Hovnanian Enterprises, Inc.

Good morning, and thank you for joining us for the Hovnanian Enterprises Fiscal 2023 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 webcasting a slide presentation along with the opening comments from management. The slides are available on the investor page at 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 now like to 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, 2023. 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 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 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 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 of the date they are made, are not guarantees of future performance or results and are subject to risks, uncertainties, and assumptions that are difficult to predict or quantify. Therefore, actual results could differ materially and adversely from those forward-looking statements as a result of a variety of factors. Such risks, uncertainties, and other factors are described in detail in the sections entitled Risk Factors in Management's Discussion and Analysis, particularly the portion of MDMA entitled Safe Harbor Statement in our annual report on Form 10-K for the fiscal year ended October 31, 2022. and subsequent filings with the Securities and Exchange Commission. Except as otherwise required by applicable security laws, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, changed circumstances, or any other reason. Joining me today on the call are Ara Hovnanian, Chairman, President, and CEO, Larry Soursby, Executive Vice President and CFO, and Brad O'Connor, Senior Vice President, Chief Accounting Officer, and Treasurer. I'll now turn the call over to Ara.

Thanks, Jeff. I'm going to review our first quarter results, and I'll also comment on the current housing environment. Larry Shoresby, our CFO, will follow me with more details, and as usual, we'll open it up to Q&A. On slide five, we compare our first quarter results to our guidance. Total revenues of $515 million, adjusted gross margin of 21.8%, Adjusted EBITDA of $50 million and adjusted pre-tax income of $19 million were all within our guidance range. Our SG&A ratio is slightly above our guidance. High inflation, sharp year-over-year increases in mortgage rates, and significant economic uncertainty adversely impacted housing demand throughout the second half of calendar 22. As you can see on slide six, starting in the upper left-hand corner, this led to a 9% decline in revenues in the first quarter of fiscal 23 compared to 22. Our first quarter has traditionally been our slowest quarter, and this year is certainly no exception. However, because of the strength of our backlog, recent improvements in home sales pay us and above average gross margins on both new contracts and in backlog, we expect better financial performance for the remainder of the year, and we'll get some more specific guidance on our next quarter toward the end of the call. Moving to the upper right-hand portion of the slide, you can see that our adjusted gross margin was 21.8% this year compared to 22.4% last year. To enhance affordability of our homes and to find the market clearing home prices, gross margins were adversely impacted by a 470 basis point increase in incentives and concessions compared to our first quarter last year. This was partially offset by the positive impact of lower construction costs, including lumber. Primarily as a result of declining revenues, You can see on the lower left-hand portion of the slide that our SG&A was 14.2% this year compared to 12.8% last year. In the lower right-hand portion of the slide, we show that adjusted EBITDA was $50 million compared to $64 million last year. On the left-hand portion of slide seven, you can see that our adjusted pre-tax income was $19 million in the quarter compared to $36 million last year. On the right-hand portion of the slide, you can see that our net income for the first quarter of 23 was $19 million, which included a $6 million tax benefit from energy-efficient home credits compared to $25 million in net income in last year's first quarter. Turning to slide eight, on the left-hand portion of the slide, you can see that contracts per community for the first quarter are down significantly compared to a year ago, but are close to the level we achieved in the first quarter of fiscal 19 before COVID. Although quarterly contracts show a low number, the monthly trend is a much more positive picture. Here on the right, we show monthly contracts per community including and excluding 107 Build for Rent contracts in fiscal 23. I'm going to focus on the monthly contracts per community, excluding the positive impact of the Build for Rent contracts. From November's low point of 1.2 contracts per community, we increased to 1.8 in December and ended the quarter with 3.0 in January. This positive trend continued through February 26 with contracts per community increasing to 3.4, which is above our February 19 pace before the COVID surge in demand occurred. We believe this positive sales trend certainly bodes well for a strong spring selling season. We still have two days remaining in February, but we wanted to give you the up-to-the-moment transparency. Given the recent increase in home demand, we modestly raised prices in approximately one-third of our communities around the country over the last month. Just one additional insight into the market. Last week, mortgage rates climbed to almost 7%. Despite this uncertain environment, our sales this past week were the best week in sales we have had in months. As you can see on the graph, our sales of BFR homes built for rent have boosted our sales a little further. And now on slide nine, we break out contracts per community for the first quarter by our three geographic segments. Similar to what we reported in the fourth quarter of 22, and similar to what many of our home building peers have reported, it's clear that contracts per community in this west segment were lower than our northeast or southeast segments. On slide 10, we show annual contracts per community for the past several years. You can see that for the full year of 22, Contracts per community, excluding bill for rent contracts, retreated to 38.9, the same level we had for the full year of 2019 before the pandemic. The bar on the far right portion of the slide shows the seasonally adjusted and annualized contracts per community for preliminary February to date results, excluding VFR contracts. At 35.2, it is improving, still below the normalized contract pace of 44 shown on the far left. Our pace, including VFR sales, gets us closer to the normalized pace with a result of 39.4. Turning to slide 11, you can see the month-by-month progression of our seasonally adjusted and annualized contract pace per community. May started the rapid decline, and it appears that we troughed in September with 21.2 contracts per community. Since September, every month has shown an improvement with our preliminary February to date results coming in at 39.4. Clearly a dramatic improvement. If you turn to slide 12, you can see our cancellation rate as the percentage of gross contracts during the first quarter of 30% was still above our normal cancellation rates. However, it is an improvement sequentially from the 41% rate we showed in the fourth quarter. If you turn to slide 13, here you can see that the trend in monthly gross cancellation rates improved greatly. On a monthly basis, cancellation rates seem to have peaked in October at 45% and have been steadily coming down each month since then. The preliminary February results of 16% are back down to our typical average cancellation rates, similar to the beginning of February of 22. Another positive trend is our website visits continue to be strong. We show our daily website activity over the past several years on slide 14. As we've said in the past, we think this is a leading indicator of future demand. Here, we show daily website visits per community with the blue line near the bottom of the graph representing fiscal year 20's pre-COVID website visits. The dark green line is in fiscal year 21, and the gray line is fiscal 22. Both of these recent years have elevated website visits during the time of extremely high demand for new homes during the COVID surge. On slide 15, we've added fiscal year 23 daily visits per community, shown with a bright yellow line. Over the past several months, our website visits have been much closer to the high levels that we experienced in the COVID surge. The recent website visits are clearly better than the normal pre-COVID levels we experienced. This continuation of high levels of website activity is encouraging and has translated to higher levels of contracts during the past few months. I'll now update you on several steps that we have been taking to address the current market. To begin with, we continue to see that consumers are seeking homes that they can close quickly. On our last conference call, we talked about a temporary pivot to have more quick-moving homes, or Q&Is as we call them, in order to provide our customers with more certainty on what their mortgage payments would be at closing. We consider a home to be a QMI the day we begin construction. If you turn to slide 16, you can see that our QMIs per community are consciously on the rise, and we discussed that last quarter. After a significant shortage of QMIs during the COVID surge in demand, we've gone from 3.2 QMIs per community in the third quarter of 22 to 5.5 in the end of the first quarter of 23. This level of QMI is higher than our historical average, but similar to the levels we had just before the COVID surge in demand. Consumer demand for QMI certainly remains quite strong. Since the beginning of the fiscal year, we've seen our QMI sales increase to about 60% of our sales versus about 40% historically, representing a 50% increase. I'd venture to say that if we had more QMIs available in all of our communities, our sales would have been even stronger. Our temporary QMI target remains approximately seven QMIs per community, as we discussed last quarter, with just a few homes beginning construction and a few homes partly through construction. Recent sales have made it difficult to keep up at that level. Once we get to seven QMIs per community, we plan to match our start schedules with the then current sales pace. We think this approach will make certain that we don't start an excessive level of unsold homes. Furthermore, we're continuing to focus on selling these homes before completion. The competition for new homes are other new homes and existing homes for sale. On slide 17, we show that the number of existing homes for sale around the country currently stands at 870,000 homes. That is less than half of the historical average, which is over 2 million homes. The lower level of existing homes for sale certainly helps our sales. Another impactful step we've taken is with respect to incentives and concessions. We closely monitor our competitors' use of incentives and concessions on a community-by-community basis. After our fiscal 22 year ended, we became more aggressive with our use of concessions on new contracts. Our improving trend in contracts per community I just walked you through indicates that these steps worked and that we found the right market clearing price to sell homes. We continue to offer customers incentive choices, such as paying for permanent or temporary below-market mortgage rates, paying for closing costs, offering discounts on options or upgrades, or discounting home prices on select Q&Is. there's not a one size fits all for all consumers. So we typically offer consumers a choice on what incentives would meet their needs the best. In general, the highest levels of incentives are reserved for our more challenging home sites in our more challenging communities. Even after increasing our use of incentives, the average margin on the new homes that we are selling today remain in the low 20% range, slightly above our historical average adjusted gross margin of 20%. When we, or other home builders for that matter, open new communities, we're generally starting with lower market-driven base prices rather than using large incentives and concessions on new communities. One reason that margins continue to be high today despite our higher use of incentives and concessions is lower lumber costs. Additionally, we held a purchasing blitz where we pitted our divisions against each other in friendly competition to see who could achieve the most savings per home. We spoke with our trade partners and our material providers to seek lower costs and our efforts have been successful thus far lowering our construction costs for future starts. Even after taking into account the recent housing rebound, the housing industry has slowed down from the red-hot pace of the COVID surge. Our trade partners increased our construction costs during the COVID surge. We and the industry today are successfully clawing back some of those increases now that the market is slowing. The benefits of the purchasing blitz should begin to positively impact our margins in the latter part of 23 and beyond as we deliver the homes that we are just starting now. Additionally, we're reviewing our staffing needs on a division by division basis and plan to finalize decisions shortly. This is obviously an evolving situation and we'll continue to reassess the steps that we're taking to make sure we are appropriate in our actions in light of changing market conditions. I'll now turn it over to Larry Sorsby, our Chief Financial Officer.

