- Revenue: $723 million, an 11% increase year-over-year.
- Adjusted Gross Margin: 22.1% for the quarter.
- SG&A Ratio: 12.4%, or 12.1% excluding $2.2 million phantom stock expense.
- Adjusted EBITDA: $131 million, a 20% increase year-over-year.
- Adjusted Pretax Income: $100 million, a 34% increase year-over-year.
- Year-to-Date Contracts: Increased 8% for the first nine months.
- Contracts per Community: Decreased to 9.5 in Q3.
- Quick Move-In Homes (QMIs): 67% of total sales in Q3.
- Community Count: 146 open for sale communities, a 20% increase year-over-year.
- Controlled Lots: 39,516, a 34% increase year-over-year.
- Land and Land Development Spend: $216 million in Q3, a 28% increase year-over-year.
- Liquidity: $250 million at the end of Q3.
- Net Debt to Net Cap: 55.9%, improved from 146.1% at the beginning of fiscal '20.
- Deferred Tax Assets: $258 million, allowing for $900 million of future pretax earnings without federal income taxes.
- Full Year Revenue Guidance: $2.9 billion to $3.05 billion.
- Full Year Adjusted EBITDA Guidance: $420 million to $445 million.
- Full Year Adjusted Pretax Income Guidance: $300 million to $325 million.
- Full Year EPS Guidance: $29 to $31.
- Book Value per Share Guidance: Approximately $109 per share by October 31, 2024.
- Return on Equity (ROE): 38.8% over the trailing 12 months.
- EBIT Return on Investment: 33.7%.
Release Date: August 22, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Revenues for the third quarter were $723 million, meeting the midpoint of guidance.
- Adjusted EBITDA increased by 20% to $131 million.
- Adjusted pretax income rose by 34% to $100 million.
- Contracts increased by 23% over the last five weeks compared to the same period last year.
- The company ended the quarter with a total of 146 open for sale communities, a 20% increase from last year.
Negative Points
- Gross margin decreased year over year to 22.1%.
- SG&A ratio was slightly above the high end of guidance due to increased advertising spend and new hires.
- Contracts per community for the third quarter decreased year over year to 9.5.
- Extended disruption from Hurricane Beryl negatively impacted sales and deliveries in Texas.
- The company experienced delays in opening new communities, primarily due to utility hookups.
Q & A Highlights
Q: Can you provide more color on the JV consolidation and its impact on future earnings?
A: Brad O'Connor, CFO: The income from the specific joint venture will now flow through our wholly-owned business, impacting revenue and COGS lines. The land value is stepped up, resulting in higher costs, but the IRR remains strong. Future JV income will continue as new JVs come online.
Q: What is the outlook for gross margins in the fourth quarter and beyond?
A: Brad O'Connor, CFO: For the fourth quarter, we expect gross margins to be around 22%, assuming stable mortgage rate buydowns and construction costs. Land costs may increase with new community openings, but potential declines in mortgage rates could offset this.
Q: How do you view your long-term ROE given the current high levels?
A: Ara Hovnanian, CEO: Our EBIT ROI, which excludes leverage, is among the highest in the industry. As our leverage decreases, we expect our ROE to remain higher than our peers, assuming continued operational performance.
Q: What are the prospects for further debt refinancing and its impact on interest costs?
A: Brad O'Connor, CFO: While refinancing next year may be cost-prohibitive unless rates drop significantly, we are close to transitioning from secured to unsecured debt, which should lower interest costs substantially.
Q: When will the Saudi venture start contributing to earnings?
A: Brad O'Connor, CFO: Meaningful profits from the Saudi venture are expected by late fiscal 2025 or early 2026, as we are currently starting new communities there.
Q: What is the impact of phantom share expenses on SG&A?
A: Brad O'Connor, CFO: Phantom share expenses will continue but are not substantial. The impact varies with stock price changes, and we provide quarterly updates in the appendix.
Q: Have you considered buying back more stock given its low PE ratio?
A: Brad O'Connor, CFO: We repurchased $11 million worth of stock at an average price of $139 during the quarter and have Board approval for further buybacks when opportune.
Q: How long will the deferred tax asset benefit last?
A: Brad O'Connor, CFO: The deferred tax asset protects approximately $900 million of future pretax earnings, likely lasting around 2 to 2.5 years at current earnings levels.
Q: What are the future plans for joint ventures?
A: Ara Hovnanian, CEO: Joint ventures will remain a core part of our strategy, allowing us to build larger communities with less capital and achieve high returns on investment.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
