This summary is based on the third quarter fiscal 2008 earnings call conducted by Hovnanian Enterprises Inc. (HOV) on September 4, 2008.
Management:
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President and CEO: Ara Hovnanian
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Executive VP and CFO: Larry Sorsby
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Senior VP and CAO: Paul Buchanan
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VP and Corporate Controller: Brad O’Connor
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Director of Investor Relations: Jeff O’Keefe
Key Investors Issues
- Revenues were $716.5 million, down 34.9% from $1.1 billion in 2007.
- The loss available to common stockholders was $202.5 million, or $2.67 per common share, compared with a net loss of $80.5 million, or $1.27 per common share in 2007.
Year to Date Highlights:
- Total revenues were $2.6 billion, down 23.5% from $3.4 billion in 2007.
- The net loss was $674.1 million, or $9.98 per common share, compared to a $168.5 million net loss, or $2.67 per common share, in the same period a year ago.
Third Quarter Highlights
Revenues were $716.5 million, down 34.9% from $1.1 billion in the prior year as deliveries, excluding unconsolidated joint ventures, were 2,185 homes , down 31%.
- The number of net contracts, excluding unconsolidated joint ventures, declined 38% to 1,584 homes compared with last year’s third quarter.
- The cancellation rate, excluding unconsolidated joint ventures, was 32%, compared with the rate of 35% in last year’s third quarter.
- The loss available to common stockholders was $202.5 million, or $2.67 per common share, compared with a net loss of $80.5 million, or $1.27 per common share, in the third quarter of fiscal 2007.
Cash flow was positive $192.2 million, with $94.7 million from a previously anticipated federal tax refund received in July 2008.
- Homebuilding cash was $677.2 million and the balance on the revolving credit facility was zero.
- The total land position decreased by 5,773 lots compared to April 30, 2008, reflecting owned and optioned position decreases of 1,700 lots and 4,073 lots, respectively.
- Lots controlled under option contracts totaled 23,118 and owned lots totaled 23,564.
- Started unsold homes and models declined 48%, from 3,242 at July 31, 2007 to 1,677 at July 31, 2008.
Macroeconomic Insights:
- The challenging market conditions continue and there is not yet any evidence of the overall housing market bottoming out.
- However, there are a few early signs of a market rebound in some individual markets that might end up proving to be the start of an improving trend.
- The seasonally adjusted annual return of national housing starts has been running at or above a million housing starts per year for the last eight months.
- Despite lowering sales price in many cases, absorption levels for the quarter are still very low.
Low absorption levels make it very challenging to staff communities efficiently.
- In the regional and divisional offices, the firm has reduced staffing levels and the firm will continue to right size staffing levels to match the current business activities in each of the markets.
- The slow sales pace and lower pricing have dramatically decreased revenues and adversely impacted gross margins.
- The Maryland side of the DC market still has persistently high inventory with 9.4 months supply, so it’s not all good news out there just yet.
- The firm is keeping an eye on indicators like the MLS listings in these markets and it could provide a single that the markets are finally starting to get back to more normal stabilized conditions in terms of the balance of supply and demand.
Moving on to Arizona and the Midwest, which have also been through some difficult times, these markets are operating at slightly better levels than California and Florida.
- The northeast is still holding up better than most markets, but they too have felt their share of pain in this downturn.
- Given the continuation of these difficult market conditions, focus remains intense and cash generation is the number one priority.
- The firm delivered about 2,200 homes, sold only about 40 lots; and offsetting these reductions, and took down about 400 lots on existing options.
- The firm had a little over 1,300 started unsold homes, down 51% from the end of last year’s third quarter.
The firm walked away from 3,733 lots and took a write-off of $30.8 million related to these option lots.
- In the most challenging markets, it has significantly reduced exposure to land options, with 78% of a remaining lot options in the better performing markets of Texas, Washington DC, Northeast, and the Carolinas.
- Remaining investment in option deposits has also dropped dramatically from a peak of $466 million at the end of the second quarter of fiscal 2006 to $96.4 million.
- The $96.4 million consists of $64.1 million of cash deposits and the other $32.2 million of deposits being letters of credit.
- Investment in land and land development declined 20% year-to-date and totaled $1.29 billion on a consolidated basis.
Update on the Mortgage Market:
