Good morning, and thank you for joining us today for Hovnanian Enterprises Fiscal 2022 Fourth Quarter Earnings Conference Call. An archive of the webcast will be available after the completion of the call and run for 12 months. This conference is being recorded for rebroadcast, and all participants are currently in a listen-only mode.

Management will make some opening remarks about the fourth quarter results and then open the line for questions. The company will also be webcasting a slide presentation, along with the opening comments from management. The slides are available on the Investors page of the company's website at www.khov.com.

Those listeners who would like to follow along should now log on to the website. I would like to turn the call over to Jeff O’Keefe, Vice President, Investor Relations. Jeff, please go ahead..

Thank you, Matiff, and thank you all for participating in this morning's call to review the results for our fourth quarter and year, which ended October 31, 2022.

All statements in this conference call that are not historical facts should be considered as forward-looking statements within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

Such statements involve known and unknown risks and uncertainties and other factors that may cause actual results, performance, or achievements of the company to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements.

Such forward-looking statements include, but are not limited to, statements related to the company's goals and expectations with respect to its financial results for future financial periods.

Although we believe that our plans, intentions and expectations reflected in or suggested by such forward-looking statements are reasonable, we can give no assurance that such plans, intentions, or expectations will be achieved.

By their nature, forward-looking statements speak only as of the date they are made, are not guarantees of future performance or results, and are subject to risks, uncertainties and assumptions that are difficult to predict or quantify.

Therefore, actual results could differ materially and adversely from those forward-looking statements as a result of a variety of factors.

Such risks and uncertainties and other factors are described in detail in the sections entitled, Risk Factors and Management's Discussion and Analysis, particularly the portion of MD&A entitled Safe Harbor statement in our Annual Report on Form 10-K for the fiscal year ended October 31, 2021 and subsequent filings with the Securities and Exchange Commission.

Except as otherwise required by applicable security laws, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, changed circumstances, or any other reason.

Joining me today are Ara Hovnanian, Chairman, President and CEO; Larry Sorsby, Executive Vice President and CFO; and Brad O’Connor, Senior Vice President, Chief Accounting Officer and Treasurer. I'll now turn the call over to Ara..

Thanks, Jeff. I'm going to review our fourth quarter and full year results, and I'll also comment on the current housing environment. Larry Sorsby, our CFO will follow me with more details and then we'll open it up to Q&A. Similar to the third quarter, we are reporting very strong levels of profitability, but a weaker number of new contracts.

I'll discuss all of this in my discussions. On Slide 5, we compare our full year results to our guidance. Total revenues of $2.9 billion, adjusted gross margin of 25%, SG&A at 10.1% and EPS of $29 per share were all within our guidance range. Our adjusted EBITDA and adjusted pre-tax income, both exceeded the high end of our guidance range.

All in all, our financial performance in fiscal '22 was strong, the best we have had in any single year since the great housing recession. Slide 6 shows year-over-year comparisons for our fourth quarter. Starting in the upper left hand portion, we show that our total revenues for the fourth quarter were $887 million, an increase of 9% over last year.

Moving to the upper right hand portion of the slide, you can see that our adjusted gross margin increased 140 basis points to 24.2% this year compared to 22.8% last year. In the lower left hand portion of the slide, you can see that our SG&A was 9.1% this year compared to 8.6% last year.

In the lower right hand portion of the slide, we show that adjusted EBITDA increased 19% year-over-year to $144 million. On the left hand portion of Slide 7, you can see that our adjusted pre-tax income improved 28% in the quarter to $104 million compared to $81 million last year.

On the right hand portion of the slide, you can see that our net income for the fourth quarter of '22 was $56 million compared to $52 million in last year’s fourth quarter. Profitability in the fourth quarter was solid, which certainly stands in sharp contrast to the current sales environment that I'll discuss now. Turning to Slide 8.

Contracts per community for the current period are down significantly compared to a year ago. Here we show that contracts per community for the fourth quarter of '22 decreased to 5 compared to 10.2 last year. There's no doubt that sales were very strong in '20 and '21, which makes comparisons to that period very difficult.

The start of '22 also saw strong sales. However, beginning in May of '22, home demand slowed and it continued to slow further through the end of November.

There are a number of factors that you're all familiar with that have created this falloff in demand including concerns about inflation, a quick sharp increase in mortgage rates and an overwhelming sense that the U.S. is headed toward a recession.

The end result is many consumers have temporarily paused their home purchase decisions and are waiting for more clarity with respect to inflation, their own job stability and where mortgage rates might stabilize. Turning to Slide 9.

