Start Time: 11:00 January 1, 0000 11:44 AM ET
Hovnanian Enterprises, Inc. (NYSE:HOV)
Q4 2018 Earnings Conference Call
December 06, 2018, 11:00 AM ET
Ara Hovnanian - Chairman, President and CEO
Larry Sorsby - EVP and CFO
Jeffrey O’Keefe - VP, IR
Alan Ratner - Zelman & Associates
Timothy Daley - Deutsche Bank
Arjun Chandar - JPMorgan
Alex Barron - Housing Research Center
Good morning and thank you for joining us today for Hovnanian Enterprises Fiscal 2018 Fourth Quarter Earnings Conference Call. An archive of the webcast will be available after the completion of the call and run for 12 months. This conference is being recorded for rebroadcast and all participants are currently in a listen-only mode.
Management will make some opening remarks about the fourth quarter results, and then open up the line for questions. The company will also be webcasting a slide presentation along with the opening comments from management. The slides are available on the Investors page of the company's Web site at www.khov.com. Those listeners who would like to follow along should log on to the Web site at this time.
Before we begin, I would like to turn the call over to Jeff O’Keefe, Vice President, Investor Relations. Jeff, please go ahead.
Thank you, Chelsea, and thank you all for participating in this morning's call to review the results for our fourth quarter, which ended October 31, 2018.
All statements on this conference call that are not historical facts should be considered as forward-looking statements within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.
Such statements involve known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements of the company to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements.
Such forward-looking statements include, but are not limited to, statements related to the company's goals and expectations with respect to its financial results for future financial periods.
Although we believe that our plans, intentions and expectations reflected in, or suggested by, such forward-looking statements are reasonable, we can give no assurance that such plans, intentions or expectations will be achieved.
By their nature, forward-looking statements speak only as of the date they are made, are not guarantees of future performance or results and are subject to risks, uncertainties and assumptions that are difficult to predict or quantify. Therefore, actual results could differ materially and adversely from these forward-looking statements as a result of a variety of factors.
Such risks, uncertainties and other factors are described in detail in the sections entitled Risk Factors in Management's Discussion and Analysis, particularly the portion of MD&A entitled Safe Harbor statement in our annual report on Form 10-K for the fiscal year ended October 31, 2017, and subsequent filings with the Securities and Exchange Commission.
Except as otherwise required by applicable security laws, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, changed circumstances or any other reason.
Joining me today are Ara Hovnanian, Chairman, President and CEO; Larry Sorsby, Executive Vice President and CFO; Brad O’Connor, Vice President, Chief Accounting Officer and Controller; and David Bachstetter, Vice President, Finance and Treasurer.
I'll now turn the call over to Ara. Ara, go ahead.
Thanks, Jeff. I'm going to briefly review our operating results for the fourth quarter and also talk about our current sales environment. And as usual, Larry will follow me with a little more detail. We’re pleased with our fourth quarter and met or exceeded the guidance we gave on our last conference call.
On Slide 4, we show the guidance and our actual results for the fourth quarter of 2018. Starting at the top, our total revenues of $615 million were in the middle of our guidance range. Our gross margin for the fourth quarter was 19.2% and exceeded the guidance range.
Our SG&A ratio was 8.3% and it was also better than the guidance range we gave. And finally, adjusted pre-tax income was $51 million which exceeded the high end of the range we gave by $11 million. While we didn’t give any guidance regarding net income, we are pleased to report $46 million of net income.
Since there has been a lot of attention given to the recent sales trend in the homebuilding industry, let me take a few minutes to take about what we are seeing out there. There’s no doubt that new home sales have been choppy throughout the summer and recently the choppiness has become more pronounced.
Slide 5 showing contracts per community for the quarter by month on the left-hand side and for the entire quarter on the right. You can see that the fourth quarter got off to a slow start in the month of August. However, we ended the quarter with year-over-year increases for the months of September and October. In spite of those increases, the fourth quarter contracts per community declined from 8.6 to 8.3 for the fourth quarter based on using quarter end community counts.
