Hovnanian (HOV) Q3 2025 Earnings Call Transcript

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Date

Thursday, Aug. 21, 2025 at 11:00 a.m. ET

Call participants

Chairman, President, and Chief Executive Officer — Ara Hovnanian

Chief Financial Officer — Brad O'Connor

Vice President, Corporate Controller — David Mitrisin

Vice President, Finance and Treasurer — Paul Everly

Investor Relations — Jeff O'Keefe

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Risks

Ara Hovnanian said, "We did have higher walkaway costs and impairment charges during the quarter." Most of these were related to the West segment and communities exited due to unmet return thresholds.

Brad O'Connor stated, "Adjusted gross margin is expected to be in the range of 15% to 16.5% for the fourth quarter." This is explicitly lower than typical due to increased mortgage rate buy down costs and a strategic focus on pace over price.

SG&A as a percentage of total revenues is projected at "Expect the range of SG&A as a percentage of total revenues to be between 11%-12%" for the next quarter, described as "still higher than usual" because the company is hiring ahead of anticipated community count growth.

Ara Hovnanian identified that "Economic uncertainty, high mortgage rates, affordability, and low consumer confidence have caused many consumers to delay purchasing a new home."

Takeaways

Total revenues-- $801 million in revenue for the third quarter of fiscal 2025 (period ended July 31, 2025), representing an 11% year-over-year increase compared to the third quarter of fiscal 2024 and driven by higher deliveries.

Adjusted gross margin-- Adjusted gross margin was 17.3% for the third quarter of fiscal 2025, slightly below the guidance midpoint, reflecting a 390-basis-point increase in incentives to 11.6% of average sales price from the prior year.

Adjusted pre-tax income-- Adjusted pre-tax income was $40 million for the third quarter of fiscal 2025, matching the top end of guidance despite higher walkaway costs and impairment charges concentrated in the West segment.

Adjusted EBITDA-- Adjusted EBITDA was $77 million for the third quarter of fiscal 2025, exceeding the high end of management's guidance.

SG&A ratio-- 11.3%, a 110-basis-point improvement from the third quarter of fiscal 2024 and better than the midpoint of guidance.

Contracts per community-- 9.8 contracts per community for the third quarter of fiscal 2025, up from the 9.1 quarterly average since February 2008, but still below the late-1990s to early-2000s levels the company considers normal.

Quick move-in homes (QMIs)-- 8.2 per community at third quarter fiscal 2025 quarter end, marking two consecutive sequential reductions; total QMIs decreased by 13% from January to July 2025.

Backlog conversion rate-- High at 84% for the third quarter of fiscal 2025, substantially above the third-quarter historical average of 55% since 1998.

Liquidity-- $278 million at third quarter fiscal 2025 quarter-end, exceeding the targeted liquidity range after $190 million was spent on land and land development.

Lots controlled-- 40,246 at third quarter fiscal 2025 quarter-end (a seven-year supply), up 2% year-over-year and 36% over two years; 86% are controlled via option, the highest percentage in company history.

Return on equity (ROE)-- Return on equity was 19% over the last twelve months, the second highest among midsize peers and fourth highest including larger peers, with a price-to-book ratio slightly higher than the median for all peers shown during the same period.

Adjusted EBITDA return on investment-- 22.1% for the last twelve months, the highest among midsize peers and fifth highest overall.

Fourth-quarter guidance-- Revenues expected between $750 million and $850 million for the fourth quarter of fiscal 2025; adjusted pre-tax income projected at $45 million to $55 million; income from unconsolidated joint ventures between $8 million and $12 million.

Interest expense ratio-- 4.2% of total revenues in the third quarter of fiscal 2025, up from 4% in the third quarter of fiscal 2024 due to higher land banking arrangements under inventory not owned.

Buy down usage-- 75% of homebuyers used mortgage rate buy downs in the third quarter of fiscal 2025, indicating continued reliance on incentives amid high mortgage rates.

