Hovnanian Enterprises, Inc.

Good morning and thank you for joining us today for Avnanian Enterprise's CISC 2025 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 be making 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 for 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, Michelle, 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 in or suggested by such forward-looking statements are reasonable, we can give no assurance that such plans, intentions, or expectations will be achieved. By their nature, forward-looking statements speak only as of the date they are made, are not guarantees of future performance or results, and are subject to risks, uncertainties, and assumptions that are difficult to predict or quantify. Therefore, actual results could differ materially and adversely from those forward-looking statements as a result of a variety of factors. Such risks, uncertainties, and other factors are described in detail in the sections entitled Risk Factors in Management's Discussion and Analysis, particularly the portion of MD&A entitled Safe Harbor Statement and our annual report on Form 10-K for the fiscal year ended October 31, 2024, and subsequent filings with the Securities and Exchange Commission. otherwise required by applicable security laws, we undertake no obligation to public update or revise any forward-looking statements or whether, or revise any forward-looking statements, whether as a result of new information, future events, or changes to circumstances, or any other reason. Joining me today on the call are Ara Hovnanian, Chairman and President and CEO, Brad O'Connor, Chief Financial Officer, David Meiterson, Vice President, Corporate Controller, and Paul Eberle, Vice President, Finance and Treasurer. Ara, you can go ahead.

Thanks, Jeff. I'm going to review our third quarter results and I'll also comment on the current housing environment. Brad will follow me with more details as usual and of course we'll open it up to Q&A afterwards. Let me begin on slide five. Here we show our third quarter guidance compared to our actual results. Given all of the political and economic uncertainty that was present throughout the quarter, we're pleased that we met or exceeded the guidance we provided for all of the metrics. Starting at the top of the slide, revenues were $801 million, which was right at the midpoint of our guidance. Our adjusted gross margin was 17.3% for the quarter, which was just below the midpoint of the guidance range. Our SG&A ratio was 11.3%, which was better than the midpoint of our guidance. Our income from unconsolidated joint ventures was $16 million, which was within the guidance range, although on the lower end. Adjusted EBITDA was $77 million for the quarter, which was above the high end of the guidance range. And finally, our adjusted pre-tax income was $40 million, which was at the very top of our guidance range. While this is adjusted pre-tax income, which excludes land charges, we did have higher walkaway costs and impairment charges during this year's third quarter. The majority of the impairments were in the west segment and were related to communities where we also walked away from land that didn't meet our return thresholds. Again, given the challenging operating environment, we're satisfied that we're able to meet or exceed the guidance we provided. On slide six, we show our third quarter results compared to last year's third quarter. Keep in mind that last year's third quarter was particularly strong. partly because it contained $46 million from a gain on consolidation of a joint venture. As Brad will discuss later, we anticipate yet another gain from consolidation of a joint venture in the fourth quarter. Given the current high level of incentives, it's no surprise that adjusted gross margin and adjusted pre-tax profit experience year over year declines. Starting in the upper left-hand portion of the slide, you can see that our total revenues increased 11% year-over-year due to an increase in deliveries. Moving across the top to adjusted gross margin, our gross margin was down year-over-year mainly due to increased incentives for affordability and also related to our focus on pace versus price and our short-term strategy of burning through low margin lots. During this year's third quarter, incentives were 11.6% of the average sales price. The majority of this cost is related to buying down mortgage rates. This is up 390 basis points from a year ago. It's up 110 basis points from the second quarter of 25, and it's up 860 basis points from fiscal year 22, which was prior to the mortgage rate spike impacting our deliveries. Other than the extraordinary cost to buy down mortgage rates to make our homes affordable today, our gross margin would be very healthy. Moving to the bottom left, you can see that our total SG&A improved 110 basis points year over year to 11.3%. In the bottom right-hand portion of the slide, you can see the negative impact the gross margin decline had on our year-over-year profitability. Again, while much lower than last year, it was at the top of our guidance range, which was consistent with our focus on burning through our older vintage lots and QMIs and emphasizing sales pace over price and clearing our balance sheet for our newer land contracts, which have much higher margins. If you turn to slide seven, you can see that contracts for the third quarter increased 1% year over year. Once again, there was considerable variability in monthly sales shown on slide eight. Contracts were down 4% in May, then bounced back with a 1% increase in June, and followed by a 7% increase in July. On slide nine, you can see that the most recent three months continued a trend of choppiness over the last year. If you turn to slide 10, you can see that contracts per community increased this year compared to last year's third