On Slide 6, we show monthly contracts per community data for the entire year. For 9 of the past 12 months shown on this slide, contracts per community were greater than or equal to what they were a year ago. Unfortunately, the choppiness of our sales velocity continued in the month of November with contracts per community down to 2.1.
Now, it is fair to point out that last year’s comparison was a difficult one. We included data from November of '16 and you can clearly see that last year’s November was a particularly strong month and hence the difficult comparison.
If you turn to Slide 7, you can see that on an annual basis the trend has been positive. On the left side, we show our annual contracts per community from '97 to '02. We’ve shown this slide before. They average 44 contracts per community during a time period that was neither a boom nor a bust for the housing industry.
On the center portion of the slide, you can clearly see the steady growth in contracts per community for each year of the past several years. This includes 2018 where contracts per community increased to 36.8 from 34.6 in the prior year. We’re gradually migrating back to normal levels.
Given the recent trends in the housing market, we remain cautious and are making certain that we’re using the most current assumptions for sales pace, home prices and construction costs when underwriting new land purchases. As such, we remain comfortable moving forward with our goal of increasing our community count during the first half of 2019.
As you can see on Slide 8, our total lots controlled at the end of the quarter are up 20% year-over-year to just over 30,000 lots. This translates to an increase of 5,000 lots compared to last year.
It’s important to note that 74% of the growth in lots controlled came from increasing our option position as opposed to our ownership. We’re using options as much as possible especially given the current market conditions.
Prior to exercising a land option takedown, we rerun our financial model based on current home prices, construction costs and pace to make certain that we’re still achieving a reasonable rate of return. Options give us a lot of flexibility.
Ultimately, combining rising contracts per community with growing community counts should result in the company seeing revenue growth and return to sustained profitability. We recognize that there has been a lot of consumer hesitation in purchasing new homes recently.
This may be a reaction to the mortgage rates rising and the stock market volatility. However, we believe that over the longer term, demographics and the strong U.S. economy will prevail as consumers become accustomed to higher mortgage rates and adjust their expectations accordingly.
I’ll turn it over to Larry Sorsby, our Executive Vice President and Chief Financial Officer.
Thanks, Ara. I’m going to start by giving some more detail on our results for our fourth quarter. Turning to Slide 9, we show consolidated revenues in gray and joint venture revenues in blue. Here you can see that our fourth quarter consolidated revenues were $615 million, down about 15% year-over-year. However, you also see that our joint venture revenues grew by more than our consolidated revenues fell.
One of the steps we took when paying down the $320 million of debt during 2016 when the high yield market was not open to refinancing our bonds was raising liquidity by contributing some of our wholly-owned communities into joint ventures. Most of those joint ventures are now delivering homes and if you add both consolidated and joint venture revenues together, despite a 10% decline in community count, our fourth quarter revenues would have increased 5.8% year-over-year.
Now turning to Slide 10. In the top left-hand portion of the slide you can see that our gross margin was 19.2% for the fourth quarter of 2018. This is a 100 basis point improvement from last year. We’ve now reported year-over-year increases in gross margin in seven of the last eight quarters. Although material and labor costs are still increasing, we continue to raise home prices in excess of those increases.
However, I want to point out that our gross margin for the 2018 fourth quarter benefitted from a one-time $5 million credit related to a land development reimbursement from a municipality in California. Had this not occurred, our gross margin would have been 18.3% which was still an improvement over last year’s fourth quarter and on the upper end of the guidance we provided last quarter.
In the upper right-hand portion of this slide, you can see that our total SG&A dollars were down 30% year-over-year from $73 million last year to $51 million in this year’s fourth quarter. Obviously, that’s a significant change and requires an explanation. Construction defect reserves, which are a non-cash item, impacted the fourth quarter of both fiscal 2017 and fiscal 2018, but in opposite directions.
During the fourth quarter of 2017, we increased our construction defect reserves by $12.5 million related to litigation for two older closed communities that delivered homes over 10 years ago. Each year during the fourth quarter, we complete an annual actuarial study to update our construction defect reserves. As a result of these studies, in three of the last four years our construction defect reserves had been reduced.