Summary

Management attributed sales variability during the quarter primarily to external macroeconomic and political factors, rather than company-specific actions, while incentives increased marginally in the quarter. Sequential monthly contract activity during the quarter showed a dip in May, modest growth in June, and a pronounced improvement in July, with July contracts per community up 6% year-over-year. The company reduced the number of QMIs per community to 8.2 during the quarter to align with sales targets. The company expects demand for QMIs to remain high as buyers continue to seek rate certainty. Community count remained steady, although persistent utility hookups and permitting delays slowed openings, with land under control and lot options both expanding as part of a disciplined land-light strategy. The company walked away from about 4,059 lots during the quarter; in the last two quarters, it put 6,500 lots under contract that met or exceeded margin and IRR hurdles. Interest expense rose year-over-year during the quarter despite reduced debt, attributed to increased use of land banking; management noted that land banking is more expensive than debt, but reduces downside risk. Fourth-quarter guidance reflects expectations for continued use of mortgage rate buy downs and elevated SG&A, while indicating that adjusted pre-tax income should increase sequentially in the fourth quarter but remain below the prior year's result.

Ara Hovnanian confirmed, "We've made a strategic decision to burn through certain less profitable land parcels at lower gross margins that clear the way for our newer land acquisitions which meet our historical return metrics even after the big incentive."

Brad O'Connor stated, "We now control 43,343 lots as of the quarter's end, including domestic unconsolidated joint ventures, demonstrating ongoing portfolio growth."

Management noted that 34% of delivered homes during the quarter were contracted within the same period, impacting backlog levels and visibility.

The company maintains a $221 million deferred tax asset, which management stated will allow it to avoid federal income taxes on $700 million of future pretax earnings.

Brad O'Connor said, "we are trading at a 31% discount to the homebuilding industry average PE ratio" despite having one of the highest returns among peer groups.

Industry glossary

Quick move-in homes (QMIs): Unsold homes under construction (framing started) intended for delivery within 60-90 days, often targeted to buyers seeking rapid occupancy and mortgage rate certainty.

Land light strategy: Business approach focused on controlling a high proportion of lots via option contracts rather than outright ownership, minimizing capital at risk and increasing operational flexibility.

Backlog conversion rate: The proportion of homes delivered in a period that were contracted for sale in the same period, indicating velocity of contract-to-close activity.

Full Conference Call Transcript

Jeff O'Keefe: Thank you, Michelle, and thank you all for participating in this morning's call to review the results for our third quarter. All statements in 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 and are 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 those 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 10/31/2024 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, or change of circumstances, or any other reason.

Joining me today on the call are Ara Hovnanian, chairman and president and CEO; Brad O'Connor, chief financial officer; David Mitrisin, vice president corporate controller; and Paul Everly, vice president finance and treasurer. Ara, you can go ahead.

Ara Hovnanian: Thanks, Jeff. I'm going to review our third quarter results and I'll also comment on the current housing environment. Brad will follow me with more details as usual, and, of course, we'll open it up to Q&A afterwards. Let me begin on slide five. Here, we show our third quarter guidance compared to our actual results. Given all of the political and economic uncertainty that was present throughout the quarter, we're pleased that we met or exceeded the guidance we provided for all of the metrics. Starting at the top of the slide, revenues were $801 million, which was right at the midpoint of our guidance.

Our adjusted gross margin was 17.3% for the quarter, which was just below the midpoint of the guidance range. Our SG&A ratio was 11.3%, which was better than the midpoint of our guidance. Our income from unconsolidated joint ventures was $16 million, which was within the guidance range although on the lower end. Adjusted EBITDA was $77 million for the quarter, which was above the high end of the guidance range. And finally, our adjusted pretax income was $40 million, which was at the very top of our guidance range. While this is adjusted pretax income, which excludes land charges, we did have higher walkaway costs and impairment charges during this year's third quarter.

The majority of the impairments were in the West segment and were related to communities where we also walked away from land that didn't meet our return thresholds. Again, given the challenging operating environment, we're satisfied that we are able to meet or exceed the guidance we provided. On slide six, we show our third quarter results compared to last year's third quarter. Keep in mind that last year's third quarter was particularly strong partly because it contained $46 million from a gain on consolidation of a joint venture. As Brad will discuss later, we anticipate yet another gain from consolidation of a joint venture in the fourth quarter.