We show that our fourth quarter is getting close to the 4.3 contracts sales pace that we had in the trough of the great financial crisis back in '08. Although the industry's current sales pace is similar to the great housing recession, we do not believe that the duration of this downturn will be anywhere near as long.

Our belief is based on the current low levels of listings of existing homes for sale, the fact that homebuilders did not overbuild new construction nearly as much as they did prior to the great housing recession, there was not a subprime speculative buying spree of homes this cycle, plus a few other factors that I'll discuss.

On the right hand portion of Slide 10, we break out contracts per community for the fourth quarter by our three geographic segments. Similar to what many of our homebuilding peers have reported, it's clear that contracts per community in our West segment are significantly lower than our Northeast and Southeast segments.

On Slide 11, we show annual contracts per community for the past several years. You can see that for the full year of '22, the last grey bar to the right, contract per community retreated to almost the same level we had for the full year of 2019 before the pandemic, but that doesn't tell the whole story.

Because as '22 unfolded in later quarters, the sales pace progressively worsened. If you annualize and seasonally adjust our fourth quarter sales pace, you get to 21 sales per community, a slow sales pace and one that we haven't seen since the great financial crisis of '08.

On Slide 12, we show contracts per community monthly from December last year through the recent month of November. The most recent months are in dark green, the same month a year ago in light blue, the same month in '20 is in light grey, and the same month in 2019 are showing up in a darker grey.

Of course, sales comparison to the COVID housing surge are difficult. Because of that pre-COVID sales in 2019 are a more representative benchmark. On Slide 13, we compare only fiscal '22 and the pre-COVID year of 2019 by month. You can see that we were tracking ahead of 2019 until the month of May.

That was definitely the pivot point as the cumulative effect of rising mortgage rates became clear. From that point on, we've been selling fewer homes per month than the pre-COVID sales pace. On Slide 14, we show our cancellations as a percentage of the entire backlog.

The cancellation rate for the fourth quarter of fiscal '22 was 13%, which is right in line with our historical average. However, if you look at cancellations as a percentage of gross contracts during the period, our fourth quarter was 41% compared to a normal cancellation rate in the high teens or the low 20s.

The absolute number of cancellations has not changed much. In fiscal '21, we averaged 96 cancellations per month and in fiscal '22, that number only rose to 107 cancellations per month. The issue is that our gross contracts have been unusually low in the back half of fiscal '22, which has led to a spike in cancellation rates.

This phenomenon is not unique to us, as you know, but it's being seen across the industry. On Slide 15, we show single family housing starts for the past 50 years.

If you look at the middle of the chart, leading up to the great housing recession and circled in red, you can see that for 14 straight years, the housing industry built more homes per year than the long-term average. This overbuilding created an excess supply in the market, which was one of the many factors that impacted the great housing recession.

That period was followed by a 14-year downturn where the industry substantially under produced long-term average levels, which is circled on the graph in green. The most recent new home construction start cycle was lengthy on the upswing and stayed below the long-term average for many, many years.

If you exclude the last cycle, the previous three cycles shown on this chart in the '70s, '80s and '90s were painful, but those downturns were brief and less severe in comparison to the Great Recession that we recently saw.

Most recently, we were only above the long-term starts average for one year in '21 and it looks like we'll certainly be below the average when the full year of '22 is disclosed.

Another indicator that the duration this time around should be shorter is that since the great housing recession recovery began, the industry produced significantly fewer homes than the prior cycle and did not overbuild anywhere near the levels of the last housing boom.

Slide 16 gives another data point that makes us comfortable that this down cycle will be shorter in duration than the prior down cycle. On this slide, we show that the number of existing homes for sale currently stands at 1.1 million homes, which is about half of the historical 2.1 million homes normally for sale on average.

Yes, it has risen a bit in the last six months and that makes a lot of headlines, but it's risen from some of the lowest levels in recent history. Even after this small increase, we are still at the lowest level of existing homes for sale in four decades.

To put this into perspective, there was 3x the supply of existing homes for sale at the beginning of the great housing recession compared to now. 3.4 million existing homes for sale then, 1.1 million now.

Given the low supply of both new and existing homes for sale, it's hard to believe that the current downturn will be as long or as painful as the great housing recession. Another positive sign that the duration of this downturn may be brief is our Web site visits continue to be strong.

We show our Web site activity on Slide 17, and we believe this is a leading indicator of future demand. Here we show daily Web site visits per community with the blue line near the bottom of the graph representing 2019 pre-COVID Web site visits.