For 2018, this resulted in a $10 million reduction to SG&A. This reduction and our construction defect reserves reflects the improved quality of the homes we have built during the past decade. We are pleased that our efforts to improve home quality have resulted in a trend of lower cost over the past four years. If you ignore these changes in construction defect reserves, both 2017 and 2018 our adjusted SG&A expenses would have been roughly 60 million during both periods.
On the bottom of the slide, we show that our interest expense was lower during the fourth quarter at $39 million compared to $59 million last year. Interest was lower due to the mix of homes that delivered as well as a result of our paying off the balance on our old revolver which matured early in the fourth quarter.
Additionally, last year’s fourth quarter included $9 million of land and lot sale interest expense compared with about $40,000 of expense in this year’s fourth quarter. We expect our annual interest expense, excluding any land sales interest expense, for fiscal 2019 to be about $160 million.
On Slide 11, we show that our income from joint ventures increased to $17 million in this year’s fourth quarter compared to income of $3 million in last year’s fourth quarter. Our income from joint ventures has been strong for the past two quarters. Although we have limited visibility into our fiscal 2019 results, assuming the spring selling season returns to contracts per community absorption levels similar to what we experienced in the spring of 2018, we expect the joint venture income for fiscal 2019 to be roughly the same as it was in fiscal 2018.
Turning to Slide 12. On the left-hand portion of the slide, we show that we reported fourth quarter adjusted pre-tax income before charges and impairments of $51 million compared with income of $21 million last year. On the right-hand side of the slide, we show pre-tax income of $48 million for the fourth quarter of 2018 compared with pre-tax income of $12 million last year. Both of those profit metrics showed the strong year-over-year growth we achieved.
As we look forward, we expect our first quarter adjusted pre-tax earnings in 2019 to show improvement over 2018 but unfortunately we still expect to report a loss. Although we have limited visibility into our fiscal 2019 results, assuming the spring selling season returns to contracts per community absorption levels similar to what we experienced in the spring of 2018, we expect our adjusted pre-tax profit for all of fiscal '19 to be similar to the $20 million we reported for fiscal 2018.
Next, I will discuss our continued efforts to grow our community count. Turning to Slide 13. It shows that our community count decreased each quarter in fiscal 2018. Given the recent slowdown of new home sales, we are carefully evaluating current market conditions when underwriting new land acquisitions. Nonetheless, we continue to move forward with our goal of increasing our community count and continue to expect our community count to grow during the first half of fiscal 2019.
On Slide 14, you can see that for of 2018 we added 10,050 newly controlled lots and delivered 5,040 homes in lots resulting in a net increase of 5,010 controlled lots. Further demonstrating the significance of our growing land position, for the full fiscal 2018 year our newly controlled lots equaled almost 200% of our year-to-date home deliveries – really for our full year home deliveries.
On Slide 15, we show our total consolidated lots controlled at the end of the fourth quarter increased 20% year-over-year. Our optioned lot position increased by 27%, while our owned lot position increased by 11%. Increase in our lots controlled through option contracts gives us flexibility – considerably more flexibility if there’s significant economic shift.
Throughout fiscal 2018 and especially in the second half of the year, we’ve made good progress in rebuilding our land supply. However, we are aware of the recent hesitation homebuyers have taken on new home purchases and remain disciplined to our underwriting standards of using current home sale price, sales pace and construction costs. While we’re pleased to report an increase in our lot supply, we recognize there’s still more work to do.
We remain focused on increasing our land supply even further so we can grow our community revenues and most importantly our profitability in the future. Looking at all of our consolidated communities in aggregate, including mothball communities and the $88 million of inventory not owned, we have an inventory book value of $1.1 billion net of $258 million of impairments. We believe one of the key pure operating metrics for the homebuilding industry is EBIT to inventory. This metric neutralizes the impact of debt.
