Hovnanian Enterprises, Inc.

currently in a listen-only mode. Management will make some opening remarks about the third quarter results and then open the line for questions. The company will also be webcasting a slide presentation along with the opening comments from management. The slides are available on the investors' page of the company's website at www.khov.com. Those listeners who would like to follow along should now log on to the website. I would like to turn the call over to Jeff O'Keefe, Vice President, Investor Relations. Jeff, please go ahead.

Thank you, Liz, and thank you all for participating in this morning's call to review the results for our third quarter. 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 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 section entitled Risk Factors in Management's Discussion and Analysis, particularly the portion of MD&A entitled Safe Harbor Statement in our annual report on Form 10-K for the fiscal year ended October 31, 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 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 third quarter results and I'll also comment on the current housing environment. Brad, our CFO, will follow me with more details and of course we'll open up for questions and answers afterwards. Let me begin on slide five. Here we show our third quarter guidance compared to our actual results. Starting on the top of the slide, revenues were $723 million which was right at the midpoint of our guidance. Our adjusted gross margin was 22.1% for the quarter, which was also within the guidance we gave. Our SG&A ratio was 12.4%. This was just above the high end of the guidance we gave. If you ignore the $2.2 million impact from the incremental phantom stock expense, which is solely due to stock price increases, our SG&A would have been 12.1%, which is slightly above the top end of the range we gave. One of the reasons our SG&A is running a little high is that we're gearing up for significant community count growth, and we have to make new hires well in advance of those communities. In addition, there are other expenses related to preparing for community count growth. Another contributor to higher than usual SG&A is an increase in our advertising spend. Adjusted EBITDA was $131 million for the quarter, which is significantly above the high end of the range that we gave. Finally, our adjusted pre-tax income was $100 million, which is also significantly better than the high end of the range that we gave. We're obviously pleased that our profitability exceeded our guidance for the quarter. Slide six, here we show our results compared to last year's third quarter. Starting in the upper left-hand quadrant of the slide, you can see that due to an increase in deliveries, a higher average sales price, and the land sale in Phoenix, our total revenues increased 11% to $723 million. In the upper right-hand portion of the slide, you can see that our gross margin decreased year-over-year to 22.1%. On a sequential basis, we also decreased slightly from 22.6% to 22.1% in the second quarter of 24. Our results for the quarter were within the range of guidance that we gave. We recognized in advance that there was a risk of seeing a year-over-year decrease in gross margin given the previous movements in mortgage rates, and more specifically, the cost to buy down those rates. The good news is that with the more recent declines in mortgage rates, the cost to offer mortgage rate buy-downs in the future may decrease for us in the future. Moving to the bottom left-hand portion of the slide, you can see that our adjusted EBITDA increased 20% to $131 million in this year's third quarter. Finally, in the bottom right-hand portion of the slide, adjusted pre-tax profit increased 34% to $100 million. I know new orders have been a focus of many analysts that follow home builders, so I'm going to discuss contracts in much greater detail this time. Turning to slide seven, if you start at the top of the table, you can see that our year-to-date contracts increased 8% for the first nine months of the year. However, as we break it down by quarter, you can see that it's been choppy. Contracts increased significantly in the first quarter when we were up 43%. In the second quarter, contracts were up 9%. And in the third quarter, contracts declined 13%. However, during the last five weeks, which we show at the bottom of this table, trends have improved substantially, and our total contracts increased 23% over the same five weeks a year ago. Even though contracts have been choppy, we feel very good about demand overall, and I'll describe in a little more detail contracts in upcoming moments. If you turn to slide eight, you can see contracts per community for the third quarter decreased year over year to 9.5. There are a couple of things on the slide I want to point out. First of all, 9.5 contracts per community that we achieved this year is close to our third quarter average of 9.9 contracts per community historically. Secondly, last year's 14.2 contracts per community was the second best third quarter of contracts per community over the past 20 years. You can also see on the slide in the third quarter of 20 with the COVID surge, our contracts per community were at 19, an unbelievably high level. But last year's 14.2 is still a very tough comparison. The third point I want to make is that the timing of the increase in our community count in the quarter hurts the calculation of contracts per community. That's because half of the community count increase occurred in July, the last month of our quarter. So you don't get the benefit of a full month of contract from those new communities, much less the benefit during the full quarter. Finally, some of our outperformance in last year's third quarter was due to a high level of billed-for-rent contracts. The 23rd quarter was the quarter that had the most billed-for-rent contracts since we began selling to this type of buyer, 259 billed-for-rent contracts. All of them happened to be in the southeast segment during the quarter. Anecdotally, there seemed to be some hesitancy from homebuyers during the third