What If Hovnanian's Equity Goes To Zero?

Hovnanian is bent upon raising cash, no matter what. But one analyst asks pointedly whether that will that stem the bleeding. From Hovnanian Enterprises (HOV) FQ408 conference call:

We ended the year with $838 million of cash and do not have any significant debt maturities coming due over the next four years.

It’s been hard to cut SG&A as fast as our business has slowed down… Our gross margin has been in the single digits for the past couple of quarters… The fourth quarter gross margin of 4.7% was lower than we anticipated.

Our goal today is to maximize cash flow even at the expense of margins… Cash flow generation is going to be a little more challenging as conditions have continued to deteriorate out there in terms of pace and sales price.

Q: Your current stated book value of $330 million or roughly $4.25 could actually be downward pressure of significance to the point where there’s no equity value left… You’ve got all this leverage with eroding equity which arguably can go to zero, how should we think about the viability of the future?

A: There is no question from traditional balance sheet metrics we’re highly levered and likely if the market continues to deteriorate that we’ll be more highly levered in the next quarter.

[But] we have a lot of cash handy, [and] over the many years before our maturities come due we think it’s highly likely the market is going to correct… There’s no covenant that gets tripped because [our] debt-to-equity ratio increases.

Q: There is a working capital need to go vertical and make payroll and continue to pay subcontractors, etc… [How] can you continue to generate cash flow per unit if closings are going to go down considerably in a similar fashion in 2009 as they did in 2008… There’s a lot of concern that cash burn will be greater than you may think despite having over $800 million right now.

A: In our most recent quarter we just ended we obviously did have lower delivery rates than earlier quarters or earlier years certainly. We did generate $175 million of positive cash flow and there was not a tax refund in there. We do expect in February a significant tax refund of $145 million in that quarter. From the SG&A standpoint we continue to make very significant reductions there. It is challenging given the low velocity per community but we are taking some very significant steps.

Q: Is there a number per community that you can get back to where you can say the bleeding would stop and maybe gross margin deceleration or erosion would stabilize? If you got back to two houses per month per community, would that be a good number?

A: Our historical average has been 42. Right now we’re running under 18. I think if we could get to the 30s I think we could do a huge improvement in SG&A on the community level.

All those off-balance sheet joint ventures come home to roost:

At October 31, 2008 we had invested $71.1 million in seven land development and 10 home building joint ventures. This is a significant decline in our investments in joint ventures.

This decrease combined with the write offs we’ve taken in our joint ventures has caused the leverage at our joint ventures to increase. Our debt to cap of all of our joint ventures in the aggregate was 57%...

During the fourth quarter, we wrote down our equity investment in Hovstone, the joint venture we formed in March, 2005 with Blackstone (BX)... to zero.

Additionally, during the fourth quarter of ’08 we recorded $21.4 million for our portion of impairments, walk-aways and investments in our joint ventures. Looking at all of our communities in the aggregate including mothball communities, we have a book value of $2.2 billion net of $719 million of impairments which were recorded on 181 of our communities.

Comments

[notsosmart:]

no comment

2008 Dec 22 03:51 PM

[tradealarm:]

I agree! HOV is near bankruptcy with its high leverage.

Let me share a funny story:
When I visited HOV's homes, the seller told me that HOV had its mortgage company and didn't own much debt to bank. HOV would be very stable.

I told her HOV's balance sheet didn't look good.

She said, "We have over 800 million cash".

I smiled. We lived in the funny world. I didn't want to hurt her feeling by the words: HOV's asset couldn't cover its liability, let alone more than 2 billion debt.

Mar 28 02:52 AM