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.

Thank you, Ara. Before I get to the next slide, I want to comment on the other income line on our income statement. During the third quarter of 24, we assumed control of one of our unconsolidated joint ventures after our partner received their final cash distribution. But before the communities were finished, Under GAAP, we were required to consolidate the joint venture at fair value, and based on the exceptionally strong performance of these communities, we recorded a $46 million gain in the other income and expense line upon consolidation. Even after this stepped-up value, we now have a high-performing, wholly-owned community that is projected to achieve an IRR in excess of 20% and provide significant profits for the next few years. Similarly, in the third quarter of 23, we recorded a $19 million gain in the other income and expense line upon consolidation of a different joint venture. This could happen again in future reporting periods when final cash distributions to the partners are made on existing and future new joint ventures. Now getting back to the slides, on slide 17, you can see that we ended the quarter with a total of 146 open for sale communities, a 20% increase from last year. 126 of those communities were wholly owned. During the third quarter, we opened 22 new wholly owned communities, sold out of 10 wholly owned communities, transitioned six communities from a joint venture to wholly owned, and contributed one community to a joint venture. We also opened four new unconsolidated joint venture communities and closed two unconsolidated joint venture communities during a quarter. The total community count of 146 was also up 11% or 14 communities sequentially from the end of the second quarter of fiscal 24. As Eri mentioned, half of those 14 community openings took place in the month of July. The financial benefits of these new communities will begin in subsequent quarters. Even with the robust growth in community count this quarter, we still experience delays in opening new communities, primarily due to utility hookups throughout the country. We expect community count to continue to grow further in the fourth quarter and in fiscal 25, predicting community count to be challenging given a variety of factors. The leading indicator for further community count growth is shown on slide 18. We ended the quarter with 39,516 controlled lots, which equates to a 7.7-year supply of controlled lots. Our lot count increased 7 percent sequentially and 34 percent year over year. If you include lots from our unconsolidated joint ventures, we now control 42,580 lots. We added 4,800 lots in 57 communities during the third quarter. Our land teams are actively engaging with land sellers and negotiating for new land parcels that meet our underwriting standards. Our land and land development spend increased 28% year-over-year to $216 million in the third quarter of fiscal 24. This brings the latest four-quarter average to $224 million a quarter. That is four quarters in a row with higher than typical levels of land and land development spent. Our corporate land committee calendar continues to be busy, which is an indication that our lot count should continue to increase over time, but not always in a straight line. We are using current home prices, including the current level of mortgage rate buy-downs, current construction costs, and current sales pace, to underwrite to a 20% plus internal rate of return. Our underwriting standards automatically self-adjust to any changes in market conditions. We are finding many opportunities in our markets and are very focused on growing our top and bottom lines for the long term. The growth in lots control precedes growth in community count, which precedes growth in deliveries. On slide 19, we show the percentage of our lots controlled via option increased from 46% in the third quarter of fiscal 2015 to 82% in the third quarter of fiscal 24. This is the highest percentage of option lots we have ever had. This increase is intentional and has been a consistent focus of our land light high inventory turnover land strategy. We are pleased with the progress we have made. Turning now to slide 20. you see that we continue to have one of the higher percentages of land control via option compared to our peers, and we are significantly above median. On slide 21, compared to our peers, we are tied for the second highest inventory turnover rate. High inventory returns 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 our terms on inventory in future periods. Another way to improve our inventory returns is by shortening our construction cycle times. We made good progress in reducing our cycle times for 190 days at the peak during COVID to 160 days in the last half of 23. Our cycle times remained around 160 days for this first two quarters of 24, but during the third quarter of 24, we were able to shorten the average cycle time by another 10 days to about 150 days. We still have some work ahead of us to get back to pre-pandemic cycle times of about four months or 120 days, but we are making substantial progress. Returning to our normal cycle time should significantly boost our ROI and ROE. Turning to slide 22, even after spending $216 million in land and land development, $32 million on debt reduction, and $11 million to repurchase stock, we still ended the third quarter with $250 million of liquidity, just above the high end of our targeted liquidity range. We are much closer to our goal of being fully invested, which reduces the interest burden of any excess cash and puts all of our capital to work. Turning now to slide 23, this slide shows our maturity ladder as of July 31, 2024. This is reflective of the exchange we did at the beginning of the third quarter, which lowered the face value of our debt by $75 million, reduced our annual cash interest by $4.6 million, and our annual interest expense by approximately $8.5 million. This was the most recent example of the steps we have taken to improve our maturity ladder over the past several years. We are still committed to further strengthening our balance sheet. Turning to slide 24, we show the progress we have made to date to grow our equity and reduce our debt. Starting on the upper left-hand part of the slide, we show the growth in equity over the past few years, as well as the year-end projected equity, assuming the midpoint of our guidance. And on the upper right-hand portion, you can see the progress we've made in reducing our debt, including the redemptions we made in fiscal 23 and 24 and the most recent debt reductions in the exchange. We reduced our debt by $669 million since the beginning of fiscal 20. On the bottom of the slide, you can see that our net debt to net cap at the end of the third quarter was 55.9%, which is a significant improvement from our 146.1% at the beginning of fiscal 20. Using the midpoint of our guidance and assuming we have cash at the same level we finished last year, we expect to end the year with net debt to net cap of 42%. We still have more work to do to achieve our goal of a mid-30% level. We are comfortable that we have a path to achieve our target soon. We've made considerable progress, which is evident by the credit rating upgrades we received from both S&P Global and Moody's during our third quarter of 24. Our balance sheet has improved significantly over the last five years, and we expect to continue to make noteworthy progress moving forward. Given our remaining $258 million of deferred tax assets, we will not have to pay federal income taxes on approximately $900 million of future pre-tax earnings. This benefit will continue to significantly enhance our cash flow in years to come and will accelerate our growth plans as well as our ability to pay down debt. Our financial guidance for the full year of 24 assumes no adverse changes in current market conditions, including no further deterioration in our supply chain or material increases in mortgage rates, inflation, or cancellation rates. Our guidance assumes continued extended construction cycle times averaging five months compared to our pre-COVID cycle time for construction of approximately four months. It also assumes that we continue to be more reliant on QMI sales, which makes forecasting gross margins more difficult. Our guidance assumes continued use of mortgage rate buy-downs similar to recent months. Further, it excludes any impact to SG&A expense from our phantom stock expense related solely to the stock price movement from the $209.89 stock price at the end of the third quarter of fiscal 24. Slide 25 shows our increased guidance for all of fiscal 24. We increased our expectations for total revenues for the full year to be between 2.9% billion and 3.05 billion. We tightened the range slightly for expected adjusted gross margin to be in the range of 21.5% to 22.5%, and we kept the range for SG&A as a percent of total revenue to be between 11 and 12%. We are providing guidance on income from joint ventures for the first time. For the year, we expect income from joint ventures to be between $55 million and $65 million. We increased guidance for adjusted EBITDA, adjusted pre-tax income, EPS, and book value per share. Our guidance for adjusted EBITDA increased to a range between $420 million and $445 million, and our expectations for adjusted pre-tax income for the full year increased to be between $300 million and $325 million. We now expect our diluted earnings per share for the full year to be in the range of $29 and $31, At the midpoint of our guidance, we anticipate our common book value per share to increase by about 50% at October 31, 2024 to approximately $109 per share compared to last year's value at year-end of $73 per share. Analysts that only focus on price-to-book missed the point regarding our industry-leading returns and rapid growth in book value. Turning to slide 26, we show that our return on equity was 38.8%. which is the highest over the trailing 12 months compared to our peers. And on slide 27, we show that compared to our peers, we have one of the highest consolidated EBIT returns on investment at 33.7%. While our ROE was helped by our leverage, our EBIT return on investment is a true measure of pure home building operating performance without regard to leverage and was the highest among our midsize peers. Over the last several years, we have consistently had one of the highest EBIT ROIs among our peers. Eventually, investors will recognize our consistent superior returns on capital and significantly improved balance sheet. Given our rapidly growing book value, we think it would be appropriate to consider a variety of metrics, including EBIT return on investment, enterprise value to EBITDA, and our price to earnings multiple when establishing a fair value for our stock. We believe when all our fundamental financial metrics are considered, our stock is still a compelling value. On slide 28, we show our price to book multiple compared to our peers. We do compare more favorably on this metric based on the midpoint of our guidance. We expect to end October with a book value of approximately $109 per share. On slide 29, we show the trailing 12 months price to earnings ratio for us in our peer group based on our price earnings multiple of 6.48 times at yesterday's stock price of $207.60. We are trading at a 36% discount to the home building industry average P.E. ratio. We recognize that our stock may trade at a discounted degree because of our higher leverage, but our leverage has been shrinking rapidly. On slide 30, we show that despite our extremely high ROE, there are still four peers that have a higher price to book ratio than us. This slide more visually demonstrates how much we are undervalued relative to the other home builders when looking at the relationship between ROE and price to book. A very similar result exists when looking at ROE to price to earnings. These last few slides further emphasize our point that given our 38.8% return on equity, our top quartile EBIT return on investment, combined with our rapidly improving balance sheet, we believe our stock continues to be the most undervalued in the entire universe of public home builders. I will now turn it back to Eric for some closing remarks.

