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Operator
Good morning, and thank you for joining us today for Havnadian Enterprises' fiscal 2021 second quarter earnings conference call. An archive of the webcast will be available after the completion of the call and run for 12 months. This conference is being recorded before we broadcast, 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 the opening comments from management. 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 should now log on to the website. I would like to turn the call over to Jeff O'Keefe, Vice President, Investor Relations. Jeff, please go ahead.
Jeff O'Keefe
Thank you, Liz, and thank you all for participating in the call this morning to review the results for our second quarter. All statements in this conference call that are not historical facts should be considered as forward-looking statements within the meaning of 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 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. By their nature, forward-looking statements speak only as 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's 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 on the call are Ara Hovnanian, Chairman, President, and CEO, Larry Sorsby, Executive Vice President and CFO, and Brett O'Connor, Senior Vice President, Chief Accounting Officer, and Treasurer. I'll now turn the call over to Ara.
Liz
Ara, go ahead. Thanks, Jeff. I'm going to review our second quarter results and then address the current market environment. As usual, Larry Soresby, our CFO, will follow me with more details and we'll end with Q&A. On slide four, we compare our second quarter results to the guidance we gave on our first quarter conference call. Our total revenues, adjusted gross margin, adjusted EBITDA, and adjusted pre-tax income were all within the guidance range that we gave. However, SG&A was higher than anticipated. The SG&A miss was related to $17.5 million of incremental phantom stock expense related solely to our common stock price increasing from $51 at the end of the first quarter to $133 at the end of the second quarter. Only one time in our company's history during 2019, Phantom stock was issued for an equity grant and it was because our stock price was very low at the time and we were concerned about the negative impact that dilution could have on our shareholders. While we certainly have been bullish in our long-term stock price, we did not budget for the magnitude of the increase in one quarter. Larry will talk more about the Phantom stock expense in just a few moments. In the third column, we show what our results would have been without the incremental stock expense. The SG&A would have been better than the guidance we gave. Additionally, our results would have been above the high end of the range for adjusted EBITDA and adjusted pre-tax income. Moving on to slide five, we show year-over-year comparisons for the second quarter performance metrics. We begin with total revenues in the upper left-hand portion of the slide. Our total revenues for the second quarter increased 31% to $703 million. Moving to the upper right-hand portion of the slide, you can see that our adjusted gross margin increased 310 basis points year over year. Adjusted gross margin was 21.3% this year compared to 18.2% in last year's second quarter. As we've said on previous calls, in anticipation of cost increases and our desire to improve margins, we pivoted to increasing home prices back in June of 2020. During the first half of 21, housing demand remained strong and we saw both labor and material costs, especially lumber, continue to increase. As a result, we continued to both aggressively increase home prices and limit home sales to a pace similar to our home starts. These actions will help ensure that we stay ahead of future cost increases. We'll talk more about that and the impact of margins in a moment. In the lower left-hand quadrant of the slide, you can see that our SG&A was certainly impacted by the incremental phantom stock expense. If you were to ignore the incremental stock expense, the SG&A ratio would have improved to 9.3% as shown in the lower blue, in the lighter blue, excuse me, compared to the 10.4% in last year's second quarter. We're benefiting from the normal leverage of scale as we grow. In the lower right-hand quadrant of the slide, we show that adjusted EBITDA increased 47% from $52 million in last year's second quarter to $76 million this year. While we were within the guidance range for EBITDA, once again, if you ignore the incremental phantom stock expense, our adjusted EBITDA would have increased 80% to $94 million above the upper end of our guidance range. On slide six, our adjusted pre-tax income before land charges and gains or losses from the extinguishment of debt improved to a $31 million profit this year from a $5 million profit last year. Once again, ignoring the phantom stock expenses would have resulted in a higher profit of $49 million this year. On slide seven, we show that our net income for the second quarter of 21 was $489 million compared to $4 million in the same quarter last