The dark green line is '20 and the grey line is '21, both of these years were elevated during the time of extremely high demand for new homes during the COVID surge. On Slide 18, you can see the 2022 daily Web site visits per community. It's shown in the bright yellow line.

For the past several months, there have certainly been fewer Web site visits than the very high levels that we experienced in '20 and '21. But they're definitely better than the more normalized 2019 pre-COVID levels. This continuation of high levels of Web site activity is encouraging.

The high Web site traffic has not yet translated into normalized sales. However, the fact that so many people are taking the time to come to our Web site and spending time on it indicates that there's interest and quite possibly pent-up home demand building. This is yet another reason that we believe the duration of the downturn should be sure.

We're hopeful that as mortgage rates and the economy stabilize, more people will become comfortable enough to buy a home and we will see the healthy level of Web site visits convert to increased levels of contracts. We have no illusion that the current state of new home sales or the housing market overall is not good. It is indeed bad.

However, for the reasons that we've just cited, we think that pain might be deep but will last a relatively short period of time. I'll now talk about several of the steps we are taking in other areas to address the current market.

The good news is that we have a very seasoned management team that has experience necessary to successfully navigate through this downturn. In this rising and uncertain mortgage rate environment, consumers are seeking homes that they can close quickly.

As a result of that shift in consumer demand, we're temporarily pivoting to more quick move in homes or QMI homes in order to provide our customers with more certainty on what their mortgage payment will be at closing. We consider a home to be a QMI home the day we begin construction.

If you turn to Slide 19, you can see that our QMIs per community are consciously on the rise. We have gone from 3.2 QMIs per community in the third quarter to 5.6 at the end of the fourth quarter. This level of QMIs is higher than our historical average, but similar to levels we had right before the COVID surge in demand.

As a result, in the recent weeks, QMI sales account for 60% of our weekly sales versus about 40% historically.

In this rising rate environment, we are temporarily targeting approximately seven QMIs per community, with a few just beginning construction and a few midway through construction, and we're certainly focused on selling those that are near the end of construction.

Once that level is achieved, we will match our start schedules with our 2023 spring selling season pace. This approach will ensure that we do not start an excessive level of unsold homes. Furthermore, we'll focus on selling these homes before completion.

Second, as we try to find the market in terms of home price and sales pace, we are closely monitoring our competitors' use of incentives, concessions and base price reductions on a community-by-community, state-by-state basis.

Given the strong margins in our fourth quarter backlog, we decided not to be too aggressive with concessions on new contracts to minimize any potential disruptions to our fourth quarter deliveries. Now that the fourth quarter is behind us, we've increased our use of incentives and concessions.

In some cases, we even need to offer incentives to customers in backlog to get them to the closing table. We've been offering our customers incentive choices, such as paying for permanent or temporary below market mortgage rates, paying for closing costs, offering discounts on options or upgrades or discounting home prices on select QMI homes.

There is not a one size that fits all consumers. So we typically offer a consumer a choice on what incentives meet their needs the best. For QMI homes that are nearing completion, we can lock in a below market fixed interest rate. The below market fixed interest rate is prohibitively expensive for to-be-built homes.

In general, higher levels of incentives are reserved for our more challenging communities and our more challenging home sites. The last thing that a homebuilder typically wants to do is lower their base prices across the board. This would only upset customers both in backlog and existing homebuyers.

However, when homebuilders open new communities, they are generally starting with lower market-driven base prices rather than using large incentives and concessions.

By November, incentives in our new contracts had increased from the 3% level that we averaged in the first half of fiscal '22 to roughly 9.5%, which is higher than our historical average incentive rate.

Even after increasing our use of incentives, the margin on most of the new homes that we're selling today remain in the low 20% range, slightly above our historical average gross margin of 20%. Let me repeat that. Even after increasing our use of incentive, our average margin on new homes that we're selling today remains in the low 20% range.

One reason our margins on new contracts remained as high is because we're selling more homes in the Northeast and Southeast where sales and margins are stronger and fewer homes in the West where sales and margins are weaker.

Another reason that margins continue to be high despite our increased use of higher incentives and concessions is lower lumber costs. In addition, given the housing market decline, we believe our trade partners and suppliers need to share the burden of declining home prices.

We have begun discussions with them to reduce their costs, which should soften the impact of margin declines in the future due to increased incentives.

Some other steps we've taken to deal with this slower market in general and the uncertainty includes postponing further debt reductions until the housing market stabilizes, re-underwriting all of our existing land and option contracts to make sure that they still make sense even if the market deteriorates a little further from the current market conditions, temporarily suspending most of our new land acquisitions, slowing land development spend on land that we already own on a community-by-community basis where we don't want improvements to get too far ahead of our needs, and reviewing our staffing needs on a division-by-division basis.