Thanks, Brad. I want to spend a few minutes talking about our joint ventures during this call. we consider joint ventures to be a core part of our operations. Income from our unconsolidated joint ventures has been an important part of our operations for a long time. On slide 31, we show income from unconsolidated joint ventures for the past six fiscal years. You can see on the far right-hand portion of the slide that income from joint ventures was already $37 million for the first nine months of fiscal 24, and the midpoint of the guidance we gave is for it to reach $60 million for the full year. Based on the current level of joint venture activity, we believe that our income from joint ventures should continue to be a meaningful portion of our earnings for the next several years. Keep in mind, these bars do not reflect the $19 million gain from consolidation during fiscal 23 or the $46 million gain from consolidation in the third quarter of 24. These gains from consolidation could occur in the future joint ventures as they've been performing very well. Turning to slide 32, we give some reasons we engage in joint ventures. First and foremost, we're extremely focused on a high return on investment. One of the key methods to achieve this high return on investment is our land light strategy. Land light has always been part of our strategy, but we've increased the focus over the last five years. An alternate tool to achieve a high return on investment is the use of joint ventures. They allow us to build larger communities with less capital. typically 20% to 25% of the peak capital, particularly for larger, longer-life communities. If these joint ventures hit certain hurdle rates, we can receive a disproportionate share of the upside performance. This improves both IRR and the net profit dollars we receive. By limiting our capital to 20 to 25%, we can invest in multiple communities with the same amount of capital, diversifying risk and leveraging our fixed costs. We don't always achieve our IRR targets for our communities. When done in a joint venture, our joint venture partners typically share in the downside risk. Having said that, as you can see from our results, our joint ventures have been performing very well for our company and for our partners. We're also paid a management fee for our joint ventures, which helps offset some of our overhead costs. We believe these benefits to utilizing joint ventures makes a lot of sense from several perspectives and will continue to seek joint venture partners to work with for future communities. On slide 33, we show some metrics for a recent community that we're considering contributing to a joint venture. As a wholly owned transaction, the peak capital on this community would be $74 million. The IRR would be 31% and the community life profit would be $82 million. As you can see, based on this underwriting, it's a very solid community and it would make sense to go forward with this transaction on a wholly owned basis. However, If we were to joint venture this community instead, our peak capital would only be $14 million. The IRR would improve to 47%, and we'd still get a community life profit of $33 million. The decrease in profit at first blush seems discouraging. If we add four other communities like this one, our peak capital for the entire joint venture for all five communities would be only $70 million, less than one wholly owned community in the example. Our community life profit for the joint venture would be $165 million, more than double that of just one wholly owned community. In addition, we get the benefit of diversifying our risk. I could make an academic argument that we should joint venture all of our communities. Now, frankly, that wouldn't be feasible, but the point I'm trying to get across is that the returns from these joint ventures are very compelling. Joint ventures will continue to be part of our overall strategy and deliveries for years to come. The majority of our joint ventures are domestic here in the United States, like all of our operations. However, yesterday we signed a memorandum of understanding with the Ministry of Housing in Saudi Arabia. This will expand our activities in Saudi and expand our partnership, increasing housing for a growing population of young middle-class families. Overall, given our recent community count growth, and continuing growth in our lot count, we find ourselves on the precipice of substantial growth, which will allow us to continue to deliver top-tier industry returns to our shareholders. That concludes our formal comments, and I'm happy to turn it over for Q&A now.