On Slide 16, we show the trailing 12-month EBIT to inventory for us and our peers. This ROI metric measures pure operating performance before interest expense. We remain in the top half when compared to our peers on this metric. We and the entire industry are still not at normalized ROI levels, but we believe this will improve as we get further into the housing industry's recovery. One of the ways we are able to achieve this is by maintaining our focus on inventory turns.
Turning to Slide 17. Compared to our peers, you see that we have the second-highest inventory turnover rate over the trailing 12 months. Although, we lag NVR's industry-leading turnover number, our turns are 50% higher than the next highest peer below us. High inventory turns are a key component of our overall strategy.
Another area for discussion is related to our deferred tax asset valuation allowance. Our deferred tax asset valuation allowance is very significant and not currently reflected on our balance sheet. We've taken numerous steps to protect it. At the end of fiscal 2018, our valuation allowance in the aggregate was $638 million. We will not have to pay cash federal income taxes on approximately $2 billion of future pre-tax earnings.
On Slide 18, we show that we ended the fourth quarter with a total shareholders’ deficit of $454 million. If you add back our valuation allowance, as we’ve done on this slide, then our shareholders’ equity would be a positive $185 million. Over time, we believe that we can repair our balance sheet and have no current intentions of issuing equity anytime soon.
Now let me comment on our current liquidity position. As seen on Slide 19, after paying off $101 million of debt and spending $162 million on land during the quarter, we ended the year with liquidity of $326 million, which is above the high end of our liquidity targets between $170 million and $245 million. We continue to have sources of liquidity to further grow our land position, which ultimately should drive increases in our community count.
We have been operating above the high end of our liquidity targets for a considerable time, which despite our desire to grow our community count, clearly demonstrates we remain disciplined in our approach to land acquisitions.
On Slide 20, we show our maturity profile as it looked as of October 31, 2018. We also show the remaining GSO financing commitment with a $25 million of additional liquidity via tack-on purchase at then current yields to our existing 10.5% senior secured notes due 2024. While we do not have any significant debt maturities until fiscal 2022, we continue to evaluate our capital structure and explore further ways to improve our financial position.
Now, I’ll turn it back to Ara for some brief closing remarks.
Thanks, Larry. I’d like to finish up the call with a brief comment about the overall housing market again and our outlook. As you know, sales are traditionally slow during the holiday season from mid-November through mid-January. We usually see sales and traffic start to pick up in the second half of January.
So where does that leave us with the pause that the housing market has recently taken? Because the U.S. economy overall remains strong and demographic trends are encouraging, we continue to believe that consumers will eventually adjust to the higher interest rate environment. However, there are still some ways that we can proactively address the current demographic trends and the higher mortgage rates.
On Slide 21, we see data from John Burns that does a great job of illustrating that there are two demographic groups that will strongly influence the housing market for the next decade and beyond. The slide shows three broad age groups with the two age groups on either end of the lopsided barbell growing over the next decade.
On the left side, you see the younger generation that has 25-year olds to 44-year olds. This group is expected to add 3.3 million households over the next decade. When trying to appeal to this group, we’re looking to build more affordable homes and obviously entry level and through our infill expertise building homes closer to job centers or commuting hubs. This is a very dynamic age group and we’re excited about meeting their future housing needs.
The other and much larger end of the barbell is the aging baby boomer. This age group of 65 years plus is expected to grow by 10.2 million households over the next decade. We’ve been proactively addressing the homebuyers in the 55 and older category for decades.
We introduced our first age restricted community in the '70s and we introduced our Four Seasons brand of active adult communities in 1994. Our Four Seasons communities offer resort style living and have some beautiful home designs that suit a variety of needs for the aging baby boomer.
We’re also aware that not everyone in this age group wants to live in an aged restricted community. To meet these homebuyers’ requirements, we’re expanding our age targeted as opposed to age restricted communities also. We have a similar lifestyle in our age targeted communities to the age restricted communities but they simply don’t have the age restriction.
In addition, throughout our market we’re offering more single-story floor plans and master-down floor plans in our typical communities that are available for the general market without any age restrictions.
