Good morning and thank you for joining us today for Hovnanian Enterprises Fiscal 2022 Second 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 second quarter results and then open the lines 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. Those listeners who would like to follow along should now log on to the website. I would like to turn the call over to Jeff O’Keefe, Vice President, Investor Relations. Jeff, please go ahead. Jeff O’Keefe: Thank you, Carmen. And thank you all for participating this morning’s call to review the results for our second quarter, which ended April 30, 2022. All statements in 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, 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 speak only as of the date they are made, are not guarantees of future performance or result, 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 and 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&A entitled Safe Harbor statement in our Annual Report on Form 10-K for the fiscal year ended October 31, 2021, and subsequent filings with the Securities and Exchange Commission. Except as 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; and Brad O’Connor, Senior Vice President, Chief Accounting Officer and Treasurer. I will now turn the call over to our CEO. Ara, go ahead.

Thanks, Jeff. I’m going to review our second quarter results and I’ll also comment on the current housing environment. Larry Sorsby, our CFO, will follow me with more details. And then, we’ll open it up to Q&A. Despite the steady presence of supply chain issues, lumber volatility, rising mortgage rates, labor shortages and uncertainty in the economy, we are very pleased with our second quarter results. On slide 5, we compare our results to our guidance. Additionally, we added a third column to compare our results without the benefit of $6 million of phantom stock benefit this quarter. If you focus on that third column, you can see that our revenue was within our guidance range and our SG&A was 0.1% over our guidance range. The standouts were gross margin and adjusted pretax income, which were both well above the upper end of our guidance range. Moving on to slide 6, we show year-over-year comparisons for our second quarter. Starting in the left hand portion of the slide, you can see that our total revenues for the second quarter were $703 million, about flat with last year. Moving to the right hand portion of the slide, you can see that our adjusted gross margin increased 530 basis points to 26.6% this year, compared to 21.3% in last year’s second quarter. The magnitude of this increase is due to strong home demand that allowed us to raise home prices more than labor and material cost increases, and brought our average sales price to approximately $507,000 per home delivered. Turning to slide 7, here, you can see that lumber prices have been very volatile over the past two years. Lumber prices have dropped significantly in recent weeks. The homes that we are about to start will benefit from this price decline. The…

Thanks Ara. I’m going to start with the progress we’ve made in growing our lot position which is the key raw material we need to build our homes. Turning to slide 21. We show that year-over-year our lot count increased by more than 5,400 lots or by 19%. We now control about 33,500 lots. Based on trailing 12-month deliveries, this equates to a 5.8-year supply. Primarily through the use of finished lot options we have been steadily increasing our lot position over the past couple of years. As you can see, our owned lot position remained flat year-over-year, while our lot optioned position increased. On slide 22, we show the percent of lots controlled by optioned increased from 45% in the second quarter of 2015 to 69% by the second quarter of ‘22, a low percentage of owned lots gives us tremendous flexibility in a shifting market. The market for land acquisitions remains rational and we continue to feel very comfortable with the acquisitions we’ve made over the past year. We now have a 5.8-year supply of lots. Until the housing market stabilizes, we will remain cautious when making new land acquisitions. By using current home prices, current construction cost and current sales pace to underwrite to a 20-plus-percent internal rate of return hurdle rate and a minimum 6% pretax profit, our underwriting standards automatically self adjust to changes in market conditions. However, since the onset of the COVID fueled increase in sales pace in the late summer of 2020, we have taken a more conservative approach to underwriting our new land parcels by consistently using lower, more normal pre-COVID sales paces, rather than the unsustainable, higher COVID sales paces we experienced over the past 20 months. Even when using these slower sales paces, we’ve been able to win our…