The company will now answer questions. So that everyone has an opportunity to ask questions, participants will be limited to three questions and a follow-up. after which they will have to get back into the queue to ask another question. We will open the call to questions. If you'd like to ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again.

Please stand by while we compile the Q&A roster. Our first question will come from the line of Alan Ratner

with Zelman and Associates.

Hey, guys, good morning. Nice quarter and thanks for all the details so far. You know, my first question, and maybe this is more for Brad, I'd love to just get a little more color or insight on the JV consolidation since it was such a big driver of the upside in the quarter and also sounds like it might be something that, you know, at least repeats on an inconsistent basis going forward. I just want to make sure I understand kind of the moving pieces here. So, you know, you booked a big game this quarter and going forward, I guess the sale of homes will be flowing through your revenue and COGS line and gross margin. The offset, I guess, when I look at your annual JV income running around $60 million pre-tax, does that mean that that number should come down as like you're not booking the gains from that project going forward and now that's shifting into your wholly owned businesses?

Not exactly. I mean, you're thinking of it correctly, but the reality is we have other new JVs that have also started, which will provide JV income going forward. So with respect to that specific joint venture, the income that we had recorded over the last year or so for our returns, well, that will go away and now come through wholly owned just like you described. And the one thing to add to that is it comes through at a higher land value because we had to record the step-up on consolidation. So that gain basically adds to the book value that we put on our books. And so as we're recognizing those deliveries, they have a higher cost, higher land cost, than they did when they were in the joint venture. So just keep that in mind. As I commented, though, when you record the fair value, we do it calculating IRR that's still – in the 20% range. So it still would provide good profits for us, just not as high as what was being generated in the JV itself. But with that said, because of other JVs that are coming online, as Errol was kind of commenting, we expect JV income to continue in the future like what you've been seeing. The other comment I'll make is the reason you may see this gain phenomena happen going forward is some of our joint ventures we structure as portfolios. prep structures so that the partner gets paid out first. And when that happens and the partner then hits their IRR hurdle and gets paid out, that's when this occurs and it becomes a wholly owned community. In the case where it's a peri passu JV and the distributions occur over time to both parties and both parties are in the venture until the end and continue to get paid out, you won't see this occur. So more recently, more of our JVs have been done as preferred structures. So that's why you're seeing this last year and this year. And I think you might see it going forward from some of the joint ventures we have in place. But we still do some JVs as peri-passu. And in those cases, you wouldn't see this happen. So I just want to give that extra clarification.

Got it. And I appreciate all that added color. And just one more on this topic. So you mentioned the step up in land cost, obviously, or land basis, obviously. Just relative to the rest of your business, I mean, is this going to be dilutive to your margins going forward? Obviously, it's only one project, or is it kind of written up to a similar margin?

It would be a relatively similar margin to what our other projects are because we used a similar underwriting IRR that we do for our existing projects. It's just that community was actually performing at much higher margins in the JV itself. So now it'll be performing at what we're doing kind of wholly with all our other communities.

Gotcha. Okay. That's helpful. Thank you for the extra time there. Second question, you know, the gross margin range you tightened, but it still implies a pretty wide range for fourth quarter. And I know you mentioned the uncertainty around spec, you know, with that being two-thirds of your business today. I guess just from a high level, you know, your margins dipped a little bit sequentially. You know, you're off of the recent highs. Where do you see the margin profile of the business, you know, vis-a-vis the third quarter result you just reported with all the moving pieces you've got going on? You know, incentives seem pretty steady but elevated. I would imagine land costs are going up. You still have some pricing power in about a third of your communities. Is this 22% margin kind of like a decent run rate going forward or are there, you know, mixed considerations or cost considerations that we should think about into the fourth quarter and into 25 that could directionally move that one way or the other?

Speaking specifically about the fourth quarter, I think you're pretty much right on that 22%-ish range is where I would think we would be, but that's given the caveats we've talked about, which is similar mortgage rate buy-down costs, et cetera. From a construction cost perspective, I think we've been holding pretty stable. In fact, we've had some decreases in areas, including some benefits from lumber. which has helped. Our land costs, as you pointed out, should, as we open new communities and get deliveries from those new communities, will probably increase because of our newer deals. So that could put some pressure on margins in 2025. On the other hand, if mortgage rates go down, as I think people might anticipate when the Fed makes their moves, then the cost of buy-downs and perhaps the amount of incentives we have to give will change as well to potentially offset that. So we're not really giving 25 guidance, but I can answer your 25.

fourth quarter 24 question by saying that that we feel that the 22 range you're talking about is pretty reasonable perfect and then if i could just squeak in one more here um you know ara the the comments on roe are you know very much appreciated and understood you guys are you know at the highest in the industry i think one of the things that you know admittedly we struggle with a little bit and i think it's probably investors do as well given where your valuation is is Just the fact that your elevated ROE today obviously is somewhat driven by the book value having been depressed over the last few years. And it has compressed. A year ago, you were at 50%. Two years ago, 80%. So I'm not asking you to forecast ROE, but I guess when you think about the business over the next two, three years, you know, the long run in industry average has been somewhere around 15%. And we've had several builders say they think, you know, they're targeting more of a 20% ROE going forward on a sustainable basis. Is there a way to think about your business over the next three to five years from an ROE standpoint, once the book value has accreted and once you're kind of at a normalized run rate of activity, the way you're thinking about the ROE of the business?

Sure. Well, thanks for the question, Alan. I think it's important to also talk about EBIT ROI, because that has nothing to do with our equity or our leverage. It is pure home building performance. And I'm proud to say we're the second highest performer on pure EBIT ROI. We outperform almost everybody, and we definitely outperform every single one of our midsize peers. So I'd say we're proud. It's not a one-time thing, by the way. We've been doing that for several years now. So I'd say whatever you feel will be the ROE of our peers, once we get to a comparable debt-to-cap leverage, Given our outperformance on EBIT ROI, I'd say we should end up higher than everyone else on an ROE on a long-term basis. That's assuming we continue our performance as we've been outperforming over the last few years. Appreciate it.

Thank you for the thoughts. Okay.

Thanks, Alan.

Our next question will come from the line of Jordan Heimowitz. with Philadelphia Financial Management of San Francisco.