Given the current high level of incentives, it's no surprise that adjusted gross margin and adjusted pretax profit experienced year-over-year declines. Starting in the upper left-hand portion of the slide, you can see that our total revenues increased 11% year-over-year due to an increase in deliveries. Moving across the top to adjusted gross margin, our gross margin was down year-over-year mainly due to increased incentives for affordability and also related to our focus on pace versus price and our short-term strategy of burning through low-margin lots. During this year's third quarter, incentives were 11.6% of the average sales price. The majority of this cost is related to buying down mortgage rates.

This is up 390 basis points from a year ago. It's up 110 basis points from the '25 and it's up 860 basis points from fiscal year '22, which was prior to the mortgage rates spike impacting our deliveries. Other than the extraordinary cost to buy down mortgage rates to make our homes affordable today, our gross margin would be very healthy. Moving to the bottom left, you can see that our total SG&A improved 110 basis points year-over-year to 11.3%. In the bottom right-hand portion of the slide, you can see the negative impact the gross margin decline had on our year-over-year profitability. Again, while much lower than last year, it was at the top of our guidance range.

Which was consistent with our focus on burning through our older vintage lots and QMIs and emphasizing sales pace over price and clearing our balance sheet for our newer land contracts, which have much higher margins. If you turn to Slide seven, you can see that contracts for the third quarter increased 1% year-over-year. Once again, there was considerable variability in monthly sales shown on slide eight. Contracts were down 4% in May, then bounced back with a 1% increase in June, and followed by a 7% increase in July. On slide nine, you can see that the most recent three months continued a trend of choppiness over the last year.

If you turn to slide 10, you can see that contracts per community increased this year compared to last year's third quarter. Additionally, the 9.8 contracts per community this year's third quarter was higher than our quarterly average of 9.1 for the third quarter since 02/2008, but we didn't get back to the 97 through 02 levels that we consider to be a normal sales environment. On slide 11, we give more granularity and show the trend of monthly contracts per community compared to the same month a year ago until long-term monthly averages. Here, you can see that for the first two months of the quarter, this year's sales pace was lower than last year.

This trend flipped in the month of July when we sold 3.4 homes per community compared to 3.2 homes in July '24. When you look at the most recent month compared to the monthly average since 02/2008, the last two months of the quarter were better than the long-term average.

Jeff O'Keefe: Turning to slide 12.

Ara Hovnanian: We show contracts per community as if we had a June 30 quarter end. This way, we can compare our results to our peers that report contracts per community on the calendar quarter end. At 9.6 contracts per community, our sales pace is the third highest among the public homebuilders. On slide 13, you can see that year-over-year contracts per community declined for all homebuilders shown on the slide that report this metric. While any decline is not desirable, we outperformed all but two of our peers. Again, this was as if our quarter ended in June so that we can compare our results to these other home companies.

Our July quarter was stronger with a 3% year-over-year increase in contracts per community and the month of July was up 6% over the prior year in contracts per community. What we're trying to illustrate in these last two slides is that even though the sales pace is not what everyone had hoped for, our focus on pace over price has resulted in an above-average number of contracts per community for us compared to our peers. On slide 14, you can see that for a considerable percentage of our deliveries, our homebuyers continued to utilize mortgage rate buy downs. The percentage of homebuyers using buy downs in this year's third quarter was 75%.

The buy down usage in our deliveries indicates that buyers continue to rely on these rate buy downs to combat affordability at the current mortgage rates. Given the persistently high mortgage rate environment, we assume buy downs will remain at similar levels going forward. In order to meet homebuyers' needs from lower mortgage rates and certainty, we're intentionally operating at an elevated level of quick move-in homes or QMIs as we call them. Since QMIs with a delivery date in sixty to ninety days can have mortgage rates bought down and locked in a cost-efficient manner. On slide 15, we show that we had 8.2 QMIs per community at the end of the third quarter.