This is obviously an evolving situation and we will continue to reassess the steps that we're taking to make sure they're appropriate in light of changing market conditions. I'll now turn it over to Larry Sorsby, our Chief Financial Officer..

Thanks, Ara. I'm going to start with Slide 20. You can see that we ended the year with 133 communities open for sale. If not for the supply chain and production delays in opening new communities, that number would have been even higher. We've been trying to grow our community count to our pre-COVID levels for several years.

After enduring long entitlement processes and slowed land development schedules, we project that we will finally be catching up during fiscal 2023. Additionally, given the recent slower sales pace per community, the expected lifespan of our communities is lengthening.

While there are many factors that affect community count, we believe we will be able to return to our pre-COVID community count of approximately 160 by the end of fiscal '23. About 70% of our expected community count growth will take place in our Northeast and Southeast segments and 30% will come from the West.

As it turns out, given the recent better sales and margin trends in our Northeast and Southeast segments, that is a fortuitous ratio. Turning now to Slide 21. On this slide, we show that our lot count seems to have peaked in the second quarter of fiscal '22 at 33,501 lots.

During each of the subsequent quarters, our lot count decreased and we ended fiscal 2022 with 31,518 lots. Reflecting our risk adverse land strategy, it's important to highlight that our owned land position declined by 10.5% sequentially to just over 9,000 lots.

I also want to point out that 62% of our total lots are located in our stronger Northeast and Southeast segments versus 38% in the West.

To make certain that land we control by option continues to meet our underwriting hurdle rates we've been re-underwriting all previously approved land acquisitions with the assumption of further market deterioration.

During this year's fourth quarter, we walked away from about 2,100 lots and $3.9 million of lot option deposits and predevelopment costs. The 2,100 lots we walked away from in the fourth quarter were either during their due diligence period or were at the point that our option agreement required us to take down land.

By using current home prices, current construction costs and current sales pace to underwrite to a 20% plus internal rate of return, our underwriting standards automatically self adjust to changes in market conditions. In addition, we are building in an extra buffer to our underwriting returns to absorb some potential future home price deterioration.

I also want to comment on the impairment that we took in one community in Southern California, a particularly weak market. We took an $8 million impairment on a single community that was originally bought before the great housing recession.

We had un-mothballed that community and built through the first phase, which consisted primarily of finished lots with reasonable success. However, as we moved on to the later phases of the community, which was raw land, the market began to weaken. And to make matters worse, land development costs began to rise.

The combination of these negative factors resulted in this one formally mothballed community triggering an impairment. I want to now give a brief update on our efforts in the build-for-rent space. BFR sales will be helpful in picking up a little of the slack in our traditional build-for-sale business.

We currently have a few 100 homes under contract are closed with build-for-rent companies. Although this is not a significant portion of our business, all sales are helpful in today's market environment.

We have been deliberately increasing our use of land options to increase our inventory turnover and our return on investment as well as to reduce risk associated with owned land.

On Slide 22, we show our percentage of lots controlled by option increased from 46% in the fourth quarter of fiscal '15 to 66% in the fourth quarter of fiscal '21 and to 71% by the fourth quarter of fiscal '22. This has been a specific part of our strategy for many years, and we continue to make progress.

A low percentage of owned lots strongly mitigates land risk and gives us flexibility in a shifting market to renegotiate land price and terms. On Slide 23, we show the vintage of our land position. 72% of our total 31,518 lots controlled were put under contract before October 31, 2021 and 39% were controlled prior to October 31, 2020.

The vast majority of those lots were underwritten at lower home prices than today's housing market, which provides us with the flexibility to increase concessions and incentives while still delivering strong margins and returns. We are looking very carefully at the lots that were put under option during fiscal '22.

Many of those lots have not survived our rigorous re-underwriting process with today's price and pace assumptions and then resulted in renegotiating option turns with sellers or walking away from that land parcel. Turning to Slide 24.

After $205 million of land spend in the fourth quarter in paying off $100 million of senior notes during the second quarter, we ended the year with $457 million of liquidity, well above the high end of our targeted liquidity range. Our land spend in the fourth quarter increased from the prior year.

As we discussed earlier, our community count had been shrinking and some of the properties we optioned before the COVID surge to counter our shrinking community count were finally entitled ready for development or lot takedowns during the fourth quarter and we moved forward on.

