Hovnanian Enterprises, Inc. Q2 FY2026 earnings call

### Market Position and Sales Performance - Despite a choppy demand environment and macro/geopolitical uncertainty (including the Iran conflict), Hovnanian delivered results at or above nearly all targeted metrics, with adjusted gross margin outperforming expectations. - Total contracts rose 3% year-over-year in the second quarter, with 11.3 contracts per community, near the historical average since 1997; on an adjusted basis aligned to peer calendar reporting, this ranks as the second highest sales pace among public homebuilders, and Hovnanian is one of only two builders with year-over-year growth in contracts per community. - Community traffic trended up through most of the past six months, with moderating declines in April amid macro uncertainty, and month-to-date May contracts were up 12% year-over-year as of the call date.

### Incentive and Margin Strategy - Incentives as a percentage of average sales price fell 70 basis points sequentially to 11.9%, marking the first sequential decline in nearly three years after three years of steady increases, though incentives remain 140 basis points higher than a year ago and 890 basis points higher than 2022 (pre-mortgage rate spike). The majority of incentives are tied to mortgage rate buy downs to support buyer affordability. - The company is deliberately working through older, lower-margin lots and quick move-in (QMI) inventory, while transitioning to new communities where current incentive levels are already incorporated into land underwriting, which management expects will drive gradual margin improvement over time. - 44% of communities saw net price increases in the quarter, the largest share in two years, with broad geographic dispersion of price gains.

### Inventory Management - QMI inventory per community held steady at 5.8, with total QMIs falling 37% from January 2025 to 731 units as of quarter end; finished unsold QMIs dropped 55% year-over-year to 137 units. - 68% of second quarter sales were QMIs (down from a peak of 79%, but still well above the 40% historical average), while to-be-built home sales rose to 32% from 21% (to-be-built homes carry higher margins, so this mix shift will support future profitability). - 41% of delivered homes were sold and closed in the same quarter, a record high since tracking began in 2023, pushing the backlog conversion rate to 85% far above the 61% historical average.

### Land and Capital Strategy - Hovnanian ended the quarter with 33,600 domestically controlled lots (36,600 including joint ventures, a 21% year-over-year decline reflecting intentional, disciplined land buying), equal to a 6.5-year supply. 66% of controlled lots were acquired after fiscal 2023, when the company began underwriting for higher incentive levels; 45% of current deliveries come from pre-2023 lots, down from over 50% in prior quarters, reflecting ongoing mix transition. - 86% of lots are controlled via options, up from 45% in 2020, giving Hovnanian the fourth highest share of option-controlled lots among peers, well above the industry median; the company has the second highest inventory turnover rate among peers and the highest adjusted EBIT return on investment among midsized peers at 15.9%. - The company is strategically shifting investment toward move-up homes in desirable A/B locations and expanding active adult communities, while reducing investment in lower-margin entry-level development on suburban outskirts. - Liquidity ended the quarter at $442 million, the third consecutive quarter above $400 million and above the company's target range; net debt to capital has fallen to 43.1% from 146.2% at the start of fiscal 2020, and the company remains on track to hit its 30% net debt-to-capital long-term target.

Hovnanian Enterprises is a single-segment homebuilding company, so no separate product segment breakdown is provided. For the second quarter of fiscal 26, the company generated total revenues of $668 million, a 3% year-over-year decline driven by a 12% drop in home deliveries, partially offset by a land sale. Adjusted gross margin was 14.3%, which improved 90 basis points sequentially from the first quarter (the company expects the first quarter was the margin trough) but remained lower year-over-year due to elevated sales incentives. SG&A as a percentage of revenue came in at 12.6%, at the lower end of guidance. Unconsolidated joint ventures reported a $1 million loss driven by startup costs for new communities, consistent with early-stage project expectations. Adjusted EBITDA was $41 million (above guidance range) and adjusted pretax income was $9 million (at the top end of guidance range).

