Hovnanian Enterprises Inc (HOV) Q2 2021 Earnings Call Transcript

Good morning and thank you for joining us today for Hovnanian Enterprises Fiscal 2021 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 line for questions. The company will also be webcasting a slide presentation along with the opening comments from management. The slides are available on the Investors 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.

Thank you, Liz and thank you all for participating in the call this morning to review the results for our second quarter. All statements in this conference call that are not historical facts should be considered as forward-looking statements within the meaning of 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 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 results 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, 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, 2020, and subsequent filings with the Securities and Exchange Commission. Except as otherwise required by applicable securities 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'll now turn the call over to Ara. Ara, go ahead.

Thanks, Jeff. I will review our second quarter results and then discuss the current market environment. As always, Larry Sorsby, our CFO, will follow me with more details before we conclude with a Q&A session. On slide 4, we compare our second quarter results to the guidance provided during our first quarter conference call. Our total revenues, adjusted gross margin, adjusted EBITDA, and adjusted pre-tax income all fell within the guidance range we outlined. However, SG&A exceeded our expectations. This increase in SG&A was due to $17.5 million in additional phantom stock expense, resulting from our common stock price rising from $51 at the end of the first quarter to $133 by the end of the second quarter. In 2019, for the first time in company history, phantom stock was issued for an equity grant because our stock price was low, and we wanted to avoid potential dilution effect on shareholders. Although we expected long-term price growth, we did not anticipate such a significant increase in just one quarter. Larry will elaborate on the phantom stock expense shortly. In the third column, we illustrate what our results might have looked like without this additional stock expense, indicating that SG&A would have performed better than our initial guidance. Furthermore, our results would have exceeded the upper end of the adjusted EBITDA and adjusted pre-tax income ranges. Moving on to slide 5, we present year-over-year comparisons for Q2 performance metrics. Total revenues for the second quarter rose by 31% to $703 million. In the upper right-hand section, our adjusted gross margin grew by 310 basis points year-over-year. This year, adjusted gross margin stands at 21.3%, up from 18.2% in the previous year’s second quarter. Anticipating cost increases and aiming to enhance margins, we began increasing home prices in June 2020. Throughout the first half of 2021, housing demand remained robust while labor and material costs, particularly lumber, continued to rise. Consequently, we have aggressively lifted home prices and controlled sales pace to match our starts. This approach is designed to allow us to stay ahead of future cost increases. We will discuss this further and its impact on margins soon. In the lower left-hand section, it is evident that SG&A was affected by the additional phantom stock expense. Without this expense, the SG&A ratio would have improved to 9.3%, as reflected in the lighter blue, compared to 10.4% in the previous year’s second quarter. We are experiencing normal scale leverage benefits as we grow. In the lower right-hand section, adjusted EBITDA rose by 47% from $52 million in last year’s second quarter to $76 million this year. While our EBITDA was within the guidance range, if we disregard the incremental phantom stock expense, adjusted EBITDA would have increased by 80% to $94 million, surpassing the upper boundary of our guidance range. On slide 6, our adjusted pretax income before land charges and debt-related gains or losses has improved to a profit of $31 million this year, compared to a $5 million profit last year. Ignoring the phantom stock expenses would have yielded a higher profit of $49 million this year. On slide 7, our net income for Q2 2021 was $489 million, which stands in contrast to $4 million for the same