Thanks, guys. A couple questions. Moody's, in their recent note, said they would look to upgrade you if debt to capital got below 50%. Your own projection is 42% by the end of this year, and unless something goes crazy, it'll be in the 30s by next year. So I guess my question is, when does the next discussion with them... When does that play a role? Do you think the only negative is they upgraded you somewhat recently, but the debt paydown has been so dramatic that could it happen again soon?

Yeah, just to be clear, Jordan, that comment they made is a gross debt-to-cap basis, and the 42% is a net debt-to-net cap, so it takes the cash into play. Okay. We'll be getting close to the 50%, to your point, by year end, but I just don't want you to be confused by the 42%. And so I would be hopeful that certainly during next fiscal year, we're having another conversation about another upgrade.

What's the gross number, sorry, on the top here?

We're looking. We didn't prepare it ahead of time. So if we grab it in time, we'll add it. We'll make the comment.

Fine. To the extent that that occurs, you know, you put out a bunch of debt that originally was hoping to be in the H but ends up being in the 10 to 11. Is there a possibility next year you could call some of that and refinance at a lower level or are there lockouts at that point?

I would say cost prohibitive. It's possible, but cost prohibitive next year. next year likely, unless rates were dramatically lower, that we could save more on the delta in interest. But it's certainly something we're going to be paying attention to, Jordan, because we think we're getting really close to being able to, if not able to do it right now, transition from secured to unsecured, which is something we want to do when we do more global refinancing in the near future. And so certainly we'll be paying attention to the cost to rate tradeoff over the coming year, year and a half, I'll say. I did get the calculation on the gross debt to cap projection for year-end at around 56%. So we still won't be at 50%, but we'll be on our way.

Okay. And final question is, can you detail any income from the Saudi venture? When do you think that will start to be an impactful number or any guidance on that in any way?

I would say it's still a couple years away. I can have Eric comment as well. But right now we're just starting two or three new communities. We don't have any that are delivering at the moment. So I would say before there's any real meaningful profit, it's probably late fiscal 25, early 26.

Jordan, I'll add a couple of comments to your first question. And that is that because we had higher leverage Our cost of debt is higher than most of our peers, but our performance has been improving so dramatically and our leverage is improving dramatically that once the high prepayment costs happen, I think we'll have a great opportunity to refinance in the future at substantially lower rates that should save us quite a bit of interest. compared to what we've been paying. Our ROE has been outstanding even with the high interest, but I think it'll get even better as we have an interest more similar to our peers. On top of that, the reason we have a big difference between gross debt to cap and net debt to cap is we don't have a large, unsecured, revolving line of credit like our peers. I suspect that in the near future we'll be able to achieve that once we refinance the bond, that will also save substantial dollars because right now we're operating with a big cash cushion that we're paying interest on. That will go away as we transition to regular financing more like our peers and should substantially enhance our performance.

But that's probably a second-half, 25 issue, it sounds like.

Yeah, early 26, something like that, yeah.

Okay.

Thank you, guys.

Thank you. Thank you.

Our next question will come from the line of Alex Barron with Housing Research Center.

Yeah, thanks, gentlemen. I wanted to ask about the phantom share impact. Is that something that has some termination date or it's just ongoing quarter to quarter?

There's been additional grants. There's another grant in December of this fiscal year with phantom shares. So there'll be some impact going forward and obviously each quarter we're providing that in the appendix just so you can see what the impact is. This quarter was the 2.2 million. We're just trying to highlight that for everybody. It can be very little if the stock price doesn't change. The good news is in this particular quarter, that means the stock price went up significantly, and that's why it was a $2.2 million impact. But it's something that we will have going forward.

And I'll add, as Brad mentioned, the quarter-by-quarter impact is in the appendix. It's there and will continue, but it's just not a substantial number yet.

The other quick comment to make, Alex, is we've looked at that, the impact from an earnings perspective under scenarios with stock price increasing even pretty dramatically, and it's still actually better for the shareholders because the dilution that would have occurred had you done shares would actually be more impactful than the earnings hit. So it's something we've paid attention to when we've given some fancy shares.

Okay, got it. And then it looked to me like the debt balance came down a little bit this quarter. Did you guys pay down some debt?

Yes. We talked about it in our second quarter call, but the debt exchange that we did actually happened in May, so it was a third quarter event. So that's what you're seeing is the change in the debt. We did a debt restructuring back in May.

Oh, okay. Got it. And then as it pertains to the deferred tax asset on your balance sheet, that's been obviously coming down as you're using it. Do you guys have an anticipated number of years it will take before that goes away? Is it a couple years or three years or faster than that?

I mean, the way to think about that is I think we said it's, what, $900 million of free tax earnings that's protected by the deferred tax asset at this point. And so if we're, you know, this year we're projecting 300-ish million of pre-tax. So at that run rate, if we stay at that run rate, it's three years. We would hope, given the growth we're anticipating and we've been talking about our growth and community count, our profit will go up. So maybe it's a little less than three years, something in the two to two and a half year time frame.

Okay. And, you know, given how cheap your stock is on a PE basis, have you guys considered buying back stocks? Or is there something that restricts doing that?

We did buy back shares in the quarter. We talked about it briefly. We spent $11 million at an average price of $139 during the quarter, and we still have some availability under the board approval for buy back. So when we think it's opportune to do it, we'll certainly look at it.

Okay, guys. Best of luck. Thank you.

All right. I'll add one other comment on the tax benefit. While the deferred tax asset will be decreasing because we're earning so much, we are active in the energy tax benefits from the energy efficient homes we build. And that is something I think we're increasingly focused on. So we will have some advantages going forward, even after the NOI deferred tax benefit goes away.

As a reminder, if you'd like to ask a question at this time, please press star 1-1 on your touchtone telephone.

I'm showing no further questions in queue at this time.

I'd like to turn the call back to Ara Hovnanian for closing remarks.

Thank you very much. We enjoyed the questions. We're excited about the future, and we look forward to reporting a fabulous fourth quarter as well. Thank you.

This concludes our conference call for today. Thank you all for participating, and have a nice day.

All parties may now disconnect. you Thank you. music music

Thank you. Thank you. Music.