quarter causing some of the choppiness in sales that I referred to, similar to what other home builders have been reporting. It's difficult to pinpoint the cause of the choppiness, but economic, mortgage rate, and geopolitical uncertainty were likely partially responsible. Furthermore, we had extended disruption from Hurricane Burl across our Texas operations in particular, which is one of our single largest states by deliveries. Both our Houston and Dallas offices and many of our associates were without power for the better part of a week during the critical last month of the quarter. This hurt sales and deliveries. As you'll see in a moment, sales have jumped back in a very strong manner in recent weeks. If you turn to slide nine, we show interest rate trends. The gray line on this slide shows what happened to interest rates last year between July of 22 and August of 23. During this period, whenever rates declined, after a little delayed reaction, we eventually saw a pickup in sales. The blue line shows what happened with mortgage rates during this past year between July of 23 and August of 24. For most of the time shown, they coincidentally followed a very similar pattern of monthly increases and decreases, just at slightly higher rates this year. Over the past few weeks, we've seen mortgage rates reduce to lower levels. Whenever mortgage rates come down, there are more potential buyers, obviously, that can qualify for mortgages. For the first time in a while, mortgage rates are actually lower now than they were last year. We've already seen the benefits of the lower rates. If you turn to slide 10, we show that over the past five weeks, contracts have increased 23% compared to the same weeks a year ago. This improved trend suggests that homebuyers have already reacted positively to the recent decreasing mortgage rate environment. In addition, web traffic continues to be very strong. As a matter of fact, the last four weeks were better than the same weeks going all the way back to 2019, with the exception of the COVID surge in August of 2020. In the last week, however, we actually matched the robust website traffic visit levels that we hit in that peak time in August 2020. That leading indicator makes me particularly optimistic about future demand. On slide 11, we give even more granularity and show the trend of monthly contracts per community compared to the same months a year ago. Here you can see the impact of Build for Rent on contracts in the month of June this year compared to last year. Even though sales were lower in this year's third quarter, we believe that many of the fundamentals that led to our prior outperformance remain intact, such as the low supply of existing homes for sale, a slightly weakening but still good jobs market, the overall health of the economy, and positive demographic trends. Again, we have seen the sales trend change to very positive comparisons over the last five weeks. Turning to slide 12, we show our contracts per community as of the 12 months ended on June 30th of 24, and that way we can compare our results to our peers that report contracts per community on our calendar quarter ends. At 42 contracts per community, our trailing 12-month sales pace per community is the fourth highest among the public home builders that reported for this time period. On slide 13, you can see that our year-over-year growth in contracts per community for that same period was also the fourth highest among our peers. What we're trying to illustrate on these last two slides is even though sales in this most recent quarter were choppy, we're still selling an above average number of homes compared to our peers. On the top of slide 14, you can see that for a sizable percentage of our deliveries, homebuyers continued to utilize mortgage rate buy downs. The percentage of customers that used buy downs this year was 71% in the third quarter compared to 73% in the second quarter and 79% in the first quarter. The bottom of the slide gives more granularity. We show monthly trends over the same period. Since the beginning of the year, the buy-down usage on our deliveries has averaged 74%, which seems to indicate homebuyers have been consistently relying on mortgage rate buy-downs to combat affordability at the current mortgage rate levels. Given the relatively high mortgage rate environment, we assume buydowns will remain at similar levels going forward. We are budgeting the cost of buydowns to remain constant. However, the cost of buydowns may decrease with the decline in mortgage rates that we've seen recently. In order to meet homebuyers' desires to use mortgage rate buydowns, Elevated levels of quick move-in homes, or QMI's as we call them, remain part of our new operating philosophy in the last few years. On slide 15, we show that we had eight QMI's per community at the end of the third quarter. It remains at a high level, but we're very comfortable with that level. Furthermore, due to the increase in community count in the quarter, It's not surprising to see that our finished QMIs increased to 192 finished homes. On a per community basis, that puts us at 1.5 finished QMIs per community. That's up slightly from 1.3 finished QMIs per community at the end of the second quarter, but it's lower than 1.9 finished QMIs at the end of our first quarter. Our goal with QMIs is obviously to sell them before completion. In the third quarter of 24, QMI sales were about 67% of our total sales, a slight increase from 65% in the second quarter of 24. Historically, that percentage was about 40%. So obviously, demand for these homes is still high. we'll continue to manage our QMIs at a community level. We track our start schedule per community with our current sales pace per community to make sure we don't get too far ahead of ourselves. If you move to slide 16, you can see that even with the choppiness in the third quarter sales, we're still able to raise net prices in 33% of our communities. Despite the choppiness, the current level of demand should support the growth that we hope to achieve over the next several years. I'll now turn it over to Brad O'Connor, our Chief Financial Officer.