Most importantly, these communities continued to underwrite at yields above our 20% IRR hurdle rates even at today's slower sales pace and today's current net home prices. Needless to say, we are only moving forward with land acquisitions if they still meet our return hurdles in today's slower sales pace and declining net home price environment.

Despite the slightly higher land-to-land developments been compared to last year's fourth quarter, we still have fewer owned lots and fewer open for sale communities than at the end of fiscal 2021. Most of our new community openings are older vintage lots which still generate strong returns. Turning now to Slide 25.

Compared to our peers, you see that we still have the third highest percentage of land controlled via option. We continue to use land options whenever possible to achieve higher inventory turns, enhance our returns on capital and to reduce risk. Turning to Slide 26, we show year supply of owned lots for us and our peers.

With 1.6 years supply, we are tied for the second lowest year supply of owned lots. Having a shorter supply of own lots is a good way to reduce risk in a declining housing market. On Slide 27, you can see that we also have 5.7 years supply of controlled land, both owned and option lots.

Our focus on controlling land by option and choosing not to be overly long owned land at this point in the cycle mitigates our risk from declining land values. Turning now to Slide 28. Compared to our peers, we continue to have the second highest inventory turnover rate. High inventory turns are a key component of our overall strategy.

We believe we have opportunities to continue to increase our use of land options and to further improve inventory turns and our returns on inventory in future years. Turning now to Slide 29. On this slide, we show our debt maturity ladder at the end of the fourth quarter. We retired early $281 million of senior notes over the past two years.

Early in the fourth quarter, we amended our revolving credit facility to extend the maturity date to June 30, 2024. After that, we don't have any debt maturing until the first quarter of fiscal 2026. Due to current market conditions, we have temporarily shifted our focus to preserving liquidity and pause our near-term debt reduction plans.

We remain committed to strengthening our balance sheet and intend to revisit our debt retirement initiatives once market conditions improve. Given our $344 million deferred tax asset, we will not have to pay federal income taxes on approximately $1.3 billion of future pre-tax earnings.

This benefit will significantly enhance our cash flows in years to come and will accelerate our progress of rapidly improving our balance sheet once the market stabilizes.

Our financial guidance for the first quarter of fiscal '23 assumes no adverse changes in current market conditions, including no further deterioration in our supply chain or material increases in mortgage rates, inflation or our cancellation rates.

Our guidance assumes continued extended construction cycle times, averaging six to seven months compared to our pre-COVID cycle times for construction of approximately four months.

Further, it excludes any impact to our SG&A expense from phantom stock expenses related solely to the stock price movement from $40.33 stock price at the end of the fourth quarter of fiscal '22.

While we have met or exceeded most of our guidance metrics over many quarters, there is a greater degree of uncertainty in current environment given inflation, the potential of an economic recession, employment risk, utility company delays and mortgage rate increases.

Additionally, given the difficult economic backdrop and the resulting uncertainty in the housing market, the company will not be providing full fiscal year 2023 guidance at this time. With those caveats in mind, on Slide 30, we show our guidance for the first quarter of fiscal '23.

We expect total revenues for the first quarter to be between $500 million and $600 million. We also expect adjusted gross margins to be in the range of 21% to 22.5%. SG&A as a percent of total revenue is expected to be between 13% and 14%. Our guidance for adjusted EBITDA is between $42 million and $57 million.

Our adjusted pre-tax income for the first quarter of fiscal '23 is expected to be between $5 million and $20 million. Our SG&A ratio is expected to increase over the prior year as we anticipate opening additional communities as well as a higher than normal increase in wages as a result of inflationary pressures.

Due to slow market conditions, we are also anticipating increasing our advertising spend over the prior year. Despite lower levels of homebuilding debt, our interest expense is expected to increase during fiscal 2023 for two reasons. First, a slower sales pace extends the average community lifespan and results in higher total interest costs.

These interest costs are expensed and cost of sales interest on a per delivery basis. Therefore, the cost of sales expense per home will be higher in fiscal '23 than fiscal '22. Second, our inventory not owned has increased from a year ago, which has a corresponding increase in interest costs.

Lastly, in response to competitive pressure from outside lenders and in order to offer lower mortgage rates so that more of our customers can qualify to purchase one of our homes, we also expect our financial service business will be significantly less profitable during fiscal 2023.

On Slide 31, you can see how our credit metrics has significantly improved over the past few years. Total debt to adjusted EBITDA has declined from 9.7x in fiscal '19 to 2.7x in fiscal '22. Net debt to adjusted EBITDA has declined from 8.9x in fiscal '19 to 2x in fiscal '22.

