Sales contracts are up, debt is restructured, and there’s $555 million in cash on hand, but don’t expect Hovnanian Enterprises to turn a profit in 2010, CEO Ara Hovnanian told analysts during its quarterly earnings call Thursday.
“2010 will be a year of transition,” he said. “As we sit here and look into 2010, we know that while we have accomplished a lot, we still have a lot to do."
The call came in the wake of an earnings release that said that Hovnanian lost $250.8 million in its fourth quarter, $3.21 a share in its fourth quarter ending Oct. 31.
Hovnanian said the company made mistakes at the peak of the market, including being too aggressive in buying land and accumulating too much debt.
“It’s painfully obvious that our 50% debt-to-equity was not conservative,” he said. “We have dug ourselves into a hole,” he said, adding that “there is a ladder down here. We have a substantial amount of cash, and we have $300 million more coming in thanks to tax law changes.”
Ironically, Hovnanian said a key to returning to profitability is buying more land, only at low enough prices to turn a tidy profit at today’s home prices. Home prices are too low now for the company to make reasonable profits by building on the 7,626 lots it already owns and has mothballed.
So the company is buying land “with a vengeance” while still making sure return rates on any land buys are in the 25% to 30% range, according to Hovnanian.
“We have adequate capital that not only buys us time for home building to get back to normal, but also gives us the capital to take advantage of the many opportunities at the bottom of the market," the CEO said.
Hovnanian Enterprises reported tying up nearly 4,000 lots in the company’s third and fourth quarters: 859 through rolling land options, 1,145 in small bulk purchases, and 1,977 through joint ventures.
While monthly sales are up substantially in Hovnanian's communities, the number of its open communities has shrunk to 179 from 198 last year. Sales per community were up to 23.3 for the company’s fiscal year, which ended Nov. 30, compared with 17.7 in 2008. However, they’re still far below past average sales paces of roughly 40 per community each year.
The housing tax credit for first-time buyers helped the company’s results last year and shifted its percentage of first-time buyers from 29% at the beginning of 2009 to 39% by year’s end. “A 10% increase is probably a good indicator of just how impactful the tax credit was to our sales,” said Hovnanian, who expects the credit's extension and expansion to buyers who have owned their homes for five years or longer to help in the months to come.
Ultimately, profitability will return, he said, and, when it does, nearly $2 billion of the builder's earnings will be tax-free because of its losses logged in recent years.
Teresa Burney is a senior editor for BUILDER and BIG BUILDER magazines.