Hovnanian Enterprises (NYSE:HOV) Inc. reported strong financial results for the fourth quarter and full fiscal year, showcasing significant revenue growth and improved margins. Despite these robust figures, the company's stock experienced a notable decline in pre-market trading. This reaction appears to reflect investor concerns over the broader market environment and specific company challenges.
Key Takeaways
- Hovnanian reported a 10% year-over-year increase in Q4 revenues.
- The company's stock fell 6.3% pre-market following the earnings release.
- Hovnanian introduced a new home design portfolio aimed at simplifying the buying process.
Company Performance
Hovnanian Enterprises demonstrated strong performance with a 9% increase in full-year revenues, reaching $3 billion. The adjusted EBITDA rose by 7% year-over-year to $456 million, indicating robust operational efficiency. The company also saw a 16% increase in adjusted pre-tax income, reflecting effective cost management and strategic growth initiatives.
Financial Highlights
- Q4 Revenue: $979.64 million, a 10% increase YoY.
- Full Year Revenue: $3 billion, a 9% increase YoY.
- Adjusted Gross Margin: 22% for the year.
- Adjusted EBITDA: $456 million, a 7% increase YoY.
- Adjusted Pre-Tax Income: $327 million, a 16% increase YoY.
Earnings vs. Forecast
Hovnanian reported an earnings per share (EPS) of $12.79. While specific forecast figures were not provided, the strong revenue growth and improved margins suggest that the company met or exceeded market expectations. This performance aligns with the company's historical trend of steady growth and margin improvement.
Market Reaction
Despite the positive earnings report, Hovnanian's stock fell by 6.3% in pre-market trading. The stock's last close was at $189.96, and the decline places it closer to its 52-week low of $118.90. This movement reflects broader market volatility and potential investor concerns about future interest rate impacts on the housing market.
Company Outlook
Looking ahead, Hovnanian projects Q1 2025 revenues between $650 million and $750 million, with an adjusted gross margin of 17.5% to 18.5%. The company is targeting over 10% annual delivery growth for the next few years, emphasizing a strategy focused on volume over price.
Executive Commentary
CEO Ara Hovnanian expressed optimism about future growth, stating, "We are very excited about the growth we hope to achieve in fiscal 2025." CFO Brad O'Connor highlighted the stock's value, noting, "We believe when all of the fundamental financial metrics are considered, our stock is one of the most compelling values in the industry."
Q&A
During the earnings call, analysts inquired about Hovnanian's margin strategy and its approach to mortgage rate buy-downs. The company also addressed potential debt refinancing and expectations for SG&A expenses, providing clarity on its strategic financial management.
Risks and Challenges
- Interest Rate Volatility: Fluctuating mortgage rates could impact homebuyer affordability and demand.
- Supply Chain Disruptions: Potential delays in material availability could affect construction timelines and costs.
- Economic Uncertainty: Broader economic conditions may influence consumer confidence and housing market dynamics.
- Market Saturation: Increased competition in certain regions could pressure pricing and margins.
- Regulatory Changes: Any shifts in housing regulations could impact operational strategies and project timelines.
Full transcript - Hovnanian Enterprises (HOV) Q4 2024:
Marvin, Conference Call Operator: Good morning, and thank you for joining us today for the Mannion Enterprises Fiscal 2024 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 Q4 results and open line for questions. The company will also be webcasting a slide presentation along with the opening comments from management.
The slides are available on Investors page of the company's website at www.khov.com. Those listeners who would like to follow along should now log on to the website. I'd now like to turn the call over to Jeff O'Keefe, Vice President, Investor Relations. Jeff, please go ahead.
Jeff O'Keefe, Vice President, Investor Relations, Mannion Enterprises: Thank you, Marvin, and thank you all for participating in this morning's call to review the results for our Q4 year end. 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 and 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 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 and Management's Discussion and Analysis, particularly the portion of MD and A entitled Safe Harbor Statement in our annual report on Form 10 ks for the fiscal year ended October 31, 2023, 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 Brad O'Connor, CFO and Treasurer and David Meitersen, Vice President, Corporate Controller.
I'll now turn
: the call over to Ara.
Ara Hovnanian, Chairman, President and CEO, Mannion Enterprises: Thanks, Jeff. I'm going to review our Q4 and year end results and I'll also comment on the current housing environment. Brad will follow me with more details and of course we'll open it up for Q and A afterwards. Let me begin on Slide 5. Here we show full year guidance compared to our actual results.