period last year. A substantial portion of this year’s increase, $469 million, was attributed to a reduction in our valuation allowance. The quarter's profit, alongside the valuation allowance reduction, resulted in total shareholders' equity rising by $489 million. On the left side of slide 8, we note that quarterly contracts rose by 19% to 1,771 homes. Contracts in the second quarter last year were negatively impacted by the early COVID shutdown, making this year’s comparisons more achievable. We recorded a 62% rise to an average of 18.3 contracts per community for this year's second quarter, compared to 11.3 for the same quarter last year. The market's strength has been broad across various product types and regions, with Phoenix, Delaware, and Dallas-Fort Worth experiencing the most significant year-over-year contract increases, each exceeding 135%. Other markets are performing well too, though in many cases, we have focused on moderating the sales pace and increasing prices. Slide 9 exhibits the number of consolidated contracts on a monthly basis from the past year. As discussed last quarter, we intentionally raised prices significantly in February to decelerate the sales pace and enhance margins. Although we maintained comparable sales in March and April through steady price adjustments, contracts are still up year-over-year due to easier comparisons. Turning to slide 10, the contracts per community over recent months demonstrate significant year-over-year increases, particularly notable for last April and March. We peaked at seven contracts per community in January but then observed the intended effects from our aggressive price increases and certain sales restrictions. In both February and March, contracts per community slowed to 6.1, and in April, they fell further to 5.5 agreements per community. Even with these lower contract rates, our annualized paces remain the highest in over a decade. Achieving six to seven contracts a month per community in today’s production environment is challenging, prompting a stronger focus on margin. As previously stated, we aim to synchronize our sales pace with our capacity to start homes, thereby minimizing the risk of construction cost increases impacting our margins. As noted in last quarter’s analyst call, we anticipated more straightforward year-over-year sales comparisons for March and April due to last year’s COVID shutdown. Conversely, we expected tougher comparisons in May and the summer months given last year’s surge in housing demand. Moreover, in recent quarters, we have been quite aggressive in raising sales prices to boost margins and slow sales to a more reasonable pace. In the recent months, we’ve significantly moderated sales and temporarily halted sales in selected communities to better align our sales pace with our home start capacity. Consequently, our May sales pace appears artificially low compared to intrinsic demand. You can observe the beginning of these challenging comparisons on slide 11. In May, due to sales restrictions and difficult comparisons to an exceptionally strong May last year with a lower community count, our contracts per community dropped by 19%, contract dollars fell by 23%, and total contracts decreased by 266 homes year-over-year. Nonetheless, we achieved our objectives, with May contracts showing the highest gross margin percentage at the point of contract for any month in over a decade. As intended, our sales pace is slowing, and the challenging comparisons will persist through the summer months. This is when the market was intensely active last year, and the homebuilding industry had not yet started to significantly control contract paces. However, similar to May, we anticipate considerably higher gross margins on our new contracts compared to last summer's contracts. The robust strength of the housing market continues to stem from solid demographic trends, a limited supply of new and existing homes, historically low mortgage rates, and a continuously improving economy. The prospects of an infrastructure bill could further enhance economic conditions. We will keep raising prices to match rising material and labor costs, ensure our sales pace aligns with our ability to start homes, and improve our margins. All indicators suggest that our financial results for 2021 will be substantially better than those of last year. I will now turn the call over to Larry Sorsby, our Chief Financial Officer.