Good morning and thank you for joining us today for Huffmanian Enterprises fiscal 2024 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 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 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 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 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 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, will 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 built-for-rent contracts, all of them happen 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 homebuilders 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 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 in 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 buy-downs will remain at similar levels going forward. We are budgeting the cost of buy-downs to remain constant However, the cost of buy-downs may decrease with the decline in mortgage rates that we've seen recently. In order to meet homebuyers' desires to use mortgage rate buy-downs, 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.

Thank you, Aaron. Before I get to the next slide, I want to comment on the other income line on our income statement. During the third quarter of 24, we assumed control of one of our unconsolidated joint ventures after our partner received their final cash distribution, but before the communities were finished. Under GAAP, we were required to consolidate the joint venture at fair value, and based on the exceptionally strong performance of these communities, we recorded a $46 million gain in the other income and expense line upon consolidation. Even after this stepped-up value, we now have a high-performing, wholly-owned community that is projected to achieve an IRR in excess of 20% and provide significant profits for the next few years. Similarly, in the third quarter of 23, we recorded a $19 million gain in the other income and expense line upon consolidation of a different joint venture. This could happen again in future reporting periods when final cash distributions to the partners are made on existing and future new joint ventures. Now getting back to the slides, on slide 17 you can see that we ended the quarter with a total of 146 open for sale communities, a 20% increase from last year. 126 of those communities were wholly owned. During the third quarter we opened 22 new wholly owned communities, sold out of 10 wholly owned communities, transitioned six communities from a joint venture to wholly owned, and contributed one community to a joint venture. We also opened four new unconsolidated joint venture communities and closed two unconsolidated joint venture communities during a quarter. The total community count of 146 was also up 11% or 14 communities sequentially from the end of the second quarter of fiscal 24. As Erin mentioned, half of those 14 community openings took place in the month of July. The financial benefits of these new communities will begin in subsequent quarters. Even with the robust growth in community count this quarter, we still experience delays in opening new communities, primarily due to utility hookups throughout the country. We expect community count to continue to grow further in the fourth quarter and in fiscal 25. Predicting community count can be challenging given a variety of factors. The leading indicator for further community count growth is shown on slide 18. We ended the quarter with 39,516 controlled lots, which equates to a 7.7-year supply of controlled lots. Our lot count increased 7% sequentially and 34% year over year. If you include lots from our unconsolidated joint ventures, we now control 42,580 lots. We added 4,800 lots in 57 communities during the third quarter. Our land teams are actively engaging with land sellers and negotiating for new land parcels that meet our underwriting standards. Our land and land development spend increased 28% year-over-year to $216 million in the third quarter of fiscal 24. This brings the latest four-quarter average to $224 million a quarter. That is four quarters in a row with higher than typical levels of land and land development spend. Our Corporate Land Committee calendar continues to be busy. which is an indication that our lot count should continue to increase over time, but not always in a straight line. We are using current home prices, including the current level of mortgage rate buy downs, current construction costs, and current sales pace to underwrite to a 20% plus internal rate of return. Our underwriting standards automatically self adjust to any changes in market conditions. We are finding many opportunities in our markets and are very focused on growing our top and bottom lines for the long term. The growth in lots control precedes growth in community count, which precedes growth in deliveries. On slide 19, we show the percentage of our lots controlled via option increased from 46% in the third quarter of fiscal 2015 to 82% in the third quarter of fiscal 24. This is the highest percentage of option lots we have ever had. This increase is intentional and has been a consistent focus of our land light high inventory turnover land strategy. We are pleased with the progress we have made. Turning now to slide 20, you see that we continue to have one of the higher percentages of land control via option compared to our peers, and we are significantly above median. On slide 21, compared to our peers, we are tied for the second highest inventory turnover rate. High inventory returns 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 our terms on inventory in future periods. Another way to improve our inventory returns is by shortening our construction cycle times. We made good progress in reducing our cycle times for 190 days at the peak during COVID to 160 days in the last half of 23. Our cycle times remained around 160 days for the first two quarters of 24, but during the third quarter of 24, we were able to shorten the average cycle time by another 10 days to about 150 days. We still have some work ahead of us to get back to pre-pandemic cycle times of about four months or 120 days, but we are making substantial progress. Returning to our normal cycle times should significantly boost our ROI and ROE. Turning to slide 22, even after spending $216 million in land and land development, $32 million on debt reduction, and $11 million to repurchase stock, We still ended the third quarter with $250 million of liquidity, just above the high end of our targeted liquidity range. We are much closer to our goal of being fully invested, which reduces the interest burden of any excess cash and puts all of our capital to work. Turning now to slide 23, this slide shows our maturity ladder as of July 31, 2024. This is reflective of the exchange we did at the beginning of the third quarter which lowered the face value of our debt by $75 million, reduced our annual cash interest by $4.6 million, and our annual interest expense by approximately $8.5 million. This was the most recent example of the steps we have taken to improve our maturity ladder over the past several years. We are still committed to further strengthening our balance sheet. Turning to slide 24, we show the progress we have made to date to grow our equity and reduce our debt. Starting on the upper left-hand part of the slide, we show the growth in equity over the past few years, as well as the year-end projected equity, assuming the midpoint of our guidance. And on the upper right-hand portion, you can see the progress we've made in reducing our debt, including the redemptions we made in fiscal 23 and 24 and the most recent debt reductions in the exchange. We reduced our debt by $669 million since the beginning of fiscal 20. On the bottom of the slide, you can see that our net debt to net cap at the end of the third quarter was 55.9%, which is a significant improvement from our 146.1% at the beginning of fiscal 20. Using the midpoint of our guidance and assuming we have cash at the same level we finished last year, we expect to end the year with net debt to net cap of 42%. We still have more work to do to achieve our goal of a mid-30% level. We are comfortable that we have a path to achieve our target soon. We've made considerable progress, which is evident by the credit rating upgrades we received from both S&P Global and Moody's during our third quarter of 24. Our balance sheet has improved significantly over the last five years, and we expect to continue to make noteworthy progress moving forward. Given our remaining $258 million of deferred tax assets, we will not have to pay federal income taxes on approximately $900 million of future pre-tax earnings. This benefit will continue to significantly enhance our cash flow in years to come and will accelerate our growth plans as well as our ability to pay down debt. Our financial guidance for the full year of 24 assumes no adverse changes in current market conditions, including no further deterioration in our supply chain or material increases in mortgage rates, inflation, or cancellation rates. Our guidance assumes continued extended construction cycle times averaging five months compared to our pre-COVID cycle time for construction of approximately four months. It also assumes that we continue to be more reliant on QMI sales, which makes forecasting gross margins more difficult. Our guidance assumes continued use of mortgage rate buy-downs similar to recent months. Further, it excludes any impact to SG&A expense from our phantom stock expense related solely to the stock price movement from the $209.89 stock price at the end of the third quarter of fiscal 24. Slide 25 shows our increased guidance for all of fiscal 24. We increased our expectations for total revenues for the full year to be between $2.9 billion and $3.05 billion. We tightened the range slightly for expected adjusted gross margin to be in the range of 21.5% to 22.5%. And we kept the range for SG&A as a percent of total revenue to be between 11% and 12%. We were providing guidance on income from joint ventures for the first time. For the year, we expect income from joint ventures to be between $55 million and $65 million. We increased guidance for adjusted EBITDA, adjusted pre-tax income, EPS, and book value per share. Our guidance for adjusted EBITDA increased to a range between $420 million and $445 million, and our expectations for adjusted pre-tax income for the full year increased to be between $300 million and $325 million. We now expect our diluted earnings per share for the full year to be in the range of $29 and $31. At the midpoint of our guidance, we anticipate our common book value per share to increase by about 50% at October 31, 2024 to approximately $109 per share compared to last year's value at year-end of $73 per share. Analysts that only focus on price of the book missed the point regarding our industry-leading returns and rapid growth in book value. Turning to slide 26, we show that our return on equity was 38.8%, which is the highest over the trailing 12 months compared to our peers. And on slide 27, we show that compared to our peers, we have one of the highest consolidated EBIT returns on investment at 33.7%. While our ROE was helped by our leverage, our EBIT return on investment is a true measure of pure home building operating performance without regard to leverage and was the highest among our midsize peers. Over the last several years, we have consistently had one of the highest EBIT ROIs among our peers. Eventually, investors will recognize our consistent superior returns on capital and significantly improved balance sheet. Given our rapidly growing book value, we think it would be appropriate to consider a variety of metrics, including EBIT return on investment, enterprise value to EBITDA, and our price to earnings multiple when establishing a fair value for our stock. We believe when all our fundamental financial metrics are considered, our stock is still a compelling value. On slide 28, we show our price to book multiple compared to our peers. We do compare more favorably on this metric based on the midpoint of our guidance. We expect to end October with a book value of approximately $109 per share. On slide 29, we show the trailing 12 months price to earnings ratio for us and our peer group based on our price earnings multiple of 6.48 times at yesterday's stock price of $207.60. We are trading at a 36% discount to the homebuilding industry average PE ratio. We recognize that our stock may trade at a discounted degree because of our higher leverage, but our leverage has been shrinking rapidly. On slide 30, we show that despite our extremely high ROE, there are still four peers that have a higher price-to-book ratio than us. This slide more visually demonstrates how much we are undervalued relative to the other homebuilders when looking at the relationship between ROE and price-to-book. A very similar result exists when looking at ROE to price to earnings. These last few slides further emphasize our point that given our 38.8% return on equity, our top quartile EBIT return on investment, combined with our rapidly improving balance sheet, we believe our stock continues to be the most undervalued in the entire universe of public home builders. I will now turn it back to Eric for some closing remarks.

