Hovnanian Enterprises today (May 31) reported a net loss of $30.7 million for the fiscal second quarter of 2007, on revenue of $1.1 billion, a 29.4% decline from the same period in 2006. The loss of $0.49 per share was in line with analysts' expectations.

The results included $34.4 million in writedowns of land holdings. The company also, like several other large public building companies, declined to provide further guidance for the year but did project that it will deliver between13,200 and 14,200 homes, excluding deliveries from unconsolidated joint ventures. It also is projecting positive cash flow from the fourth quarter of 2007 into next year.

Though the loss was expected on Wall Street, analysts were surprised by the level of impairments, which was double what most were expecting. Carl Reichardt of Wachovia Capital Markets wrote in a research note, "HOV observed that land transaction activity is at a standstill, making it difficult to gauge if pricing has truly fallen yet...Writedowns of approx. $29.4 mm were nearly double the midpoint of the previously-revealed expected range, underscoring the rapidity with which pricing and pace deterioration has proceeded in our view." He continued, "Despite valuation at a 17% discount to the group overall, we continue to view HOV as a higher-risk concern given market concentration, high leverage, dampened liquidity and our perception of HOV's reliance on acquisitions for growth longer-term."

Ivy Zelman of Credit Suisse put out a note saying, "HOV has been unable to reduce investment levels in its inventory, as its new community openings have spurred additional entitlement and development outlays and it has been unable to slow its takedown of options rapidly enough."

For the six-month period ended April 30, 2007, revenues declined 20.2% to$2.3 billion, from $2.9 billion in the year earlier period. The Company reported a net loss of $88.0 million for the first half of 2007, or $1.40 per common share, compared to net income of $182.4 million, or $2.80 per fully diluted common share, in the same period a year ago.

Homebuilding gross margin, before interest expense included in cost of sales, was 16.3% for the second quarter of fiscal 2007, a 740 basis point decline from 23.7% in the prior year's second quarter. The Company's pretax income from Financial Services in the second quarter of fiscal 2007 declined 6.3% over the same period in 2006, to $6.3 million.

The number of active selling communities on April 30, 2007, excluding unconsolidated joint ventures, was 437, an increase of 6% compared with 411 active communities at the end of the same period last year. The Company's contract cancellation rate, excluding unconsolidated joint ventures, for the second quarter of fiscal 2007 was 32%, a decrease from the rate of 36% reported in the first quarter of 2007.

The number of net contracts for the second quarter of fiscal 2007, excluding unconsolidated joint ventures, declined 21.4% to 3,116. Contract backlog as of April 30, 2007, excluding unconsolidated joint ventures, was 7,766 homes with a sales value of $2.7 billion, down 31.1% in dollars and down 33.0% in number of homes, compared to a contract backlog of 11,587 homes with a $4.0 billion sales value at the end of the second quarter of fiscal 2006.

"We are frustrated to report that the housing market has continued to slip further in many locations in terms of both sales pace and sales prices,"commented Ara K. Hovnanian, president and CEO. "The housing market weakened in the latter part of the second quarter and the slower conditions have continued into May. Lower prices offered to buyers to close homes during the quarter also led to a further reduction in margins and a net loss for the quarter."

"After a 3% increase in our February contracts over last year, the overall market fell off again, and our net contracts declined approximately 30% year over year through March and April," Hovnanian added. "We believe that much of this decline was a reaction to recent problems in the sub-prime mortgage market. While we have felt the sub-prime impact directly in the form of fewer potential homebuyers qualifying for a mortgage as lending standards have tightened, the more significant impact has been indirectly through a further pullback in home buyers' psychology toward making a purchase."

"Our use of options to control land allows us to walk away from land options that do not meet our financial hurdle rates and thus slow our investments during this current housing market slowdown," said J. Larry Sorsby, executive vp and CFO. "As of April 30, 2007, we had 52,147 lots held under option contracts and controlled a total of 85,902 lots, a 29% decline from the end of the second quarter of fiscal 2006. To further enhance cash flow, we are evaluating walking away from additional land options," he added.

Both analysts see more downside for the industry on the horizon. Zelman wrote, "It is clear that fundamentals remain under duress, with pricing pressure having yet to run its course given still-elevated levels of supply and the realities of tightening credit and poor confidence." Reichardt was even more dour: " We expect increased competition among large builders to substantially impact orders-per-community and especially margins through 2007 at least. Secularly, we believe market share gain headroom is waning for large builders and returns are unlikely to approach past peaks. In this maturing industry environment, we believe builders focused on balancing unit growth with positive cash flow generation and operating consistent share repurchase models will outperform. At 1.1x current book value with a long-term 0.8-2.3x range, we believe valuations generally discount the potential for a short-term housing cycle rebound in a secularly more-challenging landscape."