Hovnanian Enterprises, Inc. Review of Financial Results Fourth Quarter and Fiscal Year 2009
2 Note: All statements in this Presentation that are not historical facts should be considered as "forwardlooking statements" within the meaning 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 risks, uncertainties and other factors include, but are not limited to, (1) changes in general and local economic and industry and business conditions, (2) adverse weather conditions and natural disasters, (3) changes in market conditions and seasonality of the Company s business, (4) changes in home prices and sales activity in the markets where the Company builds homes, (5) government regulation, including regulations concerning development of land, the home building, sales and customer financing processes, and the environment, (6) fluctuations in interest rates and the availability of mortgage financing, (7) shortages in, and price fluctuations of, raw materials and labor, (8) the availability and cost of suitable land and improved lots, (9) levels of competition, (10) availability of financing to the Company, (11) utility shortages and outages or rate fluctuations, (12) levels of indebtedness and restrictions on the Company's operations and activities imposed by the agreements governing the Company's outstanding indebtedness, (13) operations through joint ventures with third parties, (14) product liability litigation and warranty claims, (15) successful identification and integration of acquisitions, (16) significant influence of the Company s controlling stockholders, (17) geopolitical risks, terrorist acts and other acts of war and (18) other factors described in detail in the Company's Form 10- K for the year ended October 31, 2008 and in the Company s Form 10-Q for the quarter ended July 31, 2009. All forward-looking statements involving earnings guidance or other financial or operating projections or estimates contained herein were provided on December 17, 2009. The risk that actual results will differ materially from expectations expressed in this presentation will increase with the passage of time. Where we have used non-gaap financial measures, reconciliations to the most comparable GAAP measure are provided, along with a disclosure on the usefulness of the GAAP measure, in our most recent earnings release.
Full Year Results ($ in millions) 2009 2008 % Change 1) Net Contracts 1 5,227 6,546-20% 2) Communities 1 179 284-37% 3) Net Contracts per Active Selling Community 1,2 23.3 17.7 32% 5) Deliveries 1 5,362 10,577-49% 6) Backlog 1 1,772 1,907-7% 7) Total Revenues 1 $1,596 $3,308-52% 8) Pre-tax Loss Prior to Land-related Charges, Intangible Impairments and Gain on Extinguishment of Debt ($379) ($391) -3% 9) Land Related Charges and Intangible Impairments 3 ($703) ($777) -10% 10) Gain on Extinguishment of Debt $410 - n/a 11) Net Loss ($717) ($1,125) -36% 12) Homebuilding Cash 4 $555 $838-34% (1)Excludes unconsolidated joint ventures. (2) Calculated based on a five quarter average of active selling communities, excluding unconsolidated joint ventures. (3)Includes inventory impairment loss and lot option write-offs, goodwill and definite life intangible impairments and unconsolidated joint venture intangible and land-related charges. (4) 2009 cash includes $135 million of restricted cash required to collateralize letters of credit. 3
Returning to Profitability 4 Improvements in Sales Pace Reloading on Land Position Improving Margins
Monthly Net Contracts Per Active Selling Community 5 0.5 0.8 1.1 0.9 1.1 1.4 1.3 1.5 1.5 1.4 2.0 2.2 2.0 2.5 1.8 2.4 2.3 1.5 2.2 1.6 1.4 2.0 2.4 2.6 0.8 1.1 1.6 2.0 3.0 2.0 1.0 0.0 Oct-07 Oct-08 Nov-07 Nov-08 Dec-07 Dec-08 Jan-08 Jan-09 Feb-08 Feb-09 Mar-08 Mar-09 Apr-08 Apr-09 May-08 May-09 Jun-08 Jun-09 Jul-08 Jul-09 Aug-08 Aug-09 Sep-08 Sep-09 Oct-08 Oct-09 Nov-08 Nov-09 Oct-08 Nov-08 Dec-08 Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Monthly Net Contracts 231 284 304 373 506 556 524 539 471 432 492 381 Excludes unconsolidated joint ventures. Oct-09 365 Nov-09 294
Tax Credit Update $8,000 first time buyer tax credit extended Repeat buyers now eligible for $6,500 tax credit Must have resided in current residence at least five of last eight years Buyers must have binding contracts by April 30, 2010 New home must close by June 30, 2010 Income limits increased Single from $75,000 to $125,000 Joint from $150,000 to $225,000 6
Impact of First Time Homebuyers Tax Credit % of applications taken by our mortgage company that qualified for tax credit. No Tax Credit Was Available 29% 32% 37% 39% Q1 09 Q2 09 Q3 09 Q4 09 7
9.0 9.6 7.1 7.4 7.7 7.3 7.3 5.9 5.9 5.7 6.5 3.7 3.9 4.5 4.3 Calculated based on quarter end active selling community count, excluding unconsolidated joint ventures. 8 6.9 Q1 2006 Q1 2007 Q1 2008 Q1 2009 Q2 2006 Q2 2007 Q2 2008 Q2 2009 Q3 2006 Q3 2007 Q3 2008 Q3 2009 Q4 2006 Q4 2007 Q4 2008 Q4 2009 Quarterly Net Contracts Per Active Selling Community
Annual Net Contracts Per Active Selling Community 48.1 47.2 42.7 39.0 48.2 52.3 56.6 53.7 38.7 34.2 25.2 17.7 23.3 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 9 Calculated based on a five quarter average of active selling communities, excluding unconsolidated joint ventures.