Thanks, Hera. I'm going to start with slide 18. You can see that we ended the quarter with 132 communities open for sale. Utility companies continue to present problems and are slowing down our ability to open new communities. If not for these utility company delays, our number of communities open for sale would have been even higher. We are trying to grow our community count to our pre-COVID levels. Even with continued long entitlement processes and slower land development schedules, we project that we will grow our community count during fiscal 2023. Ironically, the recent increase in sales pace makes it more challenging to achieve community count growth. While the improved pace still leads to revenue growth, it also means we sell out of communities faster than previously anticipated. About 70% of our expected fiscal 2023 community openings will take place in our northeast and southeast segments, and 30% will come from the west. As it turns out, Given the recent better sales and margin trends in our northeast and southeast segments, that is a fortuitous ratio. During the rapid increase in mortgage rates last summer, we suspended most new land acquisitions. As a result, on slide 19, we show that our lot count peaked in the second quarter of fiscal 22 at 33,501 lots. During each of the subsequent quarters, our lot count decreased, and we ended the first quarter of fiscal 23 with 29,123 lots. Given our recent increase in sales pace, our land teams are once again actively pursuing new land parcels that meet our underwriting standards. By using current home prices, current construction costs, and current sales pace to underwrite to a 20 plus percent internal rate of return, our underwriting standards automatically self-adjust the changes in market conditions. As we have stated time and time again, our land strategy is very risk averse with our focus on controlling lots primarily through option contracts. It is important to highlight that our owned land position declined by 20% since the second quarter of fiscal 22 while our option land position only decreased by 10% over the same time period. I also want to point out that 60% of our total lots are in our stronger northeast and southeast segments versus 40% in the west. We have been deliberately increasing our use of land options to increase our inventory turnover and our return on investments as well as to reduce the risk associated with owned land. On slide 20, we show our percentage of lots controlled by option increased from 44% in the first quarter of fiscal 15 to 71% in the first quarter of fiscal 23. This has been a specific focus of our strategy and we continue to make progress. A low percentage of owned lots strongly mitigates land risk and gives us flexibility in a declining market to renegotiate land price and terms. On slide 21, we show the vintage of our land position. Seventy-three percent of our total 29,123 lots controlled were put under contract before November 1, 2021. and 41% were controlled prior to November 1st, 2020. The vast majority of those lots were underwritten at lower home prices than today's housing market, which provides us with the flexibility to increase concessions and incentives while still delivering strong margins and returns. 27% of our total land position was controlled more recently in 22 and 23. Keeping with our strategy to further increase our inventory turnover and mitigate land risk, virtually all of fiscal 22 and 23 land vintage was controlled by options, and virtually all of our owned land was controlled in fiscal 21 or earlier. Given how undervalued our stock was, we spent $17 million repurchasing approximately 7% of our outstanding shares at an average share price of $39.48 over the past two quarters. If our stock price declines from current levels, we may repurchase additional shares in the future. Turning to slide 22, after $134 million of land spend in our first quarter, we ended the quarter with $366 million of liquidity more than $100 million above the high end of our targeted liquidity range. Turning now to slide 23. Compared to our peers, you see that we have the third highest percentage of land controlled B of auctions. We continue to use land options whenever possible to achieve higher inventory turns, enhance our returns on capital, and to reduce risk. Turning to slide 24. We show year supply of owned lots for us and our peers. With 1.6 years supply of owned lots, we have the second lowest year supply. Having a shorter supply of owned lots along with a strong supply of option lots is a good way to reduce land risk in a less stable housing market. On slide 25, you can see that we also have five and a half years supply of controlled land. both owned and option lots, 73% of which was controlled in fiscal 21 or earlier when home prices were lower. 71% of our total land position is controlled by options and only 29% is owned. Turning now to slide 26. Compared to our peers, we continue to have the second highest inventory turnover rate. High inventory turns are a key component of our overall strategy. We believe we have opportunities to continue to increase our use of land options and to further improve inventory turns and our returns on inventory in future years. Turning now to slide 27. On this slide, we show our debt maturity ladder at the end of the first quarter. Since the end of fiscal 19, we retired $394 million of debt. In last year's fourth quarter, we amended our revolving credit facility to extend the maturity date to June 30, 2024. After that, we don't have any debt maturing until the first quarter of fiscal 2026. Due to changing market conditions last summer, we temporarily shifted our focus to preserving liquidity and paused our near-term debt reduction plans. We remain committed to strengthening our balance sheet and intend to revisit our debt retirement initiatives once market conditions show sustained improvement. Given our $347 million deferred tax asset, we will not have to pay federal income taxes on approximately $1.3 billion of future pre-tax earnings. This benefit will significantly enhance our cash flow in years to come and will accelerate our progress of improving our balance. Our financial guidance for the second quarter of fiscal 23 assumes no adverse changes in current market conditions, including no further deterioration in our supply chain or material increases in mortgage rates, inflation, or our cancellation rates. Our guidance assumes continued extended construction cycle times, averaging six to seven months, compared to our pre-COVID cycle times for construction of approximately four months. Further, it excludes any impact to our SG&A expense from our phantom stock expenses related solely to the stock price movement from our $57.88 stock price at the end of the first quarter of fiscal 23. While we've met or exceeded most of our guided metrics over many quarters, there is a greater degree of uncertainty in the current environment given inflation, the potential of an economic recession, employment risk, utility company delays, and mortgage rate increases. Additionally, given the difficult economic backdrop and the resulting uncertainty in the housing market, the company will not be providing full fiscal year 23 guidance at this time. With those caveats in mind, on slide 28, we show our guidance for the second quarter of fiscal 23. We expect total revenues for the second quarter to be between $525 and $625 million. We also expect adjusted gross margins to be in the range of 21 to 22.5%. SG&A as a percent of total revenue is expected to be between 13 and 14%. Our guidance for adjusted EBITDA is between $52 and $67 million. Our adjusted pre-tax income for the second quarter of fiscal 23 is expected to be between 20 and $35 million. On our fourth quarter call, we talked about some assumptions that were built into our guidance for the first quarter. Those assumptions still apply to the guidance for the second quarter of 23, and I will now discuss those assumptions again. Our SG&A ratio is expected to increase over the prior year as we anticipate opening additional communities as well as incur a higher-than-normal increase in wages as a result of inflationary pressures. Due to slower market conditions, we are also anticipating increasing our advertising spend over the year. Despite lower levels of home building debt, our interest expense is expected to increase during fiscal 23 for two reasons. First, a slower sales pace extends the average community lifespan and results in a higher total community life interest cost. These interest costs are expensed in cost of sales interest on a per delivery basis. Therefore, when sales pace slows down, our interest costs per home delivered increases, and conversely, when the sales pace increases, our interest costs per home delivered decreases. As a result, we expect the cost of sales interest expense per home will be higher in fiscal 23 than it was in fiscal 22. Second, our inventory not owned has increased to $315 million at January 31st, 2023, compared with a five-quarter average of $202 million from a year ago. This increase causes a corresponding increase in interest costs. Lastly, in response to competitive pressures from outside lenders and in order to offer lower mortgage rates so that More of our customers can qualify to purchase one of our homes. We also expect our financial services business will be significantly less profitable during fiscal 2023. On slide 29, we show compared to our peers that we have the third highest consolidated EBIT return on investment at 35.8%. We believe this is the most accurate measure of pure homebuilding performance without regard to leverage. On slide 30, we show the trailing 12-month price to earnings ratio for us and our peer group. Even though HomeBuilder stocks have traded higher since the beginning of calendar 23, the group still trades at a significant discount to the overall stock market. We recognize that our stock may trade at a discount to the group because of our higher leverage. However, given our industry-leading returns on equity, our top quartile EBIT return on investment, along with our improving balance sheet, we believe our stock is the most undervalued of the entire universe of public home builders. Based on our price earnings multiple of two times at yesterday's closing stock price of $67.83, we're trading at a 59% discount to the industry average P.E. ratio. We remain focused on further strengthening our balance sheet and look forward to reporting our progress in future periods. I'll turn it back to Eric for some brief closing remarks.