We’re committed to providing many choices for these baby boomers as they’re looking for new homes in the future. Our continued focus on entry level homebuyers and the aging baby boomers puts us in a great position to take advantage of these demographic shifts.
Now turning to the subject of affordability, there are a lot of ways that customers can address this. They can obviously buy a smaller home, they can buy in a further away location from the core, they can select fewer options and upgrades and as mortgage rates raise in the future or rise in the future, we’ll like see our homebuyers shift to more adjustable rate mortgages as they’ve done in the past.
Let me touch on a few other initiatives that we are implementing that focus on affordability. These are offering very low entry level homes in some new communities and introducing a variety of mortgage buydown programs. The very low price product strategy has been in the work for some time but has really started to pick up momentum and is even more appropriate given the price sensitivity of homebuyers today with the rising mortgage rates.
We introduced what we call the Aspire line of homes in Southern California a few years ago. Our Aspire homes offer many of the advantages of new construction but typically at a lower cost due to being located further out and also having fewer features and upgrades and obviously being a little smaller. We think that our Aspire communities are a great addition to our first-time product portfolio and extends our product offerings to a whole new set of buyers.
We’ve been pleased with our initial results and the financial results thus far speak very positively toward this product line. We currently control about 1,400 Aspire lots in 16 communities that are already open or just about to open in the near future.
The average base price in these communities start at about $250,000. Our current Aspire communities are located in Northern California, Phoenix, Southern California and Chicago. We’re planning to expand the number of Aspire communities in these markets and expand the offering into other markets as well.
Another way to address affordability is through mortgage rates. Recently, we started offering lower interest rates to buyers through a variety of programs through our mortgage company that include a 2-1 temporary buydown that offers lower rates in the first two years and also permanent buydowns that offer a discount off of today’s rates for the life of the loan.
While lower rates are certainly better for housing, we’ve operated in higher mortgage rate environments in many periods over our company’s 60-year history. Consumers ultimately adjust their housing expectations to what they can afford. As the population continues to grow, housing needs will grow along with it and we plan to meet the country’s housing needs with high quality, affordable and innovative homes.
That concludes our formal remarks. And we’re happy to open it up for questions.
The company will now answer questions. So that everyone has an opportunity to ask questions, participants will be limited to one question and a follow up after which they will have to get back into the queue to ask another question. At this time, we will open the call to questions. [Operator Instructions]. Thank you. Our first question comes from the line of Alan Ratner with Zelman & Associates. Your line is open.
Hi, guys. Good morning. Thanks for taking my questions. First one, I was hoping to drill in a bit on the incentive environment. I know you guys had an incentive program over the summer and had some success there. Just curious with the monthly volatility you’re seeing in absorptions and some improvements in September, October, big drop off in November, was there anything unusual on the incentive side? And I guess more broadly how would you characterize the incentive environment in the marketplace today? Are builders becoming more aggressive and is there elasticity? Are consumers responding to those incentives?
Sure. Good question, Alan. We typically see a little more incentive in the marketplace at this time of year. Many of our peers are trying to finish up their year strongly and have been offering incentives. That’s been somewhat typical. While we have done a brief national sale, I can’t say we’ve had lots of volatility in the use of incentives. We’ve seen in the volatility in pace, but not so much in incentives or our expected gross margin.
Obviously, this is a slow period of time so it’s really hard to judge what’s going on. And needless to say, all of us are going to know a lot more by the second half of January.
Okay. But there’s nothing in the market you could point to that would say, “When we offer this type of discount or incentive or this rate buydown, there’s clear interest from the consumer and that benefits the sales pace?” There’s nothing like that that you’re seeing in the market today that would necessarily give you that conclusion?
I’d say that’s true. Housing remains extremely situational. We have some neighborhoods even with a general choppiness and slowdown, we have some neighborhoods where pace is increasing and we’re raising prices. In the same division, in the same market we’ll have another neighborhood where sales have slowed down. So it’s extremely situational and really is important to get the right land acquisitions and offer the right product.