year. A huge portion of that year-over-year increase, or $469 million, was due to the reduction of our valuation allowance. The profit for the quarter combined with the reduction in our valuation allowance resulted in total shareholders' equity, increasing sequentially by $489 million. On the left-hand portion of the slide, we show that our quarterly contracts increased, excuse me, on the left-hand portion of slide eight, we show that our quarterly contracts increased 19% to 1,771 homes. Contracts during the second quarter last year were adversely impacted by the early stages of the COVID shutdown, making this year's second quarter comparisons much easier. We achieved a 62% increase to 18.3 contracts per community for the second quarter of this year compared to 11.3 contracts per community for last year's second quarter. The strength of the market has been widespread across product types and by geography. During the second quarter, Phoenix, Delaware, and Dallas-Fort Worth had the largest year-over-year increases in contracts per community. Each of these divisions posted year-over-year increases of more than 135%. Our other markets continue to do well also, but in many of those cases, we've been more focused on slowing down sales pace and increasing price. Slide nine shows the number of consolidated contracts on a monthly basis over the past year. As we discussed last quarter, we consciously raised prices significantly in February to slow the sales pace and improve our margins. While we held the sales pace to comparable numbers in the months of March and April with steady price adjustments, the contracts are still up over the prior year because the comparisons were much easier. Turning to slide 10, you can see the contracts per community for the past several months. This shows a similar pattern of significant increases compared to the same month last year, but even more significant, again, with particularly easy comparisons for last April and March. We spiked at seven contracts per community in January. Then we saw the intended impact from our aggressive home price increases and the restriction of sales in certain locations. In both February and March, contracts per community slowed to 6.1, and in April it came down further to 5.5 contracts per community. Even at these lower contract paces per community, our annualized paces are the highest they have been for over a decade. A sales pace of six to seven per month per community is difficult to match in production today, and we pivoted harder to a greater focus on margin. As I mentioned earlier, we'd like to control our sales pace to the point where it aligns more closely with starts. This strategy significantly reduces the risk of construction cost increases, reducing our margins. As we stated on our analyst call last quarter, we expected the year-over-year sales comparison for March and April to be much easier due to the COVID shutdown last year. We also stated that comparisons would be more difficult in May and over the summer months due to the surge in COVID housing demand last year. Further, over the past several quarters, we were particularly aggressive regarding raising sales prices to both increase margins and slow sales to a more rational pace. During the recent months, we've significantly metered sales and temporarily stopped sales in certain communities in order to better match our sales pace with our ability to start homes. As a result, compared to intrinsic demand, we believe our May sales pace is artificially low. You can see the start of these more difficult comparisons on slide 11. During the month of May, due to restricting sales, an especially difficult comparison to a very strong May last year, and a lower community count, our contracts per community declined 19% and our contract dollars decreased 23%, and total contracts declined by 266 homes year over year. However, we achieved our objectives, and our May contracts had the highest gross margin percentage at the point of contract for any month in over a decade. As we intended, the slowing of our sales pace has kicked in, The difficult comparison to last year's sales pace will continue over the summer months. This was a time last year when the market was absolutely on fire, and we and the home building industry had not begun to aggressively throttle back contract paces. However, like the month of May, we expect significantly higher gross margins in our new contracts compared to last summer's contracts. The broad strength in the housing market continues to be driven by the same factors that have been in place over the past year. Solid demographic trends, limited supply of new and existing homes, historically low mortgage rates, and an ever improving economy. The potential for an infrastructure bill can only improve the economic conditions. We plan to continue to raise prices in order to keep up with rising material and labor costs, align our sales pace with our ability to start homes, and improve our margins. All signs indicate that our 21 financial results are expected to be dramatically better than last year. I'll now turn it over to Larry Sorsby, our Chief Financial Officer.
