Good morning. And thank you for joining us today for the Hovnanian Enterprises Fiscal 2021, Third 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 Third 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. These slides are available on the investor's page on the Company's website at www.khov.com.

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

Thank you, Jonathan. And thank you all for participating in this morning's call to review the results for our third quarter, which ended July 31st, 2021.

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, 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 result, 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, uncertainties, and other factors are described in detail in the section entitled risk factors and management discussion and analysis.

Particularly the portion of NBNA and paid safe harbor statement in our annual report on Form 10-K for the fiscal year ended October 31st, 2020. 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 reasons.

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 will now turn the call over to our CEO. Ara, go ahead..

Thanks, Jeff. I'm going to review our Third Quarter results and then address the current market environment. As usual, Larry Sorsby, our CFO, will follow me with more details and will then we'll open it up for a little Q&A. On Slide 5, we compare our Third Quarter results to the guidance we gave on our last conference call.

COVID-related supply chain disruption delayed the completion of some homes, resulting in slightly lower revenues. Nonetheless, our adjusted gross margin, SG&A ratio, adjusted EBITDA and adjusted pre-tax income were all better than the guidance range that we gave.

During our second-quarter conference call we talked extensively about the impact of phantom stock expense on our SG&A. During the third quarter, our stock price declined, which resulted in a $6.7 million reduction in phantom stock expense.

In the third column, we show what our results would've been without the benefit from the phantom stock expense reduction, without that benefit, we still beat our guidance for SG&A, adjusted EBITDA and adjusted pre-tax profit. Gross margin was not affected.

Moving on to Slide 6, we show year-over-year comparisons for our third quarter performance metrics. Given the supply chain disruptions and labor shortages we've all experienced as an industry, we're pleased with our strong performance in the third quarter.

Starting in the upper left-hand portion of the slide, you can see that our total revenues for the third quarter increased 10% to $691 million. Moving to the upper right-hand portion of the slide, you can see that our adjusted gross margin increased 460 basis points to 22.1% this year, compared to 17.5% in last year's third quarter.

This clearly illustrates that we've been able to raise home prices more than enough to offset the higher labor and material costs that we've incurred. Lumber prices have recently declined from the all-time highs they hit a few months ago.

Given the significant decline in random land contracts, we expect our price for lumber will continue to decrease further in future months.

While these lower lumber prices will not benefit margins on homes we delivered this quarter starting in our Second Quarter of 22, we expect our gross margins we'll see an additional benefit from the significant reduction in our lumber costs.

In the lower left-hand quadrant of the slide, you can see that our SG&A was 8.7% for the Third Quarter compared to 9.5% last year. If you ignore the benefit of the Phantom stock expense, it would have been 9.7% for this year.

In the lower right-hand quadrant of the slide, we show that adjusted EBITDA increased 59% from $65 million in last year's third quarter to $103 million this year. On Slide 7, you can see that our adjusted pre-tax income improved to $63 million compared to $15 million of profit last year.

On Slide 8, we show that our net income for the third quarter of '21 was $48 million compared to $15 million in the same quarter last year. Moving now to the sales environment. On the right-hand portion of slide 9, we show contracts per community for the Third Quarter in each of the last three years.

You can see that our sales pace jumped 75% from a historically normal pace in 2019, to a white-hot pace in 2020. Remember this was just after the March and April low in sales because of COVID and before we started to increase prices aggressively and began to meet our sales.

Our contracts in this year's Third Quarter were better than 2019, but far below 2020. The sales pace we achieved in the summer of 2020 was unsustainable. We've been saying for some time now that comparisons would be very difficult because of the white-hot sales pace that we saw last year.

Further to the left, we show that the average for the third quarter from 1997 through 2002 was 11.4. That was a time where that was neither a boom nor a bust for the housing industry. Our sales pace in the third quarter of '21 slowed to a more historically typical pace, but at significantly better margins than last year.

This more typical pace is certainly more sustainable. As the industry sales pace returns to normal, it should also help contain labor and material cost pressures. On slide 10, we show contracts per community on a monthly basis from September through August.

The most recent month is in dark green, the same month a year ago is in light blue and the same month two years ago is shown in gray. For the past 4 months, our contracts have been lower than last year's unsustainable pace. However, we compare favorably every month with 2019's more typical contract pace.

