Good morning and thank you for joining us today for Hovnanian Enterprises Fiscal 2023 Second 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.

Management will make some opening remarks about the second 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 Investor 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 now like to turn the call over to Jeff O'Keefe, Vice President, Investor Relations. Jeff, please go ahead..

Thank you, Lydia and thank you all for participating in this morning's call to review the results for our second quarter which ended April 30, 2023.

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 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, 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, 2022 and subsequent filings with the Securities and Exchange Commission.

Except as otherwise required by applicable securities 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 second quarter results and I'll comment on the current housing environment. Larry Sorsby, our CFO, will follow me with more details and we'll open it up to Q&A after. On Slide 5, as usual, we compare our quarter results to our guidance.

Considering the doubling of mortgage rates, the turmoil in the banking industry, concerns about inflation, federal debt ceiling caps, a war in Ukraine and general economic uncertainty, we are pleased that we exceeded the high end of our guidance for all but one of the metrics we gave for the second quarter.

Total revenues of $704 million, SG&A of 10.7% and adjusted EBITDA of $87 million were all better than the high end of our guidance range. Adjusted pretax income of $46 million also exceeded the top end of our range, in this case, by over 30%.

We experienced strong demand for quick move-in homes which resulted in higher deliveries, revenues and profits for the second quarter but it also resulted in a slightly lower adjusted gross margin than we projected earlier, particularly as the majority of our QMIs were in the West which currently has lower margins.

In sales recently, the spread between QMIs and to-be-built margins has narrowed and we're working hard to narrow it further. Due to the slower housing sales environment last year as mortgage rates rose rapidly, we increased our use of concessions and we started more quick move-in homes last summer.

These steps spurred demand and allowed us to achieve higher-than-anticipated home deliveries and profits during the quarter. On Slide 6, we compare our results for this year's second quarter to the same period last year. The comparisons are challenging given that last year's margins and profits were particularly good.

Starting in the upper left-hand corner, total revenues were basically flat year-over-year at $704 million. Moving to the upper right-hand portion of the slide, you can see that our adjusted gross margin was 20.9% this year compared to a very tough comparison to last year when our quarterly gross margin peaked at 26.6% for the quarter.

Gross margins for the second quarter of '23 were adversely impacted by a 650-basis point increase in incentives and concessions compared to our second quarter of last year. We delivered more homes last quarter that were sold earlier in a more challenging time in the marketplace.

Despite the increased use of concessions, our gross margin was still above 20% which we consider to be a more normalized gross margin. The contracts we are currently signing for new homes have margins higher than what we just delivered and remain above 20%.

You can see in the lower left-hand portion of the slide, our SG&A was 10.7% this year compared to 9.7% last year. Excluding some of the benefits from the Phantom stock last year, our SG&A was essentially flat. In the lower right-hand portion of the slide, we show that adjusted EBITDA was $87 million compared to $124 million last year.

On the left-hand portion of Slide 7, you can see that our adjusted pretax income was $46 million in the quarter compared to $88 million last year. On the right-hand portion of the slide, you can see that our net income for the second quarter of '23 was $34 million compared to net income of $62 million in last year's second quarter. Turning to Slide 8.

On this slide, you can see that contracts per community for the second quarter were down 13% compared to the stronger-than-normal pace a year ago. But at 13 contracts per community, we're clearly above the levels that we've achieved during any second quarter in the many years before COVID.

On the left-hand portion of the slide, you can see that we averaged 13.5 contracts per community during the second quarter from '97 through '02. So the second quarter of '23, approached levels -- approach the levels we achieved in more normal times.

We've achieved significant increases in our sales pace since last summer when home demand fell quite a bit after the rate increases. Our contracts per community for the second quarter of '23 increased 100% sequentially from 6.5% in the first quarter to 13% in the second quarter.

On Slide 9, we show that the trend of monthly contracts per community sharply increased since the beginning of our fiscal year. We show contracts per community, including and excluding BFR contracts. Either method of calculation shows our sales pace has improved significantly, far greater than the typical spring selling season would normally dictate.

While there are still a few more days to go, we also show preliminary results for the month of May through Monday, May 29. The total number of contracts for our preliminary May results increased 30% compared to all of May in '22. Contracts per community increased 18% from 3.3 in May of '22 to 3.9 for preliminary May 23 results.