Adjusted EBITDA and interest incurred coverage has increased significantly from 1x in fiscal '19 to 3.6x coverage for fiscal '22. Turning to Slide 32. Our shareholders' equity has increased from a deficit of 490 million in fiscal '19 to 383 million at the end of fiscal '22.

Our net debt decreased $588 million from $1.55 billion at the end of fiscal '19 to $965 million at the end of fiscal '22. This improvement in our equity position and net debt resulted in our net debt to capital ratio continuing to decline from 146% at year end fiscal '19 to 71.6% at the end of fiscal '22.

Over the long term, we expect to continue improving our balance sheet by reducing debt and growing equity. Our goal is to achieve a mid 30% net debt to capital ratio. We were happy with the progress we've made in improving these credits and balance sheet metrics over the past several years.

Given the current housing environment and near term, it will be difficult to achieve similar improvements. However, we remain committed to our long-term balance sheet improvement goals. On Slide 33, we show that at 37.5%, we have the third highest consolidated EBIT return on investment compared to our peers.

We believe this is the most accurate measure of pure homebuilding performance without regard to leverage. On Slide 34, we show the trailing 12-month price to earnings ratio for us and our peer group. The entire homebuilding industry has been valued as if there will be another long duration downturn like the great housing recession.

We believe that is a scenario very unlikely to occur. We recognize that our stocks should trade at a discount to the group because of our higher leverage.

However, given our returns on equity and our EBIT return on inventory compare favorably to our peers and given how rapidly we've been improving our balance sheet, we believe our stock is the most undervalued of the entire universe of public homebuilders.

Based on our price earnings multiple of 1.66x at yesterday's closing stock price of $48.14, we're trading at a 12% discount to the next lowest peer and a 62% discount to the industry average. We remain focused on further strengthening our balance sheet. Standard & Poor's and Moody's both upgraded our credit ratings during fiscal '22.

At some point, the stock market will give us credit for our superior performance as well. And now, I'll turn it back to Ara for some brief closing remarks..

Thanks, Larry. Fiscal '22 was a phenomenal year of growth and profits. As we discussed, the new home sales market shifted dramatically in May of this year and remains challenging, although we've been pleasantly surprised by a slight pickup in contracts over the last three weeks.

The good news is that we've been through worse and we've taken steps to address the current market environment. Our initiatives to pay down debt early were well timed and put us in a position with a much more solid financial footing today than at any time since the great housing recession.

We reduced our net debt outstanding as Larry described by about $0.5 billion since the end of fiscal '19 just before this pandemic began. There is no doubt that these are challenging times. We have an experienced management team in place. '22 was a great year of returns for all homebuilders.

Nonetheless, we're proud of the fact that we are the third highest among all homebuilders for EBIT return on investment and the absolute highest among our mid-sized peers. We have a proven record of industry leading return on investment and we will take the steps necessary to navigate through this current difficult market.

That concludes our formal comments, and we'll be happy to turn it over to Q&A..

The company will now answer questions. So that everyone has an opportunity to ask questions, participants will be limited to one question and one follow up, after which they will have to get back in the queue to ask another question. We will open up the call to questions. [Operator Instructions].

Our first question comes from the line of Alan Ratner of Zelman & Associates. Your question, please..

Hi, guys. Good morning. Thanks as always for the great information and detail. My first question, I'd love to just kind of dig in a little bit more on the incentives disclosure you gave up to 9% of price in November.

If I compare that to your order numbers for November, I see November was down a little bit from October and still at pretty low levels overall. So at first glance, my takeaway there is that the higher incentives really have not had much of an impact in terms of finding that point of price elasticity, but I'm sure there's more to it than that.

So just curious if you could talk a little bit about what you're seeing when you do offer these incentives. Is it helping to pull people into the market? Do you feel like you need to maybe kind of shift around the types of incentives in order to better find that point of elasticity? Any color you can give around that would be very helpful. Thank you..

Sure, Alan. I’ll address a few points. First, we report our net contracts and the ones you’re focusing are in November. October was obviously our highest closing month of deliveries. That's when a lot of our cancellations came through because consumers were forced to close and many were certainly nervous.

A lot of those cancellations get processed in November. You have to process it properly in order to keep customers' deposits if we're entitled to it. So I'd say, overall, we feel like our incentives are making a difference, particularly for QMIs.

As we mentioned, one of the nice incentives you can offer today for homes that are closing soon are fixed mortgage rate buy downs and that is attractive. The other thing to consider, obviously, is November is a slower seasonal month and we expect December will be even slower.