It would be easy to become preoccupied with the sales pace this year compared to the higher COVID demand surge levels that we experienced in 2020. On slide 11, we focus in on the increases in the most recent months compared to the same months in 2019 pre-COVID when demand was closer to historical averages.

It's clear from this trend that the COVID-19 sales frenzy has given way to a more rational sales pace. We think the new sales pace is healthy, slightly above-average, and much more sustainable. Let me take a moment to talk about increases in home prices.

On the left side of slide 12, you can see that our average sales price on deliveries was up 13% year-over-year to $443,000 in the Third Quarter. On the right-hand portion of the slide, you can see that our average sales price on new contracts increased 27% from $396,000 last year to $503,000 in this year's Third Quarter.

We believe these dramatically higher prices dampened the COVID sales frenzy that we experienced last year. And as I said a moment ago, we transitioned to a more sustainable sales pace that's in line with historical averages. You saw that the higher home prices in our deliveries have already increased our gross margins.

We expect these higher home prices in our new contracts to generate further increases in our gross margins. The combination of higher gross margins along with our expected growth in community count, should have a positive impact on our bottom line, more than offsetting the return to a more sa -- normal sales pace per community.

On Slide 13, we show what our community count was at the end of every quarter over the last year. As you can see, primarily due to selling through communities that has significantly higher than normal pace, our community count has been declining each quarter up until the most recent quarter.

We ended the third quarter of July 21 with a 120 communities. This was up slightly from last quarter, and is the first time we had a sequential increase in community count since the fourth quarter of 2019.

Given no material changes in current market conditions, we expect our community count to grow to approximately 135 communities at the end of the fiscal year. This was at the same level of communities that we had at the beginning of this fiscal year. In fiscal 22, we expect further growth in our community count.

Our community count is likely to fluctuate due to the -- each quarter due to the opening of new communities and the timing of closing out of new -- of old communities. The combination of a return to a more rational sales pace per community with a reduction in community count, certainly impacted our absolute level of contracts this quarter.

Our upcoming community count growth should help that in the near future. Our contract dollars decreased to $609 million in the third quarter of fiscal 21, compared to 882 million in the same quarter last year. This was due to a number of factors.

Metering of sales in many of our communities, selling out of communities ahead of schedule, COVID-19 related delays for new community openings, And the unprecedented COVID-19 surge in demand last summer that make the comparisons very difficult. All of these we -- you've heard many times before from us and many of our peers.

Much of our decline is related to community count. We're making excellent progress in our land position, but there's a lag between a land contract and the first home sales, and that certainly impacts our absolute level of contracts.

As we will discuss later in our presentation, we project a return to last year's community year-end -- our fiscal year-end, and we've increased our lots controlled by 20% over the past year.

We're pleased with our progress on land acquisition and we plan to be able to grow our revenues in fiscal '22 and '23, even with today's more normalized sales pace per community. The supply chain disruptions along with shortages of labor, have led to longer cycle times.

The cycle time increases vary from market-to-market and product to product, but when you look at the average for the entire Company, cycle times have increased about 30 to 45 days. The average house that should take 4 months to build is now taking 5 to 5.5 months to build. But we've already build these new cycle times into our guidance.

All signs indicate that fiscal '21 is expected to be an outstanding year for us and fiscal '22 should improve further. I will now turn it over to Larry Sorsby, our Chief Financial Officer..

Thanks, Ara. I'm going to start with the progress we've made in growing our lot position. Turning to Slide 14, we added 4,512 newly controlled consolidated lots during the third quarter. During that same quarter, we had 1,587 deliveries and lots sales, resulting in a net increase of 2,925 consolidated controlled lots.

For the 12-month period ending July 31st, 2021, We added 11,594 newly-controlled lots, delivered 6,340 homes in lots, resulting in a net increase of 5,254 lots. For the trailing 12 months, this represents us controlling new lots at a rate of 183% of home deliveries and bodes well for our expected future growth in community count and home deliveries.

Our land acquisition teams continue to find new land positions for us. Our recent land acquisitions were underwritten with contract paces that match our current slower sales environment. That pace is consistent with the sales pace we achieved before the COVID surge and home demand.

