U.S. Markets closed

Edited Transcript of HOV earnings conference call or presentation 5-Sep-19 3:00pm GMT

Q3 2019 Hovnanian Enterprises Inc Earnings Call

RED BANK Sep 20, 2019 (Thomson StreetEvents) -- Edited Transcript of Hovnanian Enterprises Inc earnings conference call or presentation Thursday, September 5, 2019 at 3:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Ara K. Hovnanian

Hovnanian Enterprises, Inc. - President, CEO & Chairman of the Board

* J. Larry Sorsby

Hovnanian Enterprises, Inc. - Executive VP, CFO & Director

* Jeffrey T. O'Keefe

Hovnanian Enterprises, Inc. - VP of IR

================================================================================

Conference Call Participants

================================================================================

* Alan S. Ratner

Zelman & Associates LLC - MD

* Alex Barrón

Housing Research Center, LLC - Founder and Senior Research Analyst

* James Peter Finnerty

Citigroup Inc, Research Division - Director

* Mary Ross Gilbert

Imperial Capital, LLC, Research Division - MD of Institutional Research Group

* Megan Talbott McGrath

The Buckingham Research Group Incorporated - Director

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good morning and thank you for joining us today for Hovnanian Enterprises Fiscal 2019 Third Quarter Earnings Conference Call. An archive of this webcast will be available after the completion of the call and run for 12 months. This conference is being recorded for rebroadcast. (Operator Instructions)

Management will make some opening remarks about the third quarter results and then open the line for questions.

The company will also be webcasting a slide presentation along with the opening comments from management. The slides are available on the investor page of the company's website at www.khov.com. (Operator Instructions)

Before we begin, I would like to turn the call over to Jeffrey O'Keefe, Vice President, Investor Relations. Jeff, please go ahead.

--------------------------------------------------------------------------------

Jeffrey T. O'Keefe, Hovnanian Enterprises, Inc. - VP of IR [2]

--------------------------------------------------------------------------------

Thank you, Gigi, and thank you all for participating in this morning's call to review the results for our third quarter, which ended July 31, 2019.

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 provision 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 or future financial period. Although we believe that our plans, intentions and expectations reflected in or 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 other 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 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 October 31, 2018, 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; Larry Sorsby, Executive Vice President and CFO; Brad O’Connor, Vice President, Chief Accounting Officer and Controller; and David Bachstetter, Vice President Finance and Treasurer.

I'll now turn the call over to Ara. Ara, go ahead.

--------------------------------------------------------------------------------

Ara K. Hovnanian, Hovnanian Enterprises, Inc. - President, CEO & Chairman of the Board [3]

--------------------------------------------------------------------------------

Thanks, Jeff. I'm going to review the results of our third quarter and, as usual, Larry will follow me with more detail.

Overall, the quarter was in line with our guidance. Slide 4 shows total revenues in the upper left-hand quadrant. For the first time, since 2016, our quarterly consolidated revenues increased year-over-year. This 6% increase was primarily driven by a 4% increase in deliveries and a 2% increase in average sale price. The increase in total revenues is a result of investments we've been making in our land position over the last 2 years. With our increasing community count, we expect more growth next year.

Moving to the top right, you can see that our gross margin was 18.4% for both the third quarter of 2019 and the third quarter of 2018. While it was flat compared to last year, it was up sequentially from the second quarter of 16.9%. As we said on earlier conference calls this year, we have been more aggressive with use of incentives, particularly on spec homes. However, incentives we offered on specs that were sold and delivered during the third quarter were not quite as high as we previously expected.

We currently anticipate our fourth quarter gross margin to be similar to the gross margin we just reported.

In the lower left-hand portion of the slide, you can see that our total SG&A dollars were up from $54 million last year to $59 million in this year's third quarter as we continue to invest and prepare for growth.

Our consolidated community count increased 12% year-over-year while our SG&A expenses were only up 8%. So our total SG&A per community decreased 3% year-over-year from $439,000 per community in last year's third quarter to $424,000 per community in the third quarter of this year.

This efficiency in SG&A expenses per community is a precursor of the expected decline in our SG&A ratio when home deliveries begin to occur from our increased number of newly opened communities next year. As we start getting a greater number of deliveries from our growing community count, we expect to be able to leverage our costs and get our SG&A ratio back to the more normalized 10% range.

