, I think it would be crazy to issue a share of equity at this point.

I agree with you.

Okay, thank you. I think we agree, yeah.

Okay, thank you. Thank you. This does conclude the question and answer session of today's program. I'd like to hand the program back to Ara Avenanian for any further remarks.

Great. Well, thank you very much. We're certainly off to a great start, and we're going to be reporting even better news in subsequent quarters. Thank you.

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