Hovnanian Enterprises Q3 2025: Contradictions Emerge on Macro-Driven Sales, JV Consolidation, Pricing, and Operational Challenges

Date of Call: August 21, 2025

Financials Results

• Revenue: $801M, up 11% YOY (driven by higher deliveries); right at guidance midpoint
• Gross Margin: Adjusted gross margin 17.3%, just below guidance midpoint; down YOY due to higher incentives (incentives = 11.6% of ASP, up 390 bps YOY and up 110 bps sequentially)

Guidance:

• Q4 revenue expected $750M–$850M (midpoint = Q3).
• Adjusted gross margin expected 15.0%–16.5% (lower due to mortgage buydowns and pace-over-price strategy).
• SG&A expected at 11%–12% of revenue.
• Adjusted pretax income $45M–$55M (includes expected JV consolidation gain).
• Income from unconsolidated JVs $8M–$12M; adjusted EBITDA $77M–$87M.
• Guidance covers only next quarter, assumes continued buydowns and ~5-month construction cycle; excludes phantom stock expense.

Business Commentary:

* Financial Performance and Guidance: - Hovnanian Enterprises reported revenue of $801 million for Q3 2025, meeting the midpoint of their guidance, with an adjusted gross margin of 17.3% slightly below the midpoint. - The financial performance was driven by meeting or exceeding guidance metrics despite political and economic uncertainties, though adjusted pretax income benefited from a joint venture consolidation.

• Homebuyer Demand and Incentives:
• Contracts for the third quarter increased by 1% year-over-year, with a bounceback in July, though the overall sales pace remains choppy.
• The company offered mortgage rate buydowns to 75% of homebuyers, impacting gross margin due to the high cost of these incentives.

• Land and Community Strategy:
• Hovnanian opened 25 new wholly-owned communities and closed 26 during Q3, maintaining a 146 open-for-sale communities.
• The strategy is to burn through less profitable land parcels to make way for new acquisitions, which meet historical return metrics even after high incentives.

• Stock Valuation and Balance Sheet:
• The company's stock trades at a 31% discount to the homebuilding industry average P/E ratio, and its return on equity is the second highest among midsized peers.
• Hovnanian's high return on equity and investment, combined with a rapidly improving balance sheet, suggests undervalued stock pricing relative to peers.

Sentiment Analysis:

Overall Tone: Positive

• Management repeatedly stated they "met or exceeded guidance" (adjusted EBITDA above guidance high end; adjusted pretax income at top of range), emphasized disciplined land underwriting and that new 2025 land purchases yield strong margins even after buydowns, and highlighted expected near-term JV consolidation gains and improving balance-sheet metrics.

Q&A:

• Question from Alan S. Ratner (Zelman & Associates LLC): You saw improvement in order activity in July — was that driven more by macro headlines/rates or by company-specific actions like higher incentives or community openings?
  Response: Management: July improvement was primarily macro/news driven; only modestly higher buydowns/incentives, no major company-specific changes.

• Question from Alan S. Ratner (Zelman & Associates LLC): For August month-to-date, has the July improvement continued or is activity remaining choppy?
  Response: Management: Activity remains choppy with week-to-week variability; no clear sustained trend yet.

• Question from Alan S. Ratner (Zelman & Associates LLC): On gross-margin headwinds from burning through lower‑margin lots — how long might this last and how large is the bucket of assets you're working through?
  Response: Management: No firm duration; impact varies by geography and lot vintage — they're burning through tougher, lower‑margin parcels while acquiring higher‑margin 2025 lots and negotiating pain-sharing with land sellers.

• Question from Alan S. Ratner (Zelman & Associates LLC): On the JV consolidation expected next quarter, did you provide a dollar amount for other income that will flow through?
  Response: Management: No precise guidance; similar prior JV consolidations averaged about $30M and this is expected to be in that neighborhood; included in pretax income.

• Question from Jay McCanless (Wedbush Securities Inc.): What types of debt restructuring opportunities are you exploring on the balance sheet?
  Response: Management: Actively evaluating options such as refinancing secured debt into unsecured and other refinancings; watching improving high‑yield market for opportunistic moves.

• Question from Jay McCanless (Wedbush Securities Inc.): Are you considering bulk land sales to move underperforming lots even at larger margin hits?
  Response: Management: Bulk sales/walkaways are considered case-by-case; they prefer negotiating shared pain with land partners and have completed selective flips rather than broad bulk disposals given most lots are optioned.

