Hovnanian soars on results, guidance

 

 Hovnanian Enterprises, Inc. (NYSE: HOV), a leading national homebuilder, reported results for its fiscal fourth quarter and year ended October 31, 2021.

RESULTS FOR THE FOURTH QUARTER AND YEAR ENDED OCTOBER 31, 2021:

• Total revenues increased 19.2% to $814.3 million in the fourth quarter of fiscal 2021, compared with $683.4 million in the same quarter of the prior year. For the year ended October 31, 2021, total revenues increased 18.7% to $2.78 billion compared with $2.34 billion in the prior fiscal year.
• Homebuilding gross margin percentage, after cost of sales interest expense and land charges, increased 200 basis points to 19.4% for the three months ended October 31, 2021 compared with 17.4% during the same period a year ago. During fiscal 2021, homebuilding gross margin percentage, after cost of sales interest expense and land charges, was 18.6%, up 390 basis points, compared with 14.7% in the prior fiscal year.
• Homebuilding gross margin percentage, before cost of sales interest expense and land charges, increased 260 basis points to 22.8% during the fiscal 2021 fourth quarter compared with 20.2% in last year’s fourth quarter. For the year ended October 31, 2021, homebuilding gross margin percentage, before cost of sales interest expense and land charges, was 21.8%, up 340 basis points, compared with 18.4% in the previous fiscal year.
• Total SG&A was $70.0 million, or 8.6% of total revenues, in the fiscal 2021 fourth quarter compared with $65.6 million, or 9.6% of total revenues, in the previous year’s fourth quarter. During fiscal 2021, total SG&A was $276.6 million, or 9.9% of total revenues, compared with $241.8 million, or 10.3% of total revenues, in the prior fiscal year.
• Total interest expense as a percent of total revenues improved by 120 basis points to 4.7% for the fourth quarter of fiscal 2021 compared with 5.9% during the fourth quarter of fiscal 2020. For the year ended October 31, 2021, total interest expense as a percent of total revenues improved by 180 basis points to 5.8% compared with 7.6% during the same period last year.
• Income before income taxes for the fourth quarter of fiscal 2021 was $77.4 million, up 82.5%, compared with $42.4 million in the fourth quarter of the prior fiscal year. For fiscal 2021, income before income taxes increased 242.7% to $189.9 million compared with $55.4 million during fiscal 2020.
• Net income was $52.5 million, or $7.41 per diluted common share, for the three months ended October 31, 2021 compared with net income of $40.6 million, or $5.54 per diluted common share, in the fourth quarter of the previous fiscal year. For fiscal 2021, net income, including the $468.6 million benefit from the valuation allowance reduction, was $607.8 million, or $85.86 per diluted common share, compared with $50.9 million, or $7.03 per diluted common share, in fiscal 2020.
• EBITDA increased 38.6% to $117.2 million for the fourth quarter of fiscal 2021 compared with $84.5 million in the same quarter of the prior year. For fiscal 2021, EBITDA was $357.0 million, a 49.5% increase, compared with $238.8 million in fiscal 2020.