This is the second consecutive quarter of sequential reductions in QMI per community. We are down from 9.3 in the '25 to 8.6 in the second quarter '25 to 8.2 in the third quarter. This gets us closer to our current target of about eight QMIs per community with varied delivery dates and model types. As a reminder, we define QMIs as any unsold home where we've begun framing. On slide 16, we show the decline in total QMIs from January '25 until July '25. Here, you can see that QMIs decreased from 1,163 in January to 1,073 in April and then to 1,016 in July. This is a 13% decrease from January to July.

In the '25, QMI sales were 79% of our total sales. This was equal to last quarter, which was the highest quarter since we started reporting this number twelve quarters ago. Historically, that percentage was 40%, about half. So, obviously, the demand for QMIs remains high, so we're comfortable with the current level of QMIs in this environment. We ended the third quarter with 323 finished QMIs. On a per community basis, that puts us at 2.6 finished QMIs per community.

Jeff O'Keefe: The focus on quick move-in homes results in more contracts

Ara Hovnanian: that are signed and delivered in the same quarter. That leads to lower levels of backlog at quarter ends but a higher backlog conversion rate. During the '25, 34% of our homes delivered in the quarter were contracted in the same quarter. This obviously makes it a little more challenging when providing guidance for the next quarter. It also resulted in a high backlog conversion ratio of 84% which is significantly higher than the third quarter average backlog conversion rate of 55% going all the way back to 1998. We continue to manage our QMIs on a community level and we're highly focused on matching our QMI starts pace with our QMI sales pace.

If you move to slide 17, you can see that even with higher mortgage rates, and a slower than anticipated sales pace, nationally we are still able to raise net prices in 21% of our communities during the third quarter. 71% of the communities with price increases were in Delaware, Maryland, New Jersey, South Carolina, Virginia, and West Virginia. Which are among our better-performing markets. While the sales environment has been difficult, we've been focusing on pace versus price as we have been for many quarters now. But we're still raising prices and lowering incentives when our sales pace at certain communities warranted.

Economic uncertainty, high mortgage rates, affordability, and low consumer confidence have caused many consumers to delay purchasing a new home. To increase our sales pace, and make our homes affordable, we continue to offer mortgage rate buy downs. Our gross margins, ignoring the mortgage rate incentives, continue to be strong. However, offering mortgage rate buy downs is very expensive. And continues to negatively impact our gross margin at many locations. Our new lab purchases show excellent margins at current sales pace and price. And excellent IRRs even after the expensive buy downs. I'll now turn it over to Brad O'Connor, our chief financial officer.

Brad O'Connor: Thank you, Ara. Turning to slide 18, you can see that we ended the quarter with a total of 146 open for sale communities, which is the same total as last year's third quarter. 124 of those communities were wholly owned. During the third quarter, we opened 25 newly new wholly owned communities and sold out of 26 wholly owned communities. Additionally, we had 22 domestic unconsolidated joint venture communities at the end of the third quarter. We closed one during the quarter. We continue to experience delays in opening new communities primarily related to utility hookups and permitting delays throughout the country, we do expect unit count will grow sequentially in the 2025.

The leading indicator for further community count growth is shown on slide 19. Ended the quarter with 40,246 controlled lots, which equates to a seven-year supply of controlled lots. Our lot count increased 2% year-over-year but 36% from two years ago. If you include lots from our domestic unconsolidated joint ventures, we now control 43,343 lots. We added 3,500 lots in 30 future communities during the third quarter. Our land teams are actively engaging with land sellers negotiating for new land parcels that meet our underwriting standards, even with high incentives and the current sales pace. In fiscal '24, we began talking about our pivot to growth.

This followed a stretch of several years when we had used a significant amount of cash generated to pay down debt. One interesting trend to point out about the growth on this slide, our lot options grew by more than 13,000 and our lots owned shrunk. By more than 2,400 lots as we continue to focus on our land light strategy. On the far right side of slide 20, you can see that our lot count decreased sequentially for the second quarter in a row. These recent declines are reflective of the operating environment.

