Hovnanian Enterprises, Inc.

Good morning and thank you for joining us today for the Hubnanian Enterprises Fiscal 2024 First Quarter Earnings Conference Call. An archive of the webcast will be available after the completion of the call and will 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's 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 now like to turn the call over to Jeff O'Keefe, Vice President, Investor Relations. Please go ahead.

Thank you, Tawanda, and thank you all for participating in this morning's call to review the results for our first quarter, which ended January 31, 2024. 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 provision 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 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, 2023, 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 on the call today 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 Ara.

Thanks, Jeff. I'm going to review our first quarter results, and I'll also comment on the current housing environment. Brad O'Connor, our Chief Financial Officer, will follow me with more details, and of course, we'll follow up with Q&A afterwards. Starting on slide five, we show how our results compared to last year's first quarter. Starting in the upper left-hand quadrant of the slide, you can see that our total revenues increased 15% to $594 million. In the upper right-hand corner of the slide, our gross margin held steady year-over-year at 21.8%. In the bottom left-hand portion of the slide, you can see that our EBITDA increased 30% to $65 million in this year's first quarter. If you adjust the impact from the incremental phantom stock expense, EBITDA would have increased 45% to $72 million. Finally, in the bottom right-hand portion of the slide, pre-tax profit increased 80% to $33 million. And if you ignore the impact of the incremental phantom stock expense, pre-tax profit would have increased 122% to $40 million. By all of these measures, we're off to a strong start for fiscal 24. On slide six, we show our first quarter guidance in the first column, our actual results in the second column, and because our guidance specifically excluded positive or negative impacts from the incremental phantom stock expense, we added a third column that shows our results adjusted for the $7.5 million of incremental phantom stock expense for the quarter. The impacts have fluctuated, positive or negative, on a quarter-over-quarter basis for the past several years, but with all the ups and downs in a quarter, it hasn't had much of a significant impact on an annual basis, but it can have a little more impact, as you see, on an individual quarter. It's obviously a little difficult to predict. Beginning at the top, our total revenues were $594 million, which was toward the upper end of the guidance range. Our adjusted gross margin was 21.8% for the quarter, which was slightly lower than the range we gave. This was partly due to fluctuating mortgage rate buy-down costs. The final buy-down costs are hard to estimate until rates are locked just before closing. Additionally, we have more QMIs that are sold and closed during the same quarter than we did historically. Having said that, we do not expect any margin compression for the second quarter. Generally, our newer sales are taking less buy-down costs. For example, for February contracts, concessions, including buy-downs, were more than 100 basis points lower than they were for the full first quarter of 24. We'll show you more about buy-down trends in a moment. Our SG&A ratio was 14.5%. This was above the range we gave. However, before the $7.5 million of incremental phantom stock expense, it would have been 13.2%, which is right in the middle of the range we gave. Adjusted EBITDA was $63 million and was within the range we gave, but again, Before the $7.5 million from incremental phantom stock expense, we were above the high end of the range at $71 million. Finally, our adjusted pre-tax income was $31 million, which was also within our guidance range. However, without the $7.5 million from the incremental phantom stock expense, we were at the very high end of the range at $39 million. Needless to say, we are pleased that our total revenues and profitability was within or above the guidance that we gave. Turning to slide seven. On this slide, you can see that contracts per community for the first quarter increased 48% year over year. While that was an easy comparison, the 9.6 contracts per community in the first quarter is 12% higher than the average of 8.6 contracts per community for the first quarter between 97 and 02. We use that time often because it was a period of neither bust nor boom. The 9.6 was also about the equivalent of the first quarter of 20, which was the most recent period before the effects of COVID. Turning to slide eight, we show interest rate trends. The gray line on this slide shows what happened to interest rates last year between July of 22 and February of 23. During this period, when rates declined, we saw a pickup in sales pace. A year later, the blue line shows what happened with these rates this year during the same time. The monthly rate pattern is very similar to the prior year. Even though rates are incrementally higher this year, we have once again seen an increase in sales as people adjusted their expectations regarding rates. Needless to say, the slow decline of rates has been helpful. Even though interest rates are higher than last year during the same period, our sales are far greater than last year during this period. On slide nine, we give more granularity and show the trend of monthly contracts per community compared to the same month a year ago for each month of the quarter as well as the last month of the fourth quarter. The slide shows contracts per community including and excluding bill for rent contracts. No matter how you look at it, our contract pace has improved significantly for each of the four months shown on this slide. As far as February goes, we're three weekends deep into the month, and while last February's sales pace was excellent at 4.1 contracts per community, this year's February sales pace so far has been even better. Turning to slide 10, we show annual contracts per community. On the far left-hand side, you can see our average sales pace of 44 for that normal period I mentioned