Hovnanian Enterprises : JP Morgan 2020 Global High Yield & Leveraged Finance Conference Presentation

JP Morgan 2020 Global High Yield & Leveraged Finance Conference

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Note: All statements in this presentation that are not historical facts should be considered as "Forward‐Looking Statements" within the meaning of the "Safe Harbor" provisions of the Private Securities Litigation Reform Act of 1995. Such statements involve known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by the forward‐looking statements. Such forward‐looking statements include but are not limited to statements related to the Company's goals and expectations with respect to its financial results for future financial periods. Although we believe that our plans, intentions and expectations reflected 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: (i) speak only as of the date they are made, (ii) are not guarantees of future performance or results and (iii) 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 include, but are not limited to, (1) changes in general and local economic, industry and business conditions and impacts of a significant homebuilding downturn; (2) adverse weather and other environmental conditions and natural disasters; (3) high leverage and restrictions on the Company's operations and activities imposed by the agreements governing the Company's outstanding indebtedness; (4) availability and terms of financing to the Company; (5) the Company's sources of liquidity; (6) changes in credit ratings; (7) the seasonality of the Company's business; (8) the availability and cost of suitable land and improved lots and sufficient liquidity to invest in such land and lots; (9) shortages in, and price fluctuations of, raw materials and labor including due to changes in trade policies, the imposition of tariffs and duties on homebuilding materials and products, and related trade disputes with and retaliatory measures taken by other countries; (10) reliance on, and the performance of, subcontractors; (11) regional and local economic factors, including dependency on certain sectors of the economy, and employment levels affecting home prices and sales activity in the markets where the Company builds homes; (12) increases in cancellations of agreements of sale; (13) fluctuations in interest rates and the availability of mortgage financing; (14) changes in tax laws affecting the after‐tax costs of owning a home; (15) operations through unconsolidated joint ventures with third parties; (16) government regulation, including regulations concerning development of land, the home building, sales and customer financing processes, tax laws and the environment; (17) legal claims brought against us and not resolved in our favor, such as product liability litigation, warranty claims and claims made by mortgage investors; (18) levels of competition; (19) successful identification and integration of acquisitions; (20) significant influence of the Company's controlling stockholders; (21) availability of net operating loss carryforwards;

1. utility shortages and outages or rate fluctuations; (23) geopolitical risks, terrorist acts and other acts of war; (24) loss of key management personnel or failure to attract qualified personnel; (25) information technology failures and data security breaches; (26) negative publicity; and (27) certain risks, uncertainties and other factors described in detail in the Company's Annual Report on Form 10‐K for the fiscal year ended October 31, 2019 and subsequent filings with the Securities and Exchange Commission. Except as otherwise required by applicable securities 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.

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U.S. Housing Market is Recovering

3

2001 - 2010 starts are comparable to prior decades

1,753,000

US Housing Production in Retrospective

January 2020 Year to Date Seasonally Adjusted Annual Rate ‐ Multi‐Family

January 2020 Year to Date Seasonally Adjusted Annual Rate ‐ Single Family

Multi‐Family

Single Family

Total U.S. Housing Starts

Decade Average Starts

(000s)

2,500

(For Sale and Rental)

2,000

	1,401,000
1,500	1,425,000

1,000

500

0

1,482,000

Harvard's

Demand

Projection

1,510,000

1,409,000 1,438,000

1,038,000

1940

1950

1960

1970

1980

1990

2000

2010

2020

2028

					Previous Low	(1991: 1,013,000)	Population
US Population								Greater
In millions	132.2	151.3	179.3	203.2	226.5	248.7	281.4	308.7

Source: U.S. Census Bureau. 2018 - 2028 demand projections are from Joint Center for Housing Studies of Harvard University.

4

Mortgage Rates Have Recently Fallen

30 year fixed rate

5.0%

4.5%

4.0%

3.5%

2/13/2020

3.47%

3.0%

3/29/2018

4/26/2018

5/24/2018

6/21/2018

7/19/2018

8/16/2018

9/13/2018

10/11/2018

11/8/2018

12/6/2018

1/31/2019

2/28/2019

3/28/2019

4/25/2019

5/23/2019

6/20/2019

7/18/2019

8/15/2019

9/12/2019

10/10/2019

11/7/2019

12/5/2019

1/30/2020

3/1/2018

1/3/2019

1/2/2020

Source: Freddie Mac.

