Hovnanian Enterprises, Inc.

Good morning, and thank you for joining us today for Hubnanian Enterprises' fiscal 2023 third 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 listen-only mode. Management will make some opening remarks about the third quarter results and then open a 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 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.

Thank you, Liz, and thank you all for participating in this morning's call to review the results for our third quarter. All statements on this conference call that are not historical facts should be considered as forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements involve known and unknown risks, uncertainties, and other factors that may cause actual results, performance, or achievements of the company to be materially different from any future results, performance, or achievements expressed or implied by the forward-looking statements. Such forward-looking statements include but are not limited to statements related to the company's goals and expectations with respect to its financial results for future financial periods. Although we believe that our plans, intentions and expectations reflected and are suggested by such forward-looking statements are reasonable, we can give no assurance that such plans, intentions or expectations will be achieved. By their nature, forward-looking statements speak only as of the date they are made, are not guarantees of future performance or results, and are subject to risks, uncertainties and assumptions that are difficult to predict or quantify. Therefore, actual results could differ materially and adversely from those forward-looking statements as a result of a variety of factors. Such risks, uncertainties, and other factors are described in detail in the sections entitled Risk Factors and Management Discussion and Analysis, particularly the portion of MD&A entitled Safe Harbor Statement and 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. I'll now turn the call over to Ara Havanian, our Chairman, President, and CEO. Go ahead, Ara.