Having said that, Alan, I think that if you have a community that’s behind its expected sales budget, then you might have some started unsold homes. If you put a little extra incentive out there, a couple percent give or take, it does help move those started unsold homes.
Thank you. [Operator Instructions]. Our next question comes from the line of Tim Daley with Deutsche Bank. Your line is open.
Hi. Thank you for the time. So, Ara, you mentioned that you believe the recent slowdown is more of a pause than a turning point in this cycle with buyers particularly taking a step back as expectations adjust the new higher mortgage payments. So I guess how long do you anticipate this reset expectation to take? Will it be something that will happen in the next couple of months before the spring selling season or is this based on the history that you’ve seen in rising mortgage rate environments? How long does this cycle retake?
That is the $1 million question that all of us are curious about. We certainly – just based on the pure amount of housing production compared to prior cycles, we’d be surprised if this is an extended pause and we’d be surprised if there is a deep reduction in the marketplace in terms of new home sales or production. When you compare to the last couple of cycles, housing starts got over 2 million starts in total and then they started reducing. We’re at almost half that amount right now. And household formations have been at that level as well, which is unusual. So just based on demographics and assuming there’s no hidden skeleton like a subprime problem blooming out there, which we don’t see, we think it’s going to be brief and buyers will adjust to their expectations in a fairly short order. The rate rise this past year was fairly sudden. To go from a three-handle mortgage rate to a five-handle mortgage rate over 12 months is percentage wise a pretty big rise and certainly can cause a little shock from consumers. But I think it will settle down and hopefully we’ll all see that and feel that with the spring selling season.
Got it. That’s very reassuring. And then I guess just to follow up on that. Larry, I know you mentioned that you guys have taken a bit more cautious stance on the land pipeline. But then as well it seemed like the '19 guidance seems to have a bit of some bullish expectations in there I think. So the absorption rate is assumed to be flat from '18 and '19. Could you just help us reconcile I guess the kind of more bearish land’s outlook versus kind of I guess more positive outlook in the guidance there? Is there some mix impact that we should be taking into account? Is this the Aspire product maybe helping absorptions a bit higher? That would be very helpful. Thanks.
We always assume flat absorptions on any kind of projections that we do internally or externally. So we’re not assuming any improvement in market conditions in terms of our internal budgets. Right now with this kind of behind-the-moon phase when the lunar module for those of you old enough to remember, it couldn’t have radio contact with earth when it was behind the moon. And during this holiday period when we’ve seen the slowdown, our results year-over-year for absorptions were up, fourth quarter was down just a touch and now we’re kind of in this holiday period that is very difficult to ascertain exactly what’s going on in terms of market demand. We’re just saying that we expect the market to be similar to what we saw last year in terms of the projections that I mentioned for the full year results for joint ventures and full year results for net income. We’re not expecting anything other than just the same kind of results that we have been seeing until extremely recently. In terms of – we’re not really negative on the land market. All we’re really saying on the land market is we’re continuing to scour our markets for good land deals in great locations. But when we underwrite them, we take the last kind of 13 weeks absorption pace, the current home prices, the current construction costs and underwrite it based on that rather than assume any deterioration or improvement in market conditions when underwriting it. That’s not a change. That’s what we’ve always done.
Thank you. Our next question comes from the line of Arjun Chandar with JPMorgan. Your line is open.
Good morning. Thank you. Just following up on Tim’s question with regards to land spend, so you did 162 million in the fourth quarter which was meaningfully higher year-over-year consistent with your expectations going into the quarter. As we look ahead to 2019 and your expectations around stabilizing community count by the middle of next fiscal year, what concerns do you have with the buyer pause potentially prolonging and that impacting your ability to hit that community count target by the middle of this coming year?
