HOV - NYSE

Thanks, Brad. I want to spend a few minutes talking about our joint ventures during this call. We consider joint ventures to be a core part of our operations. Income from our unconsolidated joint ventures has been an important part of our operations for a long time. On Slide 31, we show income from unconsolidated joint ventures for the past six fiscal years. You can see on the far right-hand portion of the slide, that income from joint ventures was already $37 million for the first nine months of fiscal ‘24, and the midpoint of the guidance we gave is for it to reach 60 million for the full year. Based on the current level of joint venture activity, we believe that our income from joint ventures should continue to be a meaningful portion of our earnings for the next several years. Keep in mind these bars do not reflect the $19 million gain from consolidation during fiscal ‘23 or the $46 million gain from consolidation in the third quarter of ‘24. These gains from consolidation could occur in the future joint ventures as they’ve been performing very well. Turning to Slide 32, we give some reasons we engage in joint ventures. First and foremost, we’re extremely focused on a high return on investment. One of the key methods to achieve this high return on investment is our land light strategy. Land light has always been part of our strategy, but we’ve increased the focus over the last five years. And an alternate tool to achieve a high return on investment is the use of joint ventures. They allow us to build larger communities with less capital, typically 20% to 25% of the peak capital, particularly for larger, longer life communities. If these joint ventures hit certain hurdle rates, we can receive a disproportionate share of the upside performance. This improves both IRR and the net profit dollars we receive. By limiting our capital to 20% to 25%, we can invest in multiple communities with the same amount of capital, diversifying risk, and leveraging our fixed costs. We don’t always achieve our IRR targets for our communities. When done in a joint venture, our joint venture partners typically share in the downside risk. Having said that, as you can see from our results, our joint ventures have been performing very well for our company and for our partners. We’re also paid a management fee for our joint ventures, which helps offset some of our overhead costs. We believe these benefits to utilizing joint ventures makes a lot of sense from several perspectives and will continue to seek joint venture partners to work with for future communities. On Slide 33, we show some metrics for a recent community that we’re considering contributing to a joint venture. As a wholly owned transaction, the peak capital on this community would be $74 million. the IRR would be 31%, and the community life profit would be $82 million. As you can see, based on this underwriting, it’s a very solid community and it would make sense to go forward with this transaction on a wholly-owned basis. However, if we were to joint venture this community instead, our peak capital would only be $14 million. The IRR would improve to 47% and we’d still get a community life profit of $33 million. The decrease in profit at first blush seems discouraging. However, if we add four other communities like this one, our peak capital for the entire joint venture for all five communities would be only $70 million less than one wholly-owned community in the example. Our community life profit for the joint venture would be $165 million more than double that of just one wholly owned community. In addition, we get the benefit of diversifying our risk. I could make an academic argument that we should joint venture all of our communities. Now frankly, that wouldn’t be feasible, but the point I’m trying to get across is that the returns from these joint ventures are very compelling. Joint ventures will continue to be part of our overall strategy and deliveries for years to come. The majority of our joint ventures are domestic here in the United States like all of our operations. However, yesterday we signed a memorandum of understanding with the Ministry of Housing in Saudi Arabia. This will expand our activities in Saudi and expand our partnership increasing housing for a growing population of young middle-class families. Overall, given our recent community count growth and continuing growth in our lot count, we find ourselves on the precipice of substantial growth, which will allow us to continue to deliver top tier industry returns to our shareholders. That concludes our formal comments and I’m happy to turn it over for Q&A now.

[Operator Instructions] Our first question will come from the line of Alan Ratner with

And then if I could just squeak in one more here. Ara, the comments on ROE are very much appreciated and understood. You guys are the highest in the industry. I think one of the things that admittedly we struggle with a little bit, and I think, it’s probably investors do as well given where your valuation is, is just the fact that your elevated ROE today obviously is somewhat driven by the book value having been depressed over the last few years and it has compressed a year ago, you were at 50%, 2 years ago, 80%. So, I’m not asking you to forecast ROE, but I guess when you think about the business over the next two, three years, the long run industry average has been somewhere around 15%. And we’ve had several builders say they think they’re targeting more of a 20% ROE going forward on a sustainable basis. Is there a way to think about your business over the next three to five years from an ROE standpoint? Once the book value has accreted, and once, you’re kind of at a normalized run rate of activity that the way you’re thinking about the ROE of the business?

