RED BANK, N.J. (Hanley-Wood News Service) - Hovnanian Enterprises, Inc. (NYSE: HOV), a national home builder, announced today that it plans to acquire the California home building operations of The Forecast Group, L.P., a privately held, single family home builder headquartered in Rancho Cucamonga, Calif. The combination is expected to rank Hovnanian Enterprises as the eighth largest home builder in the United States. Under the terms of the agreement, the purchase price is estimated to be approximately $225 million, plus the assumption of Forecast Homes' debt. The purchase price is subject to adjustment based upon Forecast's actual balance sheet in January, 2002. Net of cash and equivalents on its balance sheet, Forecast had approximately $15 million of debt as of October 31, 2001, making the total acquisition price equal to approximately $240 million. Of this total amount, $49 million consists of the purchase price of certain land parcels that will be retained by the principal owner of Forecast Homes, subject to option contracts held by Hovnanian, with optional lot takedowns under these contracts over the next three years. The balance of the acquisition price will be funded by the issuance of $45.5 million of Hovnanian's Class A common shares, along with approximately $145.5 million in cash. The number of shares to be issued will be based on Hovnanian's stock price during the week before the closing date.. Hovnanian's Board of Directors has approved this transaction, and the closing is expected to occur in January, 2002.
In its most recent fiscal year, ended October 31, 2001, the California home building operations of Forecast delivered 2,139 homes, which produced $480 million in revenue and $74.5 million in pretax income. As a combined entity, on a pro forma basis for the twelve months ended October 31, 2001, Hovnanian Enterprises and Forecast would have delivered 8,930 homes valued at $2.26 billion.
Kevork S. Hovnanian, founder and chairman of Hovnanian Enterprises, Inc. said, ''We are very excited about expanding our presence in Southern California and entering the Northern California market, as they both represent attractive market opportunities. Forecast continues to experience strong demand for entry-level homes in the Sacramento and Inland Empire markets where they are most active. In many parts of California, demand for housing continues to outpace supply due to tight government regulation, which limits the supply of available lots. Forecast does not participate in the Silicon Valley portion of Northern California that has recently been experiencing a decline in demand for high-end homes.''
This acquisition furthers the company's strategy of becoming a dominant builder in each of its markets. With the addition of Forecast's operations, Hovnanian will become the second largest home builder in the Inland Empire region in Southern California, as well as the second largest in the combined market of Sacramento and the Central Valley in Northern California. Hovnanian is already the largest home builder in New Jersey and North Carolina and the second largest home builder in Washington, DC. The Company also built more than 1,000 homes in Dallas/Fort Worth, Texas in fiscal 2001 and is among the top homebuilders in Nashville, Tennessee, Biloxi, Mississippi, and Huntsville, Alabama. The acquisition of Forecast also further enhances Hovnanian's geographic diversification.
''The California product lines and geographic markets of Forecast Homes and Hovnanian are an excellent complement to one another,'' said Ara K. Hovnanian, President and CEO. ''Forecast's primary target is first-time home buyers, whereas K. Hovnanian's customers in Southern California have historically been a wide range of move up, urban and active adult home buyers. We plan to maintain two separate operations in California to better cover the wide range of geographies and product types within the State and to leverage both the Forecast name and the Hovnanian brand we have developed in California. We will operate Forecast as a separate division, focusing primarily on entry- level homes in the Inland Empire and a wider range of homestyles at moderate price levels in its Northern California markets. Hovnanian's current California division will continue to focus on higher priced homes designed for the move up buyer in the coastal areas of San Diego, Orange County and Los Angeles, as well as the development of active adult communities throughout Southern California,'' noted Mr. Ara Hovnanian.
''Hovnanian has had an extremely successful track record of integrating acquisitions, with a total of six over the past few years,'' added Mr. Ara Hovnanian. ''Our successful acquisition of Washington Homes last year demonstrated our ability to integrate a large company both efficiently and rapidly. The fact that we will manage Forecast separately from our existing California operations, and therefore will not combine offices or personnel, will simplify and expedite the integration of Forecast Homes. However, we do intend to leverage the combined strengths of our current California operations and the Forecast division. Although we did not factor any cost savings or synergies into our projections of earnings accretion, we are confident that we will gain cost savings from regional suppliers and national contracts due to our increased market presence,'' he said.
