Executive Summary / Key Takeaways

• Hovnanian Enterprises is executing a strategic pivot towards growth and enhanced returns, leveraging a land-light model and joint ventures to expand community count and lot control despite a challenging market.
• The company has significantly strengthened its balance sheet through substantial debt reduction, earning credit rating upgrades and improving its net debt to net capitalization ratio towards a target of mid-30%.
• Operational focus on quick move-in (QMI) homes and strategic use of incentives like mortgage rate buydowns are driving sales pace and high inventory turnover, contributing to industry-leading EBIT ROI and ROE despite pressure on gross margins.
• Recent financial performance reflects mixed trends influenced by market volatility and strategic choices, with Q2 2025 revenues impacted by delivery mix and margins pressured by incentives, while profitability metrics like Adjusted EBITDA and Adjusted Pretax Income remained near or above guidance.
• Management's outlook for Q3 2025 anticipates continued growth in revenues and stable margins, supported by a growing pipeline of controlled lots and new community openings, positioning the company for sustained delivery growth and strong returns.

A Strategic Transformation Underway

Hovnanian Enterprises, Inc., a homebuilder with a history dating back to 1959, operates across 13 states, offering a diverse portfolio ranging from single-family homes to active lifestyle communities. The company's journey has seen it navigate various market cycles, adapting its strategy to prevailing economic conditions. In recent years, a significant focus has been placed on transforming its capital structure from a highly leveraged position to one prioritizing balance sheet strength and efficient capital deployment. This multi-year effort involved dedicated debt reduction initiatives, leading to substantial improvements in financial health and recognition from credit rating agencies like S&P Global (SPGI) and Moody's (MCO).

Following this period of intense deleveraging, Hovnanian has embarked on a strategic pivot towards growth. This involves increasing investment in land and development, expanding its footprint, and driving higher volumes. A core tenet of this growth strategy is an intensified commitment to a "land-light" model, utilizing land options and joint ventures to control a larger percentage of future lots with less upfront capital compared to traditional land ownership. This approach is designed to enhance capital efficiency and improve inventory turnover, key drivers of profitability in the homebuilding sector.

The company's operational strategy is closely tied to current market dynamics. Faced with persistently high mortgage rates and affordability constraints, Hovnanian has strategically increased its use of incentives, particularly mortgage rate buydowns offered through its financial services subsidiary, K. Hovnanian Mortgage. This, coupled with an elevated focus on quick move-in (QMI) homes, aims to provide buyers with greater certainty on pricing and facilitate faster deliveries. While this strategy has pressured gross margins, management views it as a necessary trade-off to maintain sales pace and drive higher overall returns on invested capital.

Hovnanian's approach to innovation, while not centered on disruptive material science like some industry peers, focuses on operational efficiency and customer experience. The introduction of the "Looks" national portfolio of home designs, with curated interiors and simplified pricing, aims to streamline both the homebuyer selection process and the internal building process. Furthermore, the company has made tangible progress in reducing construction cycle times, decreasing the average from a COVID peak of 190 days to approximately 150 days, with a stated goal of returning to pre-pandemic levels around 120 days. Shortening cycle times directly contributes to improved inventory turns and enhances returns on capital. The company is also actively exploring energy tax benefits from building energy-efficient homes, positioning this as a future advantage.

In the competitive landscape, Hovnanian operates alongside larger national builders like D.R. Horton (DHI), Lennar (LEN), PulteGroup (PHM), and Toll Brothers (TOL), as well as numerous regional and local players. While lacking the sheer scale of industry giants like DHI or LEN, Hovnanian differentiates itself through its focus on specific buyer segments and its strategic flexibility enabled by the land-light model. The company consistently demonstrates strong performance on key return metrics. For the trailing twelve months ended April 30, 2025, Hovnanian's Return on Equity (ROE) stood at 27%, ranking among the highest compared to its peers, albeit partially influenced by its higher leverage. More significantly, its Adjusted EBIT Return on Investment (ROI) was 26.1%, positioning it as a leader among mid-sized peers and competitive with larger builders, reflecting strong underlying operational performance independent of leverage. This contrasts with competitors like DHI and LEN, who often exhibit higher gross margins but may not always translate that into superior EBIT ROI when considering capital deployed. Hovnanian's high percentage of lots controlled via options (85% in Q2 2025) is notably above the median for its peers, providing a structural advantage in managing land risk and improving inventory turnover, which stood as the third highest among peers in Q2 2025.

Performance and Financial Health

Hovnanian's recent financial performance reflects the dynamics of the current housing market and the execution of its strategic priorities. For the second quarter of fiscal 2025, total revenues reached $686.47 million, a decrease from $708.38 million in the prior-year quarter. This decline was primarily attributable to a 5.5% decrease in the average sales price per home delivered ($506,081 in Q2 2025 vs $535,408 in Q2 2024), driven by shifts in the geographic and community mix of deliveries, partially offset by a slight increase in the number of homes delivered (1,285 vs 1,283). For the first six months of fiscal 2025, total revenues increased 4.4% to $1.36 billion, supported by an 8.2% increase in deliveries, despite a 4.9% decrease in average price.

Profitability metrics saw pressure, largely due to the increased use of incentives. The homebuilding gross margin percentage decreased to 13.8% in Q2 2025 from 19.5% in Q2 2024. Before the impact of cost of sales interest and land charges, the gross margin percentage was 17.3% in Q2 2025, down from 22.6% in the prior year.

Management explicitly links this margin compression to the strategic decision to utilize mortgage rate buydowns and other concessions to boost sales pace in a challenging affordability environment.