Starting on the top of the slide, revenues were $3,000,000,000 which was slightly better than the midpoint of our guidance. Our adjusted gross margin was 22% for the year, which was exactly at the midpoint of the guidance we gave. Our SG and A ratio was 11.4%, which was very near the midpoint of the guidance that we gave. Our income from unconsolidated joint ventures was $52,000,000 which was slightly below the guidance we gave due to delayed deliveries in 3 communities related to utility connections. Adjusted EBITDA was $456,000,000 for the year, which is above the high end of the range that we gave.
And finally, our adjusted pretax income was $327,000,000 which was also above the high end of the guidance range that we gave. We're obviously pleased that our profitability for the full year was above the high end of the guidance range. On Slide 6, we show how our full year results compared to last year. Starting in the upper left hand portion of the slide, you can see that our total revenues increased 9% to just over $3,000,000,000 Moving across the top to gross margin, our gross margin was 22% in fiscal year 2024, which was slightly below the prior year's gross margin. Moving to the bottom left, you can see that adjusted EBITDA increased 7% for the year to $456,000,000 and in the bottom right hand portion of the slide, we're excited about the adjusted pre tax income improvement over the prior year, up 16% to $327,000,000 If you go to Slide 7, here we show our results compared to last year's Q4.
Keep in mind that last year's Q4 was one of the strongest 4th quarters that we've had in a very long time, particularly for gross margin and pre tax income. It makes the year over year comparisons for the quarter much more difficult. Starting in the upper left hand quadrant of the slide, you can see our total revenues increased 10% to just under $1,000,000,000 In the upper right hand portion of the slide, you can see that our gross margin was a healthy 21.7 percent, but down compared to a particularly strong margin the previous year. On a sequential basis, we decreased slightly from 22.1% in the Q3 of 2024. Gross margins declined year over year as per our guidance despite a 1% decrease in construction costs over the same period.
The lower gross margin is primarily due to the continued use of mortgage rate buy downs, which have been stubbornly high due to the elevated levels of mortgage rates as well as some other incentives. It's also related to a greater conscious focus on pace versus price, which we will discuss more fully in a moment. Going forward, we continue we expect to continue to use mortgage rate buy downs to help with buyer affordability. During this year's 4th quarters, incentives were 8.5% of the average sales price. This is up 120 basis points from a year ago and up 500 basis points higher than fiscal 2022, which was prior to the mortgage rate spike impacting deliveries.
Because of the continued use of incentives and increased land life position, we expect gross margins to decrease further in the Q1 as we provided in our guidance. We continue to emphasize pace over price and we expect to report strong EBIT ROI again going forward. As a side note, we utilize a comparable level of incentives in new land acquisitions and they must meet our IRR minimum hurdle rate of 20% even after the cost of these incentives. Moving to the bottom left hand portion of the slide. As a result of the lower gross margin percentage, you can see that our adjusted EBITDA decreased a bit to $159,000,000 in this year's Q4.
Finally, in the bottom right hand portion of the slide, correspondingly adjusted pre tax profits also decreased a bit to $126,000,000 While the 4th quarter met our expectations and guidance, it would have been better if not for the hurricanes right toward the end of our fiscal year. We ended up missing deliveries primarily due to a lack of meters installed in homes and a scarcity of subcontactor crews due to the shift toward rebuilding. Our current communities were spared major damage, but there was a tornado that touched down recently in one of our completed communities in Florida's East Coast causing some damage to it about a dozen homes. I know that new orders and current levels of demand are very much in focus by investors and analysts, so I'm now going to discuss contracts from several different perspectives. If you turn to Slide 8, while the year was choppy from quarter to quarter, we ended the year with 4th quarter contracts increasing 48% year over year.
I'm going to repeat that statistic because it's pretty significant. Our 4th quarter contracts increased 48% year over year. The contract pace continued in the month of November following the Q4 with our contracts up 55% year over year as demand for our homes remained robust. Regardless of one's politics, there does seem to have been a little post election enthusiasm regarding the outlook, the economic outlook at least for our homebuyers. If you turn to Slide 9, you can see contracts per community for the 4th quarter increased to 10.4 percent, a 25% year over year increase and more than double the sales pace of Q4 'twenty two.
