Hovnanian Enterprises (NYSE:HOV) on Friday reported a net loss or $0.5 million, or $0.00 per common share, for the third quarter of fiscal 2016, compared with a net loss of $7.7 million, or $0.05 per common share, in the third quarter of the previous year.

For the nine months ended July 31, 2016, the net loss was $25.1 million, or $0.17 per common share, compared with a net loss of $41.6 million, or $0.28 per common share, in the first nine months of fiscal 2015.

Hovnanian has recently begun offering virtual tours of its homes.
Hovnanian has recently begun offering virtual tours of its homes.

“During our third quarter we made progress towards our goal of improving our profitability by increasing our revenues 33%, growing Adjusted EBITDA by 75%, improving our Adjusted EBITDA coverage to 1.40x from 0.77x, and achieving a pretax profit,” stated Ara K. Hovnanian, chairman, president and CEO. “However, we are fully aware that there is even more work to do in order to return the company to higher levels of sustainable profits. We are anticipating a solid fourth quarter with income before income taxes, excluding land related charges, gains or losses on extinguishment of debt and other non-recurring items such as legal settlements, expected to be between $32 million and $42 million.”

Total revenue was $716.9 million in quarter, an increase of 32.6%, compared with $540.6 million in the third quarter of fiscal 2015. For the nine months ended July 31, 2016, total revenue increased 33.8% to $1.95 billion compared with $1.46 billion in the first nine months of the prior year.

Total SG&A was $66.6 million, or 9.3% of total revenues, a 330 basis point improvement for the year-ago quarter. Total SG&A was $199.4 million, or 10.2% of total revenues, a 360 basis point improvement for the first nine months of fiscal 2016 compared with $201.5 million, or 13.8% of total revenues, in the first nine months of the prior year.

Total interest expense as a percentage of total revenues was 7.2% during both the third quarter of fiscal 2016 and the third quarter of fiscal 2015. For the nine months ended July 31, 2016, total interest expense as a percentage of total revenues declined 70 basis points to 6.9% compared with 7.6% during the same period a year ago.

Home building gross margin percentage, before interest expense and land charges included in cost of sales, was 16.9% for the third quarter ended July 31, 2016 compared with 17.8% for the third quarter of fiscal 2015 and 16.1% for the second quarter of fiscal 2016. During the first nine months of fiscal 2016, home building gross margin percentage, before interest expense and land charges included in cost of sales, was 16.5% compared with 17.4% in the same period of the previous year.

Income before income taxes in the third quarter of fiscal 2016 was $1.1 million compared with a loss before income taxes of $10.0 million in the prior year’s third quarter. For the first nine months of fiscal 2016, the loss before income taxes was $29.7 million compared with a loss before income taxes of $59.2 million during the first nine months of fiscal 2015.

Income before income taxes, excluding land-related charges, in the third quarter of fiscal 2016 was $2.7 million compared with a loss before income taxes, excluding land-related charges, of $8.9 million in the prior year’s third quarter. For the first nine months of fiscal 2016, the loss before income taxes, excluding land-related charges, was $6.8 million compared with a loss before income taxes, excluding land-related charges, of $51.5 million during the first nine months of fiscal 2015.

For the third quarter of fiscal 2016, Adjusted EBITDA was $56.3 million compared with $32.2 million during the third quarter of 2015, a 74.8% increase. For the first nine months of fiscal 2016, Adjusted EBITDA increased 105.1% to $134.8 million compared with $65.7 million during the first nine months of fiscal 2015.

Adjusted EBITDA to interest incurred was 1.40x for third quarter of fiscal 2016 compared with 0.77x for the same quarter last year. For the nine-month period ended July 31, 2016, Adjusted EBITDA to interest incurred was 1.07x compared with 0.53x for the same period one year ago.

Consolidated active selling communities decreased 15.5% from 206 communities at the end of the prior year’s third quarter to 174 communities as of July 31, 2016, which was impacted by the sale of ten communities in Minneapolis and Raleigh and the conversion of four consolidated communities into unconsolidated joint venture communities. As of the end of the third quarter of fiscal 2016, active selling communities, including unconsolidated joint ventures, decreased 9.8% to 193 communities compared with 214 communities at July 31, 2015.

Consolidated net contracts per active selling community increased 13.5% to 8.4 net contracts per active selling community for the third quarter of fiscal 2016 compared with 7.4 net contracts per active selling community in the third quarter of fiscal 2015. Net contracts per active selling community, including unconsolidated joint ventures, increased 3.9% to 8.0 net contracts per active selling community for the quarter ended July 31, 2016 compared with 7.7 net contracts, including unconsolidated joint ventures, per active selling community in the third quarter of fiscal 2015.

The dollar value of consolidated net contracts decreased 4.3% to $593.0 million for the three months ended July 31, 2016 compared with $619.4 million during the same quarter a year ago. The dollar value of net contracts, including unconsolidated joint ventures, during the third quarter of fiscal 2016 decreased 8.8% to $633.3 million compared with $694.6 million in last year’s third quarter.