• Question from Jay McCanless (Wedbush Securities Inc.): Of the 21% of communities where you raised price, which buyer segments have been resilient?
  Response: Management: Entry-level is the weakest segment; active-adult, first‑time and move‑up buyers are performing better; the very low entry price points remain most challenged.

Contradiction Point 1

Macro and Market-Driven Sales Activity

It indicates differing opinions on the primary drivers of sales activity, which impacts strategy and forecasting.

What drove the improvement in July order activity—macro factors like reduced tariff uncertainty and lower rates, or company-specific actions such as increased incentives or new community openings? - Alan S. Ratner (Zelman & Associates LLC)

2025Q3: 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 macroeconomic and political uncertainty news driven. - Ara K. Hovnanian(CEO)

What caused the recent softness in spring sales activity despite the slight decline in mortgage rates? - Alan Ratner (Zelman & Associates)

2025Q1: The recent slowdown in sales activity is due to the 'flavor of the month' concerns, with consumers worrying about various issues such as tariffs, interest rates, and world events. - Ara Hovnanian(CEO)

Contradiction Point 2

Macro and Market-Driven Activity

It involves differing perspectives on the drivers of improvement in order activity, which could impact investor expectations regarding market conditions and company strategy.

Can you clarify whether the July order activity improvement was driven by macroeconomic factors like reduced tariff concerns and lower interest rates, or were company-specific actions such as increased incentives or new community openings responsible? - Alan S. Ratner (Zelman & Associates LLC)

2025Q3: 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 macroeconomic and political uncertainty news driven. I mean it's just amazing. If there's a good headline, sales are good that week. If there's a bad world headline, the sale, it can go back and forth and back and forth. But other than a slightly more buydown rate, we really didn't do anything very different. It was more macro. - Ara K. Hovnanian(CEO)

Can you clarify the impact of the JV consolidation that significantly impacted Q3 results? Will JV income decline now that this community is wholly-owned? - Alan Ratner (Zelman & Associates)

2024Q3: We've made some progress as we've gone through the last few months working with our four joint venture partners, and we've been able to get a little bit of relief in some of the rental margin. I think that's been a big part of it. And so the quarter was -- the quarter was helped by that and -- and the backlog was helped by some of those properties that came to end of rental period. - Brad G. O’Connor(CFO)

Contradiction Point 3

JV Consolidation Impact on Income

It involves differing expectations regarding the impact of JV consolidation on income, which could impact investor expectations regarding financial performance.

Brad, what dollar amount will the joint venture consolidation impact the other income line next quarter? - Alan S. Ratner (Zelman & Associates LLC)

2025Q3: We didn't give a dollar amount, but on those 3 previous transactions I mentioned, we averaged about $30 million, and this will probably be in that same neighborhood. - Brad G. O’Connor(CFO)

Can you explain the impact of the JV consolidation on Q3 results? Will fully owning the community reduce JV income? - Alan Ratner (Zelman & Associates)

2024Q3: The gain from consolidation is largely due to exceptional community performance. Other joint ventures will continue providing JV income in the future. The community's higher land value post-consolidation will slightly increase costs, but IRRs remain attractive. - Brad O'Connor(CFO and Treasurer)

Contradiction Point 4

Price Increase Opportunities

It highlights differing views on the market segments where price increases are possible, which affects pricing strategy and profitability.

Which buyer groups, particularly entry-level active adults, are showing resilience that allows price increases in 21% of communities this quarter? - Jay McCanless (Wedbush Securities Inc., Research Division)

2025Q3: 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 second-time move-up. - Ara K. Hovnanian(CEO)

Where can you push prices more effectively, and is this capability geographically specific? - Jay McCanless (Wedbush)

2025Q1: Price increases are more prevalent in stronger Eastern and Northeast markets, such as Delaware and the Carolinas, compared to the West, where sales have been more challenging. - Ara Hovnanian(CEO)

Contradiction Point 5

Impact of Fires on Operations

It indicates differing perspectives on the impact of fires on operations, which affects production and labor costs.

How is labor availability and wage inflation in your operating regions? - Jay McCanless (Wedbush Securities Inc., Research Division)

2025Q3: Labor is getting better, and we've been able to mitigate some of the -- I mentioned some of the issues in the past on labor. - Brad G. O’Connor(CFO)

Have recent fires directly affected your volume or gross margins? - Jay McCanless (Wedbush)

2025Q1: Fires have led to labor shortages and utility delays, which affect new home construction. These are temporary aberrations, and the situation should stabilize over time. - Ara Hovnanian(CEO)