Hovnanian Q3 Sales Pace Tops Peers

Hovnanian Enterprises(HOV -13.00%) reported its fiscal third quarter ended July 31, 2025, posting $801 million in revenue (up 11% year-over-year), adjusted EBITDA of $77 million (above guidance for adjusted EBITDA), and adjusted pretax income of $40 million (at the top end of guidance for adjusted pretax income (non-GAAP)). The quarter highlighted above-peer sales pace per community, disciplined land strategy, and strong return metrics, despite ongoing macro and affordability pressures.HOV outperforms peers in sales pace with QMI strategyContracts per community were 9.8, surpassing the long-term fiscal third quarter average since 2008 of 9.1, despite industry-wide year-over-year declines in this metric. Hovnanian reported that 75% of delivered homes used mortgage rate buy downs, and 79% of sales were quick move-in homes (QMI), nearly double the historic average."At 9.6 contracts per community, our sales pace is the third highest among the public homebuilders. On slide 13, you can see that year-over-year contracts per community declined for all homebuilders shown on the slide that report this metric. While any decline is not desirable, we outperformed all but two of our peers."-- Ara Hovnanian, Chairman, President and CEOThis above-industry sales pace, driven by rapid QMI turnover and aggressive incentives, enhances liquidity, inventory rotation, and strengthens Hovnanian’s competitive positioning during market turbulence.Land-light strategy accelerates HOV margin expansion potentialThe company controlled 40,246 lots at quarter-end, with 86% of lots under option, the highest in its history. Hovnanian walked away from 4,059 underperforming lots and simultaneously contracted for 3,500 high-IRR lots, re-underwriting all new land for 20%+ internal rate of return (IRR) based on current incentive-heavy conditions."lots that we control during these last two quarters, we also walked away from about 6,500 lots during the same period, including 4,059 lots in Q3 FY2025. Having said that, we were able to put 6,500 lots under contract in the last two quarters that met or exceeded our margin and IRR hurdle rates. Even after factoring in our current high level of incentives."-- Brad O'Connor, Chief Financial OfficerBy reducing capital exposure through options and active churn of low-return projects, Hovnanian increases flexibility, protects downside, and positions itself for higher margin performance as new, more profitable communities replace older assets.HOV delivers leading returns but remains undervaluedTrailing twelve-month return on equity (ROE) reached 19%, second among midsize peers and fourth overall, including larger peers, for the trailing twelve months, while adjusted EBITDA return on investment (ROI) was 22.1% during the period, leading the midsize group and ranking fifth overall. Despite these operational returns and a 146.2-point improvement in leverage since fiscal 2020, shares are priced at a 31% discount to the homebuilder industry average price-to-earnings ratio."We have the fifth highest EBIT ROI and yet our stock trades at the lowest multiple to earnings of the entire group. These last six slides further emphasize our point that given our high return on equity and return on investment, combined with our rapidly improving balance sheet, we believe our stock continues to be the most undervalued in the entire universe of public homebuilders."-- Brad O'Connor, Chief Financial OfficerThe company’s sustained superior operating performance, coupled with declining leverage and conservative capital allocation, exposes a valuation gap.Looking AheadManagement guides revenue for the fiscal fourth quarter ending October 31, 2025, between $750 million and $850 million, adjusted gross margin at 15%-16.5%, SG&A expense as a percentage of revenue is expected to be 11%-12%, and adjusted pretax income at $45 million to $55 million. Land and land development spend is expected to be significantly less than last year, and explicit forward guidance is limited to the next quarter due to ongoing macro volatility and continued use of sales incentives.