The dollar value of consolidated net contracts increased 8.5% to $1.98 billion for the first nine months of fiscal 2016 compared with $1.82 billion in the first nine months of the previous year. The dollar value of net contracts, including unconsolidated joint ventures, for the nine months ended July 31, 2016 increased 6.3% to $2.09 billion compared with $1.97 billion in the first nine months of fiscal 2015.

The number of consolidated net contracts, during the third quarter of fiscal 2016, decreased 4.3% to 1,467 homes compared with 1,533 homes in the prior year’s third quarter. In the third quarter of fiscal 2016, the number of net contracts, including unconsolidated joint ventures, decreased 7.3% to 1,537 homes from 1,658 homes during the third quarter of fiscal 2015.

The number of consolidated net contracts, during the nine-month period ended July 31, 2016, increased 3.5% to 4,810 homes compared with 4,648 homes in the same period of the previous year. During the first nine months of fiscal 2016, the number of net contracts, including unconsolidated joint ventures, was 4,991 homes, an increase of 1.5% from 4,918 homes during the first nine months of fiscal 2015.

As of July 31, 2016, the dollar value of contract backlog, including unconsolidated joint ventures, was $1.48 billion, an increase of 7.7% compared with $1.37 billion as of July 31, 2015. The dollar value of consolidated contract backlog, as of July 31, 2016, increased 3.8% to $1.31 billion compared with $1.26 billion as of July 31, 2015.

As of July 31, 2016, the number of homes in contract backlog, including unconsolidated joint ventures, decreased 1.3% to 3,232 homes compared with 3,275 homes as of July 31, 2015. The number of homes in consolidated contract backlog, as of July 31, 2016, decreased 4.1% to 2,969 homes compared with 3,097 homes as of the end of the third quarter of fiscal 2015.

Consolidated deliveries were 1,574 homes in the third quarter of fiscal 2016, an 11.8% increase compared with 1,408 homes in the third quarter of fiscal 2015. For the three months ended July 31, 2016, deliveries, including unconsolidated joint ventures, increased 10.3% to 1,627 homes compared with 1,475 homes in the third quarter of the prior year.

Consolidated deliveries were 4,594 homes in the first nine months of fiscal 2016, a 21.5% increase compared with 3,780 homes in the same period in fiscal 2015. For the nine months ended July 31, 2016, deliveries, including unconsolidated joint ventures, increased 19.0% to 4,740 homes compared with 3,984 homes in the first nine months of the prior year.

The contract cancellation rate, including unconsolidated joint ventures, for the third quarter of fiscal 2016 was 22%, compared with 20% in the third quarter of fiscal 2015.

The valuation allowance was $635.4 million as of July 31, 2016. The valuation allowance is a non-cash reserve against the tax assets for GAAP purposes. For tax purposes, the tax deductions associated with the tax assets may be carried forward for 20 years from the date the deductions were incurred.

After paying off $320.0 million of debt that matured in October 2015, January 2016 and May 2016, total liquidity at the end of the third quarter of fiscal 2016 was $187.7 million.

During the third quarter of fiscal 2016, land and land development spending was $132.3 million compared with $130.0 million in last year’s third quarter.

As of July 31, 2016, the land position, including unconsolidated joint ventures, was 32,125 lots, consisting of 14,256 lots under option and 17,869 owned lots, compared with a total of 37,442 lots as of July 31, 2015.

During the third quarter of fiscal 2016, approximately 900 lots, including unconsolidated joint ventures, were put under option or acquired in 20 communities.

Subsequent to third quarter end, closed financing transactions with certain investment funds managed by affiliates of H/2 Capital Partners LLC by borrowing $75.0 million under a senior secured first lien priority term loan facility, issuing $75.0 million of 10.0% Senior Secured Second Lien Notes due 2018 and issuing $75.0 million of 9.5% Senior Secured First Lien Notes due 2020 in exchange for $75.0 million of 9.125% Senior Secured Second Lien Notes due 2020 held by such investor. Used a portion of the proceeds to call for redemption all $121.0 million of our 8.625% Senior Notes due 2017.

The company issued the following guidance to investors: Assuming no changes in current market conditions and after the impact from exiting two markets, our guidance for all of fiscal 2016 for total revenues is expected to be between $2.7 billion and $2.9 billion. Adjusted EBITDA is expected to be between $200 million and $225 million and income before income taxes, excluding land related charges, gains or losses on extinguishment of debt and other non-recurring items such as legal settlements, is expected to be between $25 million and $35 million for all of fiscal 2016.

“After paying off $320 million of debt since October 15, 2015, we ended the third quarter with $187.7 million of liquidity. Subsequent to the end of the third quarter, we issued $150 million of new debt to refinance debt maturing in 2017. Completing this debt transaction increases our liquidity and allows us to continue land investments that will help return us to higher levels of profitability in the future,” concluded CEO Hovnanian.