While lower than April which would be typical for seasonality, it remains at a very high annualized pace and well beyond the pre-COVID sales pace. Another reason that May was a little lower sequentially is that there are only 4 Sundays in May, while there were 5 Sundays in April.

I'll also point out that while the month of May is not yet complete, our results are already higher than February and March of this year. And now on Slide 10, we break out contracts per community by our geographic segments.

Similar to what we reported in the fourth quarter of '22 and the first quarter of '23, contracts per commuter in the West segment were lower than our Northeast or Southeast segments. However, the sales pace in the West has improved and the sales pace gap between the West and the Northeast has significantly closed during the second quarter of '23.

Turning to Slide 11. You can see the month-by-month progression of our seasonally adjusted annualized contract pace per community. May of '22 started the rapid decline and we troughed in September with 21.2 contracts per community.

The trajectory since September has been positive and now trending close to our normalized annual pace of 44 contracts per community. You can see the slowdown as the market reacted negatively to the sharp rise in mortgage rates.

However, you can also see that customers eventually adjusted to the mortgage rate sticker shock and have since reentered the housing market in a meaningful way. Turning now to Slide 12. On this slide, we show annual contracts per community.

On the far left-hand portion of the slide, you can see that our normalized pace of $44 million that was achieved in '97 through 2002. In the middle of the slide, you can see our annual contracts per community for the past 9 fiscal years.

And on the right-hand portion of the slide, you can see that our recent seasonally adjusted contracts per community by month for the past several months. With the exception of the pace in March, all of these other bars exceed the previous 9 years, other than the 2 years where we had the post COVID spur case in '20 and '21.

If you turn to Slide 13, you can see our cancellation rate during the second quarter returned to a more normalized 18% rate. Weekly traffic in our communities and website visits are both continuing at healthy levels, indicating future demand for new homes should remain strong.

I'm now going to shift gears and talk about our temporary pivot to start more quick move-in homes or QMIs as we call them. The logic behind this pivot is that QMIs provide our customers with more certainty on what their mortgage payments would be at closing, considering a home to be -- we consider a home to be a QMI the day we begin construction.

If you turn to Slide 14, you can see that after a significant shortage of QMIs during the COVID surge in demand, we've gone from 3.2 QMIs per community at the end of the third quarter of '22 to a high of 5.6 QMIs per community at the end of fiscal '22 to our current level of 4.8 at the end of the second quarter of '23.

It's been challenging to grow our QMIs because of the pickup in our sales pace. Right now, our QMIs per community are still slightly higher than our historical average. Consumer demand for QMIs remains quite strong.

Since the beginning of the year, we've seen our QMI sales increase to about 60% of our sales versus about 40% historically, so represents obviously a 50% increase which is very significant.

Our QMI target remains approximately 7 QMIs per community, as we discussed last quarter, ideally with a few homes beginning construction and a few homes partly through construction at every community. Again, recent strong sales have made it difficult to get to our target of 7 QMIs per community.

Some investors fear that homebuilders will overproduce QMIs. We just do not see that in the field. Should we get to 7 QMI per community, we plan to match our start schedule with the then current sales pace at that local community. We think this approach will make certain that we don't start an excessive level of unsold homes.

In the meantime, we'll continue to focus on selling these homes before they are completed. Given the strong current sales pace and the dearth of MLS listings, it's difficult to start enough QMIs to increase our supply. On Slide 15, we show that the number of existing homes for sale around the country currently remains depressed at 910,000 homes.

That's less than half of the historical average which is over 2 million homes. The lower level of existing homes for sale certainly helps our sales. Consumers have fewer existing homes to choose from and as a result, are looking at new home construction.

We talked about consumers wanting to know their mortgage rate and having the ability to lock in their mortgage rate as a reason to build more QMIs. Having QMIs available for sale is also important because just like existing homes, homebuyers can close much sooner on a QMI than a to-be-built home. Moving to Slide 16.

Due to the increasing strength of demand for our homes, we are able to raise net home prices in 30% of our communities during the first quarter and 69% of our communities during the second quarter. If demand remains strong, we expect to be able to continue increasing home prices moving forward.

These net home price increases are after taking into account incentives and concessions. One reason that margins continue to be high today despite a higher use of incentives and concessions is lower lumber costs that have returned to more historically normal levels.

Additionally, we've been proactive in lowering our construction costs in other locations. On our last call, we mentioned a purchasing blitz. We worked with our trade partners and a and material providers and have negotiated significant cost savings on an annual basis.