Thanks, Larry. Considering the economic environment, we are pleased with the financial performance of our first quarter of fiscal 23. It is frustrating, as Larry was just pointing out, to have the highest EBIT ROI in the industry with our midsize peers, the third highest of all peers, and still have the lowest PE ratio. We recognize there's a penalty for a high leverage, but as Larry said, we believe that our continued improvement in our balance sheet and solid financial performance will have our PE ratio correct itself over time. We are glad to see the pickup in traffic and contracts in the months of December, January, and February right through last week. Assuming the current sales environment continues, we expect better financial performance for the remainder of the year. We're happy to see better trends in the beginning of the 23 spring selling season. Our traffic and website visits and weekly contracts remained elevated despite the recent uptick in mortgage rates. Consumers seem to be getting accustomed to a higher mortgage rate environment, and their home purchase expectations appear to have adjusted accordingly. We'll continue to closely monitor the impact of mortgage rate movements and the actions taken by the Federal Reserve. More importantly, the long-term fundamentals that drive the housing market remain solid today. We believe we've got the right management team to see us through this period, and we also have the right associates in the field to execute our game plan, which should allow us to continue to achieve industry-leading returns. That concludes our formal comments, and we're happy to open it up for Q&A.

Certainly. Ladies and gentlemen, if you have a question at this time, please press star 11 on your telephone. If your question has been answered and you'd like to remove yourself from the queue, please press star 11 again. Our first question comes from the line of Alex Barron from Housing Research Center. Your question, please.