We are definitely being more selective with the new lots that we control during these last two quarters we also walked away from about 6,500 lots during the same two quarters, including 4,059 lots in the third quarter. Having said that, we were able to put 6,500 lots under contract in the last two quarters that met or exceeded our margin and IRR hurdle rates. Even after factoring in our current high level of incentives. On slide 21, we show our land and land development spend for each quarter going back five years. You can see for much of the time shown on this slide, how that pivot to growth impacted our land and land development spend.

However, for the past two quarters, you can see decreases due to the current market environment. This is another indication of our discipline in underwriting new land acquisitions. Again, we always use current home prices, including the current high level of mortgage rate buy and other incentives, current construction costs and current sales pace to underwrite to a 20% plus internal rate of return. And then right before we are about to acquire the lots, we re-underwrite them based on the then-current conditions just to be sure that it still makes sense to go forward with the land purchase. We feel good that our new acquisitions will yield solid IRRs we are building huge incentives and a slower sales pace.

Our underwriting standards automatically adjust to any changes in market conditions. We are still finding opportunities in our markets and are very focused on growing our top and bottom lines for the long term but we are not stretching to make deals work. We are being very disciplined. Thus, we would expect our land and land development spend in the fourth quarter will be significantly less than last year. On slide 22, we show the percentage of our lots controlled via option

Jeff O'Keefe: increased from 46% in the third quarter of fiscal 'fifteen to 86% in the '25. This is the highest percentage of option lots we've ever had

Ara Hovnanian: continuing our strategic focus on land life.

Jeff O'Keefe: Turning now to Slide 23. You see that we continue to have one of the highest percentages of land controlled via option compared to our peers.

Ara Hovnanian: Needless to say, with the fourth highest percentage of option loss, we are significantly above the median. On Slide 24, compared to our peers, we have the third highest inventory turnover rate. High inventory turns are a key component of our overall strategy. We believe we have opportunities to continue to increase our use of land options further improve our inventory terms in future periods. Our focus on pace versus price is evident here. Turning to slide 25. Even after spending $190 million on land and land development, we ended the third quarter with $278 million of liquidity. Which is well above our targeted liquidity range. Turning to slide 26. This slide shows our maturity ladder as of 07/31/2025.

Keep in mind that during the second quarter, we paid off early the remaining $27 million of the 13.5% notes, our highest cost debt. Was scheduled to mature in February 2026. This is the latest example of the steps we have taken over the past several years to improve our maturity ladder and reduce our interest cost. We remain committed to further strengthening our balance sheet going forward. Turning to slide 27. We show the progress we've made to date to grow our equity and reduce our debt. Starting on the upper left-hand part of the slide, we show the $1.3 billion growth in equity over the past few years.

During that same time period on the upper right-hand portion, you can see that $769 million reduction in debt. On the bottom of the slide, you can see that our net debt, the net cap, at the end of the third quarter fiscal 'twenty five was 47.9%, which is a significant 146.2% at the beginning of fiscal twenty. We still have more work to do to achieve our goal of 30%, but we are comfortable that we are on a path to achieve our targets soon. Before we move on, I want to comment briefly on our interest expense for the quarter.

Interest expense as a percentage of total revenues increased year-over-year in the third quarter to 4.2% compared with 4% in the prior year's third quarter despite reductions in our debt balance. This increase was predominantly due to a year-over-year increase in land banking arrangements under inventory not owned. Note that when we land bank inventory after we already purchased a lot, we must reflect the transaction as a financing showing the inventory and inventory not owned and the cash received as a liability from inventory not owned. The cost paid to the land banker in this situation is shown as interest expense.

When the land banker purchases the land directly from the seller, the cost paid to the land banker is shown as part of land costs and cost of sales. The latter cases are more common approach, but sometimes we are unable to align the timing of the purchase with the land banker and therefore we own the lots for a short period of time before the land banker buys them. While land banking is more expensive than debt, downside risk is lower and more significant market downturns. Given our remaining $221 million of deferred tax assets, we will not have to pay federal income taxes on $700 million of future pretax earnings.