• After the unprecedented and unsustainable COVID-19 surge in home demand during last year’s fourth quarter, contracts per community returned to a more normalized sales pace in the fourth quarter of 2021. Consolidated contracts per community decreased to 10.2 contracts per community for the fourth quarter ended October 31, 2021 compared to 16.5 contracts per community in last year’s fourth quarter but increased compared with 9.5 contracts per community in the fourth quarter of 2019. Contracts per community, including domestic unconsolidated joint ventures(1), decreased to 9.9 contracts per community for the fourth quarter of fiscal 2021 compared with 15.9 contracts per community for the fourth quarter of fiscal 2020, but increased compared to 9.1 contracts per community for the fiscal 2019 fourth quarter.
• As of the end of fiscal 2021, community count, including domestic unconsolidated joint ventures, increased to 140 communities, compared with 135 communities at October 31, 2020. Consolidated community count was 124 as of October 31, 2021, compared with 116 communities at the end of the previous year’s fourth quarter.
• Consolidated contract dollars decreased in the fourth quarter of fiscal 2021 to $660.4 million (1,263 homes) compared with $828.9 million (1,918 homes) in the same quarter last year but increased 27.5% compared to $517.8 million (1,345 homes) in the fourth quarter of fiscal 2019. Contract dollars, including domestic unconsolidated joint ventures, for the three months ended October 31, 2021 decreased 22.3% to $749.5 million (1,389 homes) compared with $964.8 million (2,143 homes) in the fourth quarter of fiscal 2020 but increased 25.3% compared to $597.9 million (1,479 homes) in the fourth quarter of fiscal 2019.
• For the year ended October 31, 2021, consolidated contract dollars increased 2.6% to $2.89 billion (6,023 homes) compared with $2.81 billion (6,953 homes) in the prior year. Contract dollars, including domestic unconsolidated joint ventures, for fiscal 2021 increased 1.5% to $3.30 billion (6,687 homes) compared with $3.25 billion (7,692 homes) in fiscal 2020.
• The dollar value of November 2021 consolidated contracts increased 10.5% to $239.7 million (467 homes) compared with $217.0 million (493 homes) in November last year and increased 50.2% compared to $159.6 million (404 homes) in November 2019.
• The dollar value of consolidated contract backlog, as of October 31, 2021, increased 15.4% to $1.64 billion compared with $1.42 billion as of October 31, 2020. The dollar value of contract backlog, including domestic unconsolidated joint ventures, as of October 31, 2021, increased 17.2% to $1.88 billion compared with $1.60 billion as of October 31, 2020.
• Consolidated deliveries increased 8.3% to 1,703 homes in the fiscal 2021 fourth quarter compared with 1,572 homes in the previous year’s fourth quarter. For the fiscal 2021 fourth quarter, deliveries, including domestic unconsolidated joint ventures, increased 6.0% to 1,839 homes compared with 1,735 homes during the fourth quarter of fiscal 2020.
• For fiscal 2021, consolidated deliveries increased 9.1% to 6,204 homes compared with 5,686 homes in the previous year. For fiscal 2021, deliveries, including domestic unconsolidated joint ventures, increased 5.9% to 6,793 homes compared with 6,414 homes during fiscal 2020.
• The contract cancellation rate for consolidated contracts was 15% for the fourth quarter ended October 31, 2021 compared with 18% in the fiscal 2020 fourth quarter. The contract cancellation rate for contracts including domestic unconsolidated joint ventures was 14% for the fourth quarter of fiscal 2021 compared with 17% in the fourth quarter of the prior year.

(1) When we refer to “Domestic Unconsolidated Joint Ventures”, we are excluding results from our single community unconsolidated joint venture in the Kingdom of Saudi Arabia (KSA).

LIQUIDITY AND INVENTORY AS OF OCTOBER 31, 2021:

• During the fourth quarter of fiscal 2021, land and land development spending was $167.1 million. For fiscal 2021, land and land development spending was $698.3 million, an increase of 11.9% compared with $624.2 million one year ago.
• Total liquidity at October 31, 2021 was $380.9 million, after early retirement of $181 million of senior secured notes in fiscal 2021, well above our targeted liquidity range of $170 million to $245 million.
• In the fourth quarter of fiscal 2021, approximately 3,400 lots were put under option or acquired in 29 consolidated communities.
• As of October 31, 2021, the total controlled consolidated lots increased 18.5% to 30,874 compared with 26,049 lots at the end of the previous year. Based on trailing twelve-month deliveries, the current position equaled a 5.0 years’ supply.

FINANCIAL GUIDANCE(2):

Financial guidance below assumes no adverse changes in current market conditions, including further deterioration in the supply chain, and excludes further impact to SG&A expenses from phantom stock expense related solely to stock price movements from the closing price of $84.26 at October 29, 2021.

