Hovnanian Enterprises, Inc.

Good morning and thank you for joining us today for Havanian Enterprises fiscal 2023 fourth quarter earnings conference call. An archive for 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 fourth 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 of the company's website at www.khov.com. Those listeners who would like to follow along should now log into the website. I would like to turn the call over to Jeff O'Keefe, Vice President, Investor Relations. Jeff, please go ahead.

Thank you, Michelle, and thank you all for participating in this morning's call to review the results for our fourth quarter and year ended October 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 and 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 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 and Management Discussion and Analysis, particularly the portion of MD&A entitled Safe Harbor Statement, in our annual report on Form 10-K for the fiscal year ended October 31st, 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, Brad O'Connor, CFO and Treasurer, and David Maitreson, Vice President, Corporate Controller. I'll now turn the call over to Aaron.

Thanks, Jeff. I'm going to review our full year and fourth quarter results, and I'll comment on the current housing environment. Brad O'Connor, our CFO, will follow me with more details, and of course we'll open it up to Q&A afterwards. Our results from the fourth quarter benefited from strong demand for new homes, which is supported by strong demographic trends, a resilient job market, and the low supply of existing homes for sale. On slide five, we show our full year of guidance in the first column and our final results for all of fiscal 23 in the second column. Beginning at the top, our total revenues were $2.76 billion above the high end of our guidance range. Our adjusted gross margin was 22.7% for the quarter which is toward the high end of the range. Our SG&A ratio was 11.1%, which is at the very low end of the guidance. The combination of revenues above the upper end of the guidance, margins being near the top of the guidance, and SG&A being very close to the bottom of the guidance contributed to a great year. In addition, we had a a great quarter for land sales and JV profits. The combination resulted in EBITDA and pre-tax income being significantly above the guidance we gave. Our adjusted EBITDA was $427 million. Our adjusted pre-tax income was $283 million. Our fully diluted EPS was $26.88 per share, well above the high end of our guidance range. And finally, our book value came in at $73 per common share, also above the high end of our range. Needless to say, we're pleased with our performance for the full year. If you go back to this time last year, when sales in the housing market stalled due to a quick climb in mortgage rates, we couldn't have imagined our performance would be this solid this year. By any measure, fiscal 23 was a good year. Turning now to slide six, overall, gross margins, revenues, and SG&A for the quarter were very similar to last year's results. The big improvement over last year's solid results were heavily influenced by land sales and JV profits that I described. On the left-hand portion of the slide, you can see that land sale profits have been a regular part of our business for a long time. On the right-hand portion of the slide, you can see that income from unconsolidated joint ventures has been an important part of our operations and has also been an important part for a long time. Going forward, both of these will continue to materially contribute to our bottom line, but certainly may vary from quarter to quarter. This quarter was a good quarter for both. On slide seven, we show three measures of profitability for our fourth quarter. On the upper left-hand portion of the slide, we show that our adjusted EBITDA for the fourth quarter of 23 was $181 million, a 25% year-over-year increase. In the upper right-hand portion of the slide, you can see that our adjusted pre-tax income was $144 million this year, a 38% increase over the prior year. Our strong profit was helped by $21 million of land sale profits and over 2,100 homes delivered in our joint venture in Saudi Arabia, resulting in a $9 million profit. Even without these two tailwinds, our adjusted pre-tax income would still have been up compared to last year by 9%. And on the bottom of the slide, we show that our net income was up 75% year over year to $97 million. Net income from the quarter benefited from a $10.9 million state tax valuation allowance reversal And as our strong performance resulted in the using of more of our existing deferred state tax credits, we were able to recognize that benefit. On the other hand, our 75% increase to net income to $97 million for the quarter was after a one-time $22 million loss on the extinguishment of debt related to our early debt redemption and refinancing. Turning to slide eight, on this slide, you can see that contracts per community for the fourth quarter increased 66% year over year. While last year was an easy comparison, the 8.3 contracts per community in the fourth quarter of 23 was only slightly below the long-term average of 8.8 contracts per community for the fourth quarter of 97 through the most recent quarter. While that doesn't sound exceptional, you've really got to consider what happened with mortgage rates during the fourth quarter. As you can see on the blue line on slide nine, this all took place in an environment where interest rates rose sharply from 6.8% at the end of July to 7.8% at the end of October. That's 100 basis points in three months. The 7.8% level was the highest mortgage rate since November of 2000. The gray line on this slide shows what happened to interest rates last year. We saw an even steeper increase in mortgage rates last year, which resulted in a precipitous drop in sales. However, once the rates came down from the highs, We experienced a pickup in sales in the late fall and winter, and we had a much stronger than expected spring selling season in 23. The encouraging news is that in the past few weeks, we've seen mortgage rates back off from the recent highs at the end of October. In addition, the interest rate outlook today is much brighter, given better results from inflation data. It feels like we could experience the same pattern as last year in the coming spring selling season. On slide 10, we give