Hovnanian Enterprises president and CEO Ara Hovnanian told analysts Thursday morning that he sees no evidence yet that the housing downturn is nearing an end.
Hovnanian made three separate references to the state of the market during the company's fiscal third quarter earnings conference call. While he said there was some evidence in the foreclosure-ridden California markets of Stockton and Modesto that prices had come down enough to reduce months’ supply of existing homes to 2.4 months and 5.3 months respectively, he was not "popping the champagne corks at this stage." Earlier, he said, "It's a little early to say a recovery is underway." And in his opening comments, he said, "There is not yet any evidence of the overall housing market bottoming out."
Hovnanian said he "could not point to any product type or price point" that was doing better than others, although he noted that conditions differ widely region to region. He said Virginia, like the two California markets he mentioned, had seen a stabilization in existing home inventory but that nearby Maryland was still stuck at 9.4 months. He also noted that absorption rates, at 4.5 contracts per community, were still sitting at a historic low for the fiscal year to date. "A return to more normal absorption levels," he said, would signal the beginning of recovery.
Hovnanian said that the company had no plans to repeat last year's "Deal of the Century" promotion, in which the company marked down home prices nationwide in an effort to turn inventory into cash. He also said the company is "very close to finalizing" a joint venture partnership with a private equity or hedge fund to take advantage of opportunities as land comes on the market at fire-sale prices. He said the partnership would start out small, with Hovnanian contributing assets in three or four communities, and would not make any purchases at first. Hovnanian would contribute 10 percent of the equity in the partnership but could reap returns of 40 percent to 50 percent on the investment going forward. He did not identify potential partners.
In terms of quarterly financials, Hovnanian reported a net loss of $202.5 million for its fiscal third quarter ended July 31. The loss included $111.7 million in land impairments and write downs, and the company took a $98.4 million charge to deferred tax assets under FAS 109.
The loss of $2.67 per share was greater than expected by analysts, whose consensus estimate was a loss of $1.56 per share. The stock was down more than 11.5 percent in midday trading on Thursday.
Revenues were down 34.9 percent from the same period last year to $716.5 million as deliveries fell 31 percent to 2,185 homes and revenue from deliveries fell 35.8 percent to $692.7 million. Average prices fell 6.6 percent to $317,021. Deliveries from unconsolidated joint ventures dropped 48.9 percent, revenue dropped 49.3 percent to $59.8 million, and average prices dropped 0.7 percent to $355,994.
Net contracts, excluding unconsolidated joint ventures, declined 38 percent to 1,584 homes with a dollar value of $450.5 million, a drop of 45 percent. Average prices were off 11.9 percent for the quarter to $284,427. Contracts for unconsolidated joint ventures declined 58.8 percent to 105, value fell 55.2 percent to$43.2 million, and average prices increased 8.9 percent to $411,686.
The cancellation rate, excluding unconsolidated joint ventures, was 32 percent, down from 35 percent in last year's third quarter but up from 29 percent in this year's fiscal second quarter.
Contract backlog as of July 31, excluding unconsolidated joint ventures, was 2,976 homes, down 58.2 percent from the same period last year, with a sales value of $1.0 billion, down 59.9 percent. Average prices of homes in backlog were down 4 percent to $334,505. Backlog in unconsolidated joint ventures was down 55.8 percent to 326 with a value of $179.9 million, down 48.9 percent. Average prices were up 15.5 percent to $551,953.
Hovnanian had 354 active selling communities at quarter's end, excluding unconsolidated joint ventures, a decline of 95 active communities, or 21 percent, from July 31, 2007. The lot count came down by 5,773 lots compared to April 30, 2008, reflecting owned and optioned position decreases of 1,700 lots and 4,073 lots, respectively. As of July 31, 2008, lots controlled under option contracts totaled 23,118 and owned lots totaled 23,564. The total land position of 46,682 lots represents a 62 percent decline from the peak total land position at April 30, 2006.
Started unsold homes and models declined 48 percent, from 3,242 at July 31, 2007 to 1,677 at July 31, 2008. Excluding model homes, started unsold homes as of the end of the third quarter of fiscal 2008 were 1,365, down from 1,503 at the end of the second quarter.
The company generated $192.2 million in cash flow during the quarter, which brought its home building cash on hand up to $677.2 million. It has no balance on its revolver.
Home building gross margin, before interest expense included in cost of sales, was 8.5 percent in the third quarter of 2008, compared with 15.9 percent in the fiscal 2007 third quarter and 6.8 percent in the second quarter of 2008.
The company said it expects to continue to generate positive cash flow for the rest of the fiscal year, which ends Oct. 31, and end the year with approximately $800 million.
"As we continue to compete against record foreclosures, higher than normal levels of resale listings and poor consumer confidence, the housing market remains challenging," Hovnanian said. "Despite disappointing operating losses, we successfully generated cash during the third quarter and remain on track to end our fiscal year with approximately $800 million of home building cash. We remain focused on generating sufficient liquidity to both weather this housing downturn and to take advantage of opportunities at the bottom of this housing cycle."
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