In the bottom right-hand quadrant of the slide, we show that our interest expense increased slightly from $38 million last year to $41 million in the third quarter of 2019. The first half of the year is typically our most challenging, and the final half, particularly the fourth quarter, ends far stronger.

This year will be no exception. Our pretax loss for the 9 months of 2019 is slightly less than the pretax loss we had a year ago in the same period. Assuming no adverse changes in current market conditions, we expect the pretax profit for the fourth quarter will be significant and will make us profitable for the full year, excluding land-related charges that are gains or losses from extinguishment of debt. We expect our increased committee count will lead to higher levels of home deliveries, revenues and profits during fiscal '20.

Now let me talk about our sales environment. Our third quarter was very strong from every perspective. On Slide 5, we show that wholly owned contract increased 23% year-over-year to 1,515 contracts this year compared to 1,236 contracts a year ago.

Slide 6 gives more granular detail with a number of consolidated contracts on a monthly basis. During the third quarter, every month showed an increase of at least 20% compared to the same month last year. The trends accelerated even further in August, the first month of our fourth quarter, where our consolidated contracts were up 38%.

On Slide 7, you can see consolidated contracts per community for the third quarter for each of the last 5 years. We're pleased to report that for the third quarter of 2019, our consolidated net contracts per community were 11, which was 10% higher than last year.

Of note, it's only the second time in the past 15 years that the third quarter contracts per community were higher than the second quarter of the same year. I think that speaks to the strength of the housing market this year.

On Slide 8, we show monthly consolidated contracts per community for the past 12 months. The most recent month is in blue, and the same month a year ago is in gray. 8 of the past 12 months and 5 of the last 6 months have been equal to or better than the same month of the prior year. In the month of August, we achieved 3.2 contracts per community, up versus 2.6 in August of 2018 and up versus 3.0 in August of 2017.

If you turn to Slide 9, you can see another view of contracts per community with longer-term trends. On the far left-hand side of the slide, we show our annual contracts per community from '97 to 2002. We averaged 44 contracts per community during this time period, which was neither a boom nor a bust for the housing industry.

On the center portion of the slide, you can clearly see the steady growth in contracts for -- per community for each of the past several years. On the far right-hand portion of the slide, we show that net contracts per community for the trailing 12 months ended July of '19 were 37.4, up compared to 35.9 for the same period a year ago. As we continue our gradual migration back to normal absorption levels, our SG&A ratio will be enhanced even further.

Turning to Slide 10. Our total community count increased 12% to 160 communities at the end of the third quarter compared to 143 communities at the end of the same quarter last year. This growth is the result of investments we've been making, again, in our land position and should lead to higher levels of revenues and ultimately to higher levels of profitability.

I'll now turn it over to Larry Sorsby, our Executive Vice President and Chief Financial Officer.

--------------------------------------------------------------------------------

J. Larry Sorsby, Hovnanian Enterprises, Inc. - Executive VP, CFO & Director [4]

--------------------------------------------------------------------------------

Thanks, Ara. Let me start by addressing one other trend in our community count. On Slide 11, we show quarterly community count going back to the second quarter of 2016. That was the first quarter where we saw a significant drop-off in our community count after paying off $320 million of debt.

After 2 recent quarters of sequential increases, our total community count at the end of the third quarter was slightly lower than it was at the end of the second quarter. But as Ara already mentioned, it's still up 12% year-over-year. This sequential decline is actually positive news as the improved third quarter sales pace caused us to sell out of communities faster than we anticipate.

Given our pipeline of future community openings, we expect our community count to increase in the fourth quarter. But as our third quarter sales results just proved, it's always challenging -- an always challenging statistic to accurately project. I would also like to put into perspective the amount of churn that goes into our community count total. During the last 12 months, our consolidated community count has increased by 15 communities. We opened 78 new communities, closed 60 communities and contributed 3 communities to an unconsolidated joint venture.

Now I want to briefly comment about our unconsolidated joint venture activity. As we stated in prior quarters, we expect our joint venture activity -- we expected our joint venture activity to decline, and we sold through some of the JV communities we set up in 2016 when we needed to raise liquidity. In line with our directional guidance, our unconsolidated joint venture deliveries declined 34% in the third quarter. Our income from unconsolidated joint ventures decreased from $11 million in profit in last year's third quarter compared to $4 million in this year's third quarter. The decline in profit was greater than the decline in deliveries because of the community and geographic mix of the homes we delivered this quarter.