quarter. Additionally, the 9.8 contracts per community in this year's third quarter was higher than our quarterly average of 9.1 for the third quarter since 2008, but we didn't get back to the 97 through 02 levels that we consider to be a normal sales environment. On slide 11, we give more granularity and show the trend of monthly contracts per community compared to the same month a year ago and to long-term monthly averages. Here you can see that for the first two months of the quarter, this year's sales pace was lower than last year. This trend flipped in the month of July when we sold 3.4 homes per community compared to 3.2 homes in July of 24. When you look at the most recent month compared to the monthly average since 2008, the last two months of the quarter were better than the long-term average. Turning to slide 12, we show contracts per community as if we had a June 30th quarter end. This way we can compare our results to our peers that report contracts per community on the calendar quarter end. At 9.6 contracts per community, our sales pace is the third highest among the public home builders. On slide 13, You can see that year-over-year contracts per community declined for all home builders shown on the slide that report this metric. While any decline is not desirable, we outperformed all but two of our peers. Again, this was as if our quarter ended in June so that we can compare our results to these other companies. Our July quarter was stronger with a 3% year-over-year increase in contracts per community, and the month of July was up 6% over the prior year in contracts per community. What we're trying to illustrate in these last two slides is that even though the recent sales pace is not what everyone had hoped for, our focus on pace over price has resulted in an above average number of contracts per community for us compared to our peers. On slide 14, you can see that for a considerable percentage of our deliveries, our home buyers continued to utilize mortgage rate buy downs. The percentage of home buyers using buy downs in this year's third quarter was 75%. The buy-down usage in our deliveries indicates that buyers continue to rely on these rate buy-downs to combat affordability at the current mortgage rates. Given the persistently high mortgage rate environment, we assume buy-downs will remain at similar levels going forward. In order to meet homebuyers' needs for lower mortgage rates and certainty, were intentionally operating at an elevated level of quick move-in homes, or QMIs as we call them, since QMIs with a delivery date in 60 to 90 days can have mortgage rates bought down and locked in a cost-efficient manner. On slide 15, we show that we had 8.2 QMIs per community at the end of the third quarter. This is the second consecutive quarter of sequential reductions in QMI per community. We are down from 9.3 in the first quarter of 25 to 8.6 in the second quarter of 25 to 8.2 in the third quarter. This gets us closer to our current target of about eight QMIs per community with varied delivery dates and model types. As a reminder, we define QMIs as any unsold home where we've begun framing. On slide 16, we show the decline in total QMIs from January 25 until July of 25. Here you can see that QMIs decreased from 1,163 in January to 1,073 in April and then to 1,016 in July. This is a 13% decrease from January to July. In the third quarter of 25, QMI sales were 79% of our total sales. This was equal to last quarter, which was the highest quarter since we started reporting this number 12 quarters ago. Historically, that percentage was 40%. about half. So obviously the demand for QMIs remains high, so we're comfortable with the current level of QMIs in this environment. We ended the third quarter with 323 finished QMIs on a per community basis. That puts us at 2.6 finished QMIs per community. The focus on quick move-in homes results in more contracts that are signed and delivered in the same quarter. That leads to lower levels of backlog at quarter ends, but a higher backlog conversion rate. During the third quarter of 25, 34% of our homes delivered in the quarter were contracted in the same quarter. This obviously makes it a little more challenging when providing guidance for the next quarter. It also resulted in a high backlog conversion ratio of 84%, which is significantly higher than the third quarter average backlog conversion ratio of 55%, going all the way back to 1998. We continue to manage our QMIs on a community level, and we're highly focused on matching our QMI starts pace with our QMI sales pace. If you move to slide 17, you can see that even with higher mortgage rates and a slower than anticipated sales pace nationally, we are still able to raise net prices in 21% of our communities during the third quarter. 71% of the communities with price increases were in Delaware, Maryland, New Jersey, South Carolina, Virginia, and West Virginia, which are among our better performing markets. While the sales environment has been difficult, we've been focusing on pace versus price, as we have been for many quarters now, but we're still raising prices and lowering incentives when our sales pace at certain communities warrants it. Economic uncertainty, high mortgage rates, affordability, and low consumer confidence have caused many consumers to delay purchasing a new home. To increase our sales pays and make our homes affordable, we continue to offer mortgage rate buy downs. Our gross margins, ignoring the mortgage rate incentives, continue to be strong. However, offering mortgage rate buy downs is very expensive and continues to negatively impact our gross margin at many locations. Our new land purchases show excellent margins at the current sales pace and price. and excellent IRRs even after the expense of buy-downs. I'll now turn it over to Brad O'Connor, our Chief Financial Officer.