Ara Hovnanian started off his company's most recent conference call, which reviewed Hovnanian Enterprises' fiscal year 2007 and fourth-quarter performances, by stating that the housing market "remained challenging."
That's an understatement. For the first time in a "long time," the Red Bank, N.J.-based builder posted an annual loss. Hovnanian lost $638 million ($10.11 per common share) for the full year and $469 million ($7.42 per common share) for 2007's fourth quarter.
Hovnanian's losses were mainly attributed to $383 million in pre-tax charges, including land impairments of $168 million, intangible impairments of $78 million, and write-offs of predevelopment costs and land deposits of $105 million, as well as $32 million in impairment charges for unconsolidated joint ventures. It impaired 98 communities in 2006 and 2007.
Hovnanian's losses also included a $216 million after-tax non-cash valuation allowance the company took during its fourth quarter by recording a reserve of that amount against its deferred tax assets, resulting in a $54 million tax expense in the fourth quarter instead of the $162 million tax benefit management had anticipated.
Eventually, taking these charges will benefit the builder, according to claims made by J. Larry Sorsby, Hovnanian's CFO. "As we return to profitability, we will be able to take a tax benefit every time we earn a dollar," he said.
Hovnanian generated some cash flow by walking away from or renegotiating land options. It achieved a 32% reduction in lots from Oct. 31, 2006, to Oct. 31, 2007. Its total land position of 64,784 lots represents a 47% decline from the peak total land position held on April 30, 2006.
Hovnanian will not conduct land take-downs unless the CEO himself signs off on them. "We can reduce our remaining land take-downs even further," Hovnanian said.
The conference call wasn't all doom and gloom, however. Hovnanian said that contracts picked up dramatically in December after slow months in October and November following the company's much ballyhooed "Deal of the Century" in September. Although these developments give Hovnanian reason for optimism, he admitted he won't be able to get a true handle on the market until early February.
"We won't be able to gauge the market until after the Super Bowl," he said.
Hovnanian pointed to a few reasons for optimism. For starters, Washington is helping out. "The steps outlined by the President will reduce home foreclosures," he said.
Interest rates and prices are both falling, which Hovnanian said should aid the company's recovery. Another positive development is the increase in its buyers' average FICO score from 715 in 2006 to 725 in 2007. The number of Hovnanian's buyers using adjustable-rate mortgages (ARMs) has fallen from 32% in 2006 to 14% in 2007. "The industry is going back to 'Lending 101' basics," Sorsby said.
Hovnanian's CEO remains positive about the economy and how it will eventually contribute to a housing recovery. "The lack of a recession should create an easier environment for a correction," he said.
The builder is optimistic these market trends will eventually come together to help his company, which expects to generate more than $100 million in cash flow next year. "By the end of next year, we will generate a positive cash flow and pay down the revolver and debt from where we are today," Sorsby said.