Looking forward, we still expect a decent level of unconsolidated joint venture income during the fourth quarter, but not as much as we had in last year's fourth quarter.

Turning now to Slide 12. On the left portion of the slide, you can see that the growth in new orders has led to a 12% growth in consolidated contract backlog. And on the right-hand side of the slide, we show an 11% increase in consolidated contract backlog dollars from $947 million at the end of last year's third quarter to almost $1.1 billion at July 31, 2019. This is a solid leading indicator of the growth in revenues and profits we expect to occur in the future. I'd like to provide more detail on our continued efforts to grow our community count.

If you now turn to Slide 13, you can see our years supply of total lots controlled compared to our peers. At 6.3 years of total lots controlled, we're above the median of our peers. This is another leading indicator in the growth in deliveries and revenues we will -- we expect will occur in the future.

Turning to Slide 14. As you can see on this slide, our lots controlled reduced slightly. Today, including modest growth assumptions for fiscal 2020, we control 99% of the lots required to meet our 2020 delivery forecast, and already have control of -- over 80% of the lots needed to meet the substantial growth in deliveries we're expecting during fiscal 2021. This is a significantly higher percentage of lots already under our control than we would typically have this far in advance of 2020 and 2021. We're aware of the housing market choppiness that the industry saw in the last half of calendar 2018 as well as the recent chatter regarding the potential for an economic recession. We remain disciplined to our underwriting standards of using current home sales price, sales pace and construction cost when controlling and/or purchasing new land parcels. Specifically, we look at recent home sales prices, net of incentives of our competitors in determining the correct current pricing. Similarly, we look at our competitors' most recent 13-week sales pace and seasonally adjust them for the full year. We're not going to stretch for land acquisitions. Our teams throughout the country continue to look for new land. And when we find the right opportunities, we will seek to control those lots.

We're pleased with the quality of our recent land acquisitions that we've made. We will continue to utilize options when available as we feel they mitigate risk and provide us with a built-in market hedge.

On Slide 15, compared to our peers, you can see that we had the third highest percent of land controlled via options. We continue to use land options as much as possible in order to achieve high inventory turns, enhance our returns on capital and reduce land risk.

Turning to Slide 16. We show our mothballed lots broken out by geographic segments. In total, we have 2,590 mothballed lots within 14 communities as of July 31, 2019. The book value at the end of the quarter for these remaining mothballed lots was only $14 million net of an impairment balance of $147 million. We are carrying these mothballed lots at about 9% of their original value and believe further write-downs on these lots are unlikely.

A little more than 1,300 of the mothballed lots or about half the total are in a single community in Northern California, that we are currently redesigning and re-entitling to maximize its value in today's market. This community is located in the Sacramento Valley, a market which continues to pose solid performance for us and we continue to expect this community will also be very successful once we get it opened. We hope to unmothball and then begin developing this large community as early as next year.

Looking at all of our consolidated communities in the aggregate, including mothballed communities and the $180 million of inventory not owned, we have an inventory book value of $1.4 billion net of $219 million of impairments.

Turning now to Slide 17. Compared to our peers, you see that we have the second highest inventory turnover rate over the trailing 12 months. Although we lag NVR's industry-leading turnover number, our turns are 25% higher than the next highest peer below us. High inventory turns are a key component of our overall strategy.

Another area for discussion is related to our deferred tax asset. Our deferred tax asset is very significant, and because it is fully reserved for by a valuation allowance, not currently reflected on our balance sheet. We've taken numerous steps to protect this asset. As of July 31, 2019, our deferred tax asset in the aggregate was $645 million. We will not have to pay federal cash income taxes on approximately $2.1 billion of future pretax earnings.

On Slide 18, we show that we ended the third quarter with the shareholders' deficit of $493 million. If you add back our valuation allowance, as we've done on this slide, then our shareholders' equity would be a positive $152 million.

Now let me comment on our current liquidity position. During the third quarter, we spent $147 million on land and land development. As seen on Slide 19, we ended the third quarter with liquidity of $225 million, which is within our targeted liquidity range of between $170 million and $245 million.