This was a solid 4th quarter sales pace, setting this up for a great fiscal 2025. We're pleased with these results, especially given all the uncertainty with the presidential election, the impact of hurricanes, the volatility in mortgage rates and the general economic and geopolitical uncertainty. If you turn to Slide 10, we show mortgage rate trends. The gray line on this slide shows what happened to mortgage rates last year between July of 2022 November of 2023. The blue line shows what happened with mortgage rates this past year between July of 2023 November of 2024.
For most of the time shown, they coincidentally followed a very similar pattern of monthly increases and decreases just at slightly higher rates this year. However, beginning in July of this year, mortgage rates fell below the levels of the prior year for the same months and continue to decline until September the end of September. Mortgage rates have increased since the beginning of October, but they still remain lower now than they were last year. In addition, web traffic continues to be very strong. For the last month of the quarter, as well as the month of November, weekly visits to our website were only surpassed by the COVID surge of 2022 2021.
This trend makes me particularly optimistic about future demand. On Slide 11, we give even more granularity and show the trend of monthly contracts per community compared to the same month a year ago. Other than the month of September when our sales pace was flat compared to the previous year, our contracts per community were up significantly compared to the same month the previous year. As you can also see on the slide, BFRs were not very impactful in any of the months shown. We continue to believe that many of the fundamentals that led to our outperformance remain intact such as the low supply of existing homes for sale and the good jobs report.
Furthermore, the overall health of the economy and positive demographic trends remain solid. Turning to Slide 12, we show contracts per community as if we had a September 30 quarter end. That way we can compare our results to our peers that report contracts per community on a calendar quarter end. At 10.7 contracts per community, our September quarterly sales pace is the 3rd highest among public homebuilders that reported at this time. This occurred despite September being one of the slower months in the quarter as I showed you on the previous slide.
On Slide 13, you can see that our year over year growth in contracts per community for the same period was the 2nd highest among our peers. Again, this was as if our quarter ended in September, so we could compare it to many other companies. The following 2 months were dramatically stronger in sales for us. What we're trying to illustrate on these last two slides is that we are still selling an above number of homes compared to our peers above average number of homes, excuse me. On the top of Slide 14, you can see that for a sizable percentage of our deliveries, our homebuyers continue to utilize mortgage rate buy downs.
The percentage of customers that use buy downs in this year's Q4 was 72%. The buy down usage in our deliveries indicates that buyers have been consistently relying on these mortgage rate buy downs to combat affordability at the current mortgage rate levels. Given the persistently high mortgage rate environment, we assume buy downs will remain at similar levels going forward. We are budgeting the cost of these same buy downs to remain constant. As I said earlier, this includes the analysis of any new land acquisitions.
We continue to find land opportunities for growth even with these high levels of incentives. In order to meet homebuyers' desires to use mortgage rate buy downs, we're intentionally operating with an elevated level of quick move in homes or QMIs as we call them, so that we can offer affordable mortgage rate buy downs in the near term. On Slide 15, we show that we had 7.9 QMIs per community at the end of the 4th quarter, which is consistent with where it was at the end of the third quarter. We define QMI, by the way, as a home once we start the building. In the Q4 of 'twenty four, QMI sales were 72% of our total sales, an increase from 67% in the Q3 of 2024.
Historically, that percentage was about 40%. Obviously, demand for these QMIs remains high. So we're very comfortable with the current level of QMIs per community. Due to the increase in community count in the quarter, it's not surprising that our finished QMIs increased to 233 finished homes. On a per community basis, that puts us at 1.8 finished QMIs per community.
That's up slightly from 1.5 finished QMIs per community at the end of the 3rd quarter, but it's lower than the 1.9 QMIs at our Q1. Our goal with QMIs is obviously to sell them before completion. During the Q4, we emphasized pace versus price. We're pleased that with the significant increase in sales pace and the effect on ROI. This did result in a lower gross margin for the Q4 and an even lower margin in our guidance for the Q1 of 'twenty five, but again, the trade off of pace versus price resulting in lower margin is producing great returns on inventory for us.
The decrease in gross margin is primarily due to increased use of incentives, particularly in the West. The focus on quick move in homes results in more contracts that are signed and delivered in the same quarter, which leads to higher backlog conversion. Our 4th quarter is an extreme example of this increase as 31% of our homes delivered in the 4th quarter were contracted in the same quarter. This resulted in a backlog conversion ratio of 86%. This is the highest backlog conversion ratio we've had for the past 14 years.
