It was a dismal fourth quarter for Hovnanian Enterprises, so bad that the nation's seventh largest builder is taking $300 million in land-related charges to its balance sheet, half from write offs from abandoned deposits on land options and the rest in impairment charges on owned land.
Ara Hovnanian, president and CEO, says the company is taking remedial but aggressive action in a souring market, which has sales down 44 percent in the fourth quarter.
“We have successfully renegotiated a large number of our land option contracts in the third and fourth quarters of fiscal 2006, and we have also walked away from our deposits and predevelopment costs on many other option contracts where it did not make economic sense to proceed,” Hovnanian said in a statement.
While it's a painful move, he says it is much better to walk now than to build communities that would generate lower returns—the value of the land has dropped from the price at which it was originally acquired. However, Hovnanian says the company is still buying land, but it is a “dribble” compared to what it had been doing.
“We are continuing to focus on conservative balance sheet management during this slowdown, and we ended the year with a zero outstanding balance on our $1.5 billion unsecured revolving credit facility. This leaves us well positioned to contract for new land opportunities at discounted prices as our markets begin to adjust.”
But this may be just the first in major land-related charges for Hovnanian, warns JMP Securities analyst Alex Barron. Stiffer competition among builders may lead to lower home prices, forcing the company to take additional land-related charges in the next quarter, he says.
“It's not about Hovnanian. The overall industry is going through revaluations of their projects,” Barron says. “The only difference is that [Hovnanian] may have been more realistic in admitting how much their projects have been impaired.”