On Slide 20, we show our maturity profile as it looked at July 31, 2019. The first of our larger maturities occurs in November of 2021. We continue to analyze and evaluate our capital structure and explore transactions to simplify our capital structure.

Historically, we've been successful in refinancing our debt and we remain confident we will be able to do so in the future as well.

We look forward to reporting strong fourth quarter results in December, on our December call.

That concludes our formal remarks, and we're happy to open up for questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) And our first question is from Alan Ratner from Zelman & Associates.

--------------------------------------------------------------------------------

Alan S. Ratner, Zelman & Associates LLC - MD [2]

--------------------------------------------------------------------------------

Nice job in the quarter. So obviously, the order number's very strong and the margin improvement was great to see. Ara, I think you mentioned seeing, I guess, fewer incentives than maybe you were anticipating coming into the quarter, and obviously the order number supports that. Can you just talk a little bit about actual pricing power that you see in the market today, if any? I mean are there any market or price points where you actually have an ability to raise prices? And then maybe just compare or contrast that to what you're seeing on the cost side in terms of inflation?

--------------------------------------------------------------------------------

Ara K. Hovnanian, Hovnanian Enterprises, Inc. - President, CEO & Chairman of the Board [3]

--------------------------------------------------------------------------------

Sure, Alan. As always, it's very situational. It's not even geographically specific. It's always dependent on what new communities open, what competitors are doing, et cetera. But we've been able to raise prices -- net prices, net of incentives or concessions in many communities. I don't remember the exact number. But it's a large number of our communities around the country. At the same time, in other places, we've had to do some net decreases, just depends on the competitive positioning. I can't really say that there's a trend that comes to mind regarding product type or price point in regard to price increases or decreases. It just depends on -- it is a very local situation. But overall, we've been pleased the cost side pressure has been less of the topline story than it was over the last few years. So just made for a good scenario for gross margins.

--------------------------------------------------------------------------------

Alan S. Ratner, Zelman & Associates LLC - MD [4]

--------------------------------------------------------------------------------

Got it. Now that's good to hear. Second question, just on the liquidity on your Slide 20. I believe your -- the revolver, which currently is on tap, I think the availability, I guess, expires in a couple of months. So is the assumption that you're going to borrow the full $125 million on that before December, and that'll flip to a term loan? Or is that still being contemplated?

--------------------------------------------------------------------------------

J. Larry Sorsby, Hovnanian Enterprises, Inc. - Executive VP, CFO & Director [5]

--------------------------------------------------------------------------------

Yes. I'd say it's still being contemplated. Our preference would be to find a replacement for the revolver. We don't have that in place at this point in time. If we're not able to have that in place about the time, it converts to a term loan, we would fully draw all the money.

--------------------------------------------------------------------------------

Operator [6]

--------------------------------------------------------------------------------

And our next question is from Megan McGrath from Buckingham Research.

--------------------------------------------------------------------------------

Megan Talbott McGrath, The Buckingham Research Group Incorporated - Director [7]

--------------------------------------------------------------------------------

I wanted to ask a little bit about how to think about your ability to sort of close on this very strong order growth. There, in the past, have been a fair number of headwinds in terms of labor and construction. Would it be fair to assume that maybe the backlog conversion comes down a little bit as we move forward into 2020? Or do you think that you could sort of deliver on strong double-digit closings growth?

--------------------------------------------------------------------------------

Ara K. Hovnanian, Hovnanian Enterprises, Inc. - President, CEO & Chairman of the Board [8]

--------------------------------------------------------------------------------

We're very comfortable that we're going to have a very strong delivery number in the fourth quarter. And we obviously -- we're already into the first month of the fourth quarter. We end October. So we're well along on...

--------------------------------------------------------------------------------

J. Larry Sorsby, Hovnanian Enterprises, Inc. - Executive VP, CFO & Director [9]

--------------------------------------------------------------------------------

Yes. I mean not all of the growth in deliveries that occurred in the third quarter are going to close in the fourth quarter. But as we've been saying for multiple quarters in a row, first, we were trying to increase our land position, that would lead to increased community count, which we've seen. On top of that increased community count, we're now seeing case actually grow at a faster rate than we had anticipated. All of that positions us not only for increased strong deliveries in the fourth quarter, which typically occurs, but also increased deliveries in the next year as well.

