HOVNANIAN ENTERPRISES INC Q3 FY2024 earnings call

• Community count: Ended the quarter with 146 open for sale communities, a 20% increase from the previous year. Opened 22 new wholly owned communities, transitioned 6 communities from joint venture to wholly owned, and had various joint venture community activities.
• Joint ventures: Recorded a $46 million gain in the third quarter of 2024 from consolidating an unconsolidated joint venture, and had a $19 million gain in the third quarter of 2023 from consolidating another joint venture. Future consolidations of joint ventures could result in similar gains.
• Interest rates: Mortgage rates have recently declined, which should increase the number of potential homebuyers.
• Contracts: Sales were choppy in the third quarter due to factors like economic, mortgage rate, and geopolitical uncertainty, but improved in the last five weeks. Trailing 12-month contracts per community was fourth highest among peers.
• QMI: Had 8 QMIs per community at the end of the third quarter, and QMI sales were about 67% of total sales.

Revenues for the third quarter were $723 million, which was at the midpoint of guidance. Adjusted gross margin was 22.1%, within guidance. SG&A ratio was 12.4%, slightly above the high end of guidance (excluding $2.2 million phantom stock expense, SG&A would have been 12.1% which was slightly above the top end of guidance). Total revenues increased 11% year-over-year due to higher deliveries, a higher average sales price, and a land sale in Phoenix. Adjusted EBITDA was $131 million, significantly above the high end of guidance. Year-to-date contracts increased 8%, but were choppy by quarter (up 43% in Q1, 9% in Q2, and down 13% in Q3), though improved in the last five weeks with a 23% increase over the same period a year ago. Contracts per community in the third quarter decreased year-over-year to 9.5, but the trailing 12-month contracts per community was 42, the fourth highest among public homebuilders reporting at that time.

For the full year of 2024, total revenues are expected to be between $2.9 billion and $3.05 billion. Adjusted gross margin is expected to be in the range of 21.5% to 22.5%. SG&A as a percent of total revenue is expected to be between 11% and 12%. Income from joint ventures is expected to be between $55 million and $65 million. Adjusted EBITDA is expected to be in the range of $420 million to $445 million. Adjusted pre-tax income is expected to be between $300 million and $325 million. Diluted earnings per share is expected to be in the range of $29 to $31. Common book value per share is anticipated to increase to approximately $109 per share by October 31, 2024.

• Economic, mortgage rate, and geopolitical uncertainty contributed to choppiness in sales during the third quarter.
• Delays in opening new communities due to utility hookups throughout the country.
• Uncertainty regarding future consolidations of joint ventures and their impact on earnings and financial metrics.

Q: Alan Ratner asked about JV consolidation and its impact on earnings.

A: Brad O’Connor explained that gains from consolidating joint ventures occur when partners receive final cash distributions. The step up in land cost on consolidated joint ventures means deliveries from those communities will have a higher land cost, but other new joint ventures will provide future JV income.

Q: Jordan Hymowitz asked about debt to capital and the Saudi venture.

A: Ara Hovnanian discussed debt to cap projections, noting net debt to net cap is expected to be 42% by year end and aiming for the 30s in the next year. Gross debt to cap is projected to be around 56% by year end. The Saudi venture is still a couple of years away from having meaningful impact, with deliveries likely starting in late fiscal 2025 or early 2026.

Q: Alex Barron asked about phantom share impact, debt pay down, deferred tax asset, and stock buyback.

A: Ara Hovnanian said there are ongoing phantom share grants with future impact, and the company spent $11 million on stock buybacks in the quarter. Brad O’Connor mentioned the deferred tax asset will decrease as earnings increase, and the company is focused on energy tax benefits from energy efficient homes.