HOV - NYSE

Thanks, Brad. While we met most expectations this quarter, we remain vigilant given the uncertainty in the broader economy. We're closely monitoring our communities and adjusting our local strategies accordingly. One particular area of focus that we talked about quite a bit is burning through assets that are underperforming because of when we controlled the lots, and replacing them with lots being underwritten with current levels of incentives. Those should produce better returns. While we are still performing well compared to our peers, whether you look at sales absorption levels, ROE, or ROI. As we move forward, we continue to be very disciplined in our underwriting process for all new land deals. Fortunately, with 85% to 91% of our lots controlled through options, we have the ability to find win-win alternatives with our land sellers. We're rapidly replenishing our land lot supply with more profitable new communities. You have to look at our historical ROIs and believe that we can replenish our land with good returns. We're continuing to monitor and adjust home pricing on a community-by-community basis. We're hyper-focused on improving our inventory turnover and continuing to deliver strong ROE and ROI. That concludes our formal comments, and we'll be happy to turn it over for Q&A.

The company will now answer questions so that everyone has the opportunity to ask a question. Participants will be limited to two questions and a follow-up, after which they will have to get back into the queue to ask another question. We will open the call to questions. [Operator Instructions] And our first question comes from the line of Natalie Kulasekere of

Hey, good morning. Thanks for all the detail on vintage land relative to incentives. So I understand that you're now assuming a higher level of incentives on land recent land purchases, but does this mean you've actually seen lower land prices on recent acquisitions, because that's been a little surprising based on the commentary we've gotten from other builders about land prices still remaining sticky? Otherwise, it seems that you would have a tough time making deals meet your underwriting hurdles.

No, land sellers are definitely the last to adjust prices, but we are able to find enough opportunities to replenish our land supply at dramatically better returns. It obviously varies by market. It's tougher in some markets. It's easier in other markets. So we're focused on getting a good geographic mix. But we're definitely able to find parcels that meet our historic return hurdles, which are still our current return targets in new land acquisitions, even with our assumed 10.5% average incentive and with the current sales pace.

Okay, yes, thanks. That makes sense. Are you able to maybe provide a bit more detail on what markets you're specifically seeing, like, easier terms, I guess, with the land sales?

Well, markets that I mentioned that historically, well, I shouldn't say historically, they're currently are yielding better results, include Delaware, Virginia, Southeast Coastal Charleston areas, New Jersey, and Maryland as examples, definitely finding it easier to pencil opportunities there at the moment. But having said that, even the more difficult markets, we're finding opportunities that yield appropriate returns.

Okay, got it. Thank you. And your margin guidance for next quarter intimates a flat to uptrend. But given that the demand environment has not materially improved since the previous quarter, and I'm guessing your incentives are still running at elevated levels. Is there anything besides the typical seasonal uplift in margins that gives you the confidence to achieve this?

Right. Okay. Thank you.

Thank you. One moment for our next question. And our next question comes from the line of Alex Barron of Housing Research Center. Your line is now open.

Thank you, gentlemen, and congrats on a good performance, I guess, in a tough environment.

Thank you.

I wanted to ask about the current incentive structure that you guys have. Is it primarily still like closing costs and rate buy downs, or are you guys doing some price adjustments as well?

All of the above. The mortgage rate buydowns are typically on homes that can deliver in 90 days. For homes that are, because by the way, it becomes cost-prohibitive to do it further out. But on homes that do deliver out beyond the 90 days, we offer a price reduction or some other kind of incentive on upgrades and options in lieu of a mortgage rate buydown. So it's typically one or the other, but in some cases, we offer no incentives in some of our prime properties.

Okay. And I know a couple of years ago, you guys kind of switched to focus more heavily on spec building than in the past. Has that thought process changed? Are you guys moving back towards more balance between build-to-order, or are you guys sticking with a heavy focus on spec building and what's the thought process there?