Additionally, we underwrote those recent acquisitions was significantly higher lumber costs in effect at the time. As a result of the recent declines in lumber prices, we now expect even higher margins on those land parcels. We continue to feel very good about the land acquisitions we've made over the last year.

On the left-hand portion of Slide 15, we show our community count for the past five quarters. As Ara mentioned earlier, our community count has been going down each quarter. The end of the third quarter of fiscal 2021, we finally changed the tide and now -- have now achieved a sequential increase in community count.

We expect another sequential increase in the fourth quarter that is large enough to grow our community count back to roughly the same level we had at the beginning of this fiscal year. On the right-hand portion of the slide, we show the lot count at the end of the same five quarters. For each quarter shown our lot count has increased sequentially.

Year-over-year, our lot count increased by over 5,000 lots or by 20%. We have been steadily increasing our lot position. Keep in mind there's a lag between when we control the lots and when we can open a community. That communities we put under control this quarter will be open for sale in 2022 and beyond.

This is worth repeating our ability to increase our lot supply clearly indicates the progress we've made towards growing community count in future periods. Virtually all of the land and communities necessary to achieve expected further growth and profits during fiscal 2022 are already under contract.

Today, our land acquisition teams are primarily focused on obtaining control of land and communities for home deliveries in fiscal 2023 and beyond. Under the assumption of a more historically normal housing demand market going forward, we are controlling new lots and planning for further revenue growth in future years. Turning now to Slide 16.

During the third quarter of Fiscal 2021, our land and land development spend was $178 million, a 9% increase over the same quarter a year ago. For the trailing 12 months, our land spend increased 36% to $761 million compared with $558 million during the same period last year.

This further demonstrates that we're investing the money needed to grow our community count. Turning to Slide 17, even with that increase in land spend and paying off $111 million of 2022 notes early, we ended the third quarter with $308 million of liquidity, well above the high end of our liquidity targets.

We continue to have excess liquidity and our land teams are busy contracting additional land parcels across the country today. Turning to Slide 18 compared to our peers, you see that we still have one of the highest percentages of land controlled via options.

We continue to use land option whenever possible in order to achieve high inventory turns, enhance our returns on capital and to reduced risk. We're pleased to control 66% of our land through auctions, which is up from 61% in the same quarter one year ago.

Looking at our consolidated inventories in the aggregate, including the $98 million of inventory not owned, we have an inventory book value of $1.3 billion, net of $158 million of impairments. Turning now to Slide 19. Compared to our peers you see that we continue to have the second-highest inventory turnover rate for the trailing 12-month period.

Our inventory turns were 20% higher than the next highest peer below us. High inventory turns are a key component of our overall strategy. Turning now to Slide 20, as we promised, now that we've achieved a sustainable level of higher profitability, we are now focused on repairing our balance sheet.

On this slide, we show our debt maturity ladder at the end of the third quarter. On July 31st, 2021, we paid off in full one year early, $111 million of our 10% senior secured notes due July 2022 at par.

Additionally, on August 2, 2021, we paid off in full 3 years early $70 million of our 10.5% secured notes due July 2024, at the call price of 102 and 58. We believe that we should be able to refinance our currently undrawn revolving credit facility ahead of its maturity in the first quarter of fiscal 2023.

This facility is at the very top of our capital structure. After that, we don't have any debt coming due until the first quarter of fiscal 2026. Given our 447 million deferred tax asset, we will not have to pay federal income taxes on approximately $1.8 billion of future pre-tax earnings.

This tax benefit will generate significant cash flow in the years to come and will accelerate our progress in significantly improving our balance sheet. As we continue to post strong results, we believe we should be able to refinance our debt structure at lower rates and better terms.

As always, we will analyze and evaluate our capital structure, and explore transactions to further strengthen our balance sheet and our financial performance. On Slide 21, we show that our total backlog including domestic unconsolidated joint ventures at the end of the third quarter increased 23% to 4,072 homes.

You can also see that the dollar value of this backlog increased 44% to $1.99 billion. The strength of this backlog, including a solid expected gross margin, sets us up nicely for strong results over the remainder of this fiscal year and into fiscal 2022.

