Good morning and thank you for joining us today for Hovnanian Enterprises Fiscal 2022 Third 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 third 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. These slides are available on the Investor page of the company's Web site at www.khov.com. Those listeners who would like to follow along should now log on to the Web site. I would now like to turn the call over to Jeff O'Keefe, Vice President of Investor Relations. Jeff, please go ahead.

Thank you, Norma. And thank you all for participating in this morning's call to review the results for our third quarter, which ended July 31, 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 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 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 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 on the call 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 third quarter results, and I'll also comment on the current housing environment. Larry Sorsby, our CFO, will follow me with more details. And then, as usual, we'll open it up for Q&A. Our third quarter seemed like a Tale of Two Cities; on the one hand, we had our most profitable quarter since the third quarter of 2006. On the other hand, a wave of negative economic views has weighed on the mind of homebuyers, and we've seen them hesitate on finalizing their new home buying decisions. I'll start with the good news. On slide five, we compare our results to our guidance, and you can see that our revenues were slightly below our guidance range, our gross margin was above our guidance range, and our SG&A was toward the lower end of our guidance range. The net result was an adjusted income before taxes significantly above our guidance range. Even without land sale profits, of $10 million for the quarter, we still would have been significantly above the high end of our guidance range for adjusted pretax profit. Moving on year-over-year comparisons for our third quarter, starting in the left-hand position of slide six, you can see that our total revenues for the third quarter were $768 million, an increase of 11% over last year. We achieved this increase in revenues despite persistent supply chain issues that we continue to battle every day. Some of the issues, lately, have been delays in utility companies bringing electricity to homes and developments due to a shortage of transformers and utility crews, as well as delays in delivery of cabinetry, windows, and garage doors. Moving to the right-hand portion of the slide, you can see that our adjusted gross margin increased 420 basis points, to…

Thanks, Ara. I'm going to start with our community count position. If you will recall, prior to the COVID surge in home sales, we and our peers were focused on increasing lot supply and projecting growth in community counts in order to achieve revenue growth. On slide 20, you can see the impact the COVID surge in demand had on our community count. Starting in the summer of 2020, our contract pace per community skyrocketed to unprecedented levels. This increase in sales pace caused us to sell out of communities faster than we anticipated. As a result, our community count declined from 160 communities in the first quarter of 2020 to 120 communities by the third quarter of 2021. However, we achieved even higher levels of revenue growth with this unexpected decrease in community count. I'm reminding you of this phenomenon because the opposite community counts trend is beginning to occur today. At the recent slower sales pace per community, the expected lifespan of a community will actually lengthen. This will cause our community count during 2023 to increase faster than we previously expected. Even if sales pace for community remains sluggish, we expect our fiscal 2023 deliveries and revenues will be higher than our current sales pace suggest as well as higher than some analysts might forecast. Recently, there's been some chatter about the increasing supply of existing homes for sale and the impact it will have on new home sales going forward. On slide 21, we show that the number of existing homes for sale has increased to 1.2 million homes over the past several months. The press and analysts typically talk about the percentage increase in existing home sales. However, what they fail to mention is the modest absolute increase is from record low levels. The recent…

Thanks, Larry. It's not rocket science that based on our current sales pace that we do not expect fiscal '23 revenues and profits to be as high as we planned them to be in fiscal '22. Given persistent supply chain issues, and the current sales environment, it's still too early to understand what the impact on fiscal '23 will be. However, we are building a sizeable backlog of first quarter deliveries at very solid margins we believe it's likely that construction costs will begin to trend down next year. Lumber futures certainly indicate that they may help lead that. Eventually construction cycle times will return to normal. All of these items will have a positive impact on our ROI, IRR and interest costs. Additionally, as I mentioned earlier, we're beginning with numerous build-to-rent opportunities that will fill some of the current sales gaps and deliveries for next year. We're a good size homebuilder to be nimble and take advantage of these opportunities. It's difficult to predict how long these uncertain economic times will cause homebuyers to delay their purchase decision. However, we remain confident that rising rents compared with a low supply of homes for sale will ultimately drive increased demand from the current lows. As we mentioned, our Web site visits per community and leads per community give us visibility to some green shoots and optimism that there are interested buyers as the market eventually settles down. While they will unlikely return to the COVID sales surge levels, they should return to more historically normal levels. That concludes our formal comments, and we'll be happy to turn it over for Q&A.

Thank you. The company will now answer questions. [Operator Instructions] And our first question comes from the line of Kwaku Abrokwah with Goldman Sachs. Your line is open.

Hi, guys. Thank you so much for giving me the opportunity to ask a question here and congrats on the results. Just one from me, given the large number of buyers you talked about being on the sidelines, could you describe sort of the characteristics of the buyers who decided to transact during the quarter? What are some of the demographics here; are they largely move-up or are they first-time buyers, sort of what's driving their decision to actually transact during the quarter?

Sure. I'll say, in general, we've seen a little slower demand in our first-time homebuyers. They are the ones that are most affected by the interest rates because they are typically right on the edge of qualifying. And we've seen slightly higher demand for our active adult segment. We have active adult communities throughout the country, many are -- many of them are cash buyers and not very affected by mortgage rates. So, that's really the most noticeable two different ends of the spectrum.