Yes, thanks. Good morning, gentlemen. Great job on the quarter. I just wanted to inquire about, you know, the newfound, I guess, enthusiasm of buyers this year. And I guess now that rates seem to be trickling back up, are you guys maintaining the same level of incentives or have you had to increase to maintain the sales momentum? Just some color around the last couple months would be helpful.

I think, Alex, as we pointed out, and honestly, to many of our surprises, we actually increased home prices, net home prices, net of incentives, in about a third of our communities over the last month. So I think that gives you the answer. There are lots of movements and lots of different directions of incentives or base prices, but net-net, we actually increased home prices over the last month. And I'll repeat again, last week, even after rates moved to 7%, we had one of the best weeks we've had in months. So, so far, the market seems to be adjusting to the current rate environment.

Yeah, well, that's very encouraging. You know, I guess what's your best guess or understanding from maybe feedback in the field as to why this is happening? Why, I guess, even though home prices are still high and interest rates are high, people seem to be able to afford the houses. Are they just more comfortable with the outlook, you think?

There are a number of factors. First, as I pointed out, alternatives are fewer than normal. The number of existing homes available for sale is somewhere between a half and a third of normal. That's competition for us, so less competition is helpful. Number two, people are just adjusting their home price, their home expectations. I think when rates were 3.5%, they set their sights on some very large homes with very fancy finishes, if you will, and I think people have adjusted their expectations And it comes to terms with the current environment. They're a little bit over the sticker shock and are cautiously moving off the sidelines and back into the home buying market. Luckily, demographics seem to be helping. The millennials seem to be helping. And net-net, the market is definitely finding some solid footing right now.

Yeah, that's great to hear. Can you clarify, I'm not sure if I heard you correctly towards the end of the comments, but did you guys say you bought back stock or did I hear incorrectly?

No, we did buy back about 7% of our outstanding shares and I think the number was about, I don't know, what was the dollar amount?

I forget off the top of my head. $17 million.

Yeah, that's about right. And that was over the last two quarters. Yeah.

Okay. All right. I'll reread some of the press release. Maybe I missed it there. But anyway, so is there a limit to what you guys are allowed to buy back there? And why do you feel that's preferable to reducing the debt as you guys had previously planned?

Well, I mean, the price I think we mentioned in our release was about a little over $39 of the shares that we purchased. We just thought the price just made it an irresistible purchase, notwithstanding the fact that our long-term plan is to reduce leverage and improve our balance sheet. It was just too good of an opportunity. We are authorized by the board to repurchase more, but we're just really monitoring the price. I suspect if it drops back again, we'll be back in the marketplace, but we haven't made that decision, and as I pointed out, we are authorized to buy more should we decide to.

Okay, thank you, and best of luck. I'll let somebody else ask questions. Thank you.

Thank you. One moment for our next question. And as a reminder, if you do have a question, please press star 11 on your telephone. Our next question comes from the line of Jesse Lederman from Zellman Associates. Your question, please.

Hi. Thanks for taking my questions, and congrats on the strong results thus far this year. I'd like to learn a little more about the land market. Have land sellers begun to capitulate on land and lot prices, given that you and presumably some of your peers are back in the land market? If so, I know it kind of depends on location and other factors, but are you able to give an example of some price adjustments in the land market you've seen recently versus what you may have observed a quarter or two ago?

Sure. Well, first, capitulate is a big word. I'd say many land sellers are starting to be realistic about the appropriate pricing given net home pricing and absorptions. I'd say the market was pretty inactive for six months from about mid-year 22 to And the bid ask, if you will, for land was a big spread, and there just wasn't a lot of activity. But as the market has improved a bit in terms of sales pace, as homebuilders' costs have improved a bit, and as land sellers' expectations have lowered a bit, we are seeing more and more new transactions that make sense. So we're being cautious, but we are back in the market in numerous locations around the country buying new land.

That's helpful. Thank you. Are you able to comment on maybe how far below a month or two ago some of those land prices have kind of reset on a percentage basis?

You know, it's hard. I can't say that we looked at Site A before and it's now down 18%. There are many, many moving parts, including the pace of takedowns, if we're buying finished lots, the cost of land development. There's just many, many factors. But I'd say, in general, there's an easing of costs. land prices, not across the board. Some markets remain particularly tight. Many sellers have not adjusted their expectations, but we don't need everyone in every market to adjust their expectations. We just need to find enough opportunities that pencil with the right returns for us to get back on our growth pattern.

Makes sense. My second question is just on your quick move-in homes. So during February, as sales activity improved, how is demand for your – I guess it's more – I'm asking more about your bill-to-order product. But as sales activities improved in February, how is demand for your bill-to-order product trending? You know, the number of quick move-in homes you have for communities held relatively stable, so presumably demand for that product has been high. Have you seen an equal increase in demand from build-to-order as your quick move in products over the last month or so, or has the increase really been mostly spec-focused from homebuyers?

We've seen an increase in both build-to-order and QMI's, but as we mentioned, our overall share has migrated to almost 60% QMI where it used to be. So there's been more of an uptick on the QMI side, but we have seen, especially in the last few weeks, a pickup on the bill-to-order as well.

That's helpful. And any pricing nuances or pricing power differences you're seeing on bill-to-order versus spec and maybe margin, if you could give some color on the margin differential on your spec product versus your bill-to-order product, I think that would be helpful as well.

I would say the QMIs tend to have a little lower margins, more incentive, especially around either mortgage rate buy-down or other discount closing costs. The 2B builds have been able to hold up, and it remains to be seen. Hopefully, those will hold and make it to the end of construction and delivery. Right now, we are seeing a better margin on the build orders.

It wouldn't surprise me, given the increase in demand, to see that trend reverse because we're seeing an increased demand for QMIs. And I think, you know, part of it is we just have not been a big QMI builder in the past. And we are in the process of reeducating our sales team about charging more for QMI's rather than less for QMI's given that increased demand.

It's not fully in place yet, but I think we're going to reverse that trend. That's very helpful, Collier. Thank you again.

Thank you. This does conclude the question and answer session of today's program. I'd like to hand the program back to Mr. Huffnaney for any further remarks.

Very good. Thank you very much. The results we just reported in terms of profitability and deliveries are lagging results. What's really key are our new sales, gross margins on our new sales, and website and onsite traffic. I'm happy to say those leading indicators are really moving in a very positive direction. We look forward to giving you improved results in the near upcoming quarters. Thank you very much.

Thank you, ladies and gentlemen, for your participation at today's conference. This does conclude the program. You may now disconnect. Good day.