We'll continue to manage our QMIs at a community level. We track our start schedule at a community level and we make sure that there is a match with our current sales pace per community so that we don't get too far ahead of ourselves. If you move to Slide 16, you can see that even with the economic and political uncertainty as well as the higher mortgage rates, we are still able to raise net prices in 34% of our communities during the Q4. While we are focusing on pace versus price, we are still able to raise prices in about a third of our communities. Turning to Slide 17, I'll add that in addition to the use of our incentives and the increased level of QMIs, we also attribute part of our performance metrics to the introduction of our new national portfolio of home designs that we refer to as looks.
The new designs feature curated interiors with simple and honest pricing that reduced the complexity of the selection process for the home buyers and the building process for us. There are significant other advantages to our looks programs, but we'll discuss that at some point in the future. The current high levels of demand should support the growth that we're focused on achieving over the next several years. I'll now turn it over to Brad O'Connor, our Chief Financial Officer.
Brad O'Connor, CFO and Treasurer, Mannion Enterprises: Thank you, Ara. On Slide 18, you can see that we ended the quarter with a total of 147 open for sale communities, a 14% increase from last year. 130 of those communities were wholly owned. During the Q4, we opened 21 new wholly owned communities and sold out of 17 wholly owned communities. We had 17 unconsolidated joint venture communities at the end of the 4th quarter.
We opened 1 new unconsolidated joint venture community and closed 4 unconsolidated joint venture communities during the quarter. Even with the growth in community count this quarter, we still experienced delays in opening new communities, primarily due to utility hookups throughout the country. We expect community count to continue to grow further in fiscal 2025. The leading indicator for further community count growth is shown on Slide 19. We ended the quarter with 41,891 controlled lots, which equates to a 7.8 year supply of controlled lots.
Our lot count increased 6% sequentially and 32% year over year. If you include lots from our unconsolidated joint ventures, we now control 44,720 lots. We added 5,500 lots and 56 future communities during the Q4. Our land teams are actively engaging with land sellers negotiating for new land parcels that meet our underwriting standards. In fiscal 2024, we began talking about our pivot to growth.
This followed a stretch of several years where we used a significant amount of the cash we generated to pay down debt. On Slide 20, we show our land and land development spend for each quarter going back 5 years. You can see how that pivot to growth has impacted our land and land development spend. During the Q4 of 2024, our land and land development spend increased 45% year over year to $318,000,000 You can clearly see that the land and land development spend in every quarter of fiscal 2024 was the highest over the 5 years shown on this slide. Our 4th quarter represented the highest quarterly spend since 2010 when we started reporting that metric.
Our Corporate Land Committee continues to be busy, which is an indication that our lot count should continue to increase over time, but not always in a straight line. We are using current home prices, including the current level of mortgage rate buy downs and other incentives, current construction costs and current sales base to underwrite to a 20 plus percent internal rate of return. Our underwriting standards automatically self adjust to any changes in market conditions. We are finding many opportunities in our markets and are very focused on growing our top and bottom lines for the long term. And this growth in lots control precedes growth in community count, which precedes growth in deliveries.
We are very pleased with the trends. On Slide 21, we show the percentage of our lots controlled via option increased from 46% in the Q4 of fiscal 2015 to 84% in the Q4 of fiscal 2024. This is the highest percentage of option loss we've ever had, continuing our strategic focus on land light. Turning now to Slide 22. You see that we continue to have one of the higher percentages of land controlled via option compared to our peers.
Needless to say, with the 2nd highest percentage of option loss, we are significantly above the median. On Slide 23, compared to our peers, we have the 2nd 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 and further improve our turns on inventory in future periods. Our focus on pace versus price is evident here.
Turning to Slide 24. Even after spending a record $318,000,000 on land and land development, we ended the 4th quarter with $338,000,000 of liquidity, which is above the high end of our targeted liquidity range. Turning now to Slide 25. This slide shows our maturity ladder as of October 31, 2024. Over the past several years, we have taken a number of steps to improve our maturity ladder and we remain committed to further strengthening our balance sheet going forward.
In February of 2025, 1 year prior to maturity, we plan to pay off all of the remaining $27,000,000 of the 13.5% notes, which is our highest coupon debt. Turning to Slide 26, 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 $1,300,000,000 growth in equity over the past few years. During the same period, on the upper right hand portion, you can see the $700,000,000 reduction in debt. On the bottom of the slide, you can see that our net debt to net cap at the end of fiscal 2024 was 49.3%, which is a significant improvement from our 146.2% at the beginning of fiscal 2020.