Improvements in Sales Pace Reloading on Land Position Returning to Profitability Improving Margins 10
Actively Reloading Our Land Position New Land Deals During the Third and Fourth Quarters # of Lots On a wholly owned basis Rolling lot option contracts 859 Small bulk purchases 1,145 Joint Ventures have purchased 1,977 Total 3,981 11
Improvements in Sales Pace Reloading on Land Position Returning to Profitability Improving Margins 12
20.7% 20.6% 22.0% 25.5% 25.5% 13 26.4% 23.1% 15.1% 6.7% 9.2% 5.7% 8.3% 9.1% 13.2% FY 00 FY01 FY 02 FY 03 FY 04 FY 05 FY 06 FY 07 FY 08 FY 09 Q1 09 Q2 09 Q3 09 Q4 09 Gross Margin Excludes interest related to homes sold.
Staffing Levels 6,870 6,239 4,318 2,816 1,750 Jun-06 Oct-06 Oct-07 Oct-08 Oct-09 * 75% reduction from peak * 38% reduction from end of fiscal 2008 14 Full-time associates only.
Total SG&A as a Percentage of Total Revenues 27.3% 12.2% 10.6% 9.7% 10.0% 9.5% 10.0% 11.2% 13.0% 13.9% 20.1% 19.9% 18.3% 15.9% FY 00 FY01 FY 02 FY 03 FY 04 FY 05 FY 06 FY 07 FY 08 FY 09 Q1 09 Q2 09 Q3 09 Q4 09 Excludes interest related to homes sold. 15
Active Selling Communities 500 400 300 200 100 437 449 431 404 379 354 284 245 215 198 179 0 Apr. 07 Jul. 07 Oct. 07 Jan. 08 Apr. 08 Jul. 08 Oct. 08 Jan. 09 Apr. 09 Jul. 09 Oct. 09 Excluding unconsolidated joint ventures. Active selling communities are open for sale communities with 10 or more home sites available. 16
Segment Land Positions October 31, 2009 # Lots Years Supply Segment Owned Optioned Total TTM Deliveries Owned Total Lots Investment in Land (finished lots and lots under development) ($ in millions) Northeast 3,368 3,381 6,749 823 4.1 8.2 $322 Mid-Atlantic 2,644 1,382 4,026 788 3.4 5.1 $77 Midwest 415 2,556 2,971 520 0.8 5.7 $4 Southeast 1,290 128 1,418 489 2.6 2.9 $21 Southwest 2,304 2,955 5,259 1,867 1.2 2.8 $59 West 6,456 941 7,397 875 7.4 8.5 $77 Total 16,477 11,343 27,820 5,362 3.1 5.2 $560 17
10.0 7.5 5.0 9.0 6.6 6.2 5.8 2.5 5.4 4.2 3.4 3.3 3.1 0.0 18 3.1 2.2 1.9 0.0 Toll (Oct Q4) Pulte (Sep Q3) Lennar (Aug Q3) Beazer (Sep Q4) DR Horton (Sep Q4) Standard Pac (Sep Q3 M/I Homes (Sep Q3) KB Home (Aug Q3) Ryland (Sep Q3) Hovnanian (Oct Q4) MDC (Sep Q3) Meritage (Sep Q3) NVR (Sep Q3) Lots Owned Years Supply *Years supply based on LTM deliveries Source: Company SEC filings and press releases as of 12/16/09.