more granularity and show the trend of monthly contracts per community compared to the same month in 22 for each month of the quarter plus the month of November, the first month of fiscal 24. The slide shows contracts per community including and excluding bill-for-rent contracts. No matter how you look at it, our sales pace has improved significantly for each of the four months shown on this slide compared to the previous year. The amount of improvement was less in October, and sales slowed more than we would expect seasonally. But sales bounced back a bit in November, ending with an increase of 43% compared to last year. Finally, the sales pace in the first weekend in December has started off very strong, and it's been much better than we would normally expect seasonally. The month of November is typically a slower seasonal month than October, but this year November has improved on a seasonally adjusted basis, and November only had four Sundays versus five Sundays in October. Turning to slide 11, we show annual contracts per community. On the far left side, you can see that our average pace of 44 for the normal period we've mentioned in the past of 97 through 02. On the far right side, you can see we ended the year with 40.7 contracts per community, which is close to our historical normal levels, although a little below. Turning to slide 12, we show our contracts per community as if the quarter ended on September 30th of 23 compared to our peers that report contracts per community on the September quarter end. At 10.5 contracts per community, our sales pace per community is better than all but three of our peers that report community count for this time period. On slide 13, you can see that our year-over-year growth in contracts per community for the same period was the second highest among the peers. These last two slides illustrate that we're not only competitive, but we're getting more than our fair share of the contracts to be had in today's home market. Through this last weekend, weekly traffic in our communities and our website visits have both been continuing at very healthy 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 give our customers more certainty regarding delivery dates and more certainty on what their mortgage rates will be at closing. QMIs allow us to offer customers mortgage rate buy downs that would be cost prohibitive on homes with longer delivery dates. For the full fiscal year, 62% of our customers that use the mortgage to purchase a home use some form of interest rate buy down incentive. We're still evaluating whether this QMI pivot will be more permanent on a long-term basis. One of the benefits of a greater supply of QMIs is that we greatly reduce the complexity of choices for customers and significantly increased efficiencies for our trades and construction and purchasing teams. We're certainly becoming more proficient at producing, monitoring, and selling a greater number of QMIs, and our quick pivot is a testament to our team's nimbleness. If you turn to slide 14, You can see that after a significant shortage of QMIs during the COVID surge in demand, we've gone from 1.5 QMIs per community at the end of fiscal 21 to 7.3 QMIs at the end of the fourth quarter of 23. We've reached our goal of about seven QMIs per community. In fiscal 23, we've seen our QMI sales increase to about 60 percent of our sales for the full year versus 40 percent historically. That's a 50 percent increase. At this point, we plan to match our start schedule with our current sales base at each community and keep the overall level of QMIs relatively steady on a per-community basis. Some investors have feared that homebuilders will overproduce QMIs. That's a fear that's been going on for the last year or so, but we simply don't see that in the field. Our focus continues to be to sell these QMIs before they're completed. On slide 15, we show existing homes for sale and QMIs of all the homebuilders. The blue line shows the number of existing homes for sale around the country remains depressed at 1 million homes. That's less than half of the historical average of 2.1 million homes available for sale. We added a gray line to this slide, and the gray line represents existing homes plus started and completed new homes. the measure that the US Census Bureau uses for spec homes or QMI's. The combined total today is 1.3 million homes, which is 1 million homes less than the historical average of 2.3 million homes. Frankly, I think the Census Bureau estimate of spec homes is high compared to what we see in the marketplace, regardless Even with the addition of specs with their measure, inventory available for homebuyers is very, very low. Hopefully, this alleviates some concern that there are too many QMIs on the market. The lower level of existing homes plus QMIs for sale certainly helps our sales team and certainly helps our QMI strategies. Consumers have fewer homes to choose from, whether they be existing homes or a combination of existing homes and QMIs. And as a result, homebuyers are turning to more new construction than they have in the past. Moving to slide 16, due to the strength of demand for our homes, we were able to raise net home prices in 71% of our communities during the third quarter this year. And in the fourth quarter that we just completed, as mortgage rates increased rapidly, we were still able to raise prices again in 54% of our communities. During the fourth quarter, the average price increased 17%, which is 3% of our average revenues per home for the quarter. These increases were generally small, incremental, week by week. If demand remains strong, we expect to be able to continue to increase home prices moving forward. Keep in mind that these net home price increases I'm referring to are typically reductions in incentives or concessions. As a reminder, we do not assume future home price increases in our guidance, and we do not assume future home price increases in underwriting new land acquisitions. We remain optimistic about our future growth prospects, and as you'll see in a moment, we spent one of the highest amounts on land and land development this quarter than we have in a long time. We're very focused on using our significant cash flow to both reduce debt and to fund substantial growth in communities and ultimately in deliveries in the near future. 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 Financial Officer and Treasurer.