Hovnanian Enterprises, Inc. Class A 2026 Q3 Earnings Call

Jeff, please go ahead. Thank you, Lisa, and thank you all for participating in this morning's call to review the results for our third quarter.

All statements on 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 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 31st, 2025, 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 and CEO; Brad O'Connor, CFO; David Mitrisin, Vice President and Corporate Controller; and Paul Eberly, Vice President of Finance and Treasurer. I'll now turn the call over to Ara.

Thanks, Jeff. I'll begin with a review of our third quarter results and discuss how we continue to execute our strategy in a housing market that remains challenging. Brad will then review the quarter in more detail and discuss our guidance for next quarter before we open the call for questions. To begin, it's clear that the macro environment has been challenging. World events, as well as high mortgage rates, high gas prices, inflation, and other factors have caused potential homebuyers to hesitate. While website traffic has remained strong, indicating long-term home buying interest, buyers remain slow to make the final decision to move forward. If you turn to slide 5, you can see that total revenues were $706 million, slightly above the midpoint of our guidance range that we provided for the quarter.

Honestly, we were hoping for a little more, but with almost a third of our deliveries for the quarter coming from new sales in the quarter, it's harder to predict. Gross margin was 14.6%, also above the midpoint of our guidance range. We believe gross margin troughed in the first quarter, and we've now seen improvement in the second and third quarters and are guiding to continued and more significant improvement in the fourth quarter, and we'll describe that more in a moment. Our SG&A ratio was 12.3%, which was better than our guidance range. Income from unconsolidated joint ventures was $3 million, which was within the guidance range, but below the midpoint and certainly below our expectations. Adjusted EBITDA was $32 million, also within our guidance range.

Finally, adjusted pre-tax was a loss of $2 million, slightly below the bottom of our guidance range of zero. The shortfall was primarily driven by income from unconsolidated joint ventures, which was the one area that came in below the midpoint of our guidance. This was substantially driven by delays at our newest joint venture deliveries. If JV income had been at the midpoint or if new QMI sales were just a little bit stronger, we certainly would have been within the guidance range. We're disappointed that our adjusted pre-tax income came in slightly below the guidance. Since the fourth quarter of 2020, we've consistently provided guidance one quarter in advance, and this was the first time in 23 quarters that adjusted pre-tax income finished below the guidance range.

As we discussed for the past several quarters, our strategy has been to maintain sales pace while carefully working through older land inventory that was acquired before today's higher incentive environment became the norm. At the same time, we're bringing on newer communities where the underwriting economics already reflect today's market conditions. Despite the weaker than anticipated level of profitability for the third quarter, the transition from old inventory to new continues to make progress. Turning to slide 6, compared with last year's third quarter, our results continue to reflect the reality of a housing market operating under substantially higher mortgage rates, elevated incentives, and concern about global instability, which has affected our top line as well. Although the metrics on this slide are below last year's level, we are continuing to manage through the cycle to position ourselves for long-term returns.

Our inventory position is healthier today, our land portfolio is significantly better aligned with the market conditions, and our balance sheet remains substantially stronger than it was a few years ago. Slide seven shows our quarterly contracts declined slightly by 57 homes to 1,359 homes. The decline reflected the impact of political and financial volatility during the quarter, which contributed to more cautious buyer behavior, as I mentioned just a moment ago. We continue to believe that there is meaningful underlying demand for housing. Consumers are visiting communities and shopping for new homes. The challenge remains converting that interest into contracts in an environment where buyers continue to react to the latest news they read. Even with that modest decline, we believe our sales pace remained resilient relative to the broader market backdrop.

Looking at our monthly contracts on Slide 8, the choppiness we experienced early in the year continued throughout the third quarter. Since hostilities began with Iran in March, periods of heightened geopolitical uncertainty, the presence or absence of a ceasefire, and concerns about access to two different straits have generally appeared to move in the same direction as our sales pace. As of yesterday, interestingly, month-to-date contracts in August were up 3% versus last year. Consumers are still researching communities, as evidenced by the strong website traffic. In July of 2026, website visits were higher than in all but one year since 2019, and the last two weeks were higher than any year since 2019. However, the home buyer decision-making process remains uneven, as we've been discussing, with consumers highly sensitive to changes in affordability and overall news and confidence.

When affordability improves or confidence strengthens, we believe this greater website traffic should lead to increased foot traffic. In turn, a larger portion of that foot traffic should convert to sales, but recent monthly sales clearly show buyers are remaining cautious at the moment. Turning to slide nine, our sales pace remained healthy by historical standards despite the difficult market backdrop. With 9.4 contracts per community, we're just above the historical averages. When you look at contracts per community on a monthly basis, as we do on slide 10, you can see that same uneven pattern we've been discussing. We started the quarter with a stronger year-over-year comparison in May, but the pace softened as the quarter progressed, with June roughly in line with last year and July below last year's level. So far, as we mentioned, August is just a little stronger than last year.

This pattern of ups and downs is consistent with what we said earlier. Our strategy remains relatively straightforward: Maintain a healthy sales pace, keep moving inventory, burning through older vintage land, and make certain standing inventory does not build unnecessarily. We believe that approach supports stronger long-term returns than attempting to maximize near-term pricing at the expense of absorption. One area we continue to monitor is incentive activity. As you can see on slide 11, incentives remain elevated relative to historic levels. However, after increasing for several years, incentive levels have decreased from the first quarter to the second quarter to the third quarter, and this happened even though mortgage rates increased during the quarter. Importantly, today's incentive environment is already incorporated into our new underwriting assumptions for the more recent land acquisitions. That distinction definitely matters. When we're delivering homes from land purchased several years ago, the higher incentives greatly compress margins.

When we're delivering homes from communities that were acquired or underwritten with high incentives already assumed, those communities should generate better gross margins. That transition remains one of the most important drivers of our future margin recovery. As incentives have come down over the past couple of quarters, our gross margin has improved. On slide 12, you can see that gross margins have increased sequentially since reaching a low point in the first quarter. This is now two quarters of sequential improvement, and at the midpoint of our guidance, we expect a larger sequential increase in the fourth quarter to 15.8%. Another indicator that we continue to monitor closely is the percentage of communities where we're able to raise prices or reduce incentives.