Thanks, Ara. I'm going to start with a discussion about the $17.5 million of incremental phantom stock expense that we booked in the second quarter of fiscal 2021. In 2019, for the only time in our history, phantom stock was used in lieu of actual equity for our long-term incentive plan or LTIP grant. This was done in the best interest of shareholders to avoid dilution concerns associated with the low stock price of $14.50 at the time of the grant. We determined that granting phantom shares eliminated the significantly higher-than-normal EPS dilution that would have resulted from granting actual shares at the $14.50 stock price. When actual shares are used for an equity grant, there are no GAAP expenses related to stock price movements from one quarter to the next. However, noncash GAAP expenses for phantom stock vary depending upon changes in common stock price each quarter during the performance period which began in 2019. Cash payments for the 2019 phantom stock LTIP grant will occur beginning in fiscal 2022. Since 2019, when we granted our phantom stock LTIP, our operating performance has significantly improved. As a result, our stock price has materially increased especially after we reported our strong first quarter results and guidance for fiscal 2021 in early March. The run-up in our stock price from $51.16 to $132.59 during the second quarter resulted in a $17.5 million SG&A expense that would not have occurred had we granted our 2019 LTIP utilizing actual shares instead of phantom stock. We were not surprised that the stock price went up; we were surprised by how much it went up in a single quarter. On Slide 12, we show our total mothballed lots as of the end of the second quarter of fiscal 2021. During the second quarter of fiscal 2021, we unmothballed 864 total lots including 732 lots in a large master-planned community in Northern California, a 99-lot community in Southern California, and a 33-lot community in Virginia. That leaves us with 1514 mothballed lots in 8 communities with a book value of $4 million. 705 of those lots are in the same large master-planned community in Northern California, but remain mothballed because of the long development time of the later phases. We believe the value of these remaining mothballed lots is greater than our current book value. We will continue to monitor the remaining 1514 lots and get those communities reopened when it makes good sense to do so. We remain focused on growing our land position. On Slide 13, we added 2920 newly controlled consolidated lots during the second quarter. During that same quarter, we had 1625 deliveries in lot sales, resulting in a net increase of 1295 consolidated controlled lots. And for the 9-month period ended April 30, 2021, we added 7082 newly controlled lots, delivered 4753 homes and lots resulting in a net increase of 2329 lots. On the left-hand portion of Slide 14, we show what our community count was at the end of every quarter over the past 12 months. As you can see primarily due to selling through communities at a significantly higher than normal pace, our community count has been declining. And we ended the second quarter of April 2021 with 117 communities, including domestic unconsolidated joint ventures. As we've said on our last few calls, our community count is likely to fluctuate from quarter to quarter. Throughout the remainder of fiscal 2021, we plan to open more new communities, given no material changes in current market conditions, we expect our community count including communities from domestic unconsolidated joint ventures to grow to approximately 130 communities at the end of 2021's fiscal year. Our teams are busy trying to help us get to that goal and beyond. On the right-hand portion of this slide, we show the lot count at the end of the same four quarters. And each quarter, our lot count has significantly increased sequentially. Over this period of time, we've been steadily increasing our lot position. Keep in mind there's a lag between when we control the lots and when we can open a community. Our ability to increase our lot supply clearly indicates the progress we've made toward growing community count in future periods. Virtually, all the land and communities necessary to achieve further growth in profits during both fiscal 2021 and fiscal 2022 are already under contract. Today, our land acquisition teams are primarily focused on obtaining control of land and communities for home deliveries in fiscal 2023 and beyond. Turning now to slide 15, during the second quarter of fiscal 2021 our land and land development spend was $175 million, a 53% increase over the same quarter a year ago. This followed a similar increase of 51% in the first quarter of 2021. And before that, a 41% increase in the fourth quarter of 2020. These increases demonstrate that we are investing the money needed to grow our community count. Unfortunately, there's a lag between optioning the properties, developing the land and opening the communities for sale. However, given our increasing land controlled position over the last year and the significant increase in land and land development spend over the recent quarters, we remain confident that after this lag period, we will soon see our community count rise once again. We are continuing to find land opportunities that make sense in today's environment. While we're using current home prices and current construction costs, we have typically been underwriting with more conservative contract price assumptions. Turning to slide 16, even