Hovnanian Enterprises Inc. has a market cap of $408.1 million; its shares were traded at around $5.27 with and P/S ratio of 0.3. HOV is in the portfolios of Chuck Royce of Royce& Associates, Steven Cohen of SAC Capital Advisors.
Highlight of Business Operations:We have exposure to additional impairments of our inventories, which, as of April 30, 2010, have a book value of $1.1 billion, net of $892.7 million of impairments recorded on 194 of our communities. We also have $75.5 million invested in 11,532 lots under option, including cash and letters of credit option deposits of $27.3 million as of April 30, 2010. We will record a write-off for the amounts associated with an option if we determine it is probable we will not exercise it. As of April 30, 2010, we have total investments in, and advances to, unconsolidated joint ventures of $40.3 million. Each of our joint ventures assesses its inventory and other long-lived assets for impairment and we separately assess our investment in joint ventures for recoverability, which has resulted in total reductions in our investment in joint ventures of $115.8 million from the second half of fiscal 2006, the first period in which we had impairments on our joint ventures, through April 30, 2010. We still have exposure to future write-downs of our investment in unconsolidated joint ventures if conditions deteriorate further in the markets in which our joint ventures operate.
As the market for new homes declined, we adjusted our approach to land acquisition and construction practices and shortened our land pipeline, reduced production volumes, and balanced home price and profitability with sales pace. We delayed and cancelled planned land purchases and renegotiated land prices and significantly reduced our total number of controlled lots owned and under option. Additionally, we significantly reduced our total number of speculative homes put into production. Recently, however, we have begun to see more opportunities to purchase land at prices that make economic sense in light of the current sales prices and sales paces and plan to pursue such land acquisitions. New land purchases at pricing that will generate good investment returns and drive greater operating efficiencies are needed to return to profitability. During the first half of 2010, we increased our controlled lots by 1,120 and we opened 38 new communities. During the second quarter of fiscal 2010, we purchased approximately 500 lots within 34 new communities that were identified and controlled subsequent to January 31, 2009. In addition, we put under option approximately 1,900 lots in 28 new communities during the second quarter of 2010. We have also closely evaluated and made reductions in selling, general and administrative expenses, including corporate general and administrative expenses, reducing these expenses $138.3 million from $459.9 million in fiscal 2008 to $321.6 million in fiscal 2009 due in large part to a 74.5% reduction in head count at the end of fiscal 2009 from our peak in June 2006. Given the persistence of these difficult market conditions, improving the efficiency of our selling, general and administrative expenses will continue to be a significant area of focus. For the six months ended April 30, 2010, homebuilding selling, general and administrative costs declined 35.2% to $85.4 million compared to the six months ended April 30, 2009.
In connection with the issuance of our senior secured first lien notes in the fourth quarter of fiscal 2009, we terminated our revolving credit facility and refinanced the borrowing capacity thereunder. Also in connection with the refinancing, we entered into certain stand alone cash collateralized letter of credit agreements and facilities under which there were a total of $107.5 million and $130.3 million of letters of credit outstanding as of April 30, 2010 and October 31, 2009, respectively. These agreements and facilities require us to maintain specified amounts of cash as collateral in segregated accounts to support the letters of credit issued thereunder, which will affect the amount of cash we have available for other uses. As of April 30, 2010 and October 31, 2009, the amount of cash collateral in these segregated accounts was $111.4 million and $135.2 million, respectively, which is reflected in “Restricted cash” on the Condensed Consolidated Balance Sheets.
At April 30, 2010, we had $797.2 million ($783.9 million net of discount) of outstanding senior secured notes, comprised of $0.5 million 11 1/2% Senior Secured Notes due 2013, $785.0 million 10 5/8% Senior Secured Notes due 2016 and $11.7 million 18% Senior Secured Notes due 2017. At April 30, 2010 we also had $737.9 million of outstanding senior notes ($736.1 million net of discount), comprised of $35.5 million 8% Senior Notes due 2012, $56.4 million 6 1/2% Senior Notes due 2014, $38.2 million 6 3/8% Senior Notes due 2014, $66.4 million 6 1/4% Senior Notes due 2015, $173.2 million 6 1/4% Senior Notes due 2016, $172.3 million 7 1/2% Senior Notes due 2016 and $195.9 million 8 5/8% Senior Notes due 2017. In addition, we had $120.2 million of outstanding senior subordinated notes, comprised of $66.7 million 8 7/8% Senior Subordinated Notes due 2012, and $53.5 million 7 3/4% Senior Subordinated Notes due 2013.
During the three months ended January 31, 2010, the remaining $13.6 million of our 6% Senior Subordinated Notes due 2010 matured and was paid. In addition, during the three and six months ended April 30, 2010, we repurchased in open market transactions $25.0 million principal amount of our 6 1/2% Senior Notes due 2014, $35.5 million and $45.5 million principal amount of our 6 3/8% Senior Notes due 2014, respectively, $15.9 million principal amount of our 6 1/4% Senior Notes due 2015, $0.4 million and $1.4 million principal amount of 8 7/8% Senior Subordinated Notes due 2012, respectively, and $10.8 million and $11.1 million principal amount of 7 3/4% Senior Subordinated Notes due 2013, respectively. The aggregate purchase price for these repurchases was $70.0 million and $78.7 million, respectively, plus accrued and unpaid interest. These repurchases resulted in a gain on extinguishment of debt of $17.2 million and $19.8 million for the three and six months ended April 30, 2010, respectively, net of the write-off of unamortized discounts and fees. The gains from the repurchases are included in the Condensed Consolidated Statement of Operations for the three and six months ended April 30, 2010 as “Gain on extinguishment of debt”.
Total inventory increased $44.2 million, excluding inventory not owned, during the six months ended April 30, 2010. Total inventory, excluding inventory not owned, decreased in the Northeast $10.9 million and in the Mid-Atlantic $9.0 million. These decreases were offset by increases in the Midwest $4.7 million, in the Southeast $4.8 million, in the Southwest $11.8 million, and in the West $42.6 million. During the first half of 2010, we incurred $4.5 million in write-downs primarily attributable to impairments as a result of a continued decline in sales pace, sales price and general market conditions. In addition, we wrote-off costs in the amount of $1.7 million during the six months ended April 30, 2010, related to land options that expired or that we terminated. See “Notes to Condensed Consolidated Financial Statements” - Note 5 for additional information. Despite these write-downs and inventory reductions due to deliveries, total inventory increased $44.2 million, excluding inventory not owned, because we purchased $149.4 million of land during the six months ended April 30, 2010. We have recently been able to identify new land parcels at prices that generate reasonable returns under the current homebuilding market conditions. Substantially all homes under construction or completed and included in inventory at April 30, 2010 are expected to be closed during the next 12 months. Most inventory completed or under development was/is partially financed through our line of credit and debt and equity issuances.
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