HOV - NYSE

Thanks, Brad. We’re encouraged by our sales pace in January and the first few weeks of February. There are two main factors that cause us to be optimistic about the spring selling season. First, there’s a downward trend in mortgage rates. Second, the tightness of existing homes for sale. Third, there are very favorable signs from the employment market. Fourth, there are strong demographic trends, including the millennials, and finally, the overall growth in the broader economy. These same factors should continue to drive demand for new homes over the longer term. After reducing debt for several years and refinancing much of our remaining debt last fall. We’re in a position where we are now more focused on growing our revenues and achieving higher levels of profitability. Rest assured that while we’re more focused on growth than the past, we’re still extremely committed to reducing our leverage and are targeting about mid-30% net debt-to-cap ratio. That concludes our formal comments, and we’ll open it up now for Q&A.

[Operator Instructions]. Our first question comes from the line of Alan Ratner with

That’s helpful. And then just on the pivoting to cycle times, what exactly are the bottlenecks preventing you from getting those 40 days back to get you back to the four months from the 160 where you are now?

I think it’s early on during the COVID craziness, it was more of a challenge of material and labor. Today, the material shortages have really dwindled and it’s really more about labor. I mean, the housing market has been strong, apartment construction was strong. There was a lot of demand on labor. Luckily, while new home construction for sale has been strong, apartment construction seems to be waning a bit. I think there’ll be a little less pressure on the labor side. Hopefully, that will allow us to get back to more normal cycle times.

That’s helpful. If I could squeak in one more, somewhat similar, just on the land development side. I know you’re trying to ramp community count and could you talk a little bit about the horizontal development timelines and maybe some constraints there? Cost inflation has that kind of leveled off, or is that still accelerating? Whereas on the material side, on the vertical construction, it’s leveled off. Anything on the horizontal development would be helpful.

Yes. But first of all, land development has continued to be a little behind schedule for the whole industry. The same sort of thing regarding the general demand. But on top of that, the one particular problem has been transformers for the entire industry. And that has been delaying community openings for outside developers and for ourselves for internal developers. Costs have not really been a material problem. It’s just been timing delays, and it’s very often related to transformers. I will add, I guess on the west-coast in California, they’ve had a particularly large amount of rain too. So that’s been a bit of an effect.

Okay. And do you think your reliance on third party developers, given you’re optioning a relatively high share of your lofts, has had an impact on maybe your visibility into the community count ramp here, and any impact on from those developers from the regional banking crisis about a year ago? Or has that kind of settled itself out?

Well, I’d love to blame it on our outside developers, but I mean, we can be late as well. There’s just been a challenge on for everyone on, land development, again, the transformer issue that I mentioned. So that’s part of what makes it difficult to project community count. The other thing is we have been selling out a little faster, depending on how fast a particular community sells out that would be deleted from community counts. So that’s what makes it hard to measure. Suffice it to say though, that we’re quite optimistic that we’ll continue increasing the set -- the community opening pace, hopefully even more than we’ve seen over the last couple of quarters. But for all the reasons I just mentioned, it’s always hard to project accurately.

Our next question comes from the line of Alex Barron with Housing Research Center. Your line is open.

Great, great. And so, going forward, is there a plan to continue reducing debt? Or are you switching gears and not doing that going forward?

What we try to make clear is, while our primary focus in the past was bringing down debt, we brought it down enough that we feel we can focus on both significant growth and still reducing debt. Our fanatical focus on inventory turn, which is driven by our option loss and really focusing on the timing between taking down a lot and construction certainly helps that going forward. The other thing that obviously helps us quite a bit is our NOL, because we’re not having to pay taxes even though we booked the taxes. We feel confident that we can grow significantly and still continue to reduce debt to reach our target of around the mid-30% range.

Just to add to that, when we did the refinancing in the fourth quarter, we intentionally left if you look at the maturity ladder slide that we provided, we intentionally left tranches of relatively small amounts of debt that’s coming due in ‘26, ‘27 and ‘28 that’s there for us to continue to pay down.

Okay. Yes, that was going to be my next question. If you did continue to pay down, is there a specific order that you’d have to go down?

We would likely look at it in order of where we don’t have to make significant prepayment penalties, but you have to balance that with whatever the rates are in the individual notes. We don’t have an order that we need to take out the near-term maturity. We can do it in whatever order we want, but it has to do with what it would cost us to take out each piece and when.

Okay. The good news is your leverage is coming down pretty quickly. I think by the end of the year, you should be pretty similar to most other builders. That’s very, very good progress.

My guess is we’re making there for sure.

Yes, most definitely. Now in terms of your margin outlook, as it pertains to incentives, I think you guys noted, you’ve seen improvements in sales so far in January and February. Are you guys more likely to pursue higher sales pace and maintain the incentives the same? Or are you guys more likely to accept the lower sales pace but try to reduce the incentives?

I would say pace is very important to us, but we look at every community, community-by-community and while trying to maintain the pace in that community, we will tweak pricing or reduce concessions, small amounts to continue to improve our margin without shutting off the sales pace. So, it’s a balancing act, but pace is definitely important to us.

Okay. And if I could ask one last one, as far as the phantom stock expense going forward, that’s basically, impacted by the movement in your stock price relative to each previous quarter?

That’s exactly right. So, when we -- each quarter end we adjust the phantom stock expense based on the stock price on the last day of the quarter. And so, the guidance, as we’ve said, the guidance are given for the second quarter assumes that the stock price stays the same as it was on January 31st at the 168, I think it was. So, if it moves up or down from there, we either can get a benefit or additional expense associated with that stock price movement. That’s right.

And is that somewhat indefinite or when would those pluses and minuses sort of change go away?

[Operator Instructions]. I’m showing no further questions in the queue. I would now like to turn the call back over to Ara for closing remarks.

Great, thank you very much. As we said, we’ve been pleased with the results and the market overall just feels like it’s continuing to strengthen. So, we’re looking forward to a very good ‘24 and look forward to reporting more good news next quarter. Thank you.