Benefit will continue to significantly enhance our cash flow in years to come and will accelerate our growth plans. Regarding guidance, given the volatility and the difficulty in projecting margins with moving interest rates and volatility in general, we will focus our guidance only on the next quarter. Our financial guidance assumes no adverse changes in current market conditions including no further deterioration in our supply chain material increases in mortgage rates, tariffs, inflation, or cancellation rates. Our guidance assumes continued extended construction cycle times averaging five months compared to our pre-COVID cycle times for construction of approximately four months. We continue to be more reliant on QMI sales, forecasting profits becomes more difficult.

We recognize that we beat pretax guidance in the first quarter and performed at the very high end of the guidance range in the second and third quarters. Notwithstanding the challenge of projecting even one quarter in the environment, we endeavor to provide guidance that we can meet and if situations are ideal, beat. Our guidance assumes continued use of mortgage rate buy downs other incentives similar to recent months. Further, it excludes any impact to SG&A expenses from our Phantom stock expense related solely to the stock price movement the $119.47 stock price at the end of the '25. Slide 28 shows our guidance for the '25 compared to actual results for the '25.

Our expectation for total revenues for the fourth quarter is between $750 million and $850 million the midpoint of our total revenue guidance would be the same as the third quarter. Adjusted gross margin is expected to be in the range of 15% to 16.5%. This is lower than a typical gross margin, particularly because of the increased cost of mortgage rate buy downs and our focus on pace versus price. Expect the range of SG&A as a percentage of total revenues to be between 11-12%, which is still higher than usual.

One of the reasons our SG&A is running a little high is that we are gearing up for significant community count growth, and we have to make new hires in advance of those communities. Our expectations for adjusted pretax income for the fourth quarter is between $45 million and $55 million. This would be down from last year, but up from our third quarter. This includes the expectation of other income from the consolidation of a joint venture in the fourth quarter when the partner is expected to reach their full return of all capital as prescribed in JV agreement.

As a reminder, this has become a normal part of the life cycle of our joint ventures as if we had we as we have had other income from JV related transactions three times in the past nine quarters. Moving to slide 29, we show all of the guidance we gave for the fourth quarter. The only two lines on here that we have not mentioned are income from unconsolidated joint ventures, and adjusted EBITDA. We expect income from joint ventures to be between $8 million and $12 million and our guidance for adjusted EBITDA is between $77 million and $87 million. Turning to slide 30. We show that our return on equity was 19%.

Over the last twelve months, we are the second highest amongst our midsize peers shown in the dark green on this slide and the fourth highest including the larger peer group. Obviously, this is helped by our higher leverage. On slide 31, we show that compared to our peers, have one of the highest adjusted EBITDA returns on investment at 22.1%. On this basis, we are the highest amongst the midsized peers and fifth highest overall. While our ROE was helped by our leverage, our adjusted EBIT return on investment is a true measure of pure homebuilding operating performance. Over the last several years, we've consistently had one of the highest ROIs and ROEs among our peers.

On slide 32, we show our price to book value compared to our peers, and we are slightly higher than the median for all of the peers shown on the slide. On slide 33, we show the trailing twelve-month price to earnings ratio for us and our peer group. Based on our price to earnings multiple of 7.24 times, using Wednesday's stock price of $148.95, we are trading at a 31% discount to the homebuilding industry average PE ratio if you consider all public builders at an 18% discount when considering our midsized peers. Even though we have the highest ROI among the midsized peers.

We recognize that our stock may trade at a discount to the group because of our higher leverage, our leverage has been shrinking and our equity has been growing rapidly. On slide 34, we show that despite our extremely high ROE, there are a number of peers that have a higher price to book ratio than us. This slide more visually demonstrates how much we are undervalued relative to other builders when looking at the relationship between ROE and price to book. A very similar result exists when looking at ROE to price to earnings. On slide 35, you can see an even more glaring disconnect with our high EBIT ROI. And our PE.

We have the fifth highest EBIT ROI and yet our stock trades at the lowest multiple to earnings of the entire group. These last six slides further emphasize our point that given our high return on equity and return on investment, combined with our rapidly improving balance sheet, we believe our stock continues to be the most undervalued in the entire universe of public homebuilders. I'll now turn it back to Ara for some brief closing comments.