As we mentioned, we actually hit our peak, our highest level of QMI sales. We call them QMIs. Quick move-in homes at 79%. And that is still part of our strategy going forward. And one of the main reasons is when it's within 90 days of delivery, you can affordably pay for a mortgage rate buydown. It's difficult if you can't deliver it in 90 days, and looking at a new build contract, that's difficult to achieve in 90 days. So I'd say at the moment it's still absolutely part of our strategy.

Got it. If I could ask one more. As far as the impairments, even though it was only $3 million, how many communities were involved in what markets, if you can answer that?

David, you want to answer that one?

Okay, sounds good. All right, guys. Well, best of luck for the rest of the year. Thank you.

Thank you. One moment for our next question. [Operator Instructions] And our next question comes from the line of Jay McCanless of Wedbush. Your line is now open.

Hey, good morning. Thanks for taking my questions. First one, could you give us a little commentary on what you've seen so far in May and any improvements or otherwise relative to what you saw in April?

I'd say overall, May is pretty much status quo with what we reported for April.

And then, Ara, you were talking about some of the older vintage land, I guess, at the current sales pace, assuming no change in incentives or rates, how long do you think it's going to take you to clear out the 2022? And I think you said West Coast for 2021. How long to clear that out, you think?

Oh, we haven't done that exact analysis. Obviously, in some geographies, we're already cleared out. In others, we may have two or three years out. So it's a community-by-community thing, and to be honest, we just haven't looked at how that clears the system and when. But needless to say, I mean, it's only I believe the 2022 vintage was about 10% of our lots somewhere around that number.

That's right.

So, it's just not a huge part. 2021 on the West Coast is a lower percentage than 10%. So we're just balancing and looking to burn through those. Now, having said that, the 2023 and 2024 vintages were typically underwritten at close to 8% margin -- 8% incentives --

Incentives?

Incentives, yes, versus our 10%. So they're a little bit below our target ROIs, but not dramatically below.

Okay. And as part of that, and part of the reason I ask that is -- we're all, I think, not only for Hovnanian but for the group looking for when gross margins might bottom, and just any type of commentary you could give on that, and especially, I know it's tough because you all are doing QMIs and a lot of option deals, but is there any visibility in sight for a bottom in gross margins for Hovnanian?

Well, I would hope that we're near a bottom now, and then we've kind of given our guidance for next quarter, which is pretty flat with our second quarter in terms of gross margins up slightly at the midpoint. So if you could call that a bottom, then we're there but as you pointed out, with a QMI strategy and with a quarter like this, where we sell almost 40% of our quarterly deliveries in the quarter, it's hard to really accurately project and as you get further out, a quarter or two beyond a quarter, it's even more difficult. So right now, we're just doing the same playbook that we've done for years, underwriting at current levels, and we're marking to market to move the older inventory if it's performing under -- under our current target levels.

Great. And if I could sneak one more in, kind of thinking about the back half of the calendar year, potential increases in lumber prices may be coming, but at the same time, we're hearing from some of your competitors that labor costs are getting cheaper. We saw drywall prices came down today. I guess you guys have done a great job getting the build costs down, but with some of these cross currents, and I think especially with the lumber one probably being most likely to occur, how are you all thinking about construction costs in the back half of the year?

I think other than the unknown of lumber, we feel pretty good about it. Some of the material costs may be impacted by tariffs. On the other hand, labor recognizes the slower market, so we're making some gains on that. So at the moment, I'd say we're optimistic that, other than lumber, which is a big unknown, that we can continue to slightly reduce our construction costs.

Okay, great. That's all I have. Thank you.

Thank you. I'm showing no further questions at this time. I'll now turn back to Ara Hovnanian for closing remarks.

Great. Well, thank you very much. Again, we are satisfied with the quarter, given the difficult environment, but we look forward to producing higher returns, more in keeping with our historic standards as we replenish our land supply underwritten at today's market. Thank you, and we look forward to reporting better results. Thanks.