Thanks, Larry. Let me start by making one correction. I mentioned May sales, which ended last night, were 3.2 contracts per community. They were actually slightly higher at 3.3. I’d like to wrap up the call by saying that while many of our peers have already reduced their debt levels and have had the luxury of buying back stock with their excess cash over the last two years, we’ve been focused on using our cash to aggressively reduce our debt and strengthen our balance sheet. On slide 36, we show the outstanding principal value of our public debt from the end of fiscal ‘19, through the guidance we gave for the end of this year. Over this period of time, we will have reduced our debt by almost $500 million. If you turn to slide 37, you could see that we’ve made some significant progress in strengthening our balance sheet from 2019 to the end of this fiscal year. Our equity is expected to increase by $854 million and simultaneously we’ve reduced our public debt by almost $500 million. We believe that the steps we’re currently taking to strengthen our balance sheet will have a positive impact on our future cost of debt and the valuations of our stock price. On slide 38, we show single family housing starts for the past 50 years. We think it gives a good perspective of the current state of the housing market. In the previous boom, we clearly, as an industry, produced homes well over long-term averages for several years, thanks to subprime mortgages. This time, the industry has just recently reached the long-term average production levels. ‘21 was the first time we had more than 1 million single family starts since 2006, and this year we are just slightly over that at…

[Operator Instructions] Your first question comes from Alan Ratner with Zelman & Associates. Your line is open. Please go ahead.

Hey guys, good morning. Thanks for taking my questions. And I appreciate all of the color and comments so far. First, just on the May activity, and thank you for that disclosure. When you look at the sales pace and kind of the cooling you saw in May versus the second quarter, can you talk a little bit about whether there were any notable differences, either across price points or across your various markets where you saw a greater pullback in demand? And adding to that, can you just talk about cancellation trends in the month as well, and whether that contributed to the sequential pullback?

Sure. I’d say, from a big picture perspective, the active adult segment has been stronger, and the uber entry level has been slightly weaker, and everything in between has been around the same. And regarding cancellation rates, no, May has been very solid. I mean, we’ve -- our mortgage team and our divisions have been working diligently to make sure that the backlog we have is qualified or can qualify for alternative mortgage programs. So, at this stage, as Larry commented, we’ve been pretty good as far as cancellations.

Yes. Just to make it crystal clear, we saw no change to speak of at all in our cancellation rates in the month of May.

Perfect. Thanks for that, guys. Second, I guess, this is kind of a multipart question. But, if I look at gross margin, obviously well in excess of what you guided to for the quarter. It looks like the guidance in the back half of the year implies some pullback from these levels. Yet on the other hand, you’re saying you haven’t really increased incentives yet. It sounds like maybe you’re getting some benefit on lumber, although that might be coming more next year. What’s contributing to the expected pullback in margins over the next quarter or two? Because presumably those were homes that were predominantly sold before this run-up in mortgage rates? And, when do you hit that point where you would likely start to think about increasing incentives, if the sales pace stays at these levels or even moves lower?

Alan, first, regarding gross margins, it’s in this supply chain disrupted environment and this labor shortage environment, it’s a very tricky number to predict super accurately. Because we’re allowing for a little extra cost for these last minute solutions where all of a sudden we’ve got a handful of windows missing or garage doors are gone, or we’ve got to replace an appliance with a higher end appliance because it’s backordered. So, we’re trying to be a little more cautious in our costs. And, as it turns out, we’ve been able to do a little bit better than we were cautious about. And hence, that was part of the reason why our gross margins were better than the upper end of our guidance range. So, you can take that same comment into view regarding the balance of the year. I mean, generally speaking our gross margins in our new contracts are brand new -- as of like this weekend have been really, really solid. So, I don’t know what more to tell you about that. They’re just really solid. We’ve seen pace fall off a little more, as you saw in May. And then finally, regarding the last part of your multipart question, and then I’ll turn it to Larry to answer some more. We are looking community by community. It’s not an average movement in terms of slowness. We have communities that we’re still metering sales and increasing sales prices. On the other hand, we have some communities that have definitely slowed and those are the communities that would be the first ones that we start going back to normal concessions. So, we’re looking carefully. At this stage, we haven’t really implemented going back to normal concessions across the board at all. And we’ll continue to be tactical and look community by community. Larry, do you want to elaborate?