We still have more work to do to achieve our goal of the mid-thirty percent level, but we are comfortable that we are on a path to achieve our target soon. We've made considerable progress, which is evidenced by the credit rating upgrades we received from both S and Global and Moody's (NYSE:MCO) during fiscal 2024, our balance sheet has improved significantly over the last 5 years and we expect to continue to make noteworthy progress moving forward. Given our remaining $241,000,000 of deferred tax assets, we will not have to pay federal income taxes on approximately $800,000,000 of future pretax earnings. This benefit will continue to significantly enhance our cash flows in years to come and will accelerate our growth plans. Regarding guidance, our internal plan given our significant new community openings and current sales base is for substantial growth in deliveries and revenues in fiscal 2025, which is off to a spectacular start.
However, given the volatility and the difficulty in projecting margins with moving interest rates and volatility in general, we will focus our guidance on the current quarter, the Q1 of fiscal 2025. Our financial guidance for the Q1 of 2020 5 assumes no adverse changes in current market conditions, including no further deterioration in our supply chain or material increases in mortgage rates, inflation or cancellation rates. Our guidance assumes continued extended construction cycle times averaging 5 months compared to our pre COVID cycle time for construction of approximately 4 months. It also assumes that we continue to be more reliant on QMI sales, which makes forecasting gross margins more difficult. Our guidance assumes continued use of mortgage rate buy downs and other incentives similar to recent months.
Further, it excludes any impact to SG and A expense from our phantom stock expense related solely to the stock price movement from the $176.04 stock price at the end of the Q4 of fiscal 2024. I also want to emphasize that our Q1 has historically been our lowest performing quarter in terms of gross margin, SG and A and pretax in 2025 will not be different. Slide 27 shows our guidance for the Q1 of fiscal 2025. Our expectations for total revenues for the Q1 is to be between $650,000,000 $750,000,000 Adjusted gross margin is expected to be in the range of 17.5 percent to 18.5%. This is lower than a typical gross margin, particularly because of the cost of mortgage rate buy downs and our focus on pace versus price.
Keep in mind that all else being equal, 1st quarter gross margins are lower than the rest of the year as to be as a result of lower volume given there are some period costs and cost of sales. We expect the range for SG and A as a percentage of total revenue to be between 13.5% 14.5%, which is still higher than usual. One of the reasons our SG and 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. The upcoming growth is evident from our land position and land spend. In addition, as we have said before, our Q1 is typically our lowest volume quarter and therefore SG and A as a percent of revenues is often the highest in the Q1.
We expect income from joint ventures to be between $15,000,000 $30,000,000 Our guidance for adjusted EBITDA is between $55,000,000 $65,000,000 and our expectations for adjusted pretax income for the Q1 is between $25,000,000 $35,000,000 Turning to Slide 28. We show that our return on equity was 34.6%, the 2nd highest over the trailing 12 months compared to our peers. And on Slide 29, we show that compared to our peers, we have one of the highest consolidated EBIT returns on investment at 30.7%. While our ROE was helped by our leverage, our EBIT return on investment is a true measure of pure homebuilding operating performance without regard to leverage and was the highest among our midsized peers. We believe we are striking a good balance between pace and price, which is delivering industry leading ROIs and ROEs.
Over the last several years, we have consistently had one of the highest ROIs among our peers. Eventually, investors will recognize our consistent superior terms on capital and significantly improved balance sheet. Given our rapidly growing book value, we think it would be appropriate to consider a variety of metrics, including EBIT return on investment, enterprise value to EBITDA and our price to earnings multiple when establishing a fair value for our stock. We believe when all of the fundamental financial metrics are considered, our stock is one of the most compelling values in the industry. On Slide 30, we show our price to book multiple compared to our peers, and we are just above the median.
On Slide 31, we show the trailing 12 month price to earnings ratio for us and our peer group based on our price earnings multiple of 5.98x at yesterday's stock price of $189.96 We are trading at a 45% discount to the homebuilding industry average PE ratio if you consider all public builders and a 36% discount when considering our midsized peers. We recognize that our stock may trade at a discount to the group because of our higher leverage, but our leverage has been shrinking and our equity has been growing rapidly. On Slide 32, 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 the 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 33, you can see an even more glaring disconnect with our high EBIT ROI and our PE. We have the 3rd highest EBIT ROI and yet our stock trades at the lowest multiple to earnings of the group. These last four 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 will now turn it back over to Ara for some brief closing remarks.