with that significant increase in land spend, we ended the second quarter with $353 million of liquidity, well above the high end of our liquidity targets. Some of this liquidity will be used in the third quarter of 2021 to pay down the debt that comes due in July 2022. After accounting for that, we will still have excess capital to invest in land. We are busy contracting additional land parcels across the country today. Turning to slide 17, this was another strong quarter for our financial services division driven by historically low rates and strong home demand which led to increased closing volumes, our financial services second quarter pre-tax earnings increased 119% year-over-year to $10 million. Turning to slide 18, compared to our peers, you can see that we still have one of the highest percentages of land controlled via options. We continue to use land options whenever possible in order to achieve high inventory turns, enhance our returns on capital, and to reduce risk. We are pleased to control 63% of our land through options, which is up from 60% in the same quarter a year ago. Looking at our consolidated communities in the aggregate, including the $125 million of inventory not owned, we have an inventory book value of $1.3 billion net of $162 million of impairments. Turning now to slide 19, compared to our peers, you can see that we had the second highest inventory turnover rate, for the trailing 12-month period. Our inventory turns were 29% higher than the next highest peer below us. High inventory turns are a key component of our overall strategy. Another area of discussion is related to our deferred tax assets. During the second quarter, we reduced our valuation allowance by $469 million. We reduced all of the federal valuation allowance and a portion of the state valuation allowance. As of April 30th 2021, the remaining state portion of the valuation allowance was $103 million. And our deferred tax asset net of this valuation allowance was $459 million. We've taken numerous steps to protect our deferred tax asset. Even though we will still be using GAAP taxes on our income statement, we will not have to use cash to pay federal income taxes on approximately $1.8 billion of future pre-tax earnings. This helps strengthen our balance sheet more rapidly, particularly in an environment when higher corporate taxes are in discussion. Turning now to slide 20, on this slide we show our debt maturity ladder, at the end of the second quarter. On June 2nd 2021, we set a redemption notice to call in full on July 31st 2021, the $111 million of our 10% senior secured notes due July 2022. Additionally, we still intend to further improve our balance sheet by using cash to pay off the remaining $70 million principal amount of our 10.5% senior secured notes due July 2024 in advance of their maturity. On Slide 21, we show the key metric targets we established in June 2018. In the middle column on this slide, you can see the progress we've made in achieving our key metric targets for the trailing 12 months ended April 2021. Revenue was just shy of achieving the target and gross margins of 20% was above our 19.5% target. Our SG&A ratio was slightly above target. However, if you ignore the $17.5 million of incremental phantom stock expense, our SG&A ratio would have been slightly better than the target. Lastly, even though of the incremental phantom stock expense, our adjusted EBITDA and our adjusted pre-tax profit were better than target. On the far right column, we show the further improvements we expect to report by year-end on each component of our key metric targets. As a matter of fact, we expect adjusted EBITDA and adjusted pre-tax earnings to be significantly above the key metric targets. Turning to Slide 22. I want to spend a few moments talking about the goals of deleveraging and enhancing our debt structure. Looking at the bullets on the left-hand portion of the slide, achieving higher levels of profitability has allowed us to make progress towards our deleveraging goals. Given our dramatically improved results, we believe our current debt is too expensive. Our goals for comprehensive refinancing of our debt structure include the following components: first, ensure a multiyear well-laddered debt maturity. Second, refinance our high-cost of debt with lower cost of capital that's more in line with our industry peers. Third, issue no tranche sizes that would achieve high-yield index inclusion, secondary market liquidity, and price transparency. Finally, we would want to reduce our reliance on secured debt, ultimately resulting in an unencumbered balance sheet. As we continue to post strong results, we believe we can refinance our entire debt structure with significantly improved terms. As always, we will analyze and evaluate our capital structure and explore transactions to further strengthen our balance sheet and our financial performance. On Slide 23, we show that our total backlog, including domestic unconsolidated joint ventures at the end of the second quarter increased 63% to 4,373 homes. You can also see that the dollar value of this backlog increased 80% to $2.04 billion. The strength of this backlog including solid expected gross margin sets us up nicely for strong results over the remainder of this fiscal year. Our financial guidance for both the third quarter and the full year for fiscal 2021 assumes no adverse changes in current market conditions and excludes further impact to SG&A expense from phantom stock expense related solely to stock price