A couple more points on the gross margin, just to emphasize the difficulty in making the projections. The first point I’d make is I believe that we projected the second quarter back in December and reiterated it when we announced our first quarter results. Any cancellations that occurred from December forward, ironically, we were able to resell at a higher price and got higher margin than we anticipated because home prices continued to go up. So, that’s one of the things that led to it. The other thing is lumber prices, which are the biggest single component that goes into home construction have been very volatile. And that too, certainly in the second half of this year, in terms of the deliveries that were going to have, lumber prices went up a few months ago and that is coming through in a higher cost than we had anticipated previously as well. So, that could lead to some dampening of the margin out in the second half of the year. So, I’ll leave it at that. I think Ara’s explanation was pretty comprehensive.

Great. Thanks. Thanks both of you guys for the detailed answers.

And your next question comes from Alex Barron with Housing Research Center. Your line is open. Please go ahead.

Thank you, gentlemen. And congratulations on the strong results, and good job on paying down the debt so far and strengthening the balance sheet. On that note, I wanted to ask, I know you guys had previously expressed some potential kind of global refi. At this point, is it more likely that you guys are just going to go down the path of paying down debt now, and as you’ve said for the rest of the year?

Yes. I think that for right now, obviously the high yield market has also been disrupted by inflation and higher rates, et cetera. So, we didn’t have any pressure to refinance earlier. We would opportunistically do it, if we saw a great opportunity. But, I think given changes in the market, it’s safe to say that we’re just going to continue to pay down debt. We were also concerned about refinancing. And then given our expectations, especially in the key metric targets we gave last quarter, have to pay call premiums on debt that we would’ve refinanced. So, right now, I think you’ll just see us continue to chip away at the debt. And at some point in the future, as we’ve got our balance sheet in better condition and strengthened, we will look at refinancing. Nothing near term is on the horizon there.

Okay, good. Well, the good thing is you guys didn’t need it -- need to do it. So, that’s good. On the other hand, I wanted to ask about your backlog and the discussion on incentives. To what extent have you guys secured the people [ph] through the end of the fiscal year through some extended rate locks or something that minimizes potential cancellations along those lines? What if any incentives are you guys offering? Are you guys [Technical Difficulty] if so, who’s paying for that, the customer or you guys?

First, I’ll just mention, I mean, we’ve been closing homes in April and May, and those have been -- largely were market rate -- mortgage rates in the 5% levels. We haven’t seen huge cancellations. And as I mentioned, the team has been working diligently to check on the qualifications of our buyers. Larry, do you want to comment on rate locks?

Yes. We obviously have been offering both, short-term and long-term rate locks to our contract backlog, and it’s been taken by some and refused by others. We’re encouraged by kind of the recent last few weeks that rates have dropped a little bit, at least they haven’t been going back up. Maybe that’s given comfort to some consumers as well. Having said that, I’d say more than 50% of our third quarter backlog has already been locked. And that’s a little higher than it would normally be. And if in fact when we scrub the backlog and you have [Technical Difficulty]. And we have a customer here and there that does need some assistance in order to still qualify, we’ll make those decisions case by case. And because our margins are so strong, we’ve seen an instance that our divisions will decide to help buy down a rate or help with a rate lock to provide comfort to a consumer. But I would say those have been isolated at this point in time, but they have occurred.

Just clarification, as Larry mentioned, we’ve offered rate locks to all of our backlog that hasn’t been offered at our cost. Generally, the consumer can look at it and consider the cost themselves.