Ara Hovnanian, Chairman, President and CEO, Mannion Enterprises: Thanks, Brad. I just wanted to wrap up the call by saying that we're very excited about the growth we hope to achieve in fiscal 2025. Our recent sales have been fantastic. In the Q4, again, contracts increased 48% and then we follow that up with a 55% growth in contracts in November. These are very strong year over year improvements and these are improvements over last year, which was a great year for us.
Some of you might be concerned about our gross margin guidance for the Q1. Although these contracts are at a lower gross margin, I want to repeat that we've made a conscious effort on trading pace for margin given our focus on inventory turns, EBIT ROIs and QMIs. The improved sales pace and the expected corresponding growth in revenues should result in continued industry leading inventory turns, EBIT ROI and ROE over the coming year. In closing, the housing market continues to show positive fundamentals, notwithstanding the affordability challenges. Given the growth in our lot count, our community count and our land and land development spend, we think we are really well positioned to drive delivery growth in excess of 10% on an annual basis over the next few years and we expect to continue to deliver top tier industry returns
Brad O'Connor, CFO and Treasurer, Mannion Enterprises: for our shareholders.
Ara Hovnanian, Chairman, President and CEO, Mannion Enterprises: That concludes our formal comments and we're happy to turn it over for Q and A.
Marvin, Conference Call Operator: The company will now answer questions. So that everyone has opportunity to ask questions, Our first question comes from the line of Alan Ratner of Zelman and Associates. Your line is now open.
: Hey guys, good morning. Thanks for all the commentary so far, very helpful. I'd love to drill in a little more on the strategy. Shift might be too strong of a word, but just the kind of the pace versus price kind of decision right now and clearly a bit of a change this quarter. I think we had always expected margins to gradually pull back from the recent levels we've seen, but admittedly it's happening a lot quicker than even we would have expected.
And I know this is intentional on your part, but 18% gross margin plus or minus is kind of back to where you were pre pandemic. And it kind of brings your EBIT margin levels down to something in that kind of mid, maybe high single digit range. And I'm just curious if you think about the outlook for 2025, it doesn't sound like you're anticipating much change in incentives. You do have some unknowns out there with tariffs and labor costs and things like that. Is there a level of gross margin, if you were to see some cost creep where you would perhaps shift back to maybe more of a price over pace dynamic, maybe pull back a little bit on the QMIs or the start pace in order to try to preserve that margin?
Or do you feel like there's enough in the bag here that you can kind of maintain this level 18% plus or minus and drive that 10% growth regardless of what happens on cost?
Ara Hovnanian, Chairman, President and CEO, Mannion Enterprises: Well, Alan, first, I'll note that you certainly were accurate about projecting margin for the industry would drift down from the particularly high levels that they were just post pandemic. But I do want to remind you of 2 things. Number 1, as Brad said, our Q1 gross margins have historically been the lowest. That is the case again this year. And while that may seem counterintuitive, as Brad mentioned, there are some fixed costs, particularly construction overhead that are time related.
So it's not just cost subtracted from price. We do expect improvement over the quarters from that level. But given the volatility, we're just going to project a quarter at a time. The second point, I just lost my train of thought. Brad, do you want to jump in on a second point on margin?
Brad O'Connor, CFO and Treasurer, Mannion Enterprises: Sure. I think one of the things I'll add, Alan, is as we drive for growth that we've been talking about, our EBIT margin should improve because our SG and A will improve with more volume. So we start to squeeze some of the other components of EBIT margin through the volume. So if gross margin comes down a little, you can make room for it with better SG and A percentage with growth. The other thing is as we think about whether we would pull back on pace, and I think that's what you're thinking about here, we'd have to consider as we move to more landline and by rolling lot takes, etcetera, we can consider whether we would continue in those communities or not, at the point where it doesn't make economic sense to move forward.
But so the last thing we want to do is sit on an existing asset we own. So we have to consider all those components when deciding whether we would drive for pace versus continue to or try to improve margin and slow pace down.