Jeff
Thanks, Aaron. I'm going to start with a discussion about the $17.5 million of incremental Phantom stock expense that we booked in the second quarter of fiscal 2021. In 2019, for the only time in our history, Phantom stock was used in lieu of actual equity for our long-term incentive plan, or LTIP grant. This was done in the best interest of shareholders to avoid dilution concerns associated with the low stock price of $14.50 at the time of the grant. We determined that granting phantom shares eliminated the significantly higher than normal EPS dilution that would have resulted from granting actual shares at the $14.50 stock price. When actual shares are used for an equity grant, there are no GAAP expenses related to stock price movements from one quarter to the next. However, non-cash GAAP expenses for Phantom stock varies depending upon changes in common stock price each quarter during the performance period, which began in 2019. Cash payments for the 2019 Phantom Stock LTIP grant will occur beginning in fiscal 2022. Since 2019, when we granted our phantom stock LTIP, our operating performance has significantly improved. As a result, our stock price has materially increased, especially after we reported our strong first quarter results and guidance for fiscal 2021 in early March. The run-up in our stock price from $51.16 to $132.59 during the second quarter resulted in a $17.5 million of SG&A expense that would not have occurred had we granted our 2019 LTIP utilizing actual shares instead of phantom stock. While we were not surprised that the stock price went up, we were surprised by how much it went up in a single quarter. On slide 12, we show our total mothballed lots as of the end of the second quarter of fiscal 2021. During the second quarter of fiscal 2021, we unmothballed 864 total lots, including 732 lots in a large master plan community in Northern California, a 99-lot community in Southern California, and a 33-lot community in Virginia. That leaves us with 1,514 mothballed lots in eight communities with a book value of $4 million. 705 of those lots are in the same large master plan community in Northern California but remain mothballed because of the long development time of the later phases. We believe the value of these remaining mothballed lots is greater than our current book value. We will continue to monitor the remaining 1,514 lots and get those communities reopened when it makes good sense to do so. We remain focused on growing our land position. On slide 13, we added 2,920 newly controlled consolidated lots during the second quarter. During that same quarter, we had 1,625 deliveries and lot sales, resulting in that increase of 1,295 consolidated controlled lots. And for the nine-month period ended April 30, 2021, we added 7,082 newly controlled lots, delivered 4,753 homes, and lots, resulting in a net increase of 2,329 lots. On the left-hand portion of slide 14, we show what our community count was at the end of every quarter over the past 12 months. As you can see, primarily due to selling through communities at a significantly higher than normal pace, our community count has been declining, and we ended the second quarter of April 2021 with 117 communities, including domestic unconsolidated joint ventures. As we said on our last few calls, our community count is likely to fluctuate from quarter to quarter. Throughout the remainder of fiscal 2021, we plan to open more new communities. Given no material changes in current market conditions, we expect our community count, including communities from domestic unconsolidated joint ventures, to grow to approximately 130 communities at the end of 2021's fiscal year. Our teams are busy trying to help us get to that goal and beyond. On the right-hand portion of this slide, we show the lot count at the end of the same four quarters. In each quarter, our lot count has increased sequentially. Over this period of time, we've been steadily increasing our lot position. Keep in mind, there's a lag between when we control the lots and when we can open a community. Our ability to increase our lot supply clearly indicates the progress we've made towards a growing community count in future periods. Virtually all of the land and communities necessary to achieve further growth and profits during both 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. Turning now to slide 15. During the second quarter of fiscal 2021, our land and land development spend was $175 million, a 53 percent increase over the same quarter a year ago. This followed a similar increase of 51 percent in the first quarter of 2021. And before that, a 41 percent increase in the fourth quarter of 2020. These increases demonstrate that we're investing the money needed to grow our community count. Unfortunately, there's a lag between optioning the properties, developing the land, and opening the communities for sale. However, given our increasing land-controlled position over the last year and the significant increase in land and land development spend over the recent quarters, we remain confident that after this lag period, we will soon see our community count rise once again. We are continuing to find land opportunities that make sense in today's environment. While we're using current home prices and current construction costs, we have typically been underwriting with more conservative contract pace assumptions. Turning to slide 16. Even with that significant increase in land spend, we ended the second quarter with $353 million of liquidity, well above the high end of our liquidity targets. Some of this liquidity will be used in the third quarter of 2021 to pay down the debt that comes due in July 2022. After accounting for that, we will still have excess capital to invest in land. We're busy contracting