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Hovnanian Enterprises Inc. Reports Operating Results (10-K)
Posted by: gurufocus (IP Logged)
Date: December 30, 2011 01:14PM

Hovnanian Enterprises Inc. (HOV) filed Annual Report for the period ended 2011-10-31. Hovnanian Enterprises Inc. Cl A has a market cap of $134.8 million; its shares were traded at around $1.42 with and P/S ratio of 0.1.



Highlight of Business Operations:

Current base prices for our homes in contract backlog at October 31, 2011, range from $75,500 (low income housing) to $1,350,000 in the Northeast, from $172,529 to $1,795,000 in the Mid-Atlantic, from $88,890 to $461,860 in the Midwest, from $89,990 to $504,990 in the Southeast, from $88,950 to $556,725 in the Southwest, and from $128,990 to $522,000 in the West. Closings generally occur and are typically reflected in revenues within 12 months of when sales contracts are signed.

Total inventory, excluding consolidated inventory not owned, increased $25.5 million during the year ended October 31, 2011. Total inventory, excluding consolidated inventory not owned, increased in the Mid-Atlantic $25.8 million, in the Midwest $15.7 million, in the Southeast $24.9 million and in the Southwest $4.5 million. These increases were offset by decreases in the Northeast of $33.0 million and the West of $12.4 million. During fiscal 2011, we incurred $77.5 million in impairments, the majority of which related to three properties that were transitioned from inventory held for development to held for sale, five communities in the Northeast that have had meaningful price reductions in order to maintain reasonable sales pace, and five communities in the West where we continue to see pricing pressure. In addition, we wrote-off costs in the amount of $24.3 million during fiscal 2011 related to land options that expired or that we terminated, as the communities forecasted profitability was not projected to produce adequate returns on investment commensurate with the risk. Despite these write-downs and inventory reductions due to deliveries, as well as the sale of certain inventory to a new joint venture during the first two quarters of fiscal 2011, total inventory increased $25.5 million, excluding consolidated inventory not owned, because we spent approximately $400 million on land purchases and land development during fiscal 2011. Also contributing to the increase in inventory during the period was the consolidation of a joint venture in the first quarter of fiscal 2011, whereby our partner in a land development joint venture transferred its interest in the venture to us. In the last two years, we have been able to acquire new land parcels at prices that we believe will generate reasonable returns under current homebuilding market conditions. There can be no assurances that this trend will continue in the near term. Substantially all homes under construction or completed and included in inventory at October 31, 2011 are expected to be closed during the next 12 months. Most inventory completed or under development was/is partially financed through debt and equity issuances. 34

Total inventory, excluding consolidated inventory not owned, increased $25.5 million during the year ended October 31, 2011. Total inventory, excluding consolidated inventory not owned, increased in the Mid-Atlantic $25.8 million, in the Midwest $15.7 million, in the Southeast $24.9 million and in the Southwest $4.5 million. These increases were offset by decreases in the Northeast of $33.0 million and the West of $12.4 million. During fiscal 2011, we incurred $77.5 million in impairments, the majority of which related to three properties that were transitioned from inventory held for development to held for sale, five communities in the Northeast that have had meaningful price reductions in order to maintain reasonable sales pace, and five communities in the West where we continue to see pricing pressure. In addition, we wrote-off costs in the amount of $24.3 million during fiscal 2011 related to land options that expired or that we terminated, as the communities forecasted profitability was not projected to produce adequate returns on investment commensurate with the risk. Despite these write-downs and inventory reductions due to deliveries, as well as the sale of certain inventory to a new joint venture during the first two quarters of fiscal 2011, total inventory increased $25.5 million, excluding consolidated inventory not owned, because we spent approximately $400 million on land purchases and land development during fiscal 2011. Also contributing to the increase in inventory during the period was the consolidation of a joint venture in the first quarter of fiscal 2011, whereby our partner in a land development joint venture transferred its interest in the venture to us. In the last two years, we have been able to acquire new land parcels at prices that we believe will generate reasonable returns under current homebuilding market conditions. There can be no assurances that this trend will continue in the near term. Substantially all homes under construction or completed and included in inventory at October 31, 2011 are expected to be closed during the next 12 months. Most inventory completed or under development was/is partially financed through debt and equity issuances.

Compared to the same prior period, sale of homes revenues decreased $255.0 million, or 19.2%, for the year ended October 31, 2011, decreased $195.0 million, or 12.8%, for the year ended October 31, 2010 and decreased $1,655.4 million or 52.1%, for the year ended October 31, 2009. Decreased revenues in 2011, 2010 and 2009 were primarily due to the number of home deliveries also declining 19.0%, 11.8%, and 49.3%, respectively. Average price per home also decreased to $279,873 for 2011 from $280,715 in 2010 and from $283,937 in 2009. The fluctuations in average prices are a result of the geographic and community mix of our deliveries rather than price increases or decreases in individual communities. For example, for the year ended October 31, 2011, 45.0% of our deliveries came from our Southwest segment, compared to 37.4% for the same period last year. This segment had an average selling price below the company average for both periods.

During the years ended October 31, 2011, 2010, and 2009, financial services provided an $8.1 million, $8.9 million, and $6.3 million pretax profit, respectively. In fiscal 2011, financial services revenue decreased $2.5 million to $29.5 million due to the decrease in the number of mortgage settlements and a decrease in the average loan amount. In fiscal 2010, financial services revenue decreased $3.6 million to $32.0 million due to a decrease in the number of mortgage settlements offset by a slight increase in the average loan amount. In fiscal 2009, we recorded expense of $3.2 million for abandoned lease space, which contributed to the increase in pretax profit from October 31, 2009 to October 31, 2010, as this expense did not recur in 2010. In the market areas served by our wholly owned mortgage banking subsidiaries, approximately 77%, 82%, and 82% of our noncash homebuyers obtained mortgages originated by these subsidiaries during the years ended October 31, 2011, 2010, and 2009, respectively. Servicing rights on new mortgages originated by us will be sold with the loans.

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