The conference will begin shortly. To raise and lower your hand during Q&A, you can dial star 1 1. Thank you.

Thank you.

Good morning, and thank you for joining us for the Hovnanian Enterprises Fiscal 2023 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 webcasting a slide presentation along with the opening comments from management. The slides are available on the investor page at 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 now like to 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, 2023. 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 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 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 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 of the date they are made are not guarantees of future performance or results and are subject to risks, uncertainties, and assumptions that are difficult to predict or quantify. Therefore, actual results could differ materially and adversely from those forward-looking statements as a result of a variety of factors. Such risks, uncertainties, and other factors are described in detail in the sections entitled Risk Factors in Management's Discussion and Analysis, particularly the portion of MDMA entitled Safe Harbor Statement in our annual report on Form 10-K for the fiscal year ended October 31, 2022. and subsequent filings with the Securities and Exchange Commission. Except as otherwise required by applicable security laws, we undertake no obligation to publicly update or revise any forward-looking statement, 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 Brad O'Connor, Senior Vice President, Chief Accounting Officer, and Treasurer. I'll now turn the call over to Ara.

Thanks, Jeff. I'm going to review our first quarter results, and I'll also comment on the current housing environment. Larry Shoresby, our CFO, will follow me with more details, and as usual, we'll open it up to Q&A. On slide five, we compare our first quarter results to our guidance. Total revenues of $515 million, adjusted gross margin of 21.8%, Adjusted EBITDA of $50 million and adjusted pre-tax income of $19 million were all within our guidance range. Our SG&A ratio is slightly above our guidance. High inflation, sharp year-over-year increases in mortgage rates, and significant economic uncertainty adversely impacted housing demand throughout the second half of calendar 22. As you can see on slide six, starting in the upper left-hand corner, this led to a 9% decline in revenues in the first quarter of fiscal 23 compared to 22. Our first quarter has traditionally been our slowest quarter, and this year is certainly no exception. However, because of the strength of our backlog, recent improvements in home sales pace and above average gross margins on both new contracts and in backlog, we expect better financial performance for the remainder of the year, and we'll get some more specific guidance on our next quarter toward the end of the call. Moving to the upper right-hand portion of the slide, you can see that our adjusted gross margin was 21.8% this year compared to 22.4% last year. To enhance affordability of our homes and to find the market clearing home prices, gross margins were adversely impacted by a 470 basis point increase in incentives and concessions compared to our first quarter last year. This was partially offset by the positive impact of lower construction costs, including lumber. Primarily as a result of declining revenues, can see on the lower left-hand portion of the slide that our SG&A was 14.2% this year compared to 12.8% last year. In the lower right-hand portion of the slide, we show that adjusted EBITDA was $50 million compared to $64 million last year. On the left-hand portion of slide 7, you can see that our adjusted pre-tax income was $19 million in the quarter compared to $36 million last year. On the right-hand portion of the slide, you can see that our net income for the first quarter of 23 was $19 million, which included a $6 million tax benefit from energy-efficient home credits compared to $25 million in net income in last year's first quarter. Turning to slide eight, on the left-hand portion of the slide, you can see that contracts per community for the first quarter are down significantly compared to a year ago, but are close to the level we achieved in the first quarter of fiscal 19 before COVID. Although quarterly contracts show a low number, the monthly trend is a much more positive picture. Here on the right, we show monthly contracts per community including and excluding 107 bill for rent contracts in fiscal 23. I'm going to focus on the monthly contracts per community, excluding the positive impact of the bill for rent contracts. From November's low point of 1.2 contracts per community, we increased to 1.8 in December and ended the quarter with 3.0 in January. This positive trend continued through February 26 with contracts per community increasing to 3.4, which is above our February 19 pace before the COVID surge in demand occurred. We believe this positive sales trend certainly bodes well for a strong spring selling season. We still have two days remaining in February, but we wanted to give you the up-to-the-moment transparency. Given the recent increase in home demand, we modestly raised prices in approximately one-third of our communities around the country over the last month. Just one additional insight into the market. Last week, mortgage rates climbed to almost 7 percent Despite this uncertain environment, our sales this past week were the best week in sales we have had in months. As you can see on the graph, our sales of BFR homes built for rent have boosted our sales a little further. And now on slide nine, we break out contracts per community for the first quarter by our three geographic segments. Similar to what we reported in the fourth quarter of 22, and similar to what many of our home building peers have reported, it's clear that contracts per community in this west segment were lower than our northeast or southeast segments. On slide 10, we show annual contracts per community for the past several years. You can see that for the full year of 22, Contracts per community, excluding bill for rent contracts, retreated to 38.9, the same level we had for the full year of 2019 before the pandemic. The bar on the far right portion of the slide shows the seasonally adjusted and annualized contracts per community for preliminary February to date results, excluding VFR contracts. At 35.2, it is improving, still below the normalized contract pace of 44 shown on the far left. Our pace, including VFR sales, gets us closer to the normalized pace with a result of 39.4. Turning to slide 11, you can see the month-by-month progression of our seasonally adjusted and annualized contract pace per community. May started the rapid decline, and it appears that we troughed in September with 21.2 contracts per community. Since September, every month has shown an improvement with our preliminary February to date results coming in at 39.4. Clearly a dramatic improvement. If you turn to slide 12, you can see our cancellation rate as a percentage of gross contracts during the first quarter of 30% was still above our normal cancellation rates. However, it is an improvement sequentially from the 41% rate we showed in the fourth quarter. If you turn to slide 13, here you can see that the trend in monthly gross cancellation rates improved greatly. On a monthly basis, cancellation rates seem to have peaked in October at 45% and have been steadily coming down each month since then. The preliminary February results of 16% are back down to our typical average cancellation rates, similar to the beginning of February of 22. Another positive trend is our website visits continue to be strong. We show our daily website activity over the past several years on slide 14. As we've said in the past, we think this is a leading indicator of future demand. Here, we show daily website visits per community with the blue line near the bottom of the graph representing fiscal year 20's pre-COVID website visits. The dark green line is in fiscal year 21, and the gray line is fiscal 22. Both of these recent years have elevated website visits during the time of extremely high demand for new homes during the COVID surge. On slide 15, we've added fiscal year 23 daily visits per community, shown with a bright yellow line. Over the past several months, our website visits have been much closer to the high levels that we experienced in the COVID surge. The recent website visits are clearly better than the normal pre-COVID levels we experienced. This continuation of high levels of website activity is encouraging and has translated to higher levels of contracts during the past few months. I'll now update you on several steps that we have been taking to address the current market. To begin with, we continue to see that consumers are seeking homes that they can close quickly. On our last conference call, we talked about our temporary pivot to have more quick-moving homes, or Q&Is as we call them, in order to provide our customers with more certainty on what their mortgage payments would be at closing. We consider at home to be a QMI the day we begin construction. If you turn to slide 16, you can see that our QMIs per community are consciously on the rise, and we discussed that last quarter. After a significant shortage of QMIs during the COVID surge in demand, we've gone from 3.2 QMIs per community in the third quarter of 22 to 5.5 in the end of the first quarter of 23. This level of QMI is higher than our historical average, but similar to the levels we had just before the COVID surge in demand. Consumer demand for QMI certainly remains quite strong. Since the beginning of the fiscal year, we've seen our QMI sales increase to about 60% of our sales versus about 40% historically, representing a 50% increase. I'd venture to say that if we had more QMIs available in all of our communities, our sales would have been even stronger. Our temporary QMI target remains approximately seven QMIs per community, as we discussed last quarter, with just a few homes beginning construction and a few homes partly through construction. Recent sales have made it difficult to keep up at that level. Once we get to seven kilomiles per community, we plan to match our start schedules with the then current sales pace. We think this approach will make certain that we don't start an excessive level of unsold homes. Furthermore, we're continuing to focus on selling these homes before completion. The competition for new homes are other new homes and existing homes for sale. On slide 17, we show that the number of existing homes for sale around the country currently stands at 870,000 homes. That is less than half of the historical average, which is over 2 million homes. The lower level of existing homes for sale certainly helps our sales. Another impactful step we've taken is with respect to incentives and concessions. We closely monitor our competitors' use of incentives and concessions on a community-by-community basis. After our fiscal 22-year ended, we became more aggressive with our use of concessions on new contracts. Our improving trend in contracts per community I just walked you through indicates that these steps worked and that we found the right market clearing price to sell homes. We continue to offer customers incentive choices, such as paying for permanent or temporary below-market mortgage rates, paying for closing costs, offering discounts on options or upgrades, or discounting home prices on select QMIs. There is not a one-size-fits-all for all consumers, so we typically offer consumers a choice on what incentives would meet their needs the best. In general, the highest levels of incentives are reserved for our more challenging home sites in our more challenging communities. Even after increasing our use of incentives, the average margin on the new homes that we are selling today remain in the low 20% range, slightly above our historical average adjusted gross margin of 20%. When we, or other home builders for that matter, open new communities, we're generally starting with lower market-driven base prices rather than using large incentives and concessions on new communities. One reason that margins continue to be high today despite our higher use of incentives and concessions is lower lumber costs. Additionally, we held a purchasing blitz where we pitted our divisions against each other in friendly competition to see who could achieve the most savings per home. We spoke with our trade partners and our material providers to seek lower costs and our efforts have been successful thus far lowering our construction costs for future starts. Even after taking into account the recent housing rebound, the housing industry has slowed down from the red-hot pace of the COVID surge. Our trade partners increased our construction costs during the COVID surge. We and the industry today are successfully clawing back some of those increases now that the market is slowing. The benefits of the purchasing blitz should begin to positively impact our margins in the latter part of 23 and beyond as we deliver the homes that we are just starting now. Additionally, we're reviewing our staffing needs on a division by division basis and plan to finalize decisions shortly. This is obviously an evolving situation and we'll continue to reassess the steps that we're taking to make sure we are appropriate in our actions in light of changing market conditions. I'll now turn it over to Larry Soresby, our Chief Financial Officer.