Our financial guidance for both the fourth quarter and the full year for fiscal 2021 assumes no adverse changes in current market conditions and excludes further impact SG&A expense from phantom stock expenses related solely to stock price movements from the $104.39 stock price at the end of our Fiscal 2021 third quarter.

However, our guidance for the quarter and for the year include phantom stock impacts we already absorbed in the second and third quarters. For every $4 that our stock price increases or decreases, there is approximately $1 million increase or decrease respectively of incremental phantom stock expense.

On Slide 22, we provide guidance for the fourth quarter of Fiscal 2021. We expect to report total revenues for the fourth quarter of Fiscal 2021 to be between $830 and $880 million dollars. We also expect gross margins to be in the range of 21.5% to 22.5% up substantially compared to the 20.2% in last year's fourth quarter.

SG&A, as a percent of total revenues, expected to be between 8.5% and 9.5% compared with 9.6% last year. Excluding land-related charges and gains or losses on extinguishment of debt. we expect adjusted EBITDA to be between $100 and $115 million. The high end if our guidance, this represents a 32% increase compared to the same quarter last year.

Finally, we expect our adjusted pre-tax profit for the fourth quarter of Fiscal 2021 to grow to between $60 million and $75 million compared to a $45 million profit in the same period last year. Turning now to Slide 23, we are increasing our full-year guidance.

We expect to report total revenues between $2.8 and $2.85 billion up from 2.34 billion last year. We also expect gross margins to be in the range of 21% to 22% compared to 18.4% last year, and SG&A as a percentage of total revenues to be between 9.5% and 10.5% compared with 10.3% in the prior year.

This includes the 10.8 million of incremental phantom expense from the second and third quarters. Excluding land-related charges and gains and losses on extinguishing debt, we expect adjusted EBITDA to be between $345 and $360 million up between 47% and 54% compared to last year.

Finally, we expect our adjusted pre-tax profit for fiscal 2021 to grow to between $175 and $190 million up, an amazing 243% to 273% compared to last year's earnings. This is an increase from our previous guidance of 150 to $170 million.

Assuming a 25% tax rate similar to what we saw in the third quarter of fiscal 2021, our trailing 12-month PE ratio for the closing stock price of $93.83 yesterday was 5.2. Significantly below the average fees for the home builders of 8.7. Additionally, we're currently trading at 4.5 times our earnings guidance for this fiscal year.

As we look forward to fiscal 2022, we expect that today's slower contract pace, which is more in line with historical norms, combined with higher home prices, higher gross margins, and increases in community count should lead to further growth in both total revenues and adjusted pre-tax profits in fiscal 2022.

We expect to begin fiscal 22 with a very strong first quarter compared to the first quarter of last year, or really this year, fiscal 2021 especially with respect to improvements in our adjusted pre-tax profit. Turning now to Slide 24, here we illustrate the growth we've seen in adjusted EBITDA.

On a left-hand portion of the slide, you can see that our fourth-quarter estimate for adjusted EBITDA is 23% more than the fourth quarter of 2020. On the right-hand portion of the slide, we show EBITDA for 2019, 2020, and our expectation for 2021. In 2020, we achieved a 35% growth in adjusted EBITDA.

In 21, we now expect to achieve an additional 50% growth in EBITDA. These increases are representative of the progress we've made in the materially improving our operating results. On Slide 25, you can see how our key credit metrics have improved over the past few years.

Total debt to adjusted EBITDA has declined from 10.1 times in fiscal 2019 to 3.9 times projected for fiscal 2021. Net debt to adjusted EBITDA declined from 9.3 times in 2019 to 3.4 times projected for fiscal 2021. Adjusted EBITDA, the interest incurred has more than doubled from 1 time in 2019 to 2.2 times projected for fiscal 2021.

Assuming we hit the midpoint of our Fiscal 2021 guidance for pre-tax profit our shareholders equity will grow by 661 million from 2019's fiscal year in level. Given our expectations to once again grow profits in Fiscal 2022, our book value will continue to very rapidly grow.

Both Moody's and S&P have recently recognized our improved performance with upgrades to a positive outlook, and Moody's also upgraded our credit rating by one notch. As we achieve our Fiscal 2021 guidance and continue to generate improvements in revenues and profits going forward, we expect further rating upgrades from both credit agencies.