Correct. Got it. And, if I could ask one more, on new communities that haven’t opened yet. I mean, it’s no secret that home prices are gone up very significantly, and that combined with the interest rates have perhaps made it difficult for some people to afford a home. So, on the new communities, is there any plan to somehow make them more affordable, either introduce smaller sizes or fewer upgrades included in the houses or just start them off at lower ASPs or something? Can you comment anything along those lines?

Sure. It’s a good question. At all of our communities, we typically offer a range of home sizes and home prices and we also offer a range of upgrades. When the rates were lower, we were selling a lot of our largest, most expensive homes that were offered. They could select small homes, but they tended to gravitate toward the larger end of the home size spectrum. Similarly, they were adding a fair amount of upgrades. I want to mention our gross margin. We typically price at a very, very similar gross margin percentage. Whether it’s a small home or a large home, we price margins almost the same. I’d say, more recently, we’ve definitely seen more interest at the same community without changing our product offerings. There has just been a little greater selection from our smaller homes or mid-size homes at least and a little tampering -- dampening, excuse me, of the options or upgrades they have been selecting. So, there is an ability without us really doing anything that the customers can make their own decisions and make the homes more affordable. Having said that, a lot of times in the past when rates rise rapidly, we definitely see a little hesitation. And I think you saw that in May. People are disappointed that all of a sudden they have to reduce the upgrades they were hoping for or choose the next house smaller. It takes a little time for them to adjust their expectations. But, they have the ability to do that, and obviously we still sold a lot of homes in May and many buyers did make those adjustments.

Thank you. Your next question comes from Kwaku Abrokwah with Goldman Sachs. Please go ahead. Your line is open.

Hi, guys. Congrats on the quarter. I just wanted to follow up on the month of May, if you permit me, to kind of get a sense of what you are seeing in terms of buyer attitude at the current mortgage rates. Specifically, I’m trying to compare between what we are seeing today versus what we saw in late 2018 when we saw a comparable surge in mortgage rates. And on that, I’m trying to get a sense of, you mentioned 3.3 absorption pace. Is there a level that going -- if you go below, you start to introduce more incentives into the marketplace. I’ll stop there.

I’ll start with that by just responding again that it’s highly neighborhood and community specific. We still have a metering situation and price increases at many communities. That’s certainly the case. We see it in many in Dallas, in many communities in Phoenix, in many communities in Delaware, in the Southeast Florida and South -- in the Carolinas. We have many examples where we wouldn’t -- the pace hasn’t been slowing. So, it’s community by community. It has a lot to do with our internal budgets and getting a regular pace. If we have communities that fall off on pace, and if some of our very entry communities have fallen off on pace, if that can be -- again for some of that phenomenon, I mentioned before, the expectations have been not met, then they’re disappointed. But if they don’t ultimately adjust at those communities and buy a smaller home, then we’d look at concessions there to be able to get that community back on pace. Fortunately, gross margins are very high, as we mentioned numerous times, and there’s plenty of room to return to some normal concessions.

And just a quick clarification on that. Is the pace level that you’re targeting, internally, I’m not sure if you revealed, is it around 3 per community per month, or is it somewhere else a different level?

It varies dramatically from community to community. Our higher-end communities would be lower than that or three or lower; our very entry level communities might be higher than that. So, it’s very much a community by community basis.

Got you. I appreciate the color on that. And just to follow up on a different sort of question here. In terms of your contract cancellation, would you guys be willing to talk about what you’ve been seeing in terms of cancellation out of backlog over the past two quarters? And if you look at what the buyers in the backlog are doing, what’s the spread or a combination, or I guess, if you have to split the pie, how many are moving to adjustable rate mortgages versus buy downs versus greater down payments, et cetera?

