From Seeking Alpha's Hovnanian Enterprises, Inc. F3Q08 (Qtr End 07/31/08) Earnings Call Transcript.
CEO Ara Hovnanian: “Several of our Northern California markets have begun to see an interesting trend… [In] Stockton, California… ground zero for foreclosures… total listings appear to have peaked in March of ’08 and have been coming down since then. At the same time, the pace of new sales has risen. The effect of these two movements is that month’s supply is at 2.4 months. That’s not only the lowest we have seen in the past two years, that’s a very healthy level even for the best of times.
The Virginia market currently has only a 5.6 month supply of existing homes, a dramatic drop from the last nine months…. The Maryland-DC market still has persistently high inventory with 9.4 months supply, so it’s not all side of good news out there just yet… Arizona and the Midwest… markets are operating at slightly better levels than California and Florida. Our operations in Carolinas are doing a little better than these. As of late, we have lowered prices in the Washington DC market and took impairments there. The northeast is still holding up better than most markets, but they too have felt their share of pain in this downturn… Our Texas operations are doing the best, but even here we have seen some weakness, particularly in Dallas.”
Ivy Zelman of Zelman & Associates: “…The increase in existing home sales is coming from foreclosures and dominating markets as much as 50% to as high as 75% of those existing home sale increases, and we know that through title companies and work we’ve done that half of those and maybe even more, many are being purchased by investors. The good news is that it’s moving inventory. The bad news is that there’s for every house that’s taken off, there’s more in the pipeline to come. The other bad news is it’s taking share from your new home market and your prices, although in many cases you may not be making money now, are likely to go lower because appraisals are coming in lower because the comparables are foreclosures.”
AH: “…What is important is to clear the inventory and frankly whether it’s cleared through foreclosures, which are selling often on through MLS, or it’s clear through a normal non-foreclosure sale, the point is it’s clearing the market.”
AH: “In Northern California… existing home prices per square foot… has finally come down to levels that are competitive with new home prices per square foot... that I think is what finally had prompted existing home sales in that location to start selling, and that’s an important part of the marketplace because for a homebuilder to sell a move up house, for example, because not all of our homes are first time homebuyers, our customers have to sell their existing home. So if there’s finally activity in the sales of existing homes, that begins that food chain and then buyers can sell and hopefully move up to one of our homes.”
AH: “We’re burning through a lot more land than we’re buying… We delivered about 2,200 homes, only bought about 400 lots and locations we already bought lots, a lot of them were in Texas or North Carolina, which are very low land costs markets… that is a big part of what’s generating cash flow, we’re simply selling a lot more land with a house under it than investing in new lots right now."
AH: "While we will sell a parcel of land occasionally, the best way for us to accomplish further inventory reductions and maximizing the cash generation is to continue selling and delivering homes on the lots that we own… our own lot position which is down 35% from peak levels in our option lot position which is down 73% from peak levels… At the end of Q2, we owned a little over 25,000 lots... During Q3, we delivered about 2,200 homes, sold only about 40 lots; and offsetting these reductions, we took down about 400 lots on existing options. This resulted in a net decline of 1,700 lots for the quarter."
Larry Sorsby, EVP, CFO: “So far we have mothballed land in 33 communities. The book value at July 31st, ’08, associated with these mothballed communities was $422 million, net of an impairment balance of $147M. AH: “We have mothballed [two communities] in Bakersfield [because] the cash flow generation was just not sufficient and… [We] were not really recouping enough for the land investment… In none of the conditions have we gotten to a point of zero cash flow. We would mothball a community long before that.”
AH: “Today, we have more leverage than we’re comfortable with and would not consider taking any more leverage to buy land. But one way that we’ll be able to take advantage of land prices that will inevitably present themselves is to partner with a financial institution…
We have spoken to many private equity shops and hedge funds about the prospect of forming a joint venture to buy distressed asserts… and are very close to finalizing an agreement with one of these partners… We would put up about 10% of the equity and the financial partner would invest the remaining 90%. If the properties performed to pro forma, we would earn about 40% of the profits. If the market improves thereby enhancing margins, our top tier of profit participation is 50%.”
LS: “...Our real intent here is to take advantage of opportunities at the bottom of the cycle. We’re just seeding it to get it started with our own asserts. But the real purpose of the venture is to invest in new deals at the bottom.”
AH: “[For a] $100 million [deal] our equity contribution would be $10 million. But effectively if you use that number, we would receive cash of $100 million as the venture would buy the assets from our Company. That cash of $100 million would be able to fund our 10% investment on a billion dollars of acquisition, so the equity leverage power is huge… The interest out there of financial institutions, money managers, hedge funds, equity shops, etcetera, of investing with us was just enormous… If we were interested, we could have gotten a couple of billion dollars of commitment… We earmarked initially about a quarter of billion dollars of equity for the venture… We will offer all new acquisition opportunities above a certain minimal amount of several million dollars. Anything of substance, we will offer to the venture first and only after the venture… declines, then we would look at purchasing it on our own.”
AH: “Low absorption levels, like those that we’ve experienced during this downturn, make it very challenging to staff our communities efficiently… In our regional and divisional offices, we have… reduced our staffing levels… Our staffing levels were down through the end of the July quarter. At July of ’08, we had a total of 3,075 associates; that’s a 55% reduction from the peak in June of ’06 and an 8% decline from April of ’08. We’ll continue to right size our staffing levels to match the current business activities in each of our markets.
…Based on demographics and actuarial studies, the [Harvard Joint Center for Housing Studies Report] estimates for the next decade is for growth slightly more than 1.4 million net new households per year. This is a slight increase over the past five years since 2000 and it’s a significant increase over the net new household created over the decade of the ‘90s, which were about 1.15 to 1.2 million households per year. Notwithstanding the very poor current housing conditions which causes a delay over the short-term in household formations, this coming decade is projected to have greater housing demand than we have seen in a long, long time.”
LS: “The Down-Payment Assisted Programs were 16% of our loans for the first nine months of fiscal ’08. This compares to 2% for all of fiscal 2007… The DPA was limited to 3% of the sales price. So… for $150K home, the DPA would’ve been only provided a $4,500 benefit. Now that same homebuyer can get a $7,500 tax credit. That’s a $3,000 difference for this homebuyer. The other benefit of tax credit is that it can ultimately [be] in the form of a tax refund where that homebuyer actually gets the cash. With the DPA program, the homebuyer never actually gets the money.”
AH: “We do not have any debt maturities until 2010, and that is only a $100 million issue. After that, nothing comes due until 2012. We believe the capital market moves that we made in May of ’08 have put us on a solid footing to weather this downturn without having to go back to the capital markets to raise additional cash.”
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