These improved credit statistics and rating upgrade should help us refinance our debt structure at lower rates and improved terms. Now I will turn it back over to Ara for some brief closing remarks..

Thanks, Larry. As you just heard, we expect to close fiscal 21 with a solid fourth quarter, which would make the full year our most profitable year since 2006. We're pleased that we've been able to raise our full-year guidance. And more importantly, we expect further growth and profitability in fiscal 22.

Heading into the COVID-19 frenzy that the entire home-building industry experience, we clearly did not have enough new communities in our land pipeline to open fast enough to replace the communities we sold out much more rapidly than we expected.

However, as we just illustrated with the 20% year-over-year increase in our lot count, community count growth is coming and it's coming soon. As we discussed, our margins are increasing. During the fourth quarter of fiscal '21, we have a large number of homes that deliver, as well as a big slug of communities that will be opening for sale.

There is always a possibility of further COVID-related delays during our fourth quarter. But we believe we factored in reasonable assumptions for the current environment into our guidance.

I know that I can count on all of our associates to execute our plans for the fourth quarter, which should shut us -- set us up nicely to be in an advantageous position to grow both revenues and adjusted pre-tax profits further in fiscal 22. I look forward to sharing our improved results in future periods.

That concludes our formal remarks and we'll be happy to open up for Q&A..

The Company will now answer the 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 be able to get back into the queue to ask other questions. We will now open the call to questions.

Our first question comes from the line of Alex Barron from Housing Research Center. Your question, please..

Hey, guys. Thanks for taking my question. And obviously, very -- congratulations on the turnaround and everything that you guys have done to date..

Thank you..

I wanted to ask about the prospects of refinancing some of your debt, which obviously right now yet is very low rates for most other builders.

Kind of wondering if that's something that's already in the works and if so are you also planning potentially to raise equity as part of some transaction like that?.

Alex, we continue to explore the potential of refinancing our capital structure, we believe that we could do so today at lower rates than we have now. What we're struggling with as we continue to improve our results, we think we deserve even lower rates than what we think we could actually do today.

So we're balancing the timing of when to do it with respect to potentially issuing equity as a component of doing some kind of refinancing debt structure. We've not ruled that out.

and if we could issue a modest amount of equity to get a significantly lower rate and completely refinance our entire capital structure I think it's something we would give serious consideration to..

I'll just add that we're obviously forecasting very solid cash flow. And as we discussed and Larry discussed our debt maturity ladder gives us a long runway, so we don't have to rush in. We can play the market right and look for the right rate for us..

Yeah, I know that makes sense. I mean, your equity is obviously going in the right direction. I guess the other question I had was, your community count projection seems to imply a pretty big jump in the fourth quarter, and I'm just curious about a couple of things.

One is, is that going to be more near-term or is that going to be more towards the end of the quarter? I guess what I'm trying to figure out is what impact it might have on orders. And the other thing related to orders is many other builders, including yourselves.

I think have been kind of withholding the level of orders or homes that you're willing to release to the market to kind of just the backlog and so forth.

So do you guys feel that you are already past that adjustment period where you can start taking the foot off the brakes a little bit? Can you comment on that?.

Sure. Well, first, as I think we mentioned, I think we're back to a more normalized sales pace per community. We've been -- we've gotten there by balancing metered releases and price increases.

Last year in our third quarter, we had just this burst of sales, and frankly, following what happened in March and April in the middle of the COVID shutdown, we were very hesitant as were many builders to turn off the spigot, but it was an unsustainable number.

So we feel like we're in a good position right now, we are still metering some sales, we want to match our ability to start homes, sell homes, and deliver homes, so we are still metering in many communities across the country, but we feel that's healthy and we're in a pretty solid position..

Okay.

And on the timing of the communities, do you feel it's more back-end weighted or more nearer?.

I mean, we're halfway through the quarter, so we're not giving specific guidance, but we're comfortable we'll get there. We only have a month-and-a-half left to go. We feel like we're comfortable that we'll meet our numbers.