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Business Overview and

Fiscal 2019 Results

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Hovnanian Enterprises At A Glance

1. Among the top 15 homebuilders in the United Sates in both homebuilding revenues and home deliveries

1. Founded by Kevork Hovnanian in 1959 and the Hovnanian family remains our largest shareholder

1. 162 communities in 24 markets in 14 states

Homebuilding Revenues by Segment

(last twelve months ended October 31, 2019)

11%

			6%
18%
22%

11%

32%

7

Broad Product Diversification

Fiscal 2019(1)

First

Time

38%

Move Up

28%

Luxury Active

18% Lifestyle

16%

(1) Includes unconsolidated joint venture deliveries.

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What Happened?

1. Prior cycle

o o o

o o

HOV delivered 20,201 homes in 2006 at peak of the cycle HOV had peak market cap of $4.5 billion in 2005

HOV was one of the top performers in homebuilding industry and Fortune 500 last cycle

HOV overly aggressive in last cycle with a 50% debt to cap target

HOV wrote off $2.8 billion of land related charges and intangible write‐downs

o o

HOV challenged during downturn with large debt burden

Market troughed in 2009 and by 2015 HOV was on path to recovery with growth in revenues and profits

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What Happened? (cont'd)

1. Fiscal 2016

1. High yield market closed to "CCC" issurers, including HOV o Temporarily reduced land investments
   o Paid down $320 million of maturing debt

1. Led to a reduction in our land position and a decline in our total community count

1. Fiscal 2018

1. Reinvested in land

1. Increased the number of lots we control

1. Fiscal 2019

1. Community count increased 15% year‐over‐year at end of fourth quarter

1. Year‐over‐year increase in contracts each month from February through October

1. Contracts up 14%

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Quarterly Community Count

208

12 193

19	177
	170	167	165			165	160	162
	20
			153	153
	24	26	25	18	22	21
		143	16
				21
				20

196

174

157	146	141	140		137	147	138	141
	132
					123

Q2	Q3		Q1	Q2	Q3		Q1	Q2	Q3	Q1	Q2	Q3	Q4
2016	2016	2017	2017	2017	2018	2018	2018	2019	2019	2019	2019
			Consolidated Communities		Unconsolidated Joint Venture Communities

Note: Communities are open for sale communities with 10 or more home sites available.

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Total Lots Controlled

Control 100% of lots required to meet 2020 delivery forecast

Control more than 85% of lots required to meet 2021 delivery forecast

30,339

29,378

12,729

11,374

17,610

18,004

October 31, 2018		October 31, 2019
		Optioned		Owned

Note: Excludes unconsolidated joint ventures.

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9.0

6.0

3.0

3.6 3.9 4.2

0.0

4.7 5.0

Total Lots Controlled Years Supply*

6.9 7.0 7.0

5.2	5.4	5.4	5.9	5.9	5.9

Beazer (Sep Q4)

MDC (Sep Q3)

Meritage (Sep Q3)

M/I Homes (Sep Q3)

KB Home (Aug Q3)

*Years supply based on LTM deliveries

Source: Company SEC filings and press releases as of 10/05/19.

Note: Excludes unconsolidated joint ventures, except for Hovnanian.

NVR (Sep Q3)

DR Horton (Sep Q4)

Taylor Morrison (Sep Q3)

Lennar (Aug Q3)

TRI Pointe (Sep Q3)

Hovnanian (Oct Q4)

LGI Homes (Sep Q3)

Pulte (Sep Q3)

Toll (Jul Q3)

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Quarterly Community Count

	162
142	21
19

141

123

Q4 2018		Q4 2019
Consolidated Communities		Unconsolidated Joint Venture Communities

Note: Communities are open for sale communities with 10 or more home sites available.

Note: Excludes our single community unconsolidated joint venture in the Kingdom of Saudi Arabia.

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2019 Quarterly Contracts

	1,546	1,515
	1,404	1,345
		1,236
1,027	934	1,004

2018	2019	2018	2019	2018	2019	2018	2019
	Q1		Q2		Q3		Q4

Note: Excludes unconsolidated joint ventures.

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Monthly Contracts

	445		484
	416	404
323		333	348
			285

Aug‐18 Aug‐19

Sep‐18 Sep‐19

Oct‐18 Oct‐19

Nov‐18 Nov‐19

Note: Excludes unconsolidated joint ventures.