Alan, I think as a piece you wrote that came out yesterday, you noted surprisingly better sales. It might have been on the West Coast that you were speaking of in your report. Just over the last few weeks, we've kind of felt the same thing. And again, mostly focused on our gross sales. So that's a little encouraging.

But this is the time as you know well, that's very slow in general. So we don't get overly excited or overly depressed by sales right now. What's going to be critical is what happens starting in the middle of January..

That's really helpful additional color there. I appreciate it. Second, and maybe this is for Larry or you Ara, on the disclosure of your land vintage, that's very helpful. So we appreciate that.

I guess on the 28% of lots that were underwritten or tied up in '22, I would imagine the vast, vast majority of those are held under option contracts just given your land acquisition strategy.

Are you able to talk a little bit about how much capital is tied up in those deals currently? And I know the assumption is you're probably working to renegotiate the terms on those, whether it's price or takedown schedules, but any kind of thought on how we should think about those 28% of the lot count, how many of those are likely to be ultimately walked away from or what the timing of those walkways could be? Thank you..

Yes. First, the average deposit we have on land options..

I know we have $181 million in deposits, Al. Let me get the average for you. I don't have that right at my fingertips..

As a percent, yes. But as he's looking that up, Al, I don't have anything specifically broke out just on the '22. So I can give you the average deposit so it gives you perspective of what we've historically invested on average as a percent of the land value.

But some of those lots obviously were in the early stages just during due diligence so that we can actually walk away without even losing our deposit. So not all of those '22 are even that amount at risk. But clearly, the lots that we controlled in '22 are the riskiest land deals that we have. We're not going to move forward and buy that.

Even if we do have to risk the entire deposit to walk away, I'd rather do that than continue to invest money in it, to develop it and bring it to market if it doesn't pencil what today's home prices, construction costs, and sales pace.

But if it doesn't, as you mentioned, we'll try to renegotiate and most sellers understand that the market really changed. Some are willing to alter term, some aren’t. So we don't know how many of those '22 will ultimately make it to the finish line or not..

Alan, you did ask a good question about the ownership. We were actually chatting about that yesterday. The vintage by ownership versus the vintage by option. Our guess is like yours that when we actually calculated what we own is generally of older vintage, what we option is newer. But we're going to follow up certainly by our next call.

We'll try to get that broken out, because it is an interesting point. I will add that a fairly decent number of our new options in '22 were in our Northeast or Southeast segments. And a lot of those are longer-term entitlement land contracts and land options.

So while it's controlled in '22, it is very likely on -- at least several of the ones that we actually approved in the last six months that actual land purchase will not be for multiple years as we go through some of the difficult entitlement processes..

And to follow up on the question, 9.5% is what the deposits are..

The average deposit..

Yes, the average deposit..

Got it. Gotcha. And then before I hang up, I guess since you're following up, maybe on the split there of owned versus option. If it's possible to follow up maybe just with the gross order trends for October and November given your response to my question earlier, Ara, I don’t know if you have that at your fingertips or not, but I'll hang up.

And if you do have that and could supply it, that would be great. So thank you..

Yes, we don't have it at our fingertips and we typically just report net. But we'll take that in consideration as we report our next quarter..

Great. Thanks a lot, guys..

Thanks..

Thank you. [Operator Instructions]. Our next question comes from the line of Alex Barron of Housing Research Center. Your question, please..

Yes. Thank you. Good morning. I have a few, so how many you'll allow. If not, I’ll get back in the queue. But yes, I wanted to ask first, we've heard that several builders are talking about getting incoming phone calls from frontend trades. I'm assuming you guys are experiencing the same thing.

My question is, are those calls expecting to get paid the same thing and just getting work? Or are they willing to give significant concessions to you guys so that you would have an incentive to start building new houses? Where do things kind of stand, any color you can give on that?.

First, you are correct. We, like other builders, have been receiving inbound calls. And you're also correct. They're typically on the frontend trades. Most of our trades are not new to this rodeo and have been through housing downturns before. They know they enjoyed the price appreciation and their price appreciation during the upturn.

And I believe most are fully expecting to have lower pricing on new communities going forward. Regardless of whether they're inbound or not, we are definitely working on a national effort to rediscuss pricing in light of the environment with all of our subcontractors and suppliers to reduce our pricing.

And I wouldn't say thus far any of our vendors are particularly shocked. I think it's something that all are expecting, and they're seeing it with other homebuilders as well..