additional land parcels across the country today. Turning to slide 17, this was another strong quarter for our financial services division. Driven by historically low rates, and strong home demand, which led to increased closing volumes, our financial services second quarter pre-tax earnings increased 119% year-over-year to $10 million. Turning to slide 18. Compared to our peers, you can see that we still have one of the highest percentages of land control via options. We continue to use land options whenever possible in order to achieve high inventory turns, enhance our returns on capital, and to reduce risk. We are pleased to control 63% of our land through options, which is up from 60% in the same quarter a year ago. Looking at our consolidated communities in the aggregate, including the $125 million of inventory not owned, we have an inventory book value of $1.3 billion, net of $162 million of impairments. Turning now to slide 19. 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 were 29% higher than the next highest tier below us. High inventory turns are a key component of our overall strategy. Another area of discussion is related to our deferred tax assets. During the second quarter, we reduced our valuation allowance by $469 million. We reduced all of the federal valuation allowance and a portion of the state valuation allowance. As of April 30, 2021, the remaining state portion of the valuation allowance was $103 million, and our deferred tax asset net of this valuation allowance was $459 million. We've taken numerous steps to protect our deferred tax asset. Even though we will still be using GAAP, taxes on our income statement, we will not have to use cash to pay federal income taxes on approximately $1.8 billion of future pretax earnings. This helps strengthen our balance sheet more rapidly, particularly in an environment when higher corporate taxes are in discussion. Turning now to slide 20. On this slide, we show our debt maturity ladder at the end of the second quarter. On June 2, 2021, we sent a redemption notice to call in full on July 31, 2021, the $111 million of our 10% senior secured notes due July 2022. Additionally, We still intend to further improve our balance sheet by using cash to pay off the remaining $70 million principal amount of our 10.5% senior secured notes due July 2024 in advance of their maturity. On slide 21, we show the key metric targets we established in June 2018. In the middle column on this slide, you can see the progress we've made in achieving our key metric targets for the trailing 12 months ended April 2021. Revenue was just shy of achieving the target, and gross margins of 20% was above our 19.5% target. Our SG&A ratio was slightly above target. However, if you ignore the $17.5 million of incremental phantom stock expense, our SG&A ratio would have been slightly better than the target. Lastly, even though the incremental phantom stock expense, our adjusted EBITDA and our adjusted pre-tax profit were better than target. On the far right column, we show the further improvements we expect to report by year end on each component of our key metric targets. As a matter of fact, we expect adjusted EBITDA and adjusted pre-tax earnings to be significantly above the key metric targets. Turning to slide 22, I want to spend a few moments talking about the goals of deleveraging and enhancing our debt structure. Looking at the bullets on the left-hand portion of the slide, achieving higher levels of profitability has allowed us to make progress towards our deleveraging goals. Given our dramatically improved results, we believe our current debt is too expensive. Our goals for comprehensive refinancing of our debt structure include the following components. First, ensure a multi-year well-laddered debt maturity. Second, refinance our high cost of debt with lower cost of capital that's more in line with our industry peers. Third, issue no-trunch sizes that would achieve high-yield index inclusion, secondary market liquidity, and price transparency. Finally, we would want to reduce our reliance on secure debt, ultimately resulting in an unencumbered balance sheet. As we continue to post strong results, we believe we can refinance our entire debt structure with significantly improved terms. As always, we will analyze and evaluate our capital structure and explore transactions to further strengthen our balance sheet and our financial performance. On slide 23, we show that our total backlog, including domestic unconsolidated joint ventures, at the end of the second quarter increased 63% to 4,373 homes. You can also see that the dollar value of this backlog increased 80% to $2.04 billion. The strength of this backlog, including solid expected gross margins, sets us up nicely for strong results over the remainder of this fiscal year. Our financial guidance for both the third quarter and the full year for fiscal 2021 assumes no adverse changes in current market conditions, and excludes further impact to SG&A expense from phantom stock expense related solely to stock price movements from the $132.59 stock price at the end of our fiscal 2021 second quarter. However, our guidance for the quarter and for the year include phantom stock impacts we absorbed in the second quarter. For every $4 that our stock price increases or decreases, there is approximately $1 million increase or decrease, respectively, of incremental phantom stock expense. At yesterday's closing price of $136.81, that would create roughly $1 million of incremental phantom stock expense. Ironically, if the stock price falls from that level, we actually create income. On slide 24, we provide guidance for the third quarter of fiscal 2021. We expect to report total revenues for the third quarter of fiscal 2021 between $700 and $750 million. We also expect gross margins to be in the range of 20.5 to 21.5 percent, up substantially compared to the 17.5 percent in last year's third quarter. And SG&A has a percentage of total revenues to be between 10.5 percent and 11.5 percent compared with 9.5 percent last year. Excluding land-related charges and gains or losses on extinguishing of debt, we expect adjusted EBITDA to be between $80 and $90 million, up between 24 and 39 percent compared to the same quarter last year. Finally, we expect our adjusted pre-tax profit for the third quarter of fiscal 2021 to grow between $35 and $45 million compared to a $15 million profit in the same period last year. Turning to slide 25, I will discuss our increased guidance for the full year. 