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Number of Monthly Contracts Per Community, Excludes Unconsolidated Joint Ventures

2.8

2.7

3.2

3.2

2.2

2.1

	Dec‐17	Dec‐18	Jan‐18	Jan‐19	Feb‐18	Feb‐19
Number of	5	5	4	4	4	4
Sundays
	Dec‐17	Dec‐18	Jan‐18	Jan‐19	Feb‐18	Feb‐19
Monthly	288	280	387	369	430	449
contracts

Note: Excludes unconsolidated joint ventures.

3.6

3.7

3.8

3.7

3.6

3.7

3.3

3.3

3.2

3.5

2.6

3.2

2.7

2.9

2.8

3.4

Mar‐18	Mar‐19	Apr‐18	Apr‐19	May‐18	May‐19	Jun‐18	Jun‐19	Jul‐18	Jul‐19	Aug‐18	Aug‐19	Sep‐18	Sep‐19	Oct‐18	Oct‐19
4	5	5	4	4	4	4	5	5	4	4	4	5	5	4	4
Mar‐18 Mar‐19	Apr‐18	Apr‐19	May‐18	May‐19	Jun‐18	Jun‐19	Jul‐18	Jul‐19	Aug‐18	Aug‐19	Sep‐18	Sep‐19	Oct‐18	Oct‐19
470	553	504	544	446	536	402	491	388	488	323	445	333	416	348	484

2.7	2.9
	2.2

Nov‐17	Nov‐18	Nov‐19
4	4	4
Nov‐17	Nov‐18	Nov‐19
352	285	404

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Fourth Quarter Operating Results

($ in millions)	Total Revenues

Adjusted Homebuilding Gross Margin(1)

$615

$714

19.2%18.9%

Q4 2018

Q4 2019

Total SG&A Ratio(2)

8.3%7.6%

	Q4 2018	Q4 2019
Total SG&A per	$0.413	$0.382
Community

Q4 2018

Q4 2019

Adjusted Pretax Profit(3)

$51$45

Q4 2018

Q4 2019

1. Adjusted homebuilding gross margin percentage is before cost of sales interest expense and land charges. See appendix for a reconciliation to the most directly comparable GAAP measure.
2. Total SG&A includes homebuilding selling, general and administrative costs and corporate general and administrative costs.
3. Adjusted Income Before Income Taxes excludes land‐related charges, joint venture write‐downs and loss on extinguishment of debt. See appendix for a reconciliation to the most directly comparable GAAP measure.

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Liquidity Position and Target

Homebuilding Cash		Revolver Availability

($ in millions)

$474

$8

				$347
				$5						$326
					$284	$288	$292	$274
$259	$250				$7	$8	$11
$2						$466	$11	$242	$125
$49					$205					$215
			$188	$342	$7
		$152	$5							$89
		$2			$277	$280	$281
		$126			$263
	$248	$3						$242
$210
		$183		$198					$201
		$150
									$126
		$123

7/31/2015 10/31/2015 1/31/2016

4/30/2016

7/31/2016 10/31/2016 1/31/2017

4/30/2017

7/31/2017 10/31/2017 1/31/2018

4/30/2018

7/31/2018 10/31/2018 1/31/2019

$266	$276
		$245
$225		Target
	$125
$125	Liquidity
$125		Range

$170

$141 $151

$100

4/30/2019 7/31/2019 10/31/2019

Note: Liquidity position includes homebuilding cash and cash equivalents (which includes unrestricted cash and restricted cash to collateralize a performance bond and letters of credit) and revolving credit facility availability.

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Maturity Ladder Pro Forma for Exchange

As of October 31, 2019

$103

$282

$162M

$23M

$142M

$219

$125

$211

$

350

$203

(1)

$90

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$91

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‐ $26

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

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Q1

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'20

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'40

2nd Lien Notes

Unsecured

Unsecured Term Loan

New Revolver

New 1.125 Lien Notes

New 1.25 Lien Notes

New 1.50 Lien Notes

Pro Forma for Exchange

$103

$282

$196

$

350

$81

(1)

$125

$

159

$26

‐

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$69

‐

‐

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$91

‐

‐

‐

$41

‐

‐

$90

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

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'27

'27

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'40

2nd Lien Notes

Unsecured

Unsecured Term Loan

New Revolver

New 1.125 Lien Notes

New 1.25 Lien Notes

New 1.50 Lien Notes

New 1.75 Lien Notes

New 1.75 Lien Term Loan

Note: Shown on a fiscal year basis, at face value.

Note: Excludes non‐recourse mortgages.

1. $26 million of 8.0% senior notes held by wholly owned subsidiary, no cash required to retire.

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