Keep in mind, it is very difficult to be precise because if you sell a couple of too many in one community, that drops the community count once it falls below 10. If there is a two-week delay in opening a new community, it can throw it into the next quarter. So it's always very tricky to --.

Alex, to try and give you a little clarity. If I were sitting in your shoes and we're not giving you specific guidance on this point, I'd waited a little bit to the second half of the quarter as the first half..

Got it. If I could ask one more, obviously supply-chain issues have been a big deal in the last few months.

Current -- just curious as to whether you guys think today, where you sit today, on supply chain problems and shortage and so forth, is it better, the same, or worse than 3 months ago?.

I'd say it depends, generally it's a different problem with a different product in a different market every week. It's like the classic whack-a-mole problem. The different problem raises its head and we jump on it, that's been a major focus of our Company. So I'd say it's still kind of with us.

We've tried to incorporate that into our guidance and projections. Our cycle time is still running higher as we mentioned earlier.

We expect at some point as all of the builders catch up on their starts and as sales for everyone start to return to normal levels, that some of the shortages and the labor shortages as well as material shortages will come down and return to normal and that will be able to get back to regular cycle times..

Great, I'll get back in the queue. Thank you..

Thank you..

Thank you..

Once again ladies and gentlemen if you have a question at this time. And our next question comes from the line of Vincent Foley for Barclays. Your question, please..

Morning, guys. So Larry, when we're talking about refinancing of the capital structure here, and you are sort of waiting on borrowing costs to come down.

Should we think about refinancing in the context of going from a secured to unsecured or is it your priority right now, in a refinancing just interest savings? And then as a follow-on, can you give us a sense of how longer-term you think about a balance between secured debt and unsecured debt, and or are you planning on sort of a more plain vanilla capital structure over the longer-term..

I'm going to take your last question first and we absolutely want to have a more plain vanilla capital structure. It's been an interesting last decade. But we'd love to get back to doing plain vanilla deals, rather than interesting, intriguing, exciting deals. And our focus -- I think our primary focus is on lowering the rate.

But we believe that our improved performance does justify being able to do a refinance on an unsecured basis. So we balance it, and I'm not ruling out something that is still secured and will not do this in the future. We would expect that the totally unsecured and if we can't get unsecured today, we may wait until we can.

So it's just a balance of how much the lower rate can we get in different alternative structures..

And as a follow-up, I guess one of the biggest questions we get asked is why the wait here. And I look at your slides and where leverage has gone. In 2 years, 6 turns lower leverage 2021 is going to be the best year in the Company's history. Next year could be even better.

But a year for now, who knows what the housing cycle is going to look like, where inflation is going to be, what the economy is going to look like. So why not do something sooner rather than later and take advantage of --.

I think we would do some investment enterprises later if we felt that we were getting a rate similar to peers that are certainly positioned to us, so it's not something we're ruling out at all. We're interested in refinancing that materially lower rates than what we have today.

And as Ara mentioned, we don't have a gun pointed at our head to have to do it right this second, but I understand the risk that you're pointing out that if we wait, the high yield market might run away from us, so we certainly are very conscious of the trade-offs that are out there in that regard.

But we believe as we continue to post very strong results, including this third quarter, and now that the fourth quarter projection, the full-year is going up, that the debt market should be given us additional credit.

And as we see that additional credit comes in the form of being able to do a deal at more attractive rates, we're not ruling that out at all. We may well do so. So it's just a matter of getting rates comparable to what we think similarly situated peers have today..

I'll also add that our call premiums will drop substantially in the coming months. So that's certainly something that we look at as well..

Great. Thanks very much..

Thank you. Our next question comes from the line of Alan Ratner from Zelman Associates. Your question, please..

Hey guys, good morning. Thanks for taking my question. So just curious moving away from the balance sheet a little bit, just curious, are you guys involved at all in the build for rent space? Several of your peers have announced either venture in that area or are actively selling homes to single-family rental operators.

So I'm curious if you're partaking and more broadly, what impact you're seeing from build for rent in your overall markets, either from competition on land, labor, and materials, demand, et cetera..

We have one transaction that we're finalizing now of a couple of 100 homes. And that will be our first. It's not a primary focus. We feel like our capital is well-served right now in our primary business, and we're trying to stay focused on replenishing. I'm not saying we're ruling it out and we're certainly taking a -- putting our foot in the water.