The benefits of the purchasing blitz should positively impact our margins in the latter part of '23, as we deliver the homes that we are just starting now with the lower costs. Additionally, we took steps during the second quarter to further reduce our SG&A costs. First, we reduced our staffing levels by about 10% since the end of fiscal '22.

Second, senior executives took a salary reduction. And third, we asked our associates to make cuts to outside service providers. The combined savings from all these steps resulted in significant annual savings in our overhead expenses.

Given the relative strength of the housing market and the steps we took to reduce our costs, we are even more optimistic today about our future growth prospects. Furthermore, we believe that favorable demographics and persistently low supply of homes in the existing home market will support demand over the long term.

I'll now turn it over to Larry Sorsby, our Chief Financial Officer..

Thanks, Ara. I'm going to start with Slide 17. You can see that we ended the quarter with 128 communities open for sale. Wholly owned communities grew 12% year-over-year to 114. Utility company delays continued to slow down our ability to open new communities. If not for these delays, our number of communities open for sale would have been even higher.

During the rapid increase in mortgage rates last summer, we suspended most new land acquisitions. As a result, on Slide 18, we show that our lot count peaked in the second quarter of fiscal '22 at 33,501 lots controlled.

During each of the subsequent quarters, our lot count modestly decreased and we ended the second quarter of fiscal '23 with 28,657 lots. Given our recent increase in sales pace, our land teams have jumped back into the market quickly and are once again actively negotiating new land parcels that meet our underwriting standards.

We have already experienced success in our new land acquisition efforts and our corporate land committee calendars continue to fill up.

By using current home prices, current construction cost and current sales pace to underwrite to a 20-plus percent internal rate of return, our underwriting standards automatically self-adjust to changes in market conditions.

We think our outlook for future deliveries is very bright, given the increase in new communities and the solid pace in contracts per community compared to last year. Given the return to a more normalized sales pace and our planned increase in community count, we anticipate returning to top line growth in fiscal '24.

On Slide 19, we show our percentage of lots controlled by option increased from 45% in the second quarter of fiscal '15 to 71% in the second quarter of fiscal '23. This has been a focus of our land strategy and we continue to make progress. A low percentage of owned lots strongly mitigates land risk. Turning now to Slide 20.

Compared to our peers, you see that we have one of the highest percentages of land controlled via options. We continue to use land options whenever possible to achieve higher inventory turns, enhance our returns on capital and to reduce risk. Turning now to Slide 21. We show year's supply of owned lots for us and our peers.

With 1.6-year supply of owned lots, we have the second-lowest year supply. Having a shorter supply of owned lots combined with a strong supply of option lots is a good way to mitigate land risk. On Slide 22, including both owned and option lots, you can see that we have a 5.5-year supply of controlled land. Turning now to Slide 23.

Compared to our peers, we continue to have the third 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 both inventory turns and our returns on inventory in future periods. Turning to Slide 24.

After $157 million of land spend in our second quarter, we ended the quarter with $464 million of liquidity, more than $200 million above the high end of our targeted liquidity range. Turning now to Slide 25. On this slide, we show our debt maturity ladder at the end of the second quarter.

During last year's 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 changing market conditions last summer, we temporarily shifted our focus to preserving liquidity and paused our debt reduction plans.

In our press release this morning, we announced that in May, we redeemed $100 million of our 7.75% senior secured notes due 2026. We have retired $494 million of debt since the beginning of fiscal 2020. This latest debt reduction shows that we remain committed to strengthening our balance sheet.

Given our $337 million deferred tax assets, we will not have to pay federal income taxes on approximately $1.3 billion of future pretax earnings. This benefit will significantly enhance our cash flow in years to come and will accelerate our progress of improving our balance sheet.

Our financial guidance for the third quarter and full year 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 cancellation rates.

Our guidance assumes continued extended construction cycle times averaging 6 to 7 months compared to our pre-COVID cycle times for construction of approximately 4 months.

Further, it excludes any impact to SG&A expenses from our Phantom stock expenses related solely to the stock price movement from our $73.77 stock price at the end of the second quarter of fiscal '23.

While we've met or exceeded most of our guided metrics over many quarters, there is a greater degree of uncertainty in the current environment given inflation, the potential of an economic recession, risk related to increasing the U.S. debt ceiling, employment risk, recent bank failures, utility company delays and mortgage rate increases.