Ara Hovnanian: Thanks, Brad. I want to emphasize that in this more challenging environment, we continue to work with some of our land sellers currently under option in order to find a compromise where we both share a bit of the pain in a slow market. We've made a strategic decision to burn through certain less profitable land parcels at lower gross margins that clear the way for our newer land acquisitions which meet our historical return metrics even after the big incentive. Fortunately, we're still finding new land opportunities that meet our return hurdles. Again, even after the high level of incentives, and at the slower sales pace. To wrap up, we met or exceeded our expectations for the third quarter.

Regardless of market conditions, we closely monitor our communities and adjust our local strategies on a weekly basis. Given the tough operating environment, we are focusing on this even more today. Our goal is to be able to deliver strong ROE and ROI results even in difficult markets. That concludes our formal comments, and we'll be happy to turn it over for Q&A now.

Operator: Thank you. The company will now answer questions. So that everyone has an opportunity to ask questions, participants will be limited to two questions and a follow-up. After which they will get back into the queue to ask another question. We'll open the call to questions. If you'd like to ask a question, please press 11. If your question has been answered and you'd like to remove yourself from the queue, please press 11 again. And our first question comes from Alan Ratner with Zelman and Associates. Your line is open.

Alan Ratner: Hey guys, good morning. Thanks as always for the great information so far. First, I'd love to just drill in a little bit on the improvement you guys saw in order activity in July. I'm curious if you feel like that was more macro and market-driven based on maybe some of the tariff noise subsiding and rates coming down? Or were there any company-specific actions you guys took to drive that improvement, i.e., higher incentives or community openings or anything like that?

Ara Hovnanian: I'd say in general, Alan, as you saw with our incentives, we did increase incentives a bit this quarter versus last quarter. But, overall, I'd say the market is more macro and political uncertainty, you know, news-driven. I mean, it's just amazing. There's a good headline. Sales are good that week. If there's a bad, the world headline, the sale, you know, it can go back and forth and back and forth. But other than a slightly more, you know, buy down rate, we really didn't do anything very different. It was more macro.

Alan Ratner: Got it. And then just in terms of August activity, month to date, would you say that July improvement has continued thus far? Or just remaining choppy here so far?

Ara Hovnanian: I would say really, I would hate to say it's just remaining choppy. I think we see week-to-week changes just like we kinda showed in the monthly data we were showing there. Just bounces back and forth.

Alan Ratner: Got it. Okay. Appreciate that. Second question, on the gross margin guide down sequentially, obviously, it makes sense given the strategy you guys are working through some of the maybe the underperforming assets. But I'm just curious if you can kind of give some framework on how when we you have a very helpful slide in there with the vintage of your lots and you can kind of see, I guess, land that was underwritten during a better time. When you think about the headwind that might continue from working through these assets, is this like a couple of quarters type phenomena? Is this something that's likely going to persist through 'twenty six?

Just can you help frame the size of the bucket of assets that you're kind of focusing on burning through at this point?

Jeff O'Keefe: You know, it's it's hard to comment on that, and I can't say we specifically project it. The prices and the margins are not just lot vintage driven. But are also geography driven. I mentioned earlier the markets, that are mostly East Coast that are doing, far better than some of our West Coast markets. Plus, Texas has been a little slower, and Florida has been a little slower. So some of it depends on really burning through the tougher communities, in the tougher geographies. Having said that too, we are having some success working with our, the sellers of lots to us to share some of the pain, which helps margins.

And allows us to feel more comfortable burning through some of the lower margins rather than walking from lots. We prefer not to walk from lots where we really can avoid it. So the long-winded answer, Alan, is I'm not sure. We really haven't focused on how long it's gonna be. I will say that we've reduced the number of lots that we bought in '23 and '24 by almost 2,000 homes. And we've increased our recent purchases, our recent lots, that we bought this year in '25 by about a thousand homes. So the recent purchases have excellent margins even with the rate buy downs as we've said several times.

So when that, you know, gets into better balance, I can't quite say, but I'm feeling pretty good about our new land acquisitions. And eager to clear the road in our balance sheet to pursue more and more of the new land acquisitions.