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 percent compared to 18.4 percent last year, and SG&A's percentage of total revenues to be between 10.5% and 11.5% compared with 10.3% in the prior year. This includes the $17.5 million of incremental FANM expense discussed earlier. Excluding land-related charges and gains and losses on extinguished debt, we expect adjusted EBITDA to be between $310 million and $350 million, up between 32% and 49% compared to last year. We expect our adjusted pre-tax profit for fiscal 2021 to grow to between $150 and $170 million, up 195 to 234% compared to $51 million in pre-tax earnings last year. This is a $10 million increase from our previous guidance of $140 to $160 million. Were it not for the $17.5 million of incremental phantom stock expense in the second quarter, our guidance would have increased by $27.5 million. Given our pre-tax profit guidance for the second half of the year, our shareholders' equity should double from today's level by October 31st, 2021. Assuming no changes in current market conditions, our expected earnings growth in fiscal 2022 from fiscal 2021 levels should also significantly further enhance shareholders' equity by the end of 2022's fiscal year. Turning now to slide 26, here we illustrate the growth we've seen in adjusted EBITDA. On the left-hand portion of the slide, you can see that our third quarter estimated for adjusted EBITDA is 31 percent more than the third quarter of 2020. And that was after a 76% growth from the year before that. You can see a similar trend on the right-hand portion of the slide where we show adjusted EBITDA for 2019, 2020, and our expectation for 2021. In 2020, we achieved a 35% growth in adjusted EBITDA. And in 2021, we're now expect to achieve an additional 41% growth in EBITDA. These increases are representative of the progress we've made in materially improving our operating results. We've taken numerous steps to achieve our improved results. On slide 27, we show some of the strategies we're utilizing to achieve long-term profitability and, more importantly, value creation for all of our stakeholders. This slide shows the growth-oriented strategies on the top of the slide with the actions undertaken listed below the individual strategies. Beginning on the far left-hand portion of the slide, we start with growth revenues to improve scale and enhance margin profile. In order to achieve this strategy, we have focused on higher inventory terms to allow for growth. Regarding margins, we've actively managed the sales pace through home price increases and limiting the number of homes for sale in each community. Longer term, we're focused on reducing costs further and streamlining our organization. Moving to the right, we show risk adverse land strategy. Our preferred method of controlling lots is through the use of options, which only require minimal cash deposits. Ideally, we'd like to have less than 18 months of owned land and then control as much land as practical through option contracts. We remain extremely focused on utilizing high inventory turnover to be more efficient and to increase our returns on capital. Finally, by achieving significantly improved operating results, we generate excess cash flow, which helps significantly improve our balance sheet flexibility. The combination of our expected improved financial performance this year and the deferred tax asset valuation allowance reversal will meaningfully increase our year-end book value per share. Those increases to book value combined with executing our debt reduction strategy this year should significantly improve our balance sheet at year-end. Assuming no changes in current market conditions, our expected earnings growth And fiscal 22 from fiscal 21 levels should also significantly further enhance shareholders' equity by the end of fiscal 2022. That concludes our prepared remarks, and I'll be happy now to turn it over to our Q&A.
Operator
The company will now answer questions. So that everyone has an opportunity to ask questions, participants will be limited to one question and a follow-up, after which they will have to get back in the queue to ask another question. If you'd like to ask a question at this time, please press the star, then the number one key on your touchtone telephone. To withdraw your question, press the pound key. Our first question comes from Alan Ratner with Selman.
Alan Ratner
Hey, guys. Good morning. Thanks for taking my questions. So, you know, the first one I'd love to dig in on, you guys mentioned several times this notion of trying to match your sales to start. pace, which I think a lot of builders in the industry are doing right now. So if we look at your absorption rate going from seven a month a few months ago down to four plus here in May, what is your production pace running at currently? And at what point do you think you can maybe open up the spigot a little bit more and perhaps let that absorption rate run a bit hotter than it is today? Or is four kind of the new normal that you're kind of solving for at this point?