With those caveats in mind, on Slide 26, we show our guidance for the third quarter of fiscal '23. We expect total revenues for the third quarter to be between $630 million and $730 million. We expect adjusted gross margins to be in the range of 21.5% to 22.5%. SG&A as a percent of total revenue is expected to be between 11% and 12%.

Our guidance for adjusted EBITDA is between $85 million and $95 million. Our adjusted pre-tax income for the third quarter of fiscal '23 is expected to be between $50 million and $60 million. On Slide 27, we show guidance for fiscal '23. We expect total revenues for fiscal '23 to be between $2.5 billion and $2.65 billion.

We also expect adjusted gross margins to be in the range of 21% to 22.5%. SG&A as a percent of total revenues is expected to be between 11% and 12.5%. Our guidance for adjusted EBITDA is between $320 million and $340 million. Our adjusted annual pre-tax income for fiscal '23 is expected to be between $180 million and $200 million.

We expect our diluted EPS to be in the range of $17 to $20. Book value per common share is expected to be between $57 and $60 at the end of the fourth quarter. Turning now to Slide 28. It shows the compounded annual growth rate of our book value per share from the end of '21 to the midpoint of our guidance for the fourth quarter of fiscal '23.

Our expected growth rate is 205%. Slide 29 shows our book value growth rate compared to our peers, helped by the fact that we started at a low number, our growth rate is much higher than our peers. We think it's important to consider how rapidly our book value is increasing when evaluating an appropriate price-to-book ratio compared to our peers.

Given our rapidly growing book value, we think it would be appropriate to consider a variety of metrics, including EBIT, return on investment, our price earnings multiple when establishing a fair value for our stock. We believe when all of our financial metrics are considered, our stock is a compelling value. Turning to Slide 30.

Not only is our book value per share been growing at an extremely strong rate but on this slide we show that compared to our peers we have the second highest return on equity at 50%. Turning to Slide 31. On this slide, we show compared to our peers that we have one of the highest consolidated EBIT returns on investment at 32.9%.

We believe this is the most accurate measure of pure homebuilding performance as it ignores leverage. On Slide 32, we show our price to book multiple compared to our peers. While we trade above median, we still trade below peers that have lower growth rates and lower returns than us.

Given our rapidly growing book value, it's not reasonable to place an arbitrarily low multiple of book as a cap to our share price as some analysts have suggested. On Slide 33, we show the trailing 12-month price-to-earnings ratio for us in our peer group.

Even though homebuilder stocks have traded higher since the beginning of calendar '23, the group still trades at a significant discount to the overall stock market. Based on our price earnings multiple of 3.61x at yesterday's closing, stock price of $93.83, we're trading at a 41% discount to the homebuilding industry average PE ratio.

We recognize that our stock may trade at a discount to the group because of our higher leverage.

However, given our 50% return on equity, our industry-leading growth in book value, our top quartile EBIT return on investment, combined with our improving balance sheet, we believe our stock continues to be the most undervalued of the entire universe of public homebuilders.

We remain focused on further strengthening our balance sheet, including further reductions in our debt levels. We look forward to reporting our progress in future periods. That concludes our formal comments and we're now happy to open it up for Q&A..

And our first question coming from the line Jesse Lederman with Zelman & Associates..

Congrats on the strong results. You gave some really great info, particularly on the absorption pace. And looking at Slide 11, it's clear that the second quarter was particularly strong. And on a seasonally adjusted basis, right around your historical level. I do notice that May did pick a touch lower from April on a seasonally adjusted basis.

I'm just curious to hear your thoughts on why you think that may have occurred? Was it rates rising through the month? What did you see there that may have resulted in a slight drop in that metric?.

I'll try to tackle that. Several things. First, May is seasonally normally a little slower month. Maybe more important May only had 4 Sundays, April had 5 Sundays, that makes a big difference. Finally, if you turn to Slide 12, we separate the normal contracts per community in our for-sale communities from our BFR sales.

And what you see is if you put the BFR sales aside, April was actually almost identical to May, I mean, 0.1 difference in sales per community. So it's actually surprisingly resilient and steady right now. There was a lot of variation in BFRs. In April, we were about -- we had about 5 BFRs community and -- per community.

And in May, we -- the benefit was only 1.1. So that also makes a difference..

And I'll add one additional point to that. May is not over. So we still have a couple more days of sales to report. So I wouldn't be surprised when we actually have full month of May that it isn't equal to April on a seasonally adjusted annualized basis, excluding BFRs, if not even a touch higher potentially which is unusual.