Thanks, Hera. I'm going to start with slide 18. You can see that we ended the quarter with 132 communities open for sale. Utility companies continue to present problems and are slowing down our ability to open new communities. If not for these utility company delays, our number of communities open for sale would have been even higher. We are trying to grow our community count to our pre-COVID levels. Even with continued long entitlement processes and slower land development schedules, we project that we will grow our community count during fiscal 2023. Ironically, the recent increase in sales pace makes it more challenging to achieve community count growth. While the improved pace still leads to revenue growth, it also means we sell out of communities faster than previously anticipated. About 70% of our expected fiscal 2023 community openings will take place in our northeast and southeast segments, and 30% will come from the west. As it turns out, Given the recent better sales and margin trends in our northeast and southeast segments, that is a fortuitous ratio. During the rapid increase in mortgage rates last summer, we suspended most new land acquisitions. As a result, on slide 19, we show that our lot count peaked in the second quarter of fiscal 22 at 33,501 lots. During each of the subsequent quarters, our lot count decreased, and we ended the first quarter of fiscal 23 with 29,123 lots. Given our recent increase in sales pace, our land teams are once again actively pursuing new land parcels that meet our underwriting standards. By using current home prices, current construction costs, and current sales pace to underwrite to a 20 plus percent internal rate of return, our underwriting standards automatically self-adjust the changes in market conditions. As we have stated time and time again, our land strategy is very risk averse with our focus on controlling lots primarily through option contracts. It is important to highlight that our owned land position declined by 20% since the second quarter of fiscal 22 while our option land position only decreased by 10% over the same time period. I also want to point out that 60% of our total lots are in our stronger northeast and southeast segments versus 40% in the west. We have been deliberately increasing our use of land options to increase our inventory turnover and our return on investments as well as to reduce the risk associated with owned land. On slide 20, we show our percentage of lots controlled by option increased from 44% in the first quarter of fiscal 15 to 71% in the first quarter of fiscal 23. This has been a specific focus of our strategy and we continue to make progress. A low percentage of owned lots strongly mitigates land risk and gives us flexibility in a declining market to renegotiate land price and terms. On slide 21, we show the vintage of our land position. Seventy-three percent of our total 29,123 lots controlled were put under contract before November 1, 2021. and 41% were controlled prior to November 1st, 2020. The vast majority of those lots were underwritten at lower home prices than today's housing market, which provides us with the flexibility to increase concessions and incentives while still delivering strong margins and returns. 27% of our total land position was controlled more recently in 22 and 23. Keeping with our strategy to further increase our inventory turnover and mitigate land risk, virtually all of fiscal 22 and 23 land vintage was controlled by options and virtually all of our own land was controlled in fiscal 21 or earlier. Given how undervalued our stock was, we spent $17 million repurchasing approximately 7% of our outstanding shares at an average share price of $39.48 over the past two quarters. If our stock price declines from current levels, we may repurchase additional shares in the future. Turning to slide 22, after $134 million of land spend in our first quarter, we ended the quarter with $366 million of liquidity more than $100 million above the high end of our targeted liquidity range. Turning now to slide 23. Compared to our peers, you see that we have the third highest percentage of land controlled B of auctions. We continue to use land options whenever possible to achieve higher inventory turns, enhance our returns on capital, and to reduce risk. Turning to slide 24. We show year supply of owned lots for us and our peers. With 1.6 years supply of owned lots, we have the second lowest year supply. Having a shorter supply of owned lots along with a strong supply of option lots is a good way to reduce land risk in a less stable housing market. On slide 25, you can see that we also have five and a half years supply of controlled land. both owned and option lots, 73% of which was controlled in fiscal 21 or earlier when home prices were lower. 71% of our total land position is controlled by options and only 29% is owned. Turning now to slide 26. Compared to our peers, we continue to have the second highest inventory turnover rate. High inventory turns are a key component of our overall strategy. We believe we have opportunities to continue to increase our use of land options and to further improve inventory turns and our returns on inventory in future years. Turning now to slide 27. On this slide, we show our debt maturity ladder at the end of the first quarter. Since the end of fiscal 19, we retired $394 million of debt. In last year's fourth quarter, we amended our revolving credit facility to extend the maturity date to June 30, 2024. After that, we don't have any debt maturing until the first quarter of fiscal 2026. Due to changing market conditions last summer, we temporarily shifted our focus to preserving liquidity and paused our near-term debt reduction plans. We remain committed to strengthen our balance sheet and intend to revisit our debt retirement initiatives once market conditions show sustained improvement. Given our $347 million deferred tax asset, we will not have to pay federal income taxes on approximately $1.3 billion of future pre-tax earnings. This benefit will significantly enhance our cash flow in years to come and will accelerate our progress of improving our balance Our financial guidance for the second quarter of fiscal 23 assumes no adverse changes in current market conditions, including no further deterioration in our supply chain or material increases in mortgage rates, inflation, or our cancellation rates. Our guidance assumes continued extended construction cycle times, averaging six to seven months, compared to our pre-COVID cycle times for construction of approximately four months. Further, it excludes any impact to our SG&A expense from our phantom stock expenses related solely to the stock price movement from our $57.88 stock price at the end of the first quarter of fiscal 23. While we've met or exceeded most of our guided metrics over many quarters, there is a greater degree of uncertainty in the current environment given inflation, the potential of an economic recession, employment risk, utility company delays, and mortgage rate increases. Additionally, given the difficult economic backdrop and the resulting uncertainty in the housing market, the company will not be providing full fiscal year 23 guidance at this time. With those caveats in mind, on slide 28, we show our guidance for the second quarter of fiscal 23. We expect total revenues for the second quarter to be between 525 and 625 million dollars. We also expect adjusted gross margins to be in the range of 21 to 22 and a half percent. SG&A as a percent of total revenue is expected to be between 13 and 14 percent. Our guidance for adjusted EBITDA is between 52 and 67 million dollars. Our adjusted pre-tax income for the second quarter of fiscal 23 is expected to be between 20 and $35 million. On our fourth quarter call, we talked about some assumptions that were built into our guidance for the first quarter. Those assumptions still apply to the guidance for the second quarter of 23, and I will now discuss those assumptions again. Our SG&A ratio is expected to increase over the prior year as we anticipate opening additional communities as well as incur a higher-than-normal increase in wages as a result of inflationary pressures. Due to slower market conditions, we are also anticipating increasing our advertising spend over the year. Despite lower levels of home building debt, our interest expense is expected to increase during fiscal 23 for two reasons. First, a slower sales pace extends the average community lifespan and results in a higher total community life interest cost. These interest costs are expensed in cost of sales interest on a per delivery basis. Therefore, when sales pace slows down, our interest costs per home delivered increases, and conversely, when the sales pace increases, our interest costs per home delivered decreases. As a result, we expect the cost of sales interest expense per home will be higher in fiscal 23 than it was in fiscal 22. Second, our inventory not owned has increased to $315 million at January 31, 2023, compared with a five-quarter average of $202 million from a year ago. This increase causes a corresponding increase in interest costs. Lastly, in response to competitive pressures from outside lenders and in order to offer lower mortgage rates so that more of our customers can qualify to purchase one of our homes, we also expect our financial services business will be significantly less profitable during fiscal 2023. On slide 29, we show compared to our peers that we have the third highest consolidated EBIT return on investment at 35.8%. We believe this is the most accurate measure of pure homebuilding performance without regard to leverage. On slide 30, we show the trailing 12-month price to earnings ratio for us and our peer group. Even though HomeBuilder stocks have traded higher since the beginning of calendar 23, the group still trades at a significant discount to the overall stock market. We recognize that our stock may trade at a discount to the group because of our higher leverage. However, given our industry-leading returns on equity, Our top quartile EBIT return on investment, along with our improving balance sheet, we believe our stock is the most undervalued of the entire universe of public home builders. Based on our price earnings multiple of two times at yesterday's closing stock price of $67.83, we're trading at a 59% discount to the industry average P.E. ratio. We remain focused on further strengthening our balance sheet and look forward to reporting our progress in future periods. I'll turn it back to Eric for some brief closing remarks.