Thanks, Brad. I want to spend a few minutes talking about our joint ventures during this call. We consider joint ventures to be a core part of our operations. Income from our unconsolidated joint ventures has been an important part of our operations for a long time. On slide 31, we show income from unconsolidated joint ventures for the past six fiscal years. You can see on the far right-hand portion of the slide that income from joint ventures was already $37 million for the first nine months of fiscal 24, and the midpoint of the guidance we gave is for it to reach $60 million for the full year. Based on the current level of joint venture activity, we believe that our income from joint ventures should continue to be a meaningful portion of our earnings for the next several years. Keep in mind, these bars do not reflect the $19 million gain from consolidation during fiscal 23 or the $46 million gain from consolidation in the third quarter of 24. These gains from consolidation could occur in the future joint ventures as they've been performing very well. Turning to slide 32, we get some reasons we engage in joint ventures. First and foremost, we're extremely focused on a high return on investment. One of the key methods to achieve this high return on investment is our land light strategy. Land light has always been part of our strategy, but we've increased the focus over the last five years. An alternate tool to achieve a high return on investment is the use of joint ventures. They allow us to build larger communities with less capital typically 20% to 25% of the peak capital, particularly for larger, longer-life communities. If these joint ventures hit certain hurdle rates, we can receive a disproportionate share of the upside performance. This improves both IRR and the net profit dollars we receive. By limiting our capital to 20 to 25%, we can invest in multiple communities with the same amount of capital, diversifying risk and leveraging our fixed costs. We don't always achieve our IRR targets for our communities. When done in a joint venture, our joint venture partners typically share in the downside risk. Having said that, as you can see from our results, our joint ventures have been performing very well for our company and for our partners. We're also paid a management fee for our joint ventures, which helps offset some of our overhead costs. We believe these benefits to utilizing joint ventures makes a lot of sense from several perspectives and will continue to seek joint venture partners to work with for future communities. On slide 33, we show some metrics for a recent community that we're considering contributing to a joint venture. As a wholly owned transaction, the peak capital on this community would be $74 million. The IRR would be 31% and the community life profit would be $82 million. As you can see, based on this underwriting, it's a very solid community and it would make sense to go forward with this transaction on a wholly owned basis. However, If we were to joint venture this community instead, our peak capital would only be $14 million. The IRR would improve to 47%, and we'd still get a community life profit of $33 million. The decrease in profit at first blush seems discouraging. If we add four other communities like this one, our peak capital for the entire joint venture for all five communities would be only $70 million, less than one wholly owned community in the example. Our community life profit for the joint venture would be $165 million, more than double that of just one wholly owned community. In addition, we get the benefit of diversifying our risk. I could make an academic argument that we should joint venture all of our communities. Now, frankly, that wouldn't be feasible, but the point I'm trying to get across is that the returns from these joint ventures are very compelling. Joint ventures will continue to be part of our overall strategy and deliveries for years to come. The majority of our joint ventures are domestic here in the United States, like all of our operations. However, yesterday we signed a memorandum of understanding with the Ministry of Housing in Saudi Arabia. This will expand our activities in Saudi and expand our partnership, increasing housing for a growing population of young middle-class families. Overall, given our recent community count growth, and continuing growth in our lot count, we find ourselves on the precipice of substantial growth, which will allow us to continue to deliver top-tier industry returns to our shareholders. That concludes our formal comments, and I'm happy to turn it over for Q&A now.