So I would say May is quite strong comparatively..

That's very helpful. Just one quick follow-up on the BFR side, are you seeing anything? I know your BFR sales absorptions were a little lower in May. And I'm sure some of that may be timing related.

Are you seeing, in terms of ebb and flow of demand from that particular buyer, how does that look? Are they becoming more aggressive or pulling back relative to the prior few months?.

Interestingly, it's kind of followed the pattern of normal for-sale communities. It slowed towards the last half of '22. Mortgage rates for our normal customers went up but they also went up on the build-for-rent buyers as well. So a lot of them went to the sidelines for a bit.

But as the market, in fact, picked up at the beginning of the calendar year, it seemed like the appetite for build for rent investors also picked up. So we're seeing that as a good little supplement to our normal business. It is choppier, though, because it depends on what transactions happened in a particular month.

So it will be volatile and you can kind of see that on Slide 12. But overall, we're optimistic about the long-term demand for build for rent and we anticipate strategically making it a more important part of our overall portfolio..

That's helpful. And if I could just squeeze in one more. You mentioned the spread between your quick move-in homes and your to-be-built homes. The gross margin has narrowed.

Could you just maybe quantify where the gross margin on each of those products stands today? And where you kind of see it going?.

It varies dramatically community by community. If you look at some places in the mid-Atlantic or Delaware or Southeast Coastal where in some of those markets and some of those communities were the QMIs and the build for rent -- excuse me, the build -- sorry, to-be-built, have identical margins.

There is a 0 variance in other locations -- in a couple, believe it or not, we have a premium for QMIs and in others, more historically, similar to what we're experiencing primarily in the West, we see a little discount for QMIs versus to-be-built. So it's just a very different picture by community and by geography.

Overall, though the blended delta has been narrowing recently..

When you say narrowing, you mean --.

A spread between a to-be-built margin which is typically higher than compared to a quick move in margin..

Got it.

So you're seeing spec or quick move-in margins accelerate more rapidly of late than the to-be-built margin?.

Well, yes. And more specifically, again, the margin difference between to-be-built and QMIs is narrowing. So even if we're both going up, yes, they're going -- that spread is less..

And I would say part of it is related to just training our sales associates. The value that a quick move-in home is to a consumer today.

Most consumers value having a quick move-in home so that they can lock in their mortgage payment at a reasonable rate as compared to to-be-built so that we're shifting the kind of psychological historical, hey, we've got to discount a quick move in to move it to, hey, those are more in demand than to-be-built, so we shouldn't be discounting them at all.

So it's a shift in culture for us. We've not historically been a big builder of quick move in homes. And I think some of that training is starting to kick in. And as Ara mentioned, we're seeing that spread narrow and hopefully, it will continue to narrow..

And our next question coming from the line of Jordan Hymowitz with Philadelphia Financial Management of San Francisco, LLC..

I have 2 questions. One, you spoke about continued debt pay down and you have a tremendous amount of cash now on the balance sheet. And last year, you paid down $200 million, if I remember correctly.

Would that be a possibility this year as well?.

I don't think we're putting out any guidance on when we're going to reduce debt again. I mean, we're going to balance it between making investments in land to fuel further growth. At the same time, we want to strengthen our balance sheet.

Suffice it to say, over future periods, whether it's this year or not, I'm just not prepared to comment on, we will be reducing debt..

And which debt did you reduce of the $100 million which interest rate?.

The 7.75% were required by bank -- I mean, excuse me, by debt covenants to pay that one down first. That certainly wouldn't have been our preference. If we had the flexibility to buy down the higher coupon, we would have done so but covenants restrict us to paying off early that one first..

And what would be the next one you could pay down?.

The same. Well, we still have to pay off the balance of the 7.75%..

Yes, I mean, that $150 million is left on that. So we'd have to pay down $150 million.

After the $150 million, Brad, what's the next coupon if you know?.

It's the next lien in -- so I think it's a 10.5%, Larry..

Perfect. And my last question is, you guys don't pay any cash taxes.

Should I assume that that's correct for the next year or so? So in other words, one of the reasons your book value is growing faster as well as -- and your cash flow is better because there's no cash taxes?.

Do you want to take it, Brad?.

