Hovnanian Enterprises, Inc. (HOV)
F4Q09 Earnings Call
December 17, 2009 11:00 am ET
Ara Hovnanian – President and Chief Executive Officer
J. Larry Sorsby – Executive Vice President, Chief Financial Officer
Paul W. Buchanan – Senior Vice President, Chief Accounting Officer
Brad O’Connor – Vice President, Corporate Controller
David G. Valiaveedan – Vice President Finance and Treasurer
Jeffrey T. O’Keefe – Director of Investor Relations
Michael Rehaut - J.P. Morgan
[Unidentified Analyst] for Ivy Zelman - Zelman & Associates
Daniel Oppenheim - Credit Suisse
Carl Reichardt - Wells Fargo Securities, LLC
Nishu Sood - Deutsche Bank
[Unidentified Analyst] for David Goldberg - UBS
Megan McGrath - Barclays Capital
Joel Locker - FBN Securities
Keith Wiley - Goldman Sachs
Previous Statements by HOV
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Before we begin, I would like to remind everyone that the cautionary language about forward-looking statements contained in the press release also applies to any comments made during this conference call and to the information in the slide presentation.
I would now like to turn over the conference call to Ara Hovnanian, President and Chief Executive Officer of Hovnanian Enterprises. Ara, please go ahead.
Good morning and thanks for participating in today’s call to review the results of our fourth quarter and year ended for October of ’09.
Joining me today from the company are Larry Sorsby our Executive Vice President and CFO; Paul Buchanan, our Senior Vice President and Chief Accounting Officer; Brad O’Connor, Vice President and Corporate Controller; David Valiaveedan, Vice President Finance and Treasurer; and Jeff O’Keefe, Director of Investor Relations.
On Slide 3, you’ll see a brief summary of our full year results. As usual, we give this data and more, as well as the corresponding quarterly results in our press release, which we issued yesterday. 2009 as you know was another disappointing year. The results in almost all key categories were negative when compared to the prior year, but as the year progressed we did see some signs which indicate that the market is at or is at least approaching a bottom.
Now that we are comfortable with our liquidity, in addition to focusing on cash flow we can now be more focused on returning to profitability. Unfortunately we can’t flip a switch and get there. There are a number of pieces of the puzzle that need to come together in order for us to accomplish this goal. One piece of the puzzle, Slide 4, that began in the beginning of fiscal ’09 is the improvement in net contracts per active selling community.
On a monthly basis, as is shown on Slide 5, we’ve seen an increase in 11 of the 12 months in fiscal ’09. We started our first month of fiscal 2010 with an increase in our sales pace per community as well. On an absolute basis, the seasonally slow period began a little earlier than usual this year, but that could very well be attributed to the tax credit that was set to expire at the end of November. The sequential reduction in net contracts for two of the last three months was slightly more than a typical seasonal adjustment. However, on a year-over-year basis, each month was still substantially better than last year. Over the same timeframe, existing home sales continued to improve through October which leads me to believe that the drop-off in new home sales was due to the fact that a new home could not be sold and completed and delivered in time before the tax credit was scheduled to expire on November 30, 2009.
As you all know by now, the first time home buyers tax credit that was set to expire in November was not only extended but was enhanced as well. Slide 6 gives a brief summary of the new tax credit. We are pleased to see the $8,000 first time home buyer tax credit extended to contracts that are signed by April 30, 2010, and homes that are closed before July 1. The tax credit was also expanded to included repeat buyers this time. If you lived in your home for five of the last eight years, you can get a $6,500 tax credit, not as big as the credit as it is for first time home buyers but a reasonable amount of credit nonetheless. The same time parameters for contract and closing apply to this credit as well.
Income limits were also raised, which is important in some of the markets where we build like New Jersey, California and the D.C. suburbs. In some of these markets, home buyers met the first time requirement but were excluded from getting a tax credit because they exceeded the maximum income limits. The increase in income limits is a very positive development that will allow more home buyers to benefit from the tax credit.
While it’s difficult to determine the exact impact that the tax credit has had on our sales, we do have a general sense of the magnitude by looking at the percentage of the applications that our mortgage company takes that would be eligible for the tax credit. Our first quarter, which ended in January of ’09, was prior to the $8,000 tax credit being passed by Congress. Even though there was no tax credit available, 29% of our customers were first time home buyers. You can see that on Slide 7. The stimulus bill was passed in February of ’09, the first month of our second quarter. During the second quarter, 32% of our buyers qualified for the tax credit. That percentage grew to 37% in the third quarter and then increased more to 39% in our fourth quarter.
First time home buyers have also been an important component of our broad product array, but the 10% increase between the 29% in the first quarter and the 39% in the fourth quarter is probably a good indication of just how impactful the $8,000 first time home buyer credit was on our sales. Now that the tax credit has been expanded to include repeat buyers, it’s logical to assume that there should be an incremental impact to our sales in that segment as well, although it’s hard to know if that would be a 2% incremental impact or a 10% or a 12%. We’ll have to see. My guess is it’ll have a bigger impact on our second quarter results than it does on our first quarter results due to the typical seasonal patterns.
Getting back to our selling pace, Slide 8 shows the quarterly sales pace of net contracts per active selling community. For the first three quarters of the year, the improvements increased as the year progressed. During the fourth quarter, we had a 60% year-over-year increase. Looking at these trends over a longer period of time, the first quarter was a 5% year-over-year improvement. In the second quarter of ’09 we not only exceeded ’08 but also ’07. In the third quarter and fourth quarter of ’09, we began to approach ’06 levels, and approximately 60% improvements once again. So the improvements, particularly in the second half of the year, were quite significant.