And to follow up on that, is that going to -- do you think that that's going to lead the industry to sort of shift away perhaps slightly over the next year or so from the emphasis on first-time or entry-level production to the other categories, or do you think that's not really going to affect -- or your strategy or the overall industry strategy?

Well, I think what it might affect is, as we describe, more builders focusing on having quick move-in homes for the first-time homebuyer; we typically did not do that, and we're doing that more now. And the reason that's important is you can more easily buy down mortgage rates at a reasonable cost that will help that first-time homebuyer qualify. So, I don't think that the homebuilders are going to shift that much in their portfolio.

Got it. Thank you so much, guys, and best of luck.

Okay.

Thank you. [Operator Instructions] Our next question comes from Jesse Lederman with Zelman & Associates. Your line is now open.

Hi. Thanks for taking my questions. The first, I'd like to just have you talk a little bit more about your thoughts on the sustainability of the build-to-rent demand, and how confident are you that the demand remains countercyclical? I know you noted that demand from investors, for that product in those communities, remain strong. But we've already seen a large player in that space announce they've stopped acquisitions in many markets. So, can you just talk about your thoughts with regard to the sustainability of that demand if the primary buyer continues to pull back?

Well, the primary buyer of build-to-rent, you mean. I'll tell you, we have seen enormous demand from build-to-rent investors. So, just like land, some buyers may be particularly hungry, some many not be. But we've just seen huge demand. As to the sustainability a year or two years or three years from now, I can't say that we know. But frankly, our communities that we're doing on the build-to-rent spectrum and the affordable for-sale spectrum are very, very similar. So, it's really easy for us, as we're demonstrating right now, to shift from for-sale to consumers to for-sale for build-to-rent or back. So, we've got a good amount of flexibility.

Just a follow-up on that, so if a community you have tabbed for for-sale to a build-for-rent investor, are you able to then switch and sell those communities to primary homebuyer or are not allowed to go back and forth?

No, absolutely. I mean there is nothing that prevents us. And we're also looking at communities that would have a mix of for-sale and build-for-rent in different sections of the neighborhood, perhaps divided by certain cul-de-sacs or streets, that also makes it easy to switch back and forth.

I mean, frankly, the communities that we recently put under LOI; we had anticipated doing on a for-sale basis. But as we explored and become more familiar with the returns we could earn on a for-rent basis, it was more attractive for us to switch those communities from for-sale to build-to-rent. So, I mean that -- we're already doing this switching back and forth, it is fairly easily to do.

I think it's fairly well reported that the rent on single-family rentals have really been rising, and that's part of what's driving the demand for investors.

Right, okay, thanks for that. My second question, I know you mentioned the margins that you're generating in actively selling communities is still in the mid-25% -- 20%-25%, about there, can you talk about the sensitivity to margins on future land that you have under control? So, as you re-underwrite your deals you have under option contract, what do current margins and returns look like given the increase in incentives? And what would you need to see in the market to walk away from a more significant number of deals or what would it have to happen to incentives or how much would base prices have to actually decline for you to meaningfully walk away from some deals?

Yes, so it really depends on when we initially put the parcel under control. So, as we mentioned, we have a pretty high percentage under control pre 2020. And those parcels, we did start with lower prices, add incentives and concessions, and still had very, very strong margins because they have built-in appreciation from when we initially controlled it, as compared to maybe parcels that we put in control this spring or closer to our initial underwriting criteria, closer maybe to a 20% gross margin. So, that we may not be willing to move forward on some of the parcel [technical difficulty] -- control, unless sellers are willing to renegotiate price in turn. So, it just depends on the vintage of the parcel in order to answer specifically your question. But, so far, just as I mentioned in my comments, we've been moving forward on the overwhelming majority of deals that have been brought to corporate for the final approval right before purchase because they have this built-in appreciation. So, even after adding in historical incentives and concessions and today's construction cost, and today's much slower pace, they still hit our underwriting hurdle rates. So, hopefully that explains it.

And, but what --

I'll add one additional point.

Sure.

And that's that sellers understand what -- the land sellers understand what's happening in the marketplace; we've been to this dance before. And sellers that have seen very high lot sale prices will likely adjust their pricing if the market continues to be slow. And that would include in properties that are under contract right now that are still going through due diligence or entitlement. So, it's hard to say where the environment is going to be, but there are lots of different options and alternatives.

Got it. Thanks for that thoughtful response. Real quickly, do you have a breakdown of the 525, would you happen to have that split by owned versus optioned there by vintage or do you just have the total?

All I have is what you see, whether we have the ability, I'm sure, to do it, we'll give that some thought. But we certainly don't have that at our fingertips.

Got it. Well, thank you again for taking my questions, I appreciate it.

No problem.

Thank you. [Operator Instructions] And at this time, I'm currently showing no further questions in the queue. I'd like to hand the conference back over to Mr. Hovnanian for any closing remarks.

Great. Well, thank you very much. We're obviously pleased with the quarter, and we're being nimble and hope to present some good results in the quarters ahead. Enjoy [technical difficulty] -- everyone. Thank you.

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