Liz
I'd say, Ellen, part of that is dependent on when we can get our new communities on pace, you know, on the market. We're being cautious. We don't want to gap out, so to speak, and sell out too quickly. As we get more storefronts open and, you know, as you saw, our option positions growing a lot, our land spend positions are growing a lot. We've just got to get those communities open. As we get them open, then we can feel a little more comfortable letting the absorption pace grow more rapidly and go to a higher pace than the four and a half.
Alan Ratner
Got it. Okay, that's helpful. Second question, just in terms of the margin on homes you sold in May, you mentioned it's the highest level in the decade. I was a bit surprised just looking at your margin guidance for the back half of the year. It doesn't really imply much improvement from the second quarter level. Can you talk a little bit about what the absolute margins are on homes you're selling today and presumably when that would begin to filter through to the P&L?
Liz
Sure. First, the homes that we're selling today are not really going to be delivering this fiscal year. Most of what we're delivering this fiscal year has already been in backlog. You'll begin to see these higher margins from our current contracts. in next fiscal year beginning with our first quarter. Obviously, we haven't started all of those just at this moment, so we are still subject to potential cost increases, but the margins in our current contracts are substantially higher, so we feel pretty confident we're going to generate some pretty good margins as we deliver those homes.
Alan Ratner
I appreciate that, Ira. I guess what I was thinking, you know, you didn't just start raising prices in May. You've been raising prices for several months. And I think, you know, you even mentioned starting January, February is where you really started to get aggressive there. So presumably, you know, some of those homes would deliver before the end of the year. So that's where I was referring to being a little bit surprised.
Liz
Some of them will. We're obviously being fairly cautious on margin guidance there. given that it's a very challenging environment with cost increases in general. You know what's happened with lumber up and down and other material costs and labor costs. So we're trying to be on the conservative side on our guidance.
Alan Ratner
Understood. Okay. Thanks a lot. Appreciate it. Good luck. Thanks.
Operator
As a reminder, that is star then one if you'd like to ask a question at this time. Our next question comes from Alex Barron with Housing Research Center.
Alex Barron
Yeah, thanks, guys. I wanted to ask about the deferred tax asset. What drove the fact that you didn't get the whole thing on the state side, and is that expected to get done later in the year, or how does that work?
spk05
When you evaluate the valuation allowance for states, you have to look at each state individually. States all have different rules in terms of how long you can carry forward net operating losses. We also have states that since those NOLs were generated, we're no longer operating in or we've significantly reduced our operations. As an example, we're winding our business down in Chicago. Currently, we're not operating in Pennsylvania. We've got markets that we've left and therefore are unlikely to, at least at the moment, We're unable to forecast that we would use those NOLs in time before they would expire. It is something we would continue to evaluate, but I wouldn't anticipate that valuation allowance that's currently on our books at $103 million to change dramatically in the coming, certainly the rest of this year, and maybe not much going forward. It will depend on changes in our operations in those states where we currently can't forecast using those NOLs.
Alex Barron
Got it. And for modeling purposes, what kind of tax rate do you suggest using going forward?
spk05
I would say at the moment, high to 28%, 29%, something in that range for federal and state.
Alex Barron
Okay. Great. And then on the phantom stock issue, so that's been... Just to emphasize something Larry said,
spk05
while that will be our tax expense, we won't be paying taxes, especially the federal taxes, because of our deferred tax assets. So I want to make sure that was clear.
Alex Barron
Correct, yes. And then on the phantom stock issue, it seems like it's going to be an ongoing issue based on your stock price, but is there a certain amount of stock that was issued and that's it, or is there going to be more issuances coming down the road?
spk07
No, it was a one-time event. And just keep in mind, it does go up and down.
Liz
Today our stock price is down, as all home builders are down, and it would actually result in a lowering of expense and an increase of profit of about $2.5 million at the moment. So, you know, it goes in both directions.
Alex Barron
Got it. If I could ask one last one. I think you said your contracts for May were 413 because you're raising prices and maximizing margins. Is that roughly, you think, a run rate for the remainder of the year, or is this likely to go up from here, you know, based on other factors?
spk05
Yeah. Go ahead, Brad. Well, I think, you know, as Eric mentioned during the prepared remarks and even previously on one of the responses, as our additional community is open later this year that we've talked about, we should obviously get additional contracts and then be at a faster pace than we're currently running in May. And we also mentioned right now we're intentionally restricting sales because of our ability to produce and get caught up on our existing backlog. So I think as that frees up and we get those fees open, you might see us increase sales space even on the existing communities at that point.