Again, our contract cancellation rate has been very modest by historical standard, still well below normalized cancellation rates. We do provide -- I think in the K and Q, Brad, what our backlog cancellation rate is, those two have not materially been different than what our historical trends have been, have been lower on the contract cancellation rate. I just don’t -- our backlog cancellation -- I don’t have it at my fingertips. Maybe Brad can look that up. I wouldn’t say that we’ve seen a significant shift at this point to adjustable rate mortgages, to answer second part of your question. We’ve seen a little bit of a use of adjustable rate. But because there’s not a huge spread in rate between call it a 5.1% arm versus a 30-year fixed. Not a lot of people are going that direction. Certainly there’s some people that just can’t qualify the 30-year fixed rate that can qualify in an adjustable and they’re going that direction. But it hasn’t been a material number at this point in time.

I will add one other bit of color. We probably have a little bit of a greater percentage of age-restricted communities than many of our peers. Those consumers are typically not very affected at all by mortgage rates. Many of them are cash buyers. Many of them get small mortgages. So, that’s part of the reason and I made the comment earlier. We just see more strength in that segment and I suspect, they are more indifferent about mortgage rates. Brad O’Connor: Adding to Larry’s comment, the cancellation rate on backlog, beginning backlog for the quarter was 9%, which is exactly the same as it was last year’s second quarter. And historically, that’s relatively low.

Thank you. [Operator Instructions] Next question is from Alex Barron with Housing Research Center. Please go ahead.

Yes. Thanks for taking my follow-up. Regarding specs, it doesn’t sound like you guys have any -- or very little completed specs. I’m just wondering, do you guys see a need at this point to slow down any spec starts or do you see a risk that you could end up with some finished specs by the end of the year, if things don’t improve in terms of sales pace? That’s my first question.

There are many things to worry about in this time of uncertainty. Right now, we are just scrambling to start the homes we have in backlog. We have a huge backlog, over $2 billion. So, we are just not focused on specs, nor are we very worried about our specs. We are less than half the number of specs per community than we are historically, less than half. So, it’s far from a concern, and we have virtually zero, I think we have two in the entire country, two finished specs. So, it’s just not on our radar of one of the many concerns.

Got it. I also wanted to ask in terms of, in any communities where you are starting to do incentives, rate buy downs, rate locks, whatever, how much would that impact margins generally? Is it like 1% or 2%?

Again, I think as Ara has mentioned, it’s going to be community specific. It’s not going to be a broad brush across the whole company. So, I think in terms of impacting margins near-term, it’ll be extremely modest or not even noticeable. If in fact the market slows further and use of incentives by the industry and then by us starts to increase, there is room to increase the use of incentives. I just think it’ll be gradual over time. But, if we decided at a slow selling community to increase incentives by a couple of hundred basis points, I just don’t think, one or two or three, half a dozen communities would be noticeable anytime soon. But as you do more and more communities, if that becomes an industry trend, it would come through in maybe the second half of next year or something.

Alan, I do want to add. We are not delusional about the uncertainty in the marketplace. And we certainly don’t think that the gross margins we’ve just reported and the gross margins that we’re currently selling at, we don’t think that can happen indefinitely. I mean, the market will eventually normalize. And as I mentioned earlier, last quarter we talked about our multi-year key metrics. And in that -- in those metrics, we forecasted that we ultimately get back to a 20% gross margin. Right now, we’re not seeing anything like that. It’s far better, but we think eventually the market’s going to gravitate to normalcy. And that will eventually make its way into our results as well.

Yes. No, it’s good. You’ve implemented that conservatism in your outlook, because even though you guys might not have a ton of specs or almost any, obviously a lot of your peers did start a ton of homes on spec, and we’re hoping to sell them at the last minute. So, we’ll see what happens. But thanks very much and good luck.

Thank you.

Thank you. And this concludes our Q&A session. I will turn the call back to Ara Hovnanian for his final remarks.

Great. Well, thank you very much. We’ve tried to be as transparent as possible. And I don’t think anybody else’s reported May contracts yet. So, hopefully, you’ve got fresh information. And we look forward to giving you continued good results in our upcoming quarters. Thank you.

And this concludes our conference call for today. Thank you all for participating. And have a nice day. You may now disconnect.