movements from the $132.59 stock price at the end of our fiscal 2021 second quarter. However, our guidance for the quarter and for the year include phantom stock impacts we absorbed in the second quarter. For every $4 that our stock price increases or decreases, there is approximately $1 million increase or decrease, respectively of incremental phantom stock expense. At yesterday's closing price of $136.81, that would create roughly $1 million of incremental phantom stock expense. Ironically, if the stock price falls from that level, we actually create income. On Slide 24, we provide guidance for the third quarter of fiscal 2021. We expect to report total revenues for the third quarter of fiscal 2021 between $700 million and $750 million. We also expect gross margins to be in the range of 20.5% to 21.5%, up substantially compared to the 17.5% in last year's third quarter and SG&A, as a percentage of total revenues to be between 10.5% and 11.5%, compared with 9.5% last year. Excluding land-related charges and gains or losses on extinguishment of debt, we expect adjusted EBITDA to be between $80 million and $90 million, up between 24% and 39% compared to the same quarter last year. Finally, we expect our adjusted pretax profit for the third quarter of fiscal 2021 to grow between $35 million and $45 million, compared to a $15 million profit in the same period last year. Turning to slide 25. I will discuss our increased guidance for the full year. We expect to report total revenues between $2.65 billion and $2.8 billion, up from $2.34 billion last year. We also expect gross margins to be in the range of 20.5% to 21.5%, compared to 18.4% last year and SG&A as a percentage of total revenues between 10.5% and 11.5% compared with 10.3% in the prior year. This includes the $17.5 million of incremental phantom expense discussed earlier. Excluding land-related charges and gains and losses on extinguishments of debt, we expect adjusted EBITDA to be between $310 million and $350 million, up between 32% and 49% compared to last year. Finally, we expect our adjusted pretax profit for fiscal 2021 to grow to between $150 million and $170 million, up 195% to 234% compared to $51 million in pretax earnings last year. This is a $10 million increase from our previous guidance of $140 million to $160 million. Were it not for the $17.5 million of incremental phantom stock expense in the second quarter, our guidance would have increased by $27.5 million. Given our pretax profit guidance for the second half of the year, our shareholders' equity should double from today's level by October 31, 2021. Assuming no changes in current market conditions, our expected earnings growth in fiscal 2022 from fiscal 2021 levels should also significantly further enhance shareholders' equity by the end of 2022's fiscal year. Turning now to slide 26. Here, we illustrate the growth we've seen in adjusted EBITDA. On the left-hand portion of the slide, you can see that our third quarter estimated for adjusted EBITDA is 31% more than the third quarter of 2020. And that was after a 76% growth from the year before that. You can see a similar trend on the right-hand portion of the slide, where we show adjusted EBITDA for 2019, 2020 and our expectation for 2021. In 2020, we achieved a 35% growth in adjusted EBITDA. And in 2021, we now expect to achieve an additional 41% growth in EBITDA. These increases are representative of the progress we've made in materially improving our operating results. We've taken numerous steps to achieve our improved results. On slide 27, we show some of the strategies we're utilizing to achieve long-term profitability and, more importantly, value creation for all of our stakeholders. This slide shows the growth-oriented strategies on the top of the slide, with the actions undertaken listed below the individual strategies. Beginning on the far left-hand portion of the slide, we start with grow revenues to improve scale and enhance margin profile. In order to achieve this strategy, we have focused on higher inventory turns to allow for growth. Regarding margins, we've actively managed the sales pace through home price increases and limiting the number of homes for sale in each community. Longer-term, we're focused on reducing costs further and streamlining our organization. Moving to the right, we show a risk-averse land strategy. Our preferred method of controlling lots is through the use of options, which only require minimal cash deposits. Ideally, we'd like to have less than 18 months of owned land and then control as much land as practical through option contracts. We remain extremely focused on utilizing high inventory turnover to be more efficient and to increase our returns on capital. And finally, by achieving significantly improved operating results, we generate excess cash flow, which helps significantly improve our balance sheet flexibility. The combination of our expected improved financial performance this year and the deferred tax asset valuation allowance reversal will meaningfully increase our year-end book value per share. Those increases to book value, combined with executing our debt reduction strategy this year, should significantly improve our balance sheet at year-end. Assuming no changes in current market conditions, our expected earnings growth in fiscal 2022 from fiscal 2021 levels should also significantly further enhance shareholders' equity by the end of fiscal 2022. That concludes our prepared remarks, and I'll be happy now to turn it over for our Q&A.