Thanks, Larry. Considering the economic environment, we are pleased with the financial performance of our first quarter of fiscal 23. It is frustrating, as Larry was just pointing out, to have the highest EBIT ROI in the industry with our midsize peers, the third highest of all peers, and still have the lowest PE ratio. We recognize there's a penalty for a high leverage, but as Larry said, we believe that our continued improvement in our balance sheet and solid financial performance will have our PE ratio correct itself over time. We are glad to see the pickup in traffic and contracts in the months of December, January, and February right through last week. Assuming the current sales environment continues, we expect better financial performance for the remainder of the year. We're happy to see better trends in the beginning of the 23 spring selling season. Our traffic and website visits and weekly contracts remain elevated despite the recent uptick in mortgage rates. Consumers seem to be getting accustomed to a higher mortgage rate environment, and their home purchase expectations appear to have adjusted accordingly. We'll continue to closely monitor the impact of mortgage rate movements and the actions taken by the Federal Reserve. More importantly, the long-term fundamentals that drive the housing market remain solid today. We believe we've got the right management team to see us through this period, and we also have the right associates in the field to execute our game plan, which should allow us to continue to achieve industry-leading returns. That concludes our formal comments, and we're happy to open it up for Q&A.

Certainly. Ladies and gentlemen, if you have a question at this time, please press star 11 on your telephone. If your question has been answered and you'd like to remove yourself from the queue, please press star 11 again. Our first question comes from the line of Alex Barron from Housing Research Center. Your question, please.