• For the first quarter of fiscal 2022, total revenues are expected to be between $640 million and $670 million, gross margin, before cost of sales interest expense and land charges, is expected to be between 20.5% and 22.0% and adjusted pretax income is expected to be between $30 million and $35 million.
• For the second quarter of fiscal 2022, total revenues are expected to be between $700 million and $750 million, gross margin, before cost of sales interest expense and land charges, is expected to be between 23.0% and 25.0% and adjusted pretax income is expected to be between $60 million and $75 million.
• For all of fiscal 2022, total revenues are expected to be between $2.80 billion and $3.00 billion, gross margin, before cost of sales interest expense and land charges, is expected to be between 23.5% and 25.5%, adjusted pretax income is expected to be between $260 million and $310 million, adjusted EBITDA is expected to be between $410 million and $460 million and fully diluted earnings per share is expected to be between $26.50 and $32.00. At the midpoint of our guidance, we anticipate our shareholders equity to increase by approximately 105% by October 31, 2022.

(2) The Company cannot provide a reconciliation between its non-GAAP projections and the most directly comparable GAAP measures without unreasonable efforts because it is unable to predict with reasonable certainty the ultimate outcome of certain significant items required for the reconciliation. These items include, but are not limited to, land-related charges, inventory impairment loss and land option write-offs and loss (gain) on extinguishment of debt. These items are uncertain, depend on various factors and could have a material impact on GAAP reported results.

COMMENTS FROM MANAGEMENT:

“Supply chain issues have plagued the housing industry, which caused us to conservatively revise our year end guidance down during the fourth quarter,” stated Ara K. Hovnanian, Chairman of the Board, President and Chief Executive Officer. “However, our associates rose to the occasion and worked diligently to mitigate supply chain obstacles and deliver quality homes without some of the excess costs we thought might be necessary to complete the homes. Those extraordinary efforts allowed us to achieve operating results for the fourth quarter exceeding the upper end of our original guidance for adjusted gross margin, adjusted pretax income and adjusted EBITDA. Given the solid level of sales per community, an increase in our community count and higher gross margin on current sales and homes in backlog, we are anticipating significant growth in profitability in fiscal 2022 beginning with a strong first quarter.”

“Our strong results during fiscal 2021 resulted in our key credit metrics improving substantially. We lowered our total debt to adjusted EBITDA ratio to 3.8 times at the end of fiscal 2021 compared with 6.7 times at the end of the previous year. Additionally, our adjusted EBITDA to interest incurred ratio increased to 2.3 times for fiscal 2021 compared with 1.3 times for fiscal 2020. We expect to continue our trend of improving our key credit metrics in future periods and are pleased to announce our Board of Directors approved reinstating a $2.7 million dividend payment on our preferred stock payable in January 2022,” said J. Larry Sorsby, Executive Vice President and Chief Financial Officer.

Mr. Hovnanian continued, “Our pretax income increased substantially to almost $200 million in fiscal 2021. Additionally, we generated significant amounts of cash in fiscal 2021, allowing us to payoff $181 million of our secured bonds ahead of maturity and we still ended the year with $381 million of liquidity, well above the upper end of our liquidity target of $245 million. After increasing equity substantially in fiscal 2021, we expect to achieve diluted earnings per share of between $26.50 and $32.00 for the full fiscal 2022 year and expect to more than double our shareholders equity by fiscal year end. Given that we are entering fiscal 2022 with over half of our revenue guidance in backlog, combined with our strong sales pace and gross margins, we look forward to an extraordinarily strong new year,” concluded Mr. Hovnanian.

WEBCAST INFORMATION:

Hovnanian Enterprises will webcast its fiscal 2021 fourth quarter financial results conference call at 11:00 a.m. E.T. on Thursday, December 9, 2021. The webcast can be accessed live through the “Investor Relations” section of Hovnanian Enterprises’ website at http://www.khov.com. For those who are not available to listen to the live webcast, an archive of the broadcast will be available under the “Past Events” section of the Investor Relations page on the Hovnanian website at http://www.khov.com. The archive will be available for 12 months.

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