Hovnanian Enterprises, Inc. — Q1 Fiscal 2024 Form 10-Q
Reporting period: Three months ended January 31, 2024, compared with the three months ended January 31, 2023, unless otherwise noted. Hovnanian builds homes in 13 states and also provides mortgage and title services.
Financial and operating performance
| Metric | Q1 2024 | Q1 2023 |
|---|---|---|
| Total revenue | $594.2 million | $515.4 million |
| Net income | $23.9 million | $18.7 million |
| Net income available to common shareholders | $21.2 million | $16.0 million |
| Diluted EPS | $2.91 | $2.26 |
| Operating cash flow | $(89.0) million | $(31.2) million |
- Home sale revenue was $573.6 million, up 14.8%, reflecting 1,063 deliveries, up 13.3%, and an average selling price of $539,639, up 1.3%.
- Homebuilding gross margin was 18.3%, versus 18.7%. Before cost-of-sales interest and land charges, the margin was 21.8% in both periods. Management attributed the reported margin decline mainly to buyer incentives and concessions, including mortgage-rate buydowns.
- Financial services revenue increased 25.5% to $15.3 million; pretax income rose to $3.8 million from $3.1 million.
- Income from unconsolidated joint ventures increased to $15.0 million from $7.2 million, partly because return hurdles in two ventures allowed Hovnanian to recognize a higher share of earnings.
- Cash and cash equivalents were $183.1 million in homebuilding at January 31, 2024. Total cash, cash equivalents and restricted cash were $238.1 million, down from $477.5 million at the start of the quarter. Operating, investing and financing cash flows were $(89.0) million, $(4.1) million and $(146.3) million, respectively.
- Management reported total liquidity of $313.1 million, including homebuilding cash and $125.0 million of undrawn capacity under its revolving facility. It believes available resources are sufficient for at least the next 12 months.
- Senior notes and credit facilities, net of discounts and issuance costs, were $934.6 million, compared with $1.051 billion at October 31, 2023. The company also reported $99.6 million of nonrecourse mortgages secured by inventory. Financial services liabilities were $128.4 million.
- Total assets were $2.340 billion and total equity was $607.1 million at January 31, 2024. Homebuilding inventory, excluding consolidated inventory not owned, increased $141.1 million from October 31, 2023, primarily due to land purchases and development.
Changes versus the prior comparable period
- Total revenue rose 15.3% and net income increased to $23.9 million from $18.7 million. Q1 2023 included a $6.2 million energy-efficient home tax-credit benefit; Q1 2024 recorded $8.7 million of income tax expense.
- Net contracts increased 43.0%, and net contracts per average active selling community increased to 9.7 from 6.5. The cancellation rate was 14% of gross contracts, compared with 30% a year earlier; cancellations were 10% of beginning backlog versus 16%.
- Despite stronger new contracts, backlog at January 31 declined year over year to 1,888 homes worth $1.111 billion, from 2,028 homes worth $1.178 billion. The company cited a lower community count.
- Segment results varied: Northeast revenue fell 9.5% as deliveries declined, while Southeast and West revenue increased 43.7% and 29.1%, respectively. Pretax income increased in all three segments.
- Total selling, general and administrative expense, including corporate costs, increased to $86.1 million from $73.4 million. Corporate G&A rose to $37.1 million from $25.5 million, primarily due to compensation expense associated with incentive awards and stock-price movements.
- Other interest expense declined to $10.5 million from $15.1 million, mainly following debt reductions. The company redeemed $113.5 million principal amount of 10.0% secured notes due 2025 for a redemption price of $119.2 million, including accrued interest, and recorded a $1.4 million gain on extinguishment.
Outlook, risks and unusual items
- The filing provides no specific numerical revenue or earnings guidance. Management said lower mortgage rates in Q1 supported sales, but affordability remained challenging; it continued to use pricing incentives and quick move-in homes to support demand.
- Management cited uncertainty around inflation, possible recession, employment, mortgage rates, supply-chain issues and construction costs. It is focused on shortening construction cycles and reducing costs with suppliers and trade partners.
- Management identified high leverage and debt-agreement restrictions as risks to financing and business growth. It reported covenant compliance at quarter-end and said it was evaluating debt and capital-structure actions, subject to market conditions and restrictions.
- In December 2023 the parties reached a mediated settlement of remaining Great Notch construction-defect claims; a final confidential agreement was executed in February 2024. The company said the settlement amount was not materially different from its reserve. A separate New Jersey environmental lawsuit concerning Hickory Manor remains in discovery; the complaint alleges more than $5.3 million in government costs and seeks additional remediation and other relief. Hovnanian says it intends to defend the claims.
- Other risks include land availability and option exposure, regulatory and permitting delays, warranty and construction-defect claims, and the possibility of further deterioration in housing demand. The company had $206.5 million of deposits on land and lot options at January 31, 2024, with a stated purchase price of $2.3 billion; its maximum exposure is generally limited to deposits and pre-development costs, subject to contract terms.
Key facts for investors to verify
- Whether sales momentum and lower cancellation rates persist, and how mortgage rates, affordability and incentives affect margins.
- Whether backlog conversion, deliveries and community count support revenue, given that backlog remained below the prior-year level despite higher net contracts.
- Cash consumption, land and development spending, and liquidity relative to the company’s debt maturities, interest burden and covenant restrictions.
- Future joint-venture earnings and distributions, including the extent to which higher reported income reflects return-hurdle allocations.
- Developments in the Hickory Manor litigation, warranty and construction-defect reserves, and the effect of the confidential Great Notch settlement.