Sure. Well, thanks for the question, Alan. I think it’s important to also talk about EBIT ROI because that has nothing to do with our equity or our leverage. It is pure homebuilding performance. And I’m proud to say, we’re the 2nd highest performer on pure EBIT ROI. We outperform almost everybody and we definitely outperform every single one of our midsize peers. So, I’d say we’re proud. It’s not a one-time thing by the way. We’ve been doing that for several years now. So, I’d say whatever you feel will be the ROE of our peers, once we get to a comparable debt to cap leverage, given our outperformance on EBIT ROI, I’d say we should end up higher than everyone else on an ROE on a long-term basis. That’s assuming we continue our performance as we’ve been outperforming over the last few years.

Our next question will come from the line of Jordan Hymowitz with Philadelphia Financial Management of San Francisco.

Thanks, guys. Couple of questions. Moody’s in their recent note said, they would look to upgrade you if debt to capital got below 50%. Your own projection is 42% by the end of this year, and unless something goes crazy, it’ll be in the 30s by next year. So, I guess my question is, when does the next discussion with them, when does that play a role? Do you think the only negative is they upgraded you somewhere recently, but the debt pay down has been so dramatic that could it happen again soon?

Yes. Just to be clear, Jordan, that comment they made is a gross debt to cap basis and the 42% is a net debt to net cap, so it takes the cash into play. So, we’ll be getting close to the 50% to your point, by year end, but I just don’t want you to be confused by the 42%. And so, I would be hopeful that certainly during next fiscal year, we’re having another conversation about another upgrade.

What’s the gross number? Sorry, I didn’t help you out.

We’re looking. We didn’t prepare it ahead of time. So, if we grab it in time, we’ll add it we’ll make the comment.

To the extent that occurs, you put out a bunch of debt that originally was hoping to be in the eight but ends up being in the 10 to 11. Is there a possibility next year you could call some of that and refinance at a lower level or they’re lock out to that point?

I would say cost prohibitive. It’s possible, but cost prohibitive next year likely and less rates were dramatically lower that we could save more on the delta and interest. But it’s certainly something we’re going to be paying attention to Jordan, because we think we’re getting really close to being able to, if not able to do it right now, transition from secured to unsecured, which is something we want to do when we do a more global refinancing in the near future. And so, it certainly we’ll be paying attention to the cost to rate trade off over the coming year-to-year and a half I’ll say. I did get the calculation on the gross debt to cap, projection for year end at around 56%. So, we still won’t be at 50, but we’ll be on our way.

And final question is, can you detail any income from the Saudi venture? When do you think that will start to be an impactful number or any guidance on that in any way?

But that’s probably a second half of ‘25 issue, it sounds like.

Yes. Or early ‘26, something like that.

Our next question will come from the line of Alex Barron with Housing Research Center.

I wanted to ask about the phantom share impact. Is that something that has some termination date, or it’s just ongoing quarter to quarter?

There’s been additional grants. There’s another grant in December of this fiscal year with phantom share. There’ll be some impact going forward. And obviously each quarter we’re providing that in the appendix, just so you can see what the impact is. This quarter was the $2.2 million. We’re just trying to highlight that for everybody, but it can be very little if the stock price doesn’t change. The good news is in this particular quarter, that means the stock price went up significantly and that’s why it was a $2.2 million impact, but it’s something that we will have going forward.

Okay. Got it. And then, it looks to me like the debt balance came down a little bit this quarter. Did you guys pay down some debt?

Yes. We did the we talked about it in the our Q2 call, but the debt exchange that we did actually happen in May. So, it was a Q3 event. So that’s what you’re seeing is the change in the debt. We did debt restructuring back in May.

Okay. Got it. And then, as it pertains to the deferred tax asset on your balance sheet, that’s been obviously coming down as you’re using it. Do you guys have an anticipated number of years it will take before that goes away? Is it a couple of years or three years or faster than that?

I mean, the way to think about that is, I think we said it was, what $900 million of pretax earnings that’s protected by the deferred tax asset at this point. And so, if we’re this year we’re projecting $300-ish million of pre-tax. So, at that run rate, if we stay at that run rate, it’s three years, we would hope given the growth we’re anticipating and we’ve been talking about our growth in community count, our profit will go up. So maybe it’s a little less than three years, something in the 2- to-2.5-year timeframe.

Okay. And given how cheap your stock is on a PE basis, have you guys considered buying back stock? Or is there something that restricts doing that?

I’m showing no further questions in queue at this time. I’d like to turn the call back to Ara Hovnanian for closing remarks.

Thank you very much. We enjoyed the questions. We’re excited about the future, and we look forward to reporting the fabulous Q4 as well. Thank you.