Ara Hovnanian, Chairman, President and CEO, Mannion Enterprises: But I'll focus on the point I was going to announce that Brad just touched on. We are shifting to a greater landline. It's always been part of our strategy. It's becoming even more of our strategy as you saw from some of the graphs. Landlight gross margins are inherently lower than wholly owned gross margins, wholly which is what we were pre pandemic that you're comparing to.
If everything was perfect, our gross margin should go down because you pay more for a landline lot than you do for a wholly owned lot that you carry for 2 or 3 years. But what we've done a lot of analysis and we think our ROI and earnings are much better off with lower margins and higher turnover and a higher sales pace. I want to focus, Alan, on a 55% increase in sales last month following a 48% increase in sales for the quarter. That, along with what Brad mentioned, the benefits of SG and A, we feel very comfortable are going to offset the margin decrease and it's a trade off that's very well worth it. We don't currently expect our gross margins to fall.
We actually expect them to be up from the Q1 for all the reasons that we mentioned.
: Great. I appreciate all that added color and understood on all those points And I think it makes a lot of sense. Brad, I was going to my second part was going to be kind of on the topic you ended with, which is kind of the asset light, land light strategy and how it gives you that flexibility to either attempt to renegotiate or maybe walk away from deals that no longer makes sense. I'm just curious if you've started that process in any markets or any communities at this point, are there any deals where they're no longer making economic sense of the prior underwriting? Or is that still kind of a ways off into the future?
Brad O'Connor, CFO and Treasurer, Mannion Enterprises: Yes. We haven't had to do that yet, Alan. Certainly, something we look at with every community as it's performing. But fortunately, we haven't had to walk away or frankly renegotiate anything at the moment. As you can see in our numbers, we did have a couple of impairments from stuff that we did own where we're underperforming and we had to think of impairment.
But our walkaways have been very normal, which is typically walkaways that happen during the due diligence period as opposed to something that happens once we've gotten going. So fortunately, so far, no, we have not had to do that.
Ara Hovnanian, Chairman, President and CEO, Mannion Enterprises: Alan, I'll mention one other fact that's interesting and has not been focused on very often. And that is that as we go more toward a land life strategy and as you saw, we're one of the leaders in that area. Our balance sheet has a lower percentage of land and land development of a as a percentage of our overall balance sheet compared to work in process. And I mentioned that because it really is a risk reducer because if the market slows down, it's much easier to turn a finished home into liquidity than it does a raw or developed lot into liquidity. So we feel like one of the side benefits of the QMI strategy is more safety as well because you could get liquidity extremely fast, even faster than we were able to in prior cycles.
: Makes a lot of sense. And one last quick housekeeping question. The joint venture guide for $15,000,000 to $30,000,000 is that kind of just straight profitability from JVs or are there any consolidations contemplated within that guide like you had last quarter?
Brad O'Connor, CFO and Treasurer, Mannion Enterprises: That's just straight normal JV income. There's no consolidations considered in that number.
: Great. All right. Thanks a lot guys. Appreciate it. Good luck and happy holidays.
Brad O'Connor, CFO and Treasurer, Mannion Enterprises: Thank you.
Ara Hovnanian, Chairman, President and CEO, Mannion Enterprises: Okay. Thank you. Same to you, Alan.
Marvin, Conference Call Operator: Thank you. One moment for our next question. Our next question comes from the line of Alex Barron of Housing Research Center. Your line is now open.
Alex Barron, Analyst, Housing Research Center: Yes. Thanks guys and
Jeff O'Keefe, Vice President, Investor Relations, Mannion Enterprises: great job in the quarter.
Alex Barron, Analyst, Housing Research Center: Glad to see the growth is coming. I wanted to ask about is there any thought or possibility that you guys could be taking out the debt earlier than its maturity and able to swap it for a lower interest rate debt?
Brad O'Connor, CFO and Treasurer, Mannion Enterprises: Yes. I mean, Alex, it's something that we're looking at. As you probably know, a lot of that debt currently has pretty high prepayment penalties. So it's a balance of considering what the lower rate might be versus the cost of doing that. As I mentioned, we're going to pay off the $27,000,000 that's coming due in 2026.
We'll do that in a year early. So just in a few months here, we're going to pay that off. But otherwise, we are monitoring as the call premiums reduce versus what we expect we might be able to issue new debt at and consider when we should do that. So it's something we're definitely paying attention to. But those make calls or call premiums are at the moment pretty significant.