The company will now answer questions. To ensure everyone has a chance to ask, participants are limited to one question and a follow-up. After that, you will need to return to the queue for additional questions. Our first question comes from Alan Ratner with Zelman.

Hey, guys. Good morning. Thanks for taking my questions. So, first one I'd love to dig in on, you guys mentioned several times this notion of trying to match your sales to start pace, which I think a lot of builders in the industry are doing right now. So if we look at your absorption rate going from 7 a month a few months ago down to 4-plus here in May, what is your production pace running at currently? And at what point do you think you can maybe open up the spigot a little bit more and perhaps let that absorption rate run a bit hotter than it is today, or is 4 kind of the new normal that you're solving for at this point?

I'd say, Alan, part of that is dependent on when we can get our new communities on pace on the market. What we're being cautious, we don't want to gap out, so to speak, and sell-out too quickly. As we get more storefronts open, and as you saw our option position is growing a lot, our land spend positions are growing a lot. We've just got to get those communities open. As we get them open, then we can feel a little more comfortable letting the absorption pace grow more rapidly and go to a higher pace than the 4.5.

Got it. Okay. That's helpful. Second question, just in terms of the margin on homes you sold in May, you mentioned it's the highest level in a decade. I was a bit surprised, just looking at your margin guidance for the back half of the year. It doesn't really imply much improvement from the second quarter level. So can you talk a little bit about what the absolute margins are on homes you're selling today? And presumably, when that would begin to filter through to the P&L?

Well, yes, first, the homes that we're selling today are not really going to be delivering this fiscal year. Most of what we're delivering this fiscal year has already been in backlog. You'll begin to see these higher margins from our current contracts in next fiscal year, beginning with our first quarter. Obviously, we haven't started all of those just at this moment. So we are still subject to potential cost increases, but the margins in our current contracts are substantially higher. So we feel pretty confident we're going to generate some pretty good margins as we deliver those homes.

I appreciate that, Ara. I guess, what I was thinking, you didn't just start raising prices in May, you've been raising prices for several months. And I think you've mentioned starting January, February, is where you really started to get aggressive there. So presumably, some of those homes would deliver before the end of the year. So that's where I was referring to, being a little bit surprised.

Some of them will. We're obviously being fairly cautious on margin guidance, given that it's a very challenging environment with cost increases in general. What's happened with lumber, up and down and other material costs and labor costs. So we're trying to be on the conservative side on our guidance.

Understood. Okay. Thanks a lot. Appreciate it. Good luck.

Thanks.

Our next question comes from Alex Barrón with Housing Research Center.

Yes. Thanks, guys. I wanted to ask about the deferred tax asset. What drove the fact that you didn't get the whole thing on the state side? And is that expected to get done later in the year, or how does that work?

When you evaluate the valuation allowance for state you have to look to each state individually and states will have different rules in terms of how long you can carry forward net operating losses. We also have states that since those NOLs were generated we're no longer operating in, or we've significantly reduced our operations. And as an example, we're winding our business down in Chicago. Currently, we're not operating in Pennsylvania. So we've got markets that we've left, and therefore, unlikely to at least at the moment to forecast that we would use those NOLs in time before they would expire. It is something we would continue to evaluate. But I wouldn't anticipate that valuation allowance that currently on our books at $103 million to change dramatically in the coming – certainly the rest of this year, and maybe not much going forward. It will depend on changes in our operations in those states where we currently can't forecast using those NOLs.

Got it. And for modeling purposes, what kind of tax rate do you suggest using going forward?

I would say high – at the moment high 28%, 29% something in that range for federal and state.

Okay. Great. And then on the phantom stock –

Sorry. Just to add to something Larry said, while that will be our tax expense, we won't be paying taxes especially the federal taxes, because of our deferred tax asset I just want to make sure that was clear.

Correct, yes. And then on the phantom stock issue is that – it seems like it's going to be an ongoing issue based on your stock price, but is there a certain amount of stock that was issued and that's it, or is there going to be more issuances coming down the road?

No. It was a one-time event. And just keep in mind, it does go up and down. At – today, our stock price is down as all homebuilders are down and it would actually result in a lowering of expense and an increase of profit of about $2.5 million at the moment. So it goes in both directions.

Got it. And if I could ask one last one. I think you said, your contracts for May were 413, because you're raising prices and maximizing margins. Is that roughly you think a run rate for the remainder of the year, or is this likely to go up from here based on other factors?

Yeah. Go ahead, Brad.