''After taking into account the estimated effects of purchase accounting adjustments, the acquisition is expected to be approximately $0.50 accretive to earnings per share in fiscal 2002,'' stated J. Larry Sorsby, executive vice president and CFO of Hovnanian Enterprises Inc. ''This includes the effect of approximately nine months of Forecast's operations, assuming that the transaction closes in January as planned. The price of the transaction represents less than four times our expected fiscal 2002 EBITDA for Forecast or 1.55 times the book value of Forecast's equity at closing. To fund the acquisition and refinance Forecast's debt, we expect to raise an additional $150 million through a five-year term loan to be arranged by Bank of America and Fleet National Bank. This will ensure that we maintain ample liquidity under our $440 million unsecured credit line to fund our ongoing operations and our continued growth objectives. We structured the transaction with $45.5 million of the purchase price being paid in Hovnanian stock in order to maintain a conservative debt to equity ratio. Even after this acquisition, we remain confident that we will achieve a lower average debt to equity ratio in fiscal 2002, as compared to fiscal 2001,'' stated Mr. Sorsby.
James Previti, founder and CEO of the Forecast Group, LP, stated, ''I have the utmost respect for the Hovnanian organization and I think that this is a good cultural and strategic fit for everyone involved. Other than my chief legal counsel and me, all senior management at my home building operations will be staying on at Hovnanian. I am excited that the talented team I assembled will be able to continue to grow and prosper, and I believe that Hovnanian's focus on training and development of human resources will allow our associates to continue to flourish. My family has spent 30 years developing our company and I look forward to continuing to work with the Hovnanian team for many years to come.''
''We will continue to maintain an active professional relationship with Jim Previti, both as a significant shareholder and as an experienced developer of land for residential communities,'' said Geaton A. DeCesaris, Jr., president of home building and chief operating officer for Hovnanian Enterprises, Inc. ''As part of that relationship, Mr. Previti has provided Hovnanian with a first right to acquire single-family residential properties that he develops and offers for sale to builders in California over the next three years, in addition to the $49 million of specific land parcels on which we have purchase options over that same time frame. I am personally looking forward to working with the excellent management team Jim has put together, led by Frank Glankler, who oversees day-to-day operations. We are confident that they will continue the Forecast tradition of meeting their business plan and earning solid returns,'' he said.
''Forecast Homes has an excellent lot position, with about 8,200 lots in attractive locations in Northern and Southern California,'' Mr. DeCesaris stated. With the addition of these lots, Hovnanian will control approximately 45,000 lots company-wide, which is equal to a five year supply at current delivery levels, giving us confidence in our ability to achieve our business plan and an enviable competitive position in all of our markets. Yet we maintain control of approximately 70% of our land via option contracts, which reduces our risk and allows us to maintain balance sheet flexibility and liquidity. Depending on the exact timing of the closing, we expect the combined Company to deliver more than 2,500 homes in California in fiscal 2002,'' he added. On a pro forma basis as of October 31, 2001, the Company had a combined sales backlog of 3,445 homes with a value approaching $900 million.
''We feel this was an excellent opportunity to expand our presence in select, attractive California markets,'' Mr. Ara Hovnanian continued. ''Our increased size and focused market concentration in California will provide powers and economies of scale that should lead to superior returns for our shareholders. As long as current market conditions remain similar to what we have experienced since September 11th, we expect our earnings per share in fiscal 2002 to increase to $3.00 per share, up more than 30% from $2.29 per share reported in fiscal year 2001. Revenues are expected to increase by more than 20%, from $1.75 billion in fiscal 2001 to approximately $2.1 billion in fiscal 2002. Projected earnings and revenues both include the effect of approximately nine months of Forecast's operations, and will be impacted by the timing of the closing. We expect our fiscal 2002 ending equity to exceed $500 million, or approximately $16.35 per share,'' he concluded.
Hovnanian Enterprises will hold a conference call on Wednesday, December 19th at 11:30 a.m. EST to discuss the transaction. The conference call can be accessed through Hovnanian Enterprises' website at www.khov.com and through StreetEvents at www.streetevents.com. For those who are not available to listen to the live broadcast, a replay of the call will be available on both websites.
Hovnanian Enterprises, Inc. founded in 1959, is headquartered in Red Bank, New Jersey. The Company is one of the nation's largest home builders with operations in Alabama, California, Maryland, Mississippi, New Jersey, New York, North Carolina, Pennsylvania, Tennessee, Texas, and Virginia. The Company's homes are marketed and sold under the trade names K. Hovnanian, Washington Homes, Goodman Homes, Matzel & Mumford, Diamond Homes, Westminster Homes, and Fortis Homes. The Company is also one of the nation's largest sellers of homes to Active Adults, under the name of K. Hovnanian's Four Seasons communities.