Well, first of all, we’re in the market really every week and every month reloading our land position. So each month we look at what the sales environment is, the pace and price and we guide our new acquisitions accordingly. So that’s part of what gives us comfort. We don’t load up on any big – on a particular quarter or any given point in time. We’re just constantly in there refilling the bucket. But with that said, we’re seeing opportunities we think will still be able to increase our community count at last half of the year as we’ve been saying for a little while here. But we’ll adjust accordingly in January. We’ll see what pace and price the market has to bear and that may affect our acquisitions with more communities or fewer communities. We’ll have to see what the market holds.
Thanks. And can you talk a little bit about the construction reserve? So the benefit from the construction reserve, is that one-time or is that the new normal going forward?
It can’t be a new normal forever. What’s happening is as we have less insurance claims for construction defects, it’s kind of a trailing 10-year analysis that we do an actuarial study on every year and our trend is that we have less cost being spent to repair issues. We’re building a higher quality home. But as I mentioned in my formal remarks, for three out of the last four years we’ve been able to reduce those construction defect reserves. So it’s been a normal event for three out of the last four years. It might happen again for a year or two, time will tell. But I think we’re going to just migrate to a new normal and we might be there already. There might be another year or two of reduction, only time will tell based on claims that we get for warranty.
Thank you. Our next question comes from the line of Alex Barron with Housing Research Center. Your line is open. Alex Barron, your line is now open.
Yes. Thank you. I’m sorry about that. I joined a few minutes late, so I don’t know if missed the comment. But I was just curious if there was anything one time in the SG&A line as to why it fell sequentially and year-over-year so much?
Yes, as we mentioned in the remarks, both last year and this year had impacts from our construction defect reserves. Last year, you may remember we had an increase to our reserves related to some litigation for about $12 million. And then this year our normal annual actuarial study that we do each fourth quarter to update our estimate for our reserves resulted in a $10 million decrease in the reserves. So if you remove both of those adjustments kind of one-time adjustments or a new estimate each year, you’d be back to a more consistent 60 million in both periods.
Alex, we actually have a slide in the deck that demonstrates that pretty clearly.
Got it, okay. Thanks, Larry; sorry about that. And then you mentioned that I guess you’ve tried a number of incentive programs like rate buydowns and so forth. Are you finding that clients are more attractive to the 2-1 buydown versus just kind of lower the rate for all 30 years? Are you seeing any preference one way or the other?
Not really. Each buyer has their own needs. When you do a 2-1 buydown, you still underwrite at the note rate rather than the temporary bought down rate. And if you do a permanent buydown, you’re obviously underwriting at a lower rate than you would on a 2-1 buydown and other customers may need assistance in terms of closing costs or would rather spend it on updates and options. So we have kind of a buffet of options that each customer can chose what they want and where we’re offering those kinds of incentives. But I wouldn’t say that the 2-1 temporary buydown flew off the shelf but it did meet the need of certain consumers.
Got it. And I guess one last question. I was curious whether you guys have only been trying these types of programs or whether you’ve tried or have the need to cut prices anywhere to compete with other builders, whether you don’t feel that that’s necessary at this time?
You might have missed that on an earlier question, but we do – we’re always doing some type of incentive around the country at different communities and that doesn’t change. Sometimes the incentive is through a mortgage buydown, sometimes it’s a special on a completed home, sometimes it’s an incentive based on upgrades that a buyer might select. I’d say at this stage we’re using incentives on many communities but certainly not – we’re not doing anything out of the ordinary on the majority of our communities. So we’re reacting very situationally neighborhood by neighborhood, home by home.
Alex, specifically on the lower price, that’s kind of the least preference from our perspective to do in an existing community because you would upset the next door neighbor that bought it at a different price. So that’s not something we do almost ever.
Thank you. I’m showing no further questions at this time. I’d now like to turn the call back to Ara for closing remarks.
Great. Well, thank you very much. I hope you found our quarter hopefully and hopefully you’re as pleased with the results as we were. We’re all anxious to see what the spring market holds for us, but we’re confident over the longer term it should resume its climb and recovery overall for the housing industry. Thanks and we look forward to reporting more good news next year.
This concludes our conference call for today. Thank you all for participating. Have a nice day. All parties may now disconnect.