Yes, thanks. Good morning, gentlemen. Great job on the quarter. I just wanted to inquire about, you know, the newfound, I guess, enthusiasm of buyers this year. And I guess now that rates seem to be trickling back up, are you guys maintaining the same level of incentives, or have you had to increase to maintain the sales momentum? Just some color around the last couple months would be helpful.

I think, Alex, as we pointed out, and honestly, to many of our surprises, we actually increased home prices, net home prices, net of incentives, in about a third of our communities over the last month. So I think that gives you the answer. There are lots of movements and lots of different directions of incentives or base prices, but net-net, we actually increased home prices over the last month. And I'll repeat again, last week, even after rates moved to 7%, we had one of the best weeks we've had in months. So, so far, the market seems to be adjusting to the current rate environment.

Yeah, well, that's very encouraging. You know, I guess, what's your best guess or understanding from maybe feedback in the field as to why this is happening? Why, I guess, even though home prices are still high and interest rates are high, people seem to be able to afford the houses. Are they just more comfortable with the outlook, you think?

There are a number of factors. First, as I pointed out, alternatives are fewer than normal. The number of existing homes available for sale is somewhere between a half and a third of normal. That's competition for us, so less competition is helpful. Number two, people are just adjusting their home price, their home expectations. I think when rates were 3.5%, they set their sights on some very large homes with very fancy finishes, if you will, and I think people have adjusted their expectations And it comes to terms with the current environment. They're a little bit over the sticker shock and are cautiously moving off the sidelines and back into the home buying market. Luckily, demographics seem to be helping. The millennials seem to be helping. And net-net, the market is definitely finding some solid footing right now.

Yeah, that's great to hear. Can you clarify, I'm not sure if I heard you correctly towards the end of the comments, but did you guys say you bought back stock or did I hear incorrectly?

No, we did buy back about 7% of our outstanding shares and I think the number was about, I don't know, what was the dollar amount?

I forget off the top of my head. $17 million.

Yeah, that's about right. And that was over the last two quarters. Yeah.

Okay. All right. I'll reread some of the press release. Maybe I missed it there. But anyway, so is there a limit to what you guys are allowed to buy back there? And why do you feel that's preferable to reducing the debt that you guys had previously planned?

Well, I mean, the price I think we mentioned in our release was about a little over $39 of the shares that we purchased. We just thought the price just made it an irresistible purchase, notwithstanding the fact that our long-term plan is to reduce leverage and improve our balance sheet. It was just too good of an opportunity. We are authorized by the board to repurchase more, but we're just really monitoring the price. I suspect if it drops back again, we'll be back in the marketplace, but we haven't made that decision, and as I pointed out, we are authorized to buy more should we decide to.

Okay, thank you, and best of luck. I'll let somebody else ask questions. Thank you.

Thank you. One moment for our next question. And as a reminder, if you do have a question, please press star 11 on your telephone. Our next question comes from the line of Jesse Lederman from Zellman Associates. Your question, please.

Hi. Thanks for taking my questions, and congrats on the strong results thus far this year. I'd like to learn a little more about the land market. Have land sellers begun to capitulate on land and lot prices, given that you and presumably some of your peers are back in the land market? If so, I know it kind of depends on location and other factors, but are you able to give an example of some price adjustments in the land market you've seen recently versus what you may have observed a quarter or two ago?

Sure. Well, first, capitulate is a big word. I'd say many land sellers are starting to be realistic about the appropriate pricing given net home pricing and absorptions. I'd say the market was pretty inactive for six months from about mid-year 22 to And the bid ask, if you will, for land was a big spread, and there just wasn't a lot of activity. But as the market has improved a bit in terms of sales pace, as homebuilders' costs have improved a bit, and as land sellers' expectations have lowered a bit, we are seeing more and more new transactions that make sense. So we're being cautious, but we are back in the market in numerous locations around the country buying new land.

That's helpful. Thank you. Are you able to comment on maybe how far below, you know, a month or two ago some of those land prices have kind of reset on a percentage basis?

You know, it's hard. I can't say that we looked at Site A before and it's now down 18%. There are many, many moving parts, including the pace of takedowns, if we're buying finished lots, the cost of land development. There's just many, many factors. But I'd say, in general, there's an easing of land prices, not across the board. Some markets remain particularly tight. Many sellers have not adjusted their expectations, but we don't need everyone in every market to adjust their expectations. We just need to find enough opportunities that pencil with the right returns for us to get back on our growth pattern.

Makes sense. My second question is just on your quick move-in homes. So during February, as sales activity improved, how is demand for your – I guess it's more – I'm asking more about your bill-to-order product. But as sales activity has improved in February, how is demand for your bill-to-order product trending? You know, the number of quick move-in homes you have for communities held relatively stable, so presumably demand for that product has been high. Have you seen an equal increase in demand from build-to-order as your quick move in products over the last month or so, or has the increase really been mostly spec-focused from homebuyers?

We've seen an increase in both build-to-order and QMI's, but as we mentioned, our overall share has migrated to almost 60% QMI where it used to be. So there's been more of an uptick on the QMI side, but we have seen, especially in the last few weeks, a pickup on the bill-to-order as well.

That's helpful. And any pricing nuances or pricing power differences you're seeing on bill-to-order versus spec and maybe margin, if you could give some color on the margin differential on your spec product versus your bill-to-order product, I think that would be helpful as well.

I would say the QMIs tend to have a little lower margin, more incentive, especially around either mortgage rate buy-down or other discount closing costs. The 2B builds have been able to hold up, and it remains to be seen. Hopefully, those will hold and make it to the end of construction and delivery. Right now, we are seeing a better margin on the build orders.

It wouldn't surprise me given the increase in demand to see that trend reverse because we're seeing an increased demand for QMI's and I think part of it is we just have not been a big QMI builder in the past and we are in the process of reeducating our sales team about charging more for QMIs rather than less for QMIs given that increased demand. It's not fully in place yet, but I think we're going to reverse that trend.

That's very helpful, Collier. Thank you again.

Thank you. This does conclude the question and answer session of today's program. I'd like to hand the program back to Mr. Hufnany and Freddie for the remarks.

Very good. Thank you very much. The results we just reported in terms of profitability and deliveries are lagging results. What's really key are our new sales, gross margins on our new sales, and website and on-site traffic. I'm happy to say those leading indicators are really moving in a very positive direction. We look forward to giving you improved results in the near upcoming quarters. Thank you very much.

Thank you, ladies and gentlemen, for your participation at today's conference. This does conclude the program. You may now disconnect. Good day.