But we're not ready to dive in full force just yet..

I would just add one more thing, Alan, certainly over the last year, demand from traditional sources have been so strong, that's where our focus is -- has been, we've had -- and the industry's had trouble getting homes started as fast as we got demand.

The for rent market, is a nice longer-term and something that I think if we could actually find a relationship on a longer-term basis is something that we'd find intriguing..

Got it. Appreciate your comments there. Second, on pricing really strong increase in your average order price this quarter. I'm not sure how much of that 27% were like-for-like versus mix-driven.

But just curious, when you are seeing a balance now with absorption pulling back to what you consider to be more normal levels, would you expect to take the foot off the gas a little bit on pushing price, or is that something where you still feel like there's an opportunity to drive price higher, given how strong demand is today?.

I'd say we're back to more normalized pricing reviews. There was a point in the last 6 months, we would need to raise prices every week or 2 or even every sale or 2 because lumber costs were going up and that was really caused concern.

I'd say right now we're back to a normal environment, so I don't think I would expect the kind of price increases that we've witnessed over the last year..

On the flip side, are you starting to see any incentivizing going on in your markets from other builders? I know it's very early up from that standpoint, but a few have mentioned that's a possibility as you get into the third and fourth quarters, which always happens this time of the year.

It didn't happen last year, but just curious if you're starting to see any of that?.

We're seeing very little thus far, but we do not primarily expect builders, we're more than the majority is built to order, so we're not as influenced by people doing end-of-the-year spec discounts. I'm sure it will return at some point to some normalcy in terms of concessions. And you would think that might hurt margins.

On the other hand, our primary building material lumber has been dropping and will likely drop quite a bit more so, we feel pretty comfortable about margins given those 2 factors..

Got it. Alright, thanks a lot. Appreciate it..

Thank you. Our next question is a follow-up from the line of Alex Barron from Housing Research Center. Your question, please..

Yes. thanks.

So one of the things that we've been -- or I wanted to ask is this issue about the phantom stock, and is this accounting going to go on for many, many quarters, or is it just constrained to this year and then once it's frozen and complete that's it?.

The way that works is as the -- after this fiscal year the performance will be set, but it's paid over the subsequent three years. So it will trail off, 60% of it gets paid in January, so a large -- more than half of the variability goes away in this coming January and then a year later another, I think it's 22% and then 20% the following year..

Okay. Got it. The other question I had was on your margins. Obviously, you guys did a -- had a good increase in the last few quarters, especially this quarter. A few other builders have expressed confidence in the direction of margins. I think you guys did, too.

I think you mentioned that you expect all the margins to improve by the second quarter relative to lumber costs. But some other builders have seen even larger margin increases.

Do you feel like there's more potential here? Is there something that would offset the lumber expense from allowing margins to improve like, just any thoughts around margins that you can offer?.

Yes, I think we're optimistic about the outlook for further margin growth. Part of it is driven by the lumber costs. Of course, that will be offset with some of the other materials that are in shortage and sometimes you have to pay a premium for that.

But as we pointed out, the price of our contract was higher than the average price of our deliveries per home. So we feel good about what the margins in our backlog looked like compared to what we just delivered. Having said that, as you can appreciate that, I think as everyone appreciates, it's a very difficult market to project.

There are supply chain issues popping up all over the place, and unfortunately, sometimes you have to deal with them by paying a high price, so we're not going to be too accurate or too specific in margin guidance, but we're feeling very comfortable right now that we will see some growth coming up..

Okay, great. I think that's it for me for now. Thank you..

Okay..

Thank you. Our next question comes from the line of Brian from Emerson. Your question, please..

Hi, guys. Great quarter, great execution, I appreciate you taking my question. The first question was kind of on any ESG initiatives you might be working on. And the timing that you might kind of go into that. And then a clarification when you look at your multiples, you're based on -- we're getting fully tax multiples, I believe.

I think you're more like three times cash EPS for this year and next; is that correct?.

Two questions, one on --.

We don't focus on cash multiples, but we do after-tax EPS and that's the number we were referring to..

After-tax EPS was the multiple you gave it, like four-ish, five-ish,.

Yeah..