Well, I think as Ara mentioned during the prepared remarks and even previously on one of the responses, as our additional communities opened later this year that we've talked about we should obviously get additional contracts and then be at a faster pace than we're currently running in May. And we also mentioned right now, we're intentionally restricting sales, because of our ability to produce and get caught up on our existing backlog. So I think as that frees up, and we get those fees open, you might see us increase sales pace even on the existing communities at that point.

Okay. Great. Thanks. I’ll get back in the queue.

Okay.

Our next question comes from Jordan Hymowitz with Philadelphia Financial.

Thanks, guys. A couple of questions on the debt refinancing and pay down, what is the earliest, first of all, you could pay down the 2024s?

Well, it's dependent upon us achieving certain secured debt leverage ratio results. And so we are not there yet, and we are monitoring that each quarter end, but we're not projecting that at the moment. But if you look at the indentures, you probably could get a pretty good estimate all that yourself.

But it looks like around the September, October time period? And I guess would your goal be to refinance those as soon as possible?

I don't think we've made any decisions on precisely when we're going to do that. We certainly intend to do it in advance of maturity and hopefully well in advance of maturity, but I don't think we put a fine point on precisely when.

And in addition, at the current moment, our plan is not to refinance, but rather just have a reduction in the amount of our debt.

You said it all.

Perfect. Once that happens, I assume the ratings agencies would consider upgrading your company's overall rating?

You would assume that and we hope that that is true, and we intend to meet with the rating agencies in the not-too-distant future just to further update them on our improved performance.

Okay. Doesn't the adjusted EBITDA include the $17 million of SG&A expense?

Because it's not taxes or interest depreciation or amortization. I mean, is it SG&A expense. I know you're trying to do it as a non-cash item. So you theoretically can do that on your own, but from a definition of EBITDA, it's not any of those items.

But adjusted EBITDA by nature is a non-cash definition and it's a non-cash item.

You feel free to add it back.

Okay. And final question. what do you think current coupons are if you were able to refinance the 2026s?

That's a difficult question to answer given the lack of liquidity in our current bonds, you really just don't trade. But if you look at what similarly rated homebuilders to us are trading at yield-wise, it's dramatically lower than our current coupon. But the fact that that is occurring versus our ability to actually refinance our whole structure, we've got some work to do to reeducate the high-yield market on our improved performance and I'm very optimistic as we do that that the coupons that we can refinance that are materially lower and much closer to what our similar situated peers have.

And what are your similarly situated peers have for those of us that are less familiar with the debt markets?

Yes. They're less than 6%.

Our next question comes from Alex Barrón with Housing Research Center.

Yes. Thanks. I was wondering if you could talk about build times. Have those been extended to various supply chain disruptions? And if so by how much roughly?

They have been extended partly due to supply chain disruptions, partly due to pressures on labor. Many builders are experiencing what we're experiencing, most builders with dramatically improved sales, which means a lot of strain on labor capacity. I'd say, depending on the geography in the moment, we've seen delays of 30 days to 60 days in many locations and product types. And we factored those delays into our guidance.

Got it. In relation to your specification strategy, considering the increase in costs and delays, how has that changed, if at all, regarding the number of specifications you are starting compared to the stage in the construction cycle at which you are selling the homes?

Yeah. I know the strategy varies quite a bit by builder. Some builders are almost 100% spec. Some builders are still almost 100%, build to order. We're somewhere in between. At the moment, frankly, sales have been so robust that all of our capabilities are going into starting the sold homes we have, which leaves a little less capacity for starting specs, just extremely active right now. So I'd say, in general, we're starting fewer specs than we did a year or two ago.

Okay. Thanks a lot. And best of luck.

Okay. Thank you.

I'm showing no further questions in queue. I'd like to turn the call back to Ara Hovnanian for closing remarks.

Great. Well, thank you very much. We're pleased with our results overall. And we're excited about, what we're going to be reporting in future quarters. So we look forward to sharing some good news in upcoming quarters. Thank you.

This concludes our conference call for today. Thank you all for participating. And have a nice day. All parties may now disconnect.