Got it. Now I guess along those fronts, can you talk about how many homes you guys have under construction and how does that split between specs and build to order I guess? Well, I guess the build to order would be close to your backlog.

But I'm just curious on the spec side, how many homes you guys have and how many of those are completed specs?.

Brad?.

I think we have a slide on that..

The completed spec is 142 as of October 31. The total, I don't know Jeff if you have your specs..

I know you have where it's average per community. But I don't know if you have the total..

Yes, we did give the total slide. On that slide, it's 680 at October 31..

So Alex to put the finished specs and call them QMIs into perspective, it's a little over one per community across the country on average..

Got it. Okay, that makes sense. I think I heard you say that on pricing and incentives, it seems like you guys are more willing to or have been up until fiscal year end were less willing to upset the backlog and maybe were more willing to do that on new communities coming out of the ground.

But now that you're kind of in the new fiscal year and other guys are desperately trying to get some sales before year end, I'm sure you're seeing more price cuts from your competitors.

So are you guys kind of engaging in those similar ways or are you still waiting maybe more for the spring selling season and still trying to protect the backlog? Just trying to get a sense --.

I'd say in good time -- we're not in the phase of protecting backlog in the majority of our communities. There are a few exceptions where we've got a lot of backlog and we don't want to disrupt it. But in general, good times, bad times, rising prices, lowering prices, we're always very aware of what our competitors are doing.

I think the thing to focus on is with the incentives that we are currently offering, and, again, we have dialed them up since the fiscal year end, our current sales have margins above 20% and that's not as good as what we just delivered, but certainly better than one might expect at this time in the housing cycle..

One other comment I'd make or repeat really is that we historically have been a build or build to order builder rather than having a bunch of quick move in homes or specs. And after the last quarter the demand for homes that were kind of move in ready has increased, we didn't have much.

So as we monitor what our competitors are doing, we are seeing more demand on the homes that are kind of move in ready. So we are continuing to produce more. We think that will also help sales as we get more homes that can meet that kind of demand from a consumer wanting to move quickly so that they can lock in an affordable mortgage rate..

Correct. Okay, great. Thanks. I'll get back in the queue. Appreciate it..

Okay. Alex, if you'd like to ask another question or two, I think we've got time..

Sure. I guess since you just mentioned you are mostly built to order.

What is the typical deposit you guys get from consumers, from customers to build? In other words, how much money do they typically have at risk if they cancel?.

It’s a good question. It varies quite a bit by geographic region. The East Coast tends to be higher I think on base price. The higher divisions have about a 10% purchase price deposit. On top of that if they're doing a lot of options and upgrades, we take a higher deposit on those options and upgrades. On the West Coast, we tend to have lower deposits.

I think somewhere close to 3% is very typical on the West Coast. Sometimes when it's higher than 3%, there's a negotiation around 3%. So those are kind of the two goalposts..

It's interesting, because I think there's a pretty decent correlation between the level of deposits and cancellation rates, so that's why I was kind of --.

We agree with it. Yes, we agree..

But at the same time, it seems -- I guess competitive pressures are shifting what you were just talking about people moving towards spec building I guess to try to get people more payment certainty and that type of thing.

Now in terms of seasonality, I guess this past year was anything but normal with demand super strong at the beginning of the year, low rates and then the opposite at the end of the year.

What is I guess your crystal ball or your expectation for this year? Do you think we're going to see more normal seasonality or do you think it's still going to be largely driven by interest rates that if interest rates start to stabilize or come down, you'll see an acceleration in the backend, or how do you think things could play out?.

Brad?.

If I was to guess that acceleration will have -- excuse me, interest rates will have a big effect on the seasonality. And if rates jumped considerably in the spring selling season, I think that will dampen the normal rise you'd see in the spring selling season.

If rates level off or even go down toward the end of the year when you'd normally see seasonality bring down sales, it might heighten the impact of sales at that time. So I do agree with I think what you're expecting that rates will impact normal seasonality..

Got it. Thanks, Ara. Thanks, Larry. Appreciate it. I'll get back in the queue..

Thank you. At this time, I'd like to turn the call back over to our Chairman and CEO, Ara Hovnanian, for closing remarks.

Sir?.

Thanks very much. As we've said before, there are great things about our quarter and things we're not so happy about, particularly regarding new contracts. But we've been down this road before. We've steered through far more difficult situation and we're in the best financial foundation that we've had in many, many years.

So we look forward to producing good results considering the environment and we look forward to reporting our first quarter in the not too distant future. Thank you..

This concludes our conference call for today. Thank you all for participating and have a nice day. All parties may now disconnect..