- Management only provides guidance for the upcoming third quarter of fiscal 2026 due to demand variability and the timing impact of QMI deliveries, with the outlook assuming broadly stable market conditions, no major increases in mortgage rates, inflation, cancellation rates, or construction cycle times. - Third quarter guidance: total revenues of $650 million to $750 million; adjusted gross margin of 14% to 15%; SG&A as a percentage of revenue of 12.5% to 13.5%; joint venture income between breakeven and $10 million; adjusted EBITDA of $30 million to $40 million; adjusted pretax income between breakeven and $10 million. - Management expects sequential improvement in delivery volume, revenues, and gross margins in the fourth quarter of fiscal 26, driven by increasing deliveries from newer, higher-margin communities that were underwritten for current incentive levels; no year-over-year improvement is forecast, only sequential gains relative to the second and third quarters. - Longer term, management expects continued gradual margin improvement as the mix shift to newer communities progresses, and projects community count growth starting in late fiscal 26 or early fiscal 27.

- Macroeconomic and geopolitical uncertainty, including the ongoing Iran conflict and elevated mortgage rates, has reduced consumer confidence and caused volatile, choppy demand, leading to unpredictable quarterly sales results. - Pre-2023 land lots, which were underwritten for lower incentive levels, continue to create downward pressure on gross margins until the mix transition to newer land is complete. - Industry-wide delays in land development and new community opening timelines have slowed expected growth in community count. - While the company has made significant progress in deleveraging, it has not yet reached its long-term 30% net debt-to-capital target. - Weak consumer confidence in the Middle East, driven by regional geopolitical tensions, has slowed demand for the company's small Saudi Arabian development project.

Q: Management noted expected Q4 improvement — is this a sequential or year-over-year improvement, and what is driving it? Also, why was there a slight dip in cash balance, and how will excess cash be used if attractive land deals remain scarce? A: The expected Q4 improvement is sequential (versus Q2 and Q3), not year-over-year, driven by higher delivery volumes and continued gross margin expansion as more new higher-margin communities begin deliveries. The slight cash dip is typical seasonality for the second quarter, and current liquidity is actually well above historical levels for this quarter and above the company's target. The company will hold dry powder for future land deals, but may opportunistically repurchase stock with excess cash if it remains undervalued, as it currently trades 20% below book value.

Q: What progress has the company made renegotiating option terms with land sellers, and have you shifted from mortgage rate buy downs to base price adjustments as incentives become less effective? A: Most renegotiations are with land bankers for individual struggling communities, primarily resulting in closing deferrals with limited price adjustments so far; the company does not have a total percentage of renegotiated lots, as negotiations happen on a community-by-community basis, and most land sellers are willing to collaborate to avoid exit. The sequential decline in incentives is not due to a shift to base price adjustments: widespread base price cuts have not occurred, so the decline is not masked in the incentive numbers. Incentive strategy is tailored per community, but there has been no meaningful change in the overall usage of mortgage rate buy downs.

Q: Why did incentives fall sequentially this quarter, and what is driving that improvement? Also, can you update on the status of your joint ventures and Saudi Arabian operations? A: The largest driver of lower incentives is the significant reduction in QMI inventory: the company cut total QMIs per community from 8.6 a year ago to 5.8 currently, and cut finished QMIs per community from a peak of ~2.5 to ~1 currently, reducing the need for aggressive incentives to clear excess inventory. Competitor activity and shifting mortgage buy down costs play a smaller role. The $1 million JV loss comes from startup costs for new domestic joint ventures (not Saudi, which is now wholly owned) and the project will start delivering later this year, with small positive JV income expected in Q3. The Saudi operation has two selling communities with no deliveries yet expected to start in H2, and it is a very small part of the overall business; regional demand is currently weak due to geopolitical tensions, but the company has minimal invested capital.

Q: The 32% to-be-built sales share this quarter is up from 21% — what does this mean for future margins, and how high can this share go? A: The 32% figure refers to share of total sales for the quarter. Historically, to-be-built sales made up ~60% of total sales before the 2022 mortgage rate spike pushed the company to focus more on QMIs, so management expects the share to gradually migrate back toward that historical level over time as QMI inventory normalizes. The shift to more to-be-built sales is beneficial for margins, as these homes consistently carry higher margins than QMIs. This trend is also supported by the company's strategic shift away from entry-level housing (whose buyers are most dependent on mortgage buy downs and quick closings) toward higher-margin move-up and active adult product.