--------------------------------------------------------------------------------

Megan Talbott McGrath, The Buckingham Research Group Incorporated - Director [10]

--------------------------------------------------------------------------------

Yes, I just didn't know if there were any structural issues that might sort of dampen that growth in your -- in the (inaudible)

--------------------------------------------------------------------------------

Ara K. Hovnanian, Hovnanian Enterprises, Inc. - President, CEO & Chairman of the Board [11]

--------------------------------------------------------------------------------

No. We're -- the labor situation has been under control, I'd say, generally speaking, around the country.

--------------------------------------------------------------------------------

J. Larry Sorsby, Hovnanian Enterprises, Inc. - Executive VP, CFO & Director [12]

--------------------------------------------------------------------------------

Yes. We're not too impacted by the hurricane that's out there. But weather can always have an impact. But I don't expect that our operations are going to be too adversely impacted by the current hurricane.

--------------------------------------------------------------------------------

Megan Talbott McGrath, The Buckingham Research Group Incorporated - Director [13]

--------------------------------------------------------------------------------

Great. And then could you just give a little bit of color. You talked about not seeing too many differences on the incentive side in terms of product type or price point. Geographically, given the high community count growth, I know it's hard to get a sense of that absorption pay itself, any commentary on healthier or not as healthy markets across the country would be helpful.

--------------------------------------------------------------------------------

Ara K. Hovnanian, Hovnanian Enterprises, Inc. - President, CEO & Chairman of the Board [14]

--------------------------------------------------------------------------------

I'd say, one of our stronger markets continues to be Northern California in the Sacramento area. But we have a lot of strong markets, Delaware has been good, Houston is surprisingly good, considering some of the external factors there. Arizona has been strong. So we've seen some very good markets all around. I can't say there has been a particular market that stands out in terms of price increases or decreases.

--------------------------------------------------------------------------------

Operator [15]

--------------------------------------------------------------------------------

And our next question is from Alex Barrón from Housing Research Center.

--------------------------------------------------------------------------------

Alex Barrón, Housing Research Center, LLC - Founder and Senior Research Analyst [16]

--------------------------------------------------------------------------------

Nice job on the order growth. I wanted to ask about your product's price points mix. Is that something that is changing in any way? Or you guys -- can you comment on your land purchases, recent land purchases, how those might be similar or different versus what you've been buying in the last couple of years as we look forward?

--------------------------------------------------------------------------------

Ara K. Hovnanian, Hovnanian Enterprises, Inc. - President, CEO & Chairman of the Board [17]

--------------------------------------------------------------------------------

We have been slowly migrating to more of the very low priced entry-level housing. We refer to it as our Aspire line. But generally -- and maybe a slight increase in our active adult as well. Those are strategic shifts we've been planning and we're executing on. But none of them are seismic in terms of the change. But directionally, we're seeing more of our mix be this very affordable entry-level and a little bit more of our active adult in the plans for land acquisition.

--------------------------------------------------------------------------------

Alex Barrón, Housing Research Center, LLC - Founder and Senior Research Analyst [18]

--------------------------------------------------------------------------------

Okay. Great. So some other builders have been, I guess, more aggressive in that tilt. Is there any the reason why you guys are -- it sounds like slightly instead of a little bit more like -- is there any hesitation or some concern you're seeing?

--------------------------------------------------------------------------------

Ara K. Hovnanian, Hovnanian Enterprises, Inc. - President, CEO & Chairman of the Board [19]

--------------------------------------------------------------------------------

No. No, it's just a matter of where we see the opportunities. But -- I mean we've always been a large first-time home buying builder. I'd say, close to 1/3 of our business has historically been for first-time homebuyer product. In some markets that are expensive, that first-time product might be a townhouse. In other markets, it's a single-family detached house. But this new trend of being ultra-affordable and really stripping down instead of the finishes has been surprisingly strong. And it's just general direction we're migrating to, perhaps more conservatively than some of our peers.

--------------------------------------------------------------------------------

Alex Barrón, Housing Research Center, LLC - Founder and Senior Research Analyst [20]

--------------------------------------------------------------------------------

Got it. And the other thing was in terms of the incentives. I think you mentioned they weren't as high as you were initially expecting. What are the trends you're seeing in terms of the incentives in recent order months versus what they had been into the year?