Thanks, Jeff. I'm going to review our third quarter results, and I'll comment on the current housing market. Given that Larry Sorsby, our CFO, will be retiring at year end after 35 years at Hovnanion, we'll give an opportunity for Brad O'Connor, our upcoming CFO, to present today. Brad has been with us for almost 20 years, 12 years as Chief Accounting Officer, and also in the past few years as Treasurer, and has participated on all our calls since that time. Also joining us on this call is David Mitreson, our vice president and corporate controller. As usual, we'll open it up to Q&A after. Our third quarter results were excellent. However, as we review our results, keep in mind that comparisons to last year are challenging for some metrics and very easy for others, as we'll discuss. The doubling of mortgage rates during fiscal 22 caused the entire industry's home sales to fall substantially in the second half of the year. To spur sales activity, starting last summer, we and most of the industry offered increased incentives which resulted in lower margins on new contracts at that time. As a result of those lower margins and the reduction in sales pace in the second half of 22, many of our third quarter profit metrics are challenging year-over-year comparisons. Fortunately, starting early this calendar year, demand for new homes bounced back, and we've seen strong sequential improvement in our profitability metrics and strong year-over-year performance in our net contract metrics. Based on the strong sales environment right through last weekend in August, we are increasing our full year 23 guidance, including a 20% increase in EPS. Additionally, While we're not ready to give the detailed guidance for the first quarter of 24, we're confident that our first quarter of 24, for which we are already building a very solid backlog, will show significant year-over-year improvements. On slide five, on the left side, you see our revenues of $650 million were less than last year, and that's obviously for all the reasons I just discussed a moment ago. But you'll also see on the right-hand portion of the slide, they were within the guidance range we gave. On the left-hand side of slide six, we show that total SG&A was 11.6% and was higher than last year. However, as we show on the right-hand portion of the slide, our SG&A was also well within our guidance. The SG&A percentage was higher primarily due to lower delivery volume. On slide seven, in the upper left-hand portion of the slide, we show that our adjusted gross margin for the third quarter of 23 was strong at 23.2%. While this is down compared to last year's third quarter, keep in mind that last year's gross margin was historically one of our highest gross margin quarters. If you look to the upper right-hand portion of the slide, you can see that gross margin increased 230 basis points from the second quarter to the third quarter. And finally, on the bottom, you can see that our third quarter gross margin exceeded the high end of our guidance. Turning to slide eight, in the top left-hand corner of the slide, we show that adjusted EBITDA was $109 million compared to $147 million last year. Moving to the upper right-hand portion of the slide, again, while it was lower than last year, it improved 26% sequentially. On the bottom of the slide, you can also see that EBITDA was well above the guidance range of 85 million to 95 million. In the upper left-hand portion of slide nine, you can see that our adjusted pre-tax income was $75 million in the quarter compared to $113 million last year. In the upper right hand corner, like many other metrics, it has improved sequentially up 62% from $46 million in the second quarter of 23. And at the bottom of the slide, you can see that our income before taxes was also well above the high end of our guidance range. On slide 10, you can see that our net income for the third quarter of 23 was $56 million compared to net income of $83 million in last year's third quarter. Turning to slide 11. On this slide, you can see that contracts per community for the third quarter increased 92% year over year. While last year was an easy comparison, at 14.2 contracts per community, we are clearly above the levels that we achieved in any third quarter for many years other than the COVID surge in contracts in 2020. On the left-hand portion of the slide, you can see that we averaged 11.4 contracts per community during the third quarter from 97 to 02, a period we often refer to as a more normalized neither peak nor bust period. So the third quarter of 23 also exceeded the levels we achieved in more normal times. On slide 12, we give more granularity and show the trend of monthly contracts per community compared to the same months in 22 and 21 for May through July. The slide shows contracts per community including and excluding billed for rent contracts. No matter how you look at it, our sales pace has improved significantly and even compares favorably to 21 for two of the three months shown on this slide. That is somewhat surprising given the strong sales during the COVID surge that we experienced in 21. More recently, the sales pace for the past two months has leveled off, but at a very solid level. While August is not over, our contracts to date as of last Sunday are up 56% over last year. We continue to see demand in our build for rent opportunities. While build for rent opportunities reduce our normal for sale opportunities, the returns in this segment are very solid. Over the longer term, Bills for rent should be additive to our total deliveries and will likely be a long-term part of our strategy. Turning to slide 13, you can see the month-by-month progression of our seasonally adjusted annualized contract pace per community. The chart shows that the contract pace bottomed out in the fall of 22 and has improved steadily to current levels. Once again, on this slide, you can see the impact of BFR contracts that predominantly fell in the month of June and the outperformance we achieved that month. But even without the BFR sales in the month of June, the seasonally adjusted and annualized pace was still very strong at 45.9%. Demonstrating the strength of the housing market through July, our sales, even without the benefit of BFR, didn't have the typical summer fall off. And the sales pace in the months of May and June were as strong as any month in the spring selling season, which is unusual and speaks to the continued strength in the market in spite of the raise in interest rates. Turning to slide 14, we show annual contracts per community. On the far left-hand side, you can see our more normalized pace of 44 for that period I discussed before of 97 through 02. In the middle of the slide, you can see our annual contracts per community for the past nine fiscal years. And on the right-hand portion of the slide, you can see our recent seasonally adjusted contracts per community by month for the past three months. I want to point out our annualized sales pace for the months of May through July exceeded the pace for the six years prior to the COVID surge. Turning to slide 15, here we show our contracts per community as if our quarter ended on June 30th, 23, and compared to our peers that report contracts per community on a June quarter end basis. At 15.7 contracts per community, we have the second highest absorption rate among our peers during this period. On slide 16, you can see that our year-over-year growth in contracts per community for the same period was also the second highest among our peers. These last two slides illustrate that we're not only competitive, but we're getting more than our fair share of contracts to be had in this strong new home market. Through this last weekend, weekly traffic in our communities and website visits are both continuing at very healthy levels, surprisingly close to 21 levels, indicating that future demand for new homes should remain strong. One of the reasons we've been able to maintain such a strong sales pace is due to our pivot to start more quick move-in homes, or QMI's as we call them. The logic behind this pivot is that QMI's provide our customers with more certainty on what their mortgage payments will be at closing. We consider a home to be a QMI the day we begin vertical construction. We're still evaluating whether this pivot will be more permanent on a long-term basis. We do definitely like the benefit right now of having a large number of QMIs along with build-to-order homes. In the interim, we've greatly reduced the complexity of choices for our customers and significantly increased the efficiencies for our trades and construction and purchasing teams. If you turn to slide 17, You can see that after a significant shortage of QMIs during the COVID surge in demand, we've gone from 3.2 QMIs per community at the end of last year's third quarter to 6.7 QMIs at the end of the third quarter of 23. The pickup in our sales pace has made it challenging to increase the number of QMIs as quickly as we wanted. However, we're very close to our goal of about seven QMIs per community. Some investors have definitely feared that home builders will overproduce QMIs. That's been a fear for the last year. We just do not see that in the field. Our focus continues to be to sell these QMIs before they are completed. We're particularly pleased to see that even though we increased The absolute number of QMI's by 139 from the second quarter to the third quarter, the number of finished QMI's declined from 127 to 100. The demand for QMI's is particularly strong when they are between 30 and 60 days of completion. Since the beginning of the year, we've seen our QMI sales increase to about 56% of our sales versus 40% historically. At this point, we plan to match our start schedule with our current sales pace at each community and keep the overall level of QMI steady on a per community basis. On slide 18, we show that the number of existing homes for sale around the country currently remains depressed at 980,000 homes. That's 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 and validates our QMI strategy. Consumers have fewer existing homes to choose from and as a result, more home buyers are turning to new construction than in the past. Having QMI's available for sale is also important because just like existing homes, home buyers can close much sooner on a QMI than on a to be built home and it allows customers more certainty on mortgage rates. This strategy has clearly helped fuel our growth in contracts and our growth in contracts per community. Moving to slide 19, due to the increasing strength of demand for our homes, we were able to raise net home prices in 30% of our communities during the first quarter. We raised home prices again in 69% of our communities during the second quarter, and we raised them again in 71% of our communities during the third quarter. Many of our communities raised prices multiple times this year. If demand remains strong, we expect to be able to continue to increase home prices moving forward. These net home price increases I'm referring to, by the way, include reductions in incentives and concessions. I want to emphasize that we have not assumed any further home price increases in our guidance. We're optimistic about our future growth prospects. Furthermore, we believe that favorable demographics, persistently low supply of existing homes, and a positive employment trend will support demand over the long term. I'll now turn it over to Brad O'Connor, our Chief Accounting Officer and Treasurer.