Hovnanian Enterprises will return to profitability when it gets more lower-priced land in its portfolio and up for sale and that is more likely to happen next year than this, CEO Ara Hovnanian told investors during the company's second fiscal quarter conference call Thursday June3.
This year 90% of the company's communities are comprised of older, more expensive legacy land, Hovnanian said. Next year, however, with 40% of its communities primed with lower-cost land, turning a profit will be much easier.
In the meantime, while the sales pace per community is stable, the company's community numbers dwindled, falling 17% year-over-year, and contributing to another quarterly loss of $28.6 million, $0.36 a share. Still, the company still beat the market's estimated loss of $0.64 a share. Hovnanian lost $118.6 million in its second quarter in 2009, $1.50 a share.
Home deliveries fell to 1,118 homes for the quarter, down 19% from the same quarter a year ago. Sales contracts also fell to 1,314 homes, down 17% from the same quarter a year ago,
Restocking the company's land supply was a big topic during the call. More open communities should contribute to increased sales and the cheaper land will help increase margins.
"We have to continue to buy new lots every month going forward," said Hovnanian. But it can't just be any lots. They need to be lots that will sell and bring 20 to 21% internal rate of returns.
"We still have a ways to go before our sales absorption rates are back to normal," Hovnanian said.
In the meantime, Hovnanian has been slowly improving its gross margin. It increased for the sixth quarter to 17.3% compared with 8.3% in the same quarter of 2009.
Hovnanian reported some traction in its land-buying efforts. Since Jan. 31 of 2009 it has bought or optioned 7,100 lots in 98 communities, purchasing about 2,300, optioning 2,900 in 86 communities and buying through joint ventures another 1,900 in 12 communities.
By the end its fiscal year, Hovnanian executives expect to have 200 communities online, reversing the eroding community count trend. It had 178 active selling communities on April 30.
Hovnanian acknowledged it has competition for finished lots from other builders and that a shortage of finished lots is beginning to push the company into buy some less improved land that isn't far out into the nether regions of markets.
Still, Hovnanian is confident that the land will be there and that the company will be able to acquire it.
Prices in general are at levels that make economic sense," Hovnanian said. "Are there transactions (by other builders) where we scratch our heads and say, 'Gee, how did they make that work?' That certainly does happen."
But there are deals to be had and the lack of competition from private builders has helped Hovnanian compete successfully for them.
"We are all out there buying and right now there is a healthy balance," he said.