For next year's initiatives. And so --.

Yeah..

--I guess on a -- given your tax yield, you reduced it by the tax base, so you're more like --.

Yeah..

-- 3 times kind of a cash EPS, not cash flow from operations, but --.

I understand where you're going. We haven't done that exact calc. But directionally you're correct. Yes, our cash flow is far higher than our after-tax income because we're not as.

As a proxy for what I call cash EPS, which is simply just your pre-tax plus your tax rate, I get you at -- close to a 33% free cash flow yie -- or what would be free cash flow yield.

And I don't mean to say that that's cash flow because you're obviously growing communities and doing good things to grow the business, will benefit shareholders, so if you didn't grow, you'd have the free cash flow, if you did, you might have less free cash flow. So is that -- I guess that's the way I look at it..

I think you're going to not hear us object to you saying that you think you've been cheaper than what we said on an after-tax basis. We do not believe the market on either the equity or the debt side is yet giving us credit for our dramatically improved performance.

But I think as we continue to improve, we'll make believers out of both the debt market and the equity market. And there's an upside..

I will -- and two other points. The P is one focus. Some analysts are focused on price to book. Our book value, we've obviously increased our projection for this year, that will increase our book value at year-end if we perform there. And we're giving guidance that we expect to improve on that next year.

It's the law of small numbers to some extent, our book value is going to be rising rapidly. And we think we will be an opportunity from that perspective by the time we complete 22 and we've got $2 billion of backlog. So we're well on the way for fiscal 22.

I think you have a second part to your question?.

ESG. Yes.

Before we said ESG I'd cut to the chase and go one step further on a present value basis, it's hard-pressed for me to find before this quarter's report, but with your guidance, a value less than 150 and more reasonably above 200, just based on different discount rates and pretty moderate assumptions for cash flow beyond the three years that we're looking at, providing it holds up.

So I mean, I get more like a $300 PV, pretty easily based on just how you've transformed things in the last 5 years. I was out there visiting you guys 5 years ago, I think you had 2.5 billion in debt, and you're looking like you're going to be closer to 1.25 net by year-end, October, a couple of months, right? Thank you.

Anyway, the ESG, great job, great job.

The ESG question, As people, are -- investors are so concerned about ESG these days, you guys can -- are you guys going to be talking in the future about any of your initiatives and what would that look like, especially given your opportunities, do something green on the green side, given you're a builder?.

That's a well-timed question. It's actually something we're very focused on. It's on our agenda for the full board to discuss and I think you'll be seeing a lot of information about our ESG efforts in this year's proxy. And soon in the near future as well on our website..

Perfect. I'll get back in the queue for a follow-up unless you want to just take it off the cuff right now..

You can follow up we're good..

The follow-up was -- given that you're getting cleared for rental partnerships and I know your assets are best suited as you're utilizing them currently. But given the high demand, finding someone like a black rock or a big investor to even backstop or refi at a market rate, which we know is much lower on your debt as per interest.

It seems like there is just to create a possibility for you guys to do a JV (ph) that could refi or even eliminate debt for a multiyear partnership that would -- I'm talking something larger where they commit capital, which wouldn't stretch your balance sheet.

Seems like Linara is an interesting thing -- everyone seems to be moving on things and I guess you guys have 120 community that you're working on, but just thinking outside the box a question on financing and partnering..

I think maybe what you're touching on is what we've been doing historically, continued to do and perhaps we'll grow, is land banking, to where it takes less and less of our capital, meaning that we can do more with the same capital and grow.

We've not really explored a joint venture that -- at least that we've thought of anyway, that would transform our ability to refinance our debt structure at lower rates. But if there's someone interested in having that discussion with us, we'd love to have it..

Sounds great, guys. Thanks. Keep executing. Incredible quarter, and thanks for the guidance..

You bet. Thank you..

Thank you. This does conclude the question and answers session of today's program. I'd like to hand the program back to Ara Hovnanian for any further remarks..

Thanks very much. And we're pleased with the quarter were amazed at what our team has been able to accomplish all around the country, particularly given all the chaos and turmoil that COVID has created. We're proud of our results. We look forward to giving better results. And we'll look forward to entering 22 with a bang. Thank you..

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