Alex Barron
Okay. Great. Thanks. I'll get back in the queue.
spk05
Okay.
Operator
Our next question comes from Jordan Heimovitz with Philadelphia Financial.
spk02
Thanks, guys. A couple questions on the debt refinancing and paydown. What is the earliest, first of all, you could pay down the 2024s?
spk05
Well, it's dependent upon us achieving certain secure debt leverage ratio results. And so we are not there yet, and we are monitoring that each quarter end, but we're not projecting that at the moment. But if you look in the indentures, you probably could get a pretty good estimate on that yourself.
spk02
But it looks like around the September, October time period. And I guess, would your goal be to refinance those as soon as possible?
Jeff
I don't think we've made any decisions on precisely when we're going to do that. We certainly intend to do it in advance of maturity and hopefully well in advance of maturity. But I don't think we've put a fine point on precisely when.
Liz
And in addition, at the current moment, our plan is not to refinance, but rather just have a reduction in the amount of our debt.
spk02
Perfect. And once that occurs, I assume the ratings agencies would take a look at upgrading the rating for your company overall.
Jeff
You would assume that, and we hope that that is true, and we intend to meet with the rating agencies soon. in the not-too-distant future just to further update them on our improved performance.
spk02
Okay, a different topic. Why doesn't the adjusted EBITDA add back the $17 million of SG&A expense?
spk05
Because it's not taxes or interest depreciation or amortization. I mean, it's an SG&A expense. I know you're trying to do it as a non-cash expense. so you theoretically can do that on your own, but from a definition of EBITDA, it's not any of those items.
spk02
But adjusted EBITDA by nature is a non-cash definition, and it's a non-cash item.
spk05
Feel free to add it back.
spk02
Okay. And final question is, what do you think current coupons are if you were able to refinance the 2026s?
Jeff
That's a difficult question to answer given the lack of liquidity in our current bonds. You really just don't trade. But if you look at what similarly rated home builders to us are trading at yield-wise, it's dramatically lower than our current coupon. But the fact that that is occurring versus our ability to actually refinance our whole structure You know, we've got some work to do to re-educate the high-yield market on our improved performance, and I'm very optimistic as we do that that the coupons that we can refinance at are materially lower and much closer to what our similarly situated peers have.
spk02
And what do your similarly situated peers have, for those of us that are less familiar with the debt markets?
Jeff
You know, they're less than 6%.
Operator
Thank you. Our next question comes from Alex Barron with Housing Research Center.
Alex Barron
Yeah, thanks. I was wondering if you could talk about build times. Have those been extended to various supply chain disruptions? And if so, by how much roughly?
Liz
They have been extended partly due to supply chain disruptions. partly due to pressures on labor. Many builders are experiencing what we're experiencing, most builders with dramatically improved sales, which means a lot of strain on labor capacity. I'd say, depending on the geography and the moment, we've seen delays of 30 to 60 days in many locations and product types, and we factored those delays into our guidance.
Alex Barron
Got it. And in terms of your spec strategy, you know, given the rise in costs and delays and so forth, how has that shifted, if anything, you know, when you guys are, how many specs you're starting versus at what point in the construction cycle you guys are selling the homes?
Liz
Yeah, I know the strategy varies quite a bit by builder. Some builders are almost 100% spec. Some builders are still almost 100% build to order. We're somewhere in between. At the moment, frankly, sales have been so robust that all of our capabilities are going into starting the sold homes we have, which leaves a little less capacity for starting specs. We're just extremely active right now. So I'd say in general, we're starting fewer specs than we did a year or two ago.
Alex Barron
Okay. Thanks a lot and best of luck. Thank you.
Operator
I'm showing no further questions in queue. I'd like to turn the call back to Ara Hovnanian for closing remarks.
Liz
Great. Well, thank you very much. We're pleased with our results overall. and we're excited about what we're going to be reporting in future quarters. So we look forward to sharing some good news in upcoming quarters. Thank you.
Operator
This concludes our conference call for today. Thank you all for participating, and have a nice day. All parties may now disconnect.
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