The company will now answer questions. So that everyone has an opportunity to ask questions, participants will be limited to three questions and a follow-up. after which they will have to get back into the queue to ask another question. We will open the call to questions. If you'd like to ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again.

Please stand by while we compile the Q&A roster. Our first question will come from the line of Alan Ratner

with Zelman and associates.

Hey guys, good morning. Um, nice quarter and thanks for all the details so far. Um, you know, my first question, uh, maybe this is more for Brad. I'd love to just get a little more, uh, color or insight on the JV consolidation since it was such a big driver of the upside in the quarter. And also sounds like it might be something that, uh, you know, at least repeats on a, um, inconsistent basis going forward. I just want to make sure I understand kind of the moving pieces here. So, you know, you booked a big game this quarter and going forward, I guess the sale of homes will be flowing through your revenue and COGS line and gross margin. The offset, I guess, when I look at your annual JV income running around $60 million pre-tax, does that mean that that number should come down as like you're not booking the gains from that project going forward and now that's shifting into your wholly owned businesses?

Not exactly. I mean, you're thinking of it correctly, but the reality is we have other new JVs that have also started, which will provide JV income going forward. So with respect to that specific joint venture, the income that we had recorded over the last year or so for our returns, well, that will go away and now come through wholly owned just like you described. And the one thing to add to that is it comes through at a higher land value because we had to record the step-up on consolidation. So that gain basically adds to the book value that we put on our books. And so as we're recognizing those deliveries, they have a higher cost, higher land cost than they did when they were in the joint venture. So just keep that in mind. As I commented, though, when you record the fair value, we do it calculating IRR that's still – in the 20% range. So it still would provide good profits for us, just not as high as what was being generated in the JV itself. But with that said, because of other JVs that are coming online, as Errol was kind of commenting, we expect JV income to continue in the future like what you've been seeing. The other comment I'll make is the reason you may see this gain phenomena happen going forward is some of our joint ventures we structure as portfolios. prep structures so that the partner gets paid out first. And when that happens and the partner then hits their IRR hurdle and gets paid out, that's when this occurs and it becomes a wholly owned community. In the case where it's a peri passu JV and the distributions occur over time to both parties and both parties are in the venture until the end and continue to get paid out, you won't see this occur. So more recently, more of our JVs have been done as preferred structures. So that's why you're seeing this last year and this year. And I think you might see it going forward from some of the joint ventures we have in place. But we still do some JVs as peri-passu. And in those cases, you wouldn't see this happen. So I just want to give that extra clarification.

Got it. And I appreciate all that added color. And just one more on this topic. So you mentioned the step up in land cost, obviously, or land basis, obviously. Just relative to the rest of your business, I mean, is this going to be dilutive to your margins going forward? Obviously, it's only one project, or is it kind of written up to a similar margin?

It would be a relatively similar margin to what our other projects are because we used a similar underwriting IRR that we do for our existing projects. It's just that community was actually performing at much higher margins in the JV itself. So now it'll be performing at what we're doing kind of wholly with all our other communities.

Gotcha. Okay. That's helpful. Thank you for the extra time there. Second question, you know, the gross margin range you tightened, but it still implies a pretty wide range for fourth quarter. And I know you mentioned the uncertainty around spec, you know, with that being two-thirds of your business today. I guess just from a high level, you know, your margins dipped a little bit sequentially. You know, you're off of the recent highs. Where do you see the margin profile of the business, you know, vis-a-vis the third quarter result you just reported with all the moving pieces you've got going on? You know, incentives seem pretty steady but elevated. I would imagine land costs are going up. You still have some pricing power in about a third of your communities. Is this 22% margin kind of like a decent run rate going forward or are there, you know, mixed considerations or cost considerations that we should think about into the fourth quarter and into 25 that could directionally move that one way or the other?

Speaking specifically about the fourth quarter, I think you're pretty much right on that 22%-ish range is where I would think we would be, but that's given the caveats we've talked about, which is similar mortgage rate buy-down costs, et cetera. From a construction cost perspective, I think we've been holding pretty stable. In fact, we've had some decreases in areas, including some benefits from lumber. which has helped. Our land costs, as you pointed out, should, as we open new communities and get deliveries from those new communities, will probably increase because of our newer deals. So that could put some pressure on margins in 2025. On the other hand, if mortgage rates go down, as I think people might anticipate when the Fed makes their moves, then the cost of buy-downs and perhaps the amount of incentives we have to give will change as well to potentially offset that. So we're not really giving 25 guidance, but I can answer your 25.

fourth quarter 24 question by saying that that we feel that the 22 range you're talking about is pretty reasonable perfect and then if i could just squeak in one more here um you know ara the the comments on roe are you know very much appreciated and understood you guys are you know the highest in the industry i think one of the things that you know admittedly we struggle with a little bit and i think it's probably investors do as well given where your valuation is is Just the fact that your elevated ROE today obviously is somewhat driven by the book value having been depressed over the last few years. And it has compressed. A year ago, you were at 50%. Two years ago, 80%. So I'm not asking you to forecast ROE, but I guess when you think about the business over the next two, three years, you know, the long run in industry average has been somewhere around 15%. And we've had several builders say they think, you know, they're targeting more of a 20% ROE going forward on a sustainable basis. Is there a way to think about your business over the next three to five years from an ROE standpoint, once the book value has accreted and once you're kind of at a normalized run rate of activity, the way you're thinking about the ROE of the business?

Sure. Well, thanks for the question, Alan. I think it's important to also talk about EBIT ROI, because that has nothing to do with our equity or our leverage. It is pure home building performance. And I'm proud to say we're the second highest performer on pure EBIT ROI. We outperform almost everybody, and we definitely outperform every single one of our midsize peers. So I'd say we're proud. It's not a one-time thing, by the way. We've been doing that for several years now. So I'd say whatever you feel will be the ROE of our peers, once we get to a comparable debt-to-cap leverage, Given our outperformance on EBIT ROI, I'd say we should end up higher than everyone else on an ROE on a long-term basis. That's assuming we continue our performance as we've been outperforming over the last few years. I appreciate it. Thank you for the thoughts.