--------------------------------------------------------------------------------

Ara K. Hovnanian, Hovnanian Enterprises, Inc. - President, CEO & Chairman of the Board [21]

--------------------------------------------------------------------------------

I'd say, it's -- we haven't seen much change recently. And based on that -- as we mentioned earlier, we expect gross margins to be similar next quarter as they are the quarter we just reported.

--------------------------------------------------------------------------------

J. Larry Sorsby, Hovnanian Enterprises, Inc. - Executive VP, CFO & Director [22]

--------------------------------------------------------------------------------

I mean they're still incentives out there. Actually, it's just that typically in the quarter, we might have some started unsold homes that we're selling, that we had anticipated higher incentives than we actually ended up having to do. But I wouldn't say there was a significant change in the incentives that we're after in general.

--------------------------------------------------------------------------------

Alex Barrón, Housing Research Center, LLC - Founder and Senior Research Analyst [23]

--------------------------------------------------------------------------------

Okay. And Larry, in terms of your ability to start monetizing the DTA. How many years do you guys have to do that?

--------------------------------------------------------------------------------

Ara K. Hovnanian, Hovnanian Enterprises, Inc. - President, CEO & Chairman of the Board [24]

--------------------------------------------------------------------------------

It's 20 years from each year that you're have a net operating loss. One of the net operating loss is -- actually occur in tax basis. So we have -- still into the teens numbers of years. We have a long time on the federal side.

--------------------------------------------------------------------------------

Operator [25]

--------------------------------------------------------------------------------

And our next question is from Mary Gilbert from Imperial Capital.

--------------------------------------------------------------------------------

Mary Ross Gilbert, Imperial Capital, LLC, Research Division - MD of Institutional Research Group [26]

--------------------------------------------------------------------------------

Yes. I just wanted to clarify. So it sounds like, in the fourth quarter, with gross margin being flat sequentially, it sounds like it's what you're saying, and you've got generally better pricing net-net, we should see a year-over-year improvement in EBITDA? And that's -- it sounded like that's what you're saying in your prepared remarks, but wanted to confirm that, number one. Number two, when do we start to see the inflection point in the collateral coverage? It sequentially dropped again, looking at the secured bonds. So I wondered, when would we start to see that improve?

--------------------------------------------------------------------------------

J. Larry Sorsby, Hovnanian Enterprises, Inc. - Executive VP, CFO & Director [27]

--------------------------------------------------------------------------------

Okay. So the first comment is, we didn't make any comment regarding a projection of EBITDA. So you can draw your own conclusion on that. But all we're saying is that gross margins are going to be relatively flat sequentially. But we made no comment with regard to expectations on EBITDA.

--------------------------------------------------------------------------------

Ara K. Hovnanian, Hovnanian Enterprises, Inc. - President, CEO & Chairman of the Board [28]

--------------------------------------------------------------------------------

But we did regarding pretax, and we said it's going to be extremely strong and should make the full year profitable.

--------------------------------------------------------------------------------

J. Larry Sorsby, Hovnanian Enterprises, Inc. - Executive VP, CFO & Director [29]

--------------------------------------------------------------------------------

And with respect to the collateral coverage issue, and what we refer to as the old group, it did decline sequentially once again as we discussed on prior quarterly conference calls. The reason for it declining whereas the new group actually improved slightly is that there's more leverage, there's more debt leverage on the old group than the new group and the interest rates are higher on the old group debt than they are on the new group debt. That's what's been causing it. When it reverses will be, when you're making higher levels of profitability, which we're striving to do as these communities -- increasing community count start seeing deliveries. Over time, we do believe that we will stabilize and then start to improve the collateral coverage ratio.

--------------------------------------------------------------------------------

Mary Ross Gilbert, Imperial Capital, LLC, Research Division - MD of Institutional Research Group [30]

--------------------------------------------------------------------------------

Is that more like a fiscal '20 or later part of fiscal '20 or more into fiscal '21, when -- where we start to see that inflection?

