This summary is based on the fourth quarter fiscal 2008 earnings call conducted by Hovnanian Enterprises Inc. (HOV) on December 17, 2008.
Management:
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President, Chief Executive Officer & Director: Ara K. Hovnanian
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Chief Financial Officer, Executive Vice President & Director: J. Larry Sorsby
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Senior Vice President & Chief Accounting Officer: Paul W. Buchanan
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Vice President and Corporate Controller: Brad O’Connor
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Vice President of Finance: David Valiaveedan
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Director of Investor Relations: Jeffrey T. O’Keefe
Key Investors Issues
- Revenues were $721.4 million, a decrease of 48% from $1.39 billion in 2007.
- The firm realized a loss of $450.5 million, or $5.79 a share, compared with a net loss of $469.3 million, or $7.42 a share, in 2007.
Full Year Highlights:
- Total revenues were $3.3 billion, down 31% from $4.8 billion in the previous year.
- The net loss available to common stockholders was $1.1 billion, or $16.04 a share, compared to a $637.8 million net loss, or $10.11 a share in 2007.
Fourth Quarter Highlights
Total revenues were $721.4 million, a decrease of 48% from $1.39 billion in the prior year as deliveries, excluding unconsolidated joint ventures, were 2,294 homes, a decrease of 42% from 3,969 home deliveries in the fiscal 2007 fourth quarter.
- The number of net contracts, excluding unconsolidated joint ventures, declined 56% to 1,225 homes compared with last year’s fourth quarter.
- Pre-tax land-related charges and intangible impairments were $319.9 million, including land impairments of $215.6 million, write-offs of predevelopment costs and land deposits of $47.5 million.
- The after tax loss available to common stockholders was $450.5 million, or $5.79 per common share, compared with a net loss of $469.3 million, or $7.42 per common share, in 2007.
Contract backlog was 1,907 homes with a sales value of $646.2 million, a decrease of 68% compared to the prior year.
- There were 284 active selling communities, excluding unconsolidated joint ventures, a decline of 147 active communities, or 34%, from 2007.
- The total land position decreased by 24,881 lots compared to October 31, 2007, reflecting decreases of 5,241 owned lots and 19,640 optioned lots.
- Lots controlled under option contracts totaled 16,464 and owned lots totaled 23,439.
Operational Highlights:
- Given the fact that more than half of the lots that the firm owns are largely finished and net contracts for 2008 were down 41% year-over-year, it did not feel the necessity to spend a significant amount of cash on land development this year.
- It will save that land until such time as the market improves and it can generate higher returns and more meaningful cash flow.
- The firm has mothballed land in 54 communities, whose book value was $550 million net of an impairment balance of $290 million.
For the option land, the firm continues to actively renegotiate, extend and modify land option take downs as well as walk away from others.
- The goal is to team up with joint venture partners to take advantage of the land prices that will inevitably become more attractive both directly and through the purchase of loans.
- It continues to have discussions with potential JV partners to establish ventures that would take advantage of land at the bottom of the market.
- As the community count, net contracts and backlog continue to shrink, Hovnanian will continue to right size its business based on the current activity that is is generating in each of the markets.
The slow homes sales pace and lower home pricing trends dramatically decreased revenues and adversely impacted gross margins.
- Home building cost of sales was reduced by $41.7 million from the reversal of land impairments taken in prior periods.
- Gross margin of 4.7% was lower due to the continued focus on cash flow than on margins as it was aggressive on lowering home prices in order to spur sales activity.
- Margins were also impacted by when the firm walked away from lots in a community or adjust land development budgets where it needed to spread the common costs over a fewer number of homes overall.
- The firm had invested $71.1 million in seven land development and 10 home building joint ventures.
Hovnanian walked away from 6,233 lots in the fourth quarter and took a write off of $47.5 million related to these option lots.
- Remaining investment and option deposits has also dropped dramatically from a peak of $466 million at the end of the second quarter fiscal 2006 to $69.9 million at October 31, 2008.
- A total of $41.2 million of cash deposits and the other at $28.7 million deposits being held with letters of credit and additionally the firm has another $91.8 million invested in predevelopment expenses.
- With average FICO scores at 723, the firm’s average credit quality of mortgage customers remains higher than national averages.