between 97 and 02. On the far right-hand side, you can see that for the past 12 months, the annual contract per community was 43.9. It's not as good as the post-COVID sales boom pace of 20 and 21, but it puts our current sales pace at our normal annualized sales pace. Turning to slide 11, we show our contracts per community as if our quarter ended on December 31, 23, compared to our peers that report contracts per community on a December quarter end. At 8.4 contracts per community, our sales pace per community is the fourth highest among the public home builders that reported for this time period. On slide 12, you can see our year-over-year growth in contracts per community for that same period, and it was the third highest among the peers. The last two slides illustrate that we're not only competitive, but we continue to get more than our fair share of contracts. Turn to slide 13. On the left-hand portion of the slide, we show total website visits during the month of January for 23 and 24. As you can see, total website visits are up more than 100,000 year-over-year for January. Total website visits were also up 43% month-over-month from December. On the right-hand portion of the slide, you can see internet leads. Those are customers that gave us their email address or phone number. The Internet leads per community were up 13% year over year, and they were up 31% month over month. Now, seasonality is to be expected, but it certainly is great to see the best improvement over last year. Of note, both total website visits and internet leads per community for January were also above the levels back in January of 19 and January of 20, which was before the COVID surge in demand. Anecdotally, we're seeing similar strong levels of activity in February as well. Through this last weekend, weekly traffic in our communities has also been continuing at healthy levels. These trends indicate that future demand for new homes should remain strong. One of the reasons we've been able to maintain a strong sales pace is related to our pivot to start more quick move-in homes, or QMIs as we call them. Having more QMIs allows us to offer customers mortgage rate buy-downs that would be cost prohibitive on to-be-built homes, which have longer delivery dates. If you turn to slide 14, on this slide, you can see that customers that used a buy-down declined from 87% in the month of November to 82% in December and down further to 72% in the month of January. We averaged 79% for the quarter. Based on sales so far in February, the expectation is that it'll continue to decline in February. For the foreseeable future, elevated QMIs remain part of our operating philosophy. One of the benefits of a larger QMI supply is that it greatly reduces complexities for our customers and increases efficiencies for our trade partners. It also makes it easier for our internal construction and purchasing teams. We're certainly becoming much more proficient at producing, monitoring, and selling a greater number of QMIs. If we turn to slide 15, which shows QMIs by community, you can see that after a significant shortage of QMIs during the COVID surge in demand, we've gone from a trough of 1.4 QMIs per community at the end of the second quarter of 21 to 6.3 QMIs at the end of the first quarter of 24. In the first quarter of 24, our QMI sales were about 63% of our sales. versus 40% historically, a significant increase. We'll continue to manage our start schedule per community with our current sales pace per community at each community. Not only do we monitor our QMI's, but we continue to keep an eye on the supply of QMI's in the market. With the exception of a few communities from time to time, we do not get the sense that our peers are being overly aggressive or out of the ordinary under QMI strategies. While there is no perfect data set on total QMIs in the market, slide 16 shows existing homes for sale and QMIs for all home builders as measured by the Census Bureau. The blue line shows the number of existing homes for sale around the country remaining depressed at about 900,000 homes. That's less than half of the historical average of 2 million homes available for sale. The gray line on this slide represents existing homes plus started and completed new homes, the measure that the U.S. Census Bureau uses for spec homes or QMIs. The combined total today is 1.2 million homes, That's about half of the historical average of 2.3 million homes. While not perfect, this data confirms our observations that inventory available for homebuyers, regardless of whether it is new or existing homes, remains at extremely low levels. Consumers have fewer existing homes to choose from, And as a result, homebuyers are turning more to new construction than they have in the past. Additionally, the ability to buy down mortgage rates gives builders an advantage over existing rates. Even if rates move down to 6% later in the year, we believe it's unlikely that it would create a surge of existing homes being listed and increasing supply. Moving to slide 17. due to the strength of demand for our homes, we were still able to raise net home prices in 37% of our communities during the first quarter of 24. As you can see on this slide, this percentage is lower than it has been for the previous three quarters, but it's unusual to raise prices over the slower winter holiday season. we've already seen increases in 44% of our communities month to date for February. We probably will see even more increases as we get further into the spring selling season based on the early demand that we're seeing. Slightly higher prices and lower mortgage rate buy-down costs will certainly be helpful to margins if this continues. We monitor contracts on a community by community basis. If we are ahead of our expected sales pace, we'll generally make small incremental week by week increases. Keep in mind that these net home prices I'm referring to are often reductions in incentives or concessions. As a reminder, do not assume any future home price increases in our guidance, and we do not assume future home price increases when we underwrite new land transactions. The fundamentals remain strong for the new home industry, and our operating results and our recent sales pace reflect those results. I'll now turn it over to Brad O'Connor, our Chief Financial Officer and Treasurer.