Okay.

Thanks, Alan.

Our next question will come from the line of Jordan Heimowitz. with Philadelphia Financial Management of San Francisco.

Thanks, guys. Couple questions. Moody's in their recent note said they would look to upgrade you if debt to capital got below 50%. Your own projection is 42% by the end of this year. And unless something goes crazy, it'll be in the 30s by next year. So I guess my question is, when does the next discussion with them When does that play a role? Do you think the only negative is they upgraded you somewhat recently, but the debt paydown has been so dramatic that could it happen again soon?

Yeah, just to be clear, Jordan, that comment they made is a gross debt-to-cap basis, and the 42% is a net debt-to-net cap, so it takes the cash into play. Okay. We'll be getting close to the 50%, to your point, by year end, but I just don't want you to be confused by the 42%. And so I would be hopeful that certainly during next fiscal year, we're having another conversation about another upgrade.

What's the gross number, sorry, on the top here?

We're looking. We didn't prepare it ahead of time. So if we grab it in time, we'll add it. I'll make the comment.

Fine. To the extent that that occurs, you know, you put out a bunch of debt that originally was hoping to be in the H but ends up being in the 10 to 11. Is there a possibility next year you could call some of that and refinance at a lower level or are there lockouts at that point?

I would say cost prohibitive. It's possible, but cost prohibitive next year. next year likely, unless rates were dramatically lower, that we could save more on the delta in interest. But it's certainly something we're going to be paying attention to, Jordan, because we think we're getting really close to being able to, if not able to do it right now, transition from secured to unsecured, which is something we want to do when we do more global refinancing in the near future. And so certainly we'll be paying attention to the cost to rate tradeoff over the coming year, year and a half, I'll say. I did get the calculation on the gross debt to cap projection for year-end at around 56%. So we still won't be at 50%, but we'll be on our way.

Okay. And final question is, can you detail any income from the Saudi venture? When do you think that will start to be an impactful number or any guidance on that in any way?

I would say it's still a couple years away. I mean, I can have Eric comment as well. But right now, we're just starting two or three new communities. We don't have any that are delivering at the moment. So I would say before there's any real meaningful profit, it's probably late fiscal 25, early 26.

Jordan, I'll add a couple of comments to your first question. And that is that because we had higher leverage Our cost of debt is higher than most of our peers, but our performance has been improving so dramatically and our leverage is improving dramatically that once the high prepayment costs happen, I think we'll have a great opportunity to refinance in the future at substantially lower rates that should save us quite a bit of interest. compared to what we've been paying. Our ROE has been outstanding even with the high interest, but I think it'll get even better as we have an interest more similar to our peers. On top of that, the reason we have a big difference between gross debt to cap and net debt to cap is we don't have a large, unsecured, revolving line of credit like our peers. I suspect that in the near future we'll be able to achieve that once we refinance the bond, that will also save substantial dollars because right now we're operating with a big cash cushion that we're paying interest on. That will go away as we transition to regular financing more like our peers and should substantially enhance our performance.

But that's probably a second-half, 25 issue, it sounds like.

Yeah, early 26, something like that, yeah.

Okay.

Thank you, guys.

Thank you. Thank you.

Our next question will come from the line of Alex Barron with Housing Research Center.

Yeah, thanks, gentlemen. I wanted to ask about the phantom share impact. Is that something that has some termination date or it's just ongoing quarter to quarter?

There's been additional grants. There's another grant in December of this fiscal year with phantom shares. So there'll be some impact going forward and obviously each quarter we're providing that in the appendix just so you can see what the impact is. This quarter was the 2.2 million. We're just trying to highlight that for everybody. It can be very little if the stock price doesn't change. The good news is in this particular quarter, that means the stock price went up significantly, and that's why it was a $2.2 million impact. But it's something that we will have going forward.

And I'll add, as Brad mentioned, the quarter-by-quarter impact is in the appendix. It's there and will continue, but it's just not a substantial number yet.

The other quick comment to make, Alex, is we've looked at that, the impact from an earnings perspective under scenarios with stock price increasing even pretty dramatically, and it's still actually better for the shareholders because the dilution that would have occurred had you done shares would actually be more impactful than the earnings hit. So it's something we've paid attention to when we've given some fancy shares.

Okay, got it. And then it looked to me like the debt balance came down a little bit this quarter. Did you guys pay down some debt?

Yes. We talked about it in our second quarter call, but the debt exchange that we did actually happened in May, so it was a third quarter event. So that's what you're seeing is the change in the debt. We did a debt restructuring back in May.

Oh, okay. Got it. And then as it pertains to the deferred tax asset on your balance sheet, that's been obviously coming down as you're using it. Do you guys have an anticipated number of years it will take before that goes away? Is it a couple years or three years or faster than that?

I mean, the way to think about that is I think we said it's, what, $900 million of free tax earnings that's protected by the deferred tax asset at this point. And so if we're, you know, this year we're projecting 300-ish million of pre-tax. So at that run rate, if we stay at that run rate, it's three years. We would hope, given the growth we're anticipating and we've been talking about our growth and community count, our profit will go up. So maybe it's a little less than three years, something in the two to two and a half year time frame.

Okay. And, you know, given how cheap your stock is on a PE basis, have you guys considered buying back stocks? Or is there something that restricts doing that?

We did buy back shares in the quarter. We talked about it briefly. We spent $11 million at an average price of $139 during the quarter, and we still have some availability under the board approval for buy back. So when we think it's opportune to do it, we'll certainly look at it.

Okay, guys. Best of luck. Thank you.

All right. I'll add one other comment on the tax benefit. While the deferred tax asset will be decreasing because we're earning so much, we are active in the energy tax benefits from the energy efficient homes we build. And that is something I think we're increasingly focused on. So we will have some advantages going forward, even after the NOI deferred tax benefit goes away.

As a reminder, if you'd like to ask a question at this time, please press star 1 1 on your touchtone telephone.

I'm showing no further questions in queue at this time.

I'd like to turn the call back to Ara Hovnanian for closing remarks.

Thank you very much. We enjoyed the questions. We're excited about the future and we look forward to reporting a fabulous fourth quarter as well. Thank you.

This concludes our conference call for today. Thank you all for participating and have a nice day. All parties may now disconnect.