Hovnanian Enterprises will return to profitability when it gets more lower-priced land for building new homes in its portfolio, which is more likely to happen next year than this one, CEO Ara Hovnanian told investors during the company's second fiscal quarter conference call Thursday, June 3.
This year, according to the CEO, 90% of the company's communities are comprised of older, more expensive legacy land. Next year, though, with 40% of Hovnanian's communities primed with lower-cost land, turning a profit will be much easier, he said.
In the meantime, while the sales pace per community is stable, Hovnanian'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.
For comparison, in 2009's second quarter, Hovnanian lost $118.6 million, or $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% on an annual basis.
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," explained CEO Hovnanian.
But those deals can't just be any land; they need to be lots that will sell and bring 20% to 21% internal rate of return, according to company executives.
In the meantime, Hovnanian has been slowly improving its gross margin, which increased for the sixth consecutive 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, 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 buying some less improved land that isn't far out into the nether regions of markets.
Still, the CEO 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," Ara 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, he said. "We are all out there buying, and right now there is a healthy balance."
Teresa Burney is a senior editor for BUILDER and BIG BUILDER magazines.