Alan Ratner: That's great. I appreciate that. And, Brad, can I just squeak in one last housekeeping question?

Brad O'Connor: Sure.

Alan Ratner: Consolidation on the JV, next quarter, did you give a dollar amount what's going to flow through the other income line?

Brad O'Connor: We didn't give a dollar amount, but on those three previous transactions I mentioned, we averaged about $30 million. And this will probably be in that same neighborhood.

Alan Ratner: And that's embedded within the pretax income. Correct?

Brad O'Connor: Correct.

Alan Ratner: Perfect. Thanks a lot, guys. Appreciate it.

Ara Hovnanian: Mhmm.

Operator: Thank you. As a reminder, to ask a question, please press 11. Our next question comes from Jay McCanless with Wedbush. Your line is open.

Jay McCanless: Hey, good morning everyone. Thanks for taking my questions. I guess, first, can we talk about the balance sheet and what type of debt restructuring opportunities might be out there at this point?

Brad O'Connor: Sure. I mean, we as we've said in the past, I'm always looking at ways to continue to improve our balance sheet. And one of those that we talked about previously with the market is the idea of refinancing our secured debt into unsecured and it's something we're certainly continuing to take a look at. We'll take advantage of if the opportunity arises. Something I pay a lot of attention to. On a regular basis.

Ara Hovnanian: Yeah. Overall, I'd say the market for high yield, even in the homebuilding industry is, getting a little better and a little stronger. So we think there will be opportunities in the very near future.

Jay McCanless: Great. Thank you. And then the second question kinda following on what Alan's asking. Are there opportunities maybe to do bulk sales in terms of moving through some of these lots, going ahead and taking an even larger gross margin hit to get that off your book so that these newer communities and the better gross margins can shine through a little easier?

Ara Hovnanian: You know, we look at that regularly and we're constantly looking at the potential loss in a sale or a walk away versus building out. And we haven't done a lot of land sales in bulk. We have done a couple of walkaways. But generally speaking, as I mentioned earlier, we're finding some better opportunities with sharing the pain with our landline partners. So I think that's probably more of the strategy. I will also say I can't you know, we've mentioned Brad mentioned three times in the last nine quarters, we've had a gain from consolidation. We've also had probably three or four quarters with gains from land sales.

So we tend to do more of the latter, the gain from land sales than the loss from land sales. And it makes sense if you consider 85% of our lots are optioned we don't have a lot of bulk land on our balance sheet today to sell in bulk at a loss. But we do have, from time to time, entitled land that's more than that where the entitlements come through a little earlier than we planned and more than we need for a and we've been having good success selling those at a profit.

Brad O'Connor: Just to add to your comment, one of the land sales we had earlier this year was basically what you described. It was an underperforming community that we did flip to somebody else. So it's something we do look at.

Jay McCanless: Got it. Okay. Great. And then the, the 21% of communities where you could raise price this quarter, I know they were mostly focused in the Northeast, Mid-Atlantic. I think that's the second quarter in a row where you all see good performance there. But diving down a little further, is that entry-level, active adult? Any color you can give us on what buyer groups are resilient enough where you can raise price at this point?

Ara Hovnanian: I'd say, generically, the entry level is the tougher market. We've had some good success in active adult as a couple of our peers have had. And we've had some good success on first-time and time move up. It's been a more challenging environment in the tertiary super low entry price points.

Jay McCanless: That's great. Thanks for taking my questions.

Operator: Thank you. There are no further questions. I'd like to turn the call back over to Ara for any further comments.

Ara Hovnanian: Thank you very much. Again, we're pleased to have met our expectations and guidance even though we're not as good as we performed last year. But we are excited about the opportunities in the land market and replenish our land supply, and we'll look forward to delivering some good results. I think we've shown that we have a great franchise that can really deliver some in the leading ROEs and ROIs. And I think as we continue to replace our land, position with newer and newer land parcels, I think our performance is gonna get just that much better. Thank you very much.

Operator: Thank you. This concludes our conference call for today. Thank you all for participating, and have a nice day. All parties may now disconnect.

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