Ara Hovnanian, Chairman, President and CEO, Mannion Enterprises: Yes. However, I think it's fair to emphasize that as the call premiums become more reasonable, there will be significant savings in interest at the current if all things hold semi steady with the current levels. When we do refinance, there will be significant savings in our interest costs. And it's not way out in the future. The opportunities are going to be coming pretty soon as our call premiums reduce rapidly.
Alex Barron, Analyst, Housing Research Center: Yes. I mean, that's the hope. As far as share buybacks, I couldn't figure out if you guys bought any this quarter. I know you did in the last couple of quarters.
Brad O'Connor, CFO and Treasurer, Mannion Enterprises: We did not have any in the Q4.
Alex Barron, Analyst, Housing Research Center: Okay. And as far as your shift towards increasing sales pace, is there like average target you guys are trying to aim at?
Ara Hovnanian, Chairman, President and CEO, Mannion Enterprises: No, we don't. We just look at pricing and pace on a community by community basis. So we don't have a specific target.
Brad O'Connor, CFO and Treasurer, Mannion Enterprises: That's something we certainly consider is in many cases because we've moved to more landline, we've got scheduled land take requirements, lot take requirements per month or per quarter. So we want to at least make sure we're hitting a sales base that hits those requirements. If we go faster, we can buy the lots faster. But and so we would consider doing that. But we certainly don't want to make sure we're at least hitting the pace we need to hit the minimum lot takedowns.
Alex Barron, Analyst, Housing Research Center: Got it. And if I could ask one more. I saw some homes advertised with a 3.5% mortgage rate, and I was wondering if that was just a temporary thing that led to the lower guidance. In other words, if you're no longer offering that, is there a chance that margins could bounce back in the back half of the year?
Brad O'Connor, CFO and Treasurer, Mannion Enterprises: There's certainly a chance that margins could get better in the back half of the year. It all depends on what happens with mortgage rates, what happens with the market and what it takes to sell the homes and maintain the pace we want to maintain. The example you gave on our website, we do have we do those advertisements and those incentives by communities. So we can have 1 or 2 communities that might have very low rate while other communities wouldn't have been as low. So it's certainly something we look at every community, how that community is performing, what appears competitors to that community are offering to make sure we're competitive.
But your point about whether margins could get better later in the year, we absolutely think that could happen if the market were to get stronger or mortgage rates come down and the cost of the buy downs we're giving decreases. So that's certainly a possibility.
Ara Hovnanian, Chairman, President and CEO, Mannion Enterprises: I'll add that similar to retail stores, even if a community offers a 3.5% 30 year fixed, it doesn't mean every home in the community is. It's usually for a select number of homes that have been finished and are ready to deliver. It's not an across the board offering.
Alex Barron, Analyst, Housing Research Center: Got it. Yes, I assume that. Okay, guys. Well, best of luck for 2025. Thanks.
Brad O'Connor, CFO and Treasurer, Mannion Enterprises: Thanks, Al.
Marvin, Conference Call Operator: Thank you. One moment for our next question. Our next question comes from the line of Austin Hopper of AWH Capital. Your line is now open.
Austin Hopper, Analyst, AWH Capital: Hey guys, thanks for taking my question and you answered several of them already. You talked about SG and A as a percentage of revenues. I guess it was 11.4% in the year. Can you give us a sense like what that can trend towards in future periods kind of as you scale your business and how that would potentially offset some amount of gross margins?
Brad O'Connor, CFO and Treasurer, Mannion Enterprises: I mean, I think, as we grow, we've talked about the fact that we've had to invest ahead in some of that growth. But as we intimated in the remarks, we said we think we're positioned for 10 plus percent growth over the next few years. And if we can achieve that, I think SG and A goes from 11.4% to something south of 10% ultimately, which still would put us at the high end of the range of our homebuilding peers. So we're continuing to look at ways to drive that further. But just pure growth should get us into single digits over the next couple of years if we can grow the way we anticipate.
Austin Hopper, Analyst, AWH Capital: Great. Thank you.
Marvin, Conference Call Operator: Thank you. I'm showing no further questions at this time. I would now like turn it back to Ara Helanean for closing remarks.
Ara Hovnanian, Chairman, President and CEO, Mannion Enterprises: Thank you very much. We were pleased with the results for our last quarter and we look forward to giving you continued great results during fiscal 2025. Thank you.
Marvin, Conference Call Operator: This concludes our conference call for today. Thank you for all participating and have a nice day. All parties may disconnect.
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