--------------------------------------------------------------------------------

J. Larry Sorsby, Hovnanian Enterprises, Inc. - Executive VP, CFO & Director [31]

--------------------------------------------------------------------------------

Yes. I'm not too sure that we made a public projection on that. But I think directionally, you're correct. It's not going to be next quarter. So latter '20 and into '21 is probably a good a guess as any in the future.

--------------------------------------------------------------------------------

Mary Ross Gilbert, Imperial Capital, LLC, Research Division - MD of Institutional Research Group [32]

--------------------------------------------------------------------------------

Okay. But you feel really good about your liquidity and you're currently discussing with your lenders for a new facility?

--------------------------------------------------------------------------------

Ara K. Hovnanian, Hovnanian Enterprises, Inc. - President, CEO & Chairman of the Board [33]

--------------------------------------------------------------------------------

No. We do feel very good about our liquidity. And we...

--------------------------------------------------------------------------------

J. Larry Sorsby, Hovnanian Enterprises, Inc. - Executive VP, CFO & Director [34]

--------------------------------------------------------------------------------

Constantly are looking at the market in terms of opportunities on the capital-structure front. I don't have any specific discussions to comment on, but we constantly are receiving ideas that we look at.

--------------------------------------------------------------------------------

Ara K. Hovnanian, Hovnanian Enterprises, Inc. - President, CEO & Chairman of the Board [35]

--------------------------------------------------------------------------------

Yes, we talked about the revolver. It automatically turns to a term loan. So really doesn't affect liquidity. We prefer a revolver versus a term loan. But it really doesn't have an effect on liquidity.

--------------------------------------------------------------------------------

Operator [36]

--------------------------------------------------------------------------------

Our next question is from James Finnerty from Citigroup.

--------------------------------------------------------------------------------

James Peter Finnerty, Citigroup Inc, Research Division - Director [37]

--------------------------------------------------------------------------------

Congratulations on a solid quarter. I had a question on your percent of lots options at 60%. How high do you think you can get that in the future, is there a target for that?

--------------------------------------------------------------------------------

J. Larry Sorsby, Hovnanian Enterprises, Inc. - Executive VP, CFO & Director [38]

--------------------------------------------------------------------------------

100% would be nice. NVR has the magic formula to do that. Historically, we've been as high as 75%. So I think we can edge somewhat higher. It's not the easiest things in the world to do. But we motivate our divisions, bonuses are based on return on invested capital. So they try to be creative on ways to control land via option vis-a-vis just buying it all cash. So we've got everybody kind of aligned towards enhancing our returns on invested capital. And I think we have upside to the 60%. I can't give you a specific number other than historically we've been probably as high as 75%.

--------------------------------------------------------------------------------

James Peter Finnerty, Citigroup Inc, Research Division - Director [39]

--------------------------------------------------------------------------------

Great. And in terms of the coverage ratio that you referred on the last call -- sorry, to in the last question. What level you do you think this bottoms out at in terms of the debt versus the collateral?

--------------------------------------------------------------------------------

J. Larry Sorsby, Hovnanian Enterprises, Inc. - Executive VP, CFO & Director [40]

--------------------------------------------------------------------------------

I don't really have a response. We never publically commented on that. I don't think it's something we've actually projected. So I don't have a number in mind.

--------------------------------------------------------------------------------

James Peter Finnerty, Citigroup Inc, Research Division - Director [41]

--------------------------------------------------------------------------------

Okay. I just thought last quarter, you had talked about it sort of stabilizing in the coming quarters. Has that changed your view? I thought that's what you had said on this call today.

--------------------------------------------------------------------------------

J. Larry Sorsby, Hovnanian Enterprises, Inc. - Executive VP, CFO & Director [42]

--------------------------------------------------------------------------------

I just -- I don't think we ever made that comment.

--------------------------------------------------------------------------------

Operator [43]

--------------------------------------------------------------------------------

At this time, I'm showing no further questions. I would like to turn the call back over to Ara for closing remarks.

--------------------------------------------------------------------------------

Ara K. Hovnanian, Hovnanian Enterprises, Inc. - President, CEO & Chairman of the Board [44]

--------------------------------------------------------------------------------

Thank you very much. We're obviously pleased with the sales results, in particular and the community count growth, and we look forward to reporting a solid fourth quarter. Thank you.

--------------------------------------------------------------------------------

Operator [45]

--------------------------------------------------------------------------------

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