Selling, general and administrative (SGA) expenses increased to $51.06 million in Q2 2025 from $46.49 million in Q2 2024, primarily due to higher advertising costs and increased compensation expenses associated with expanding headcount to support community count growth. Corporate general and administrative expenses saw a decrease, mainly due to lower stock compensation expense.

Income before income taxes decreased to $26.53 million in Q2 2025 from $69.39 million in Q2 2024. Net income followed a similar trend, falling to $19.73 million from $50.84 million.

For the six months ended April 30, 2025, net income included a $22.7 million gain from the contribution of assets to a new joint venture, recorded in Other income/expense, net. Income from unconsolidated joint ventures decreased year-over-year, impacted by losses in certain JVs and prior-year income from a consolidated venture. Financial services income, however, saw a notable increase, driven by higher loan closing volumes and improved spreads.

The balance sheet reflects the ongoing strategic shifts. Total inventory increased to $1.74 billion at April 30, 2025, from $1.64 billion at October 31, 2024, primarily due to investments in new land and development, partially offset by home deliveries and contributions to joint ventures. Consolidated inventory not owned, related to land banking and model financing arrangements treated as financing, also increased. Investments in and advances to unconsolidated joint ventures grew to $183.46 million, reflecting new partnerships.

Liquidity remains a key focus. At April 30, 2025, total liquidity stood at $202.4 million, comprising $74.0 million in homebuilding cash and cash equivalents and $125.0 million available under the senior secured revolving credit facility. Management views this as sufficient for working capital needs over the next 12 months. The company continues to utilize various financing methods, including nonrecourse mortgages, model sale leasebacks, and land banking programs. Debt reduction remains a priority, with the company redeeming the remaining $26.6 million of its 13.5% Senior Notes in April 2025. While covenant restrictions in existing debt instruments limit the ability to incur new debt and make certain distributions, management believes the company was in compliance as of April 30, 2025, and continues to explore opportunities to optimize its capital structure. The net debt to net capitalization ratio has seen significant improvement, reaching 52.2% at the end of Q1 2025, a substantial reduction from 146.2% at the start of fiscal 2020, moving towards the company's mid-30% target.

Outlook and Risks

Hovnanian's outlook for the third quarter of fiscal 2025 reflects expectations for continued growth and stable profitability metrics, albeit within a volatile market environment. Management provided the following guidance for Q3 2025:

• Total Revenues: Between $750 million and $850 million
• Adjusted Gross Margin: Between 17% and 18%
• SG&A as a percentage of Total Revenues: Between 11% and 12%
• Income from Unconsolidated Joint Ventures: Between $15 million and $25 million
• Adjusted EBITDA: Between $60 million and $70 million
• Adjusted Pretax Income: Between $30 million and $40 million

This guidance is based on several key assumptions, including no adverse changes in current market conditions, stable supply chains, no material increases in mortgage rates, tariffs, inflation, or cancellation rates. It also assumes continued extended construction cycle times (averaging five months) and ongoing reliance on QMI sales and mortgage rate buydowns at levels similar to recent months. The expected increase in revenues compared to Q2 2025 is anticipated to drive a slight improvement in the SG&A ratio.

Management remains confident in the long-term fundamentals of the new home market and the company's positioning for future growth. The significant increase in controlled lots (42,440 at April 30, 2025, up 15% year-over-year) and community count (148 open communities, up 12% year-over-year) are seen as leading indicators for sustained delivery growth in the coming years. The disciplined underwriting of new land acquisitions, incorporating current incentive levels and sales paces to meet target return hurdles, supports the expectation of improved performance as newer land vintages deliver.

However, the path forward is not without risks. The demand for homes remains sensitive to macroeconomic factors, particularly fluctuations in mortgage rates, inflation, and consumer confidence, which have contributed to sales volatility. Affordability continues to be a significant challenge. Operational risks include potential disruptions to supply chains, labor availability, and ongoing delays in obtaining necessary utility hookups and permits, which can impact delivery schedules and costs. The company is also subject to various legal and regulatory risks, including construction defect claims, environmental laws, and litigation, such as the ongoing NJDEP lawsuit. While management believes existing reserves and insurance are adequate, adverse outcomes could impact financial results. Furthermore, the company's ability to access capital markets at competitive rates remains constrained by its historical leverage, potentially limiting growth opportunities compared to less leveraged peers. The success of the land-light and joint venture strategies depends on finding suitable partners and executing these complex arrangements effectively.

Conclusion

Hovnanian Enterprises is in a dynamic phase, transitioning from a period of intense balance sheet repair to one focused on strategic growth and maximizing returns. The company's commitment to a land-light model, coupled with tactical operational adjustments like emphasizing QMI sales and incentives, is designed to navigate the current challenging market while positioning for future expansion. Despite near-term pressures on gross margins due to incentive usage, the focus on sales pace and inventory turnover is yielding strong returns on capital, as evidenced by industry-leading EBIT ROI and competitive ROE metrics.

The significant progress in debt reduction provides a stronger foundation, although continued efforts are needed to reach target leverage levels and potentially access more favorable financing. The growing pipeline of controlled lots and increasing community count signal potential for sustained revenue and delivery growth. While external market volatility and operational challenges persist, Hovnanian's strategic framework, supported by its disciplined land acquisition process and operational efficiencies like cycle time reduction, provides a clear path for value creation. For investors, the story is one of a company executing a deliberate transformation, aiming to leverage its improved financial health and strategic operational model to deliver compelling returns in the evolving homebuilding landscape.