Sure. I mean, the answer to your question is, we won't be paying any federal taxes. We do pay some state taxes. But it doesn't change our book value, the deferred tax asset that is being used at the time that it's basically an asset offsets the payable associated with taxes. So it's already in our book value..

And our next question coming from the line of Alex Barron with Housing Research Center..

I guess continuing on what Jordan was asking.

So if you guys have to pay the debt down in the order of these liens and you've got 2025 debt coming due, wouldn't it be beneficial to you to just continue to pay down debt continuously, assuming that if interest rates don't come down and don't give you an opportunity to refi otherwise?.

I mean we're -- I think we've sent a pretty strong message that we're returning to our debt reduction kind of slide path. So we do intend to allocate some capital to future debt reductions in future periods.

At the same time, we continue to always monitor the high-yield market to see when it might be a good time to potentially refinance some of our capital structure as well..

I mean, overall, again, with the pattern, we reduced debt 2 years ago, a couple of hundred million dollars. We reduced debt last year, a couple of hundred million dollars. We just reduced $100 million this quarter. So our plans are certainly to stay on that trend.

At the moment, though, there's a lot of uncertainty in the economy, as we've discussed many times in our call. So we're staying on the more conservative side with more cash than we really need on our balance sheet right now. But I'd anticipate as things smoothing out in the economy that we're going to be continuing our trajectory of debt reduction..

Yes. Because I mean, I get the conservatism and -- but at the same time, it seems economically, just all the interest savings are increasing your earnings and book value you invest in. So hopefully, that will continue on that path..

Yes. We agree..

Okay.

On the issue of DTA and taxes, the $12 million that you posted this quarter, is that just for accounting purposes? Or is there actual payment that you're making just for state purposes or something like that?.

It's -- so what happens now that we no longer have -- the DTA is now on our books. If you remember, several years ago, it was fully reserved. And so as you had income, you wouldn't show any tax expense now because the reserve has gone, the asset is on our books.

You show on the income statement, the expense associated with the income, you just don't pay it because you then offset the receivable. That's why you see it as an expense. So it's a non -- effectively a non-cash expense..

Okay.

So going forward, we can assume you'll be showing that but the true earnings power is the pretax income?.

Right. From a cash flow perspective, correct. That's right..

Thank you. And I'm showing no further questions. Actually I'm showing Jordan just queue up..

Yes. Just one quick follow-up. So even if you don't pay down the debt, eventually, you guys are going to try and do a global debt refinancing.

And can you talk a little bit about what your total net debt to EBITDA has trended down to at this point? And how lenders tend to look at that?.

I don't have that stat at my fingertips.

Brad, you or Jeff?.

No, not in front of us. No..

But I think it's -- suffice it to say, Jordan, with our improving sales pace, our increasing outlook for profits, both in the third and fourth quarter this year and the trend in the high-yield market starting to see the window crack open a little bit.

I think that the bond market at some point will be receptive to us and other homebuilders potentially doing new issuance and we're just going to closely monitor it. And at the appropriate time, when we feel comfortable and the market is open, we will take the right steps to refinance some of our capital structure.

I don't think we'd want to do a global refinance of the whole thing because, again, we want to further strengthen our balance sheet, further pay down debt and we don't want to have huge prepayment penalties. So we would not refinance our entire stack. We would do something less than our entire stack with our intent to pay off debt going forward..

But again, overall, we have about 3 years remaining before the bulk of our debt is due. So we're focused. We don't have our gun to our head. And in the meantime, we're storing up more cash than normal but we certainly anticipate we'll have good opportunities sometime over the next 3 years to refinance..

The last question is, if you don't pay down any more debt this year, how much additional cash will you generate?.

I don't think we made a projection on that either, Jordan. So I think you see the trend historically for us is the fourth quarter is a big quarter for us in terms of deliveries that generally generates strong cash flow and I think our liquidity will be well above the high end of our targeted range at year-end.

And I think that's about as much guidance as we can give you..

Jordan, we did fund at the end of the first quarter, we don't have it updated for the second quarter. But at the end of the first quarter on a trailing 12 months basis, the net debt to adjusted EBITDA was at 2.2x, down significantly from where we were in 2019 of 8.9x..

Got it. Yes, if you could update that slide, maybe that would be helpful..

Sure..

Very good.

Any last questions, operator?.

I'm showing no further questions at this time..

Very good. Well, thank you all very much. We're pleased with the current environment and we look forward to sharing some more continued good news in future quarters. Thank you..

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