Hovnanian Enterprises, Inc. Q3 FY2026 earnings call

Market Context & Overall Performance

• Challenging macro environment characterized by high mortgage rates, high inflation, elevated gas prices, and geopolitical volatility has caused potential homebuyers to delay purchase decisions, even as website traffic (a leading indicator of long-term demand) remains strong, with July 2026 website visits higher than all but one year since 2019.
• Third quarter results were generally within the provided guidance range, with total revenue and gross margin coming in above the guidance midpoint, and only adjusted pre-tax income finishing slightly below the guidance range (the first miss in 23 quarters of guidance), driven by delivery delays at new joint ventures.
• Gross margin troughed in the first quarter of fiscal 2026, and has posted two consecutive quarters of sequential improvement, with further improvement expected.

Strategic Execution & Portfolio Transition

• Core strategy: Maintain healthy sales velocity to reduce older land inventory (acquired before the current high-incentive environment), while growing the share of new communities underwritten for today's market conditions to drive margin recovery.
• 33% of third quarter deliveries were sold and closed within the same quarter, creating higher volatility in quarterly earnings forecasts, while the backlog conversion ratio of 74% remains well above the company's historical average of 57%.
• Incentive levels have declined sequentially for two quarters even as mortgage rates rose, and 31% of communities saw price increases or incentive cuts in the quarter, showing that balanced inventory and local market conditions can support improved net pricing even amid broader headwinds.

Balance Sheet & Capital Strategy

• The company ended the quarter with liquidity above its target range, a well-laddered debt maturity profile with no large near-term maturities, and a dramatically improved net debt-to-capital ratio from multi-year debt reduction and growing book equity.
• The company maintains a disciplined approach to capital allocation and land underwriting, walking away from deals that do not meet return hurdles, which has slowed community count growth relative to prior expectations.

Long-Term Strategic Priorities

1. Sales Pace Leadership: Maintain industry-leading sales velocity per community to clear older inventory and capture above-average market share, ranking third among peer builders for contracts per community and year-over-year sales growth in comparable reporting periods.
2. Capital Efficiency: The company's land-light model with 87% optioned lots limits capital tied up in land and preserves flexibility, while its industry-high inventory turnover reduces carrying costs, preserves pricing power, and enables faster capital recycling.
3. Strong Returns on Capital: The combination of optioned lots and high inventory turnover has positioned the company as one of the top performers in EBIT ROI among small-to-mid-sized peer homebuilders, with a focus on maximizing long-term value over growth for growth's sake.
4. Portfolio Shift to Higher-Value Segments: The company is reducing exposure to the highly competitive entry-level segment and expanding focus on move-up and active adult homebuyers to drive stronger margins; a veteran active adult industry executive was recently hired to grow the company's Four Seasons active adult brand.

Hovian Enterprises is a homebuilding company that does not break out separate product segment financial performance in this call. Aggregate third quarter fiscal 2026 results: total revenues = $706 million, gross margin = 14.6%, SG&A ratio = 12.3%, income from unconsolidated joint ventures = $3 million, adjusted EBITDA = $32 million, adjusted pre-tax income = a loss of $2 million. Quarterly contracts totaled 1,359 homes (a decline of 57 homes quarter-over-quarter), with 9.4 contracts per community. QMI (quick move-in) inventory stood at 6.7 units per community, with total QMI inventory down 29% from early 2025 levels. As of quarter-end, the company had 147 total communities, 87% of controlled lots are held via option (the highest share in company history), and 82% of all controlled lots were acquired in fiscal 2023 or later, when today's elevated incentive environment was already incorporated into underwriting.

• Management only provides guidance for the upcoming fourth quarter of fiscal 2026, given ongoing sales volatility and timing sensitivity of QMI closing volumes. Guidance assumes stable market conditions with no major changes to mortgage rates, inflation, cancellation rates, or construction timelines.
• Expected fourth quarter total revenue: $800 million to $900 million, with no land sales included in this guidance range.
• Expected adjusted gross margin: 15% to 16.5%, representing a larger sequential increase than the third quarter improvement from the second quarter.
• Expected SG&A as a percentage of revenue: 10.5% to 11.5%, which remains above the company's long-term target.
• Expected income from joint ventures: $10 million to $20 million.
• Expected adjusted EBITDA: $50 million to $65 million.
• Expected adjusted pre-tax income: $15 million to $30 million.
• Management expects total community count to increase sequentially in the fourth quarter (ending a streak of three consecutive sequential declines) and grow further in fiscal 2027, barring additional walkaways from underperforming land deals.
• Average selling prices (ASP) are expected to see gradual, sustained quarter-over-quarter increases as the portfolio shifts away from entry-level housing to higher-value move-up and active adult segments over the coming years.

• Macroeconomic risks: High mortgage rates and elevated inflation have severely reduced housing affordability, creating extreme buyer caution and volatile monthly sales that are highly sensitive to geopolitical news and economic data.
• Geopolitical risk: Ongoing hostilities in the Middle East and uncertainty around key global shipping straits have correlated with sales slowdowns during the quarter, creating unpredictability in demand.
• Earnings volatility: A large share of recent deliveries come from same-quarter new sales, leading to greater sensitivity to closing timing and mix that makes quarterly results harder to forecast.
• Execution risk: Disciplined land underwriting has led to repeated delays in expected community count growth, as the company regularly walks away from deals that do not meet return requirements.
• All forward-looking statements are inherently uncertain, and actual results may differ materially from guidance due to a range of unforeseen risks that are detailed in the company's SEC filings, particularly the Risk Factors section of its most recent 10-K.

Q: The quarter saw a small tick up in construction costs per square foot — what drove this increase, and are you able to negotiate lower costs in coming quarters? Has immigration enforcement caused any operational disruptions?

A: The increase was very small, driven primarily by minor upticks including rising lumber prices. The company had reduced construction costs meaningfully since early 2025, so this is only a slight reversal, and the team continues to push suppliers for lower costs across materials and labor. The company has not experienced recent operational disruptions from immigration enforcement, and with current soft labor demand, workforce availability is not an issue, as nearly all trade partners use fully legal labor.

Q: What is your outlook for incentive levels going forward, and can you update on your consolidated Saudi Arabian joint venture project?

A: Incentives fell in the third quarter even as mortgage rates rose, but it is hard to forecast future incentive trends with mortgage rates currently creeping up again. The key support for margins regardless is the growing share of deliveries from new communities that already underwrote for today's high incentive environment. The Saudi JV was consolidated on the balance sheet in the first quarter, but has little capital invested and no delivery activity so far this year; first deliveries are expected to start in the fourth quarter, ramp into 2027, and remain a small portion of overall company business for the foreseeable future.

Q: Is the fourth quarter revenue guidance all housing, or does it include land sales? What is your ASP outlook, and when do you expect community count growth to resume? How sustainable is the current gross margin improvement? Are you seeing discounted land opportunities from recent M&A activity to speed up growth?

A: No land sales are included in the fourth quarter revenue guidance. ASP will rise gradually over time as the portfolio shifts to higher-value segments, with no sharp near-term increases. Community count is expected to rise sequentially in the fourth quarter and grow in 2027, after three quarters of declines driven by disciplined walkaways from land deals that did not meet underwriting standards. Gross margin is expected to continue its improving trend; there may be a 30-50 basis point sequential decline from fourth quarter to first quarter due to typical volume effects, but first quarter margins would still improve from third quarter levels if market conditions hold. The company is seeing more discounted land opportunities, including finished lots, from peers walking away from underperforming deals and M&A activity, and is expanding its land acquisition team to pursue opportunities that meet underwriting criteria.