Owned Lots % Development Costs Spent 43% 44% 13% >80% developed 30% - 80% developed <30% developed 19
Land Related Charges by Segment Fourth Quarter 2009 ($ in millions) Walk-Aways Impairments Total Northeast (NJ, NY, PA) Midatlantic (DE, MD, VA, WV) Midwest (IL, MN, OH) Southeast (FL, GA, NC, SC) Southwest (AZ, TX) West (CA) Total $4.4 $62.8 $67.2 $2.5 $7.7 $10.2 $0.0 $1.1 $1.1 $4.4 $12.2 $16.6 $4.0 $4.4 $8.4 $0.0 $34.5 $34.5 $15.3 $122.7 $138.0 20
Mothballed Lots As of October 31, 2009 # of Lots Northeast (NJ, NY, PA) 1,497 Midatlantic (DE, MD, VA, WV) 409 Midwest (IL, MN, OH) 102 Southeast (FL, GA, NC, SC) 560 Southwest (AZ, TX) 309 West (CA) 4,749 Total 7,626 21
Inventory Breakdown Sold and Unsold homes Land (finished lots and lots under development) $ in Millions Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 $1,848 $1,651 $1,609 $1,421 $1,645 $1,269 $1,348 $1,128 $1,293 $944 $1,134 $727 $1,020 $643 $776 $500 $686 $468 $559 $394 Excluding Inventory Not Owned, on-your-lot construction, assets outside the US and option deposits and pre-development costs. 22
Started Unsold Homes Reduced Started Unsold Homes by 2,633 homes, or 80%, since peak at July 31, 2006 3,292 2,942 2,581 2,659 2,792 2,390 1,898 1,503 1,365 1,275 1,142 892 793 659 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Excluding unconsolidated joint ventures and models. 23
Unsold Homes per Community 659 started unsold homes at 10/31/09, excluding models Approximately 1.6 months supply at fourth quarter sales pace Compared to the national average of 5.8 months supply (based on started and completed homes) Started Unsold Homes Models 9.0 6.0 3.0 0.0 Jan-98 Apr-98 Jul-98 Oct-98 Jan-99 Apr-99 Jul-99 Oct-99 Jan-00 Apr-00 Jul-00 Oct-00 Jan-01 Apr-01 Jul-01 Oct-01 Jan-02 Apr-02 Jul-02 Oct-02 Jan-03 Apr-03 Jul-03 Oct-03 Jan-04 Apr-04 Jul-04 Oct-04 Jan-05 Apr-05 Jul-05 Oct-05 Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 # Homes / Community 24
Total Stockholders Equity $ in millions Actual Adjusted $638 ($350) 10/31/2009 10/31/2009* *Total Stockholders Deficit of $(350) million with $988 million valuation allowance added back equals an adjusted Total Stockholders Equity of $638 million. 25
Credit Quality of Homebuyers Fiscal Year 2009: Average LTV: 86% Average CLTV: 86% ARMs: 0.9% FICO Score: 733 Capture Rate: 82% Fiscal Year 2008: Average LTV: 85% Average CLTV: 85% ARMs: 4% FICO Score: 723 Capture Rate: 75% *Loans originated by our wholly-owned mortgage banking subsidiary. 26
Hovnanian Mortgage Breakdown* Fiscal 2009 All Jumbo Loans, 1.4% Prime (Full Doc: Conforming), 48.8% FHA/VA, 45.9% Construction to Permanent, 0.2% USDA, 2.5% Broker, 1.1% Fiscal 2008 All Jumbo Loans, 2.5% Prime (Full Doc: Conforming), 50.0% FHA/VA, 35.5% *Loans originated by our wholly-owned mortgage banking subsidiary. Note: During 2009, there were no Alt-A or Sub-prime loans. 27 Sub-prime, 0.3% Alt-A, 7.7% Broker, 1.8% Construction to Permanent, 2.2%
Joint Ventures ($ in Millions) As of October 31, 2007 2008 2009 Total Assets $840.5 $622.7 $415.4 Notes Payable $339.2 $320.2 $233.6 Total Equity $410.8 $242.9 $145.4 Debt to Capitalization Ratio 45% 57% 62% Guarantees, if any, are limited only to completion of development, environmental indemnification and standard indemnification for fraud and misrepresentation including voluntary bankruptcy. 28
Improving Debt Maturity Schedule as of July 31, 2009 Senior Sub. Notes Senior Notes Senior Secured Notes $600 11.500% $11 6.000% $93 7.750% $69 8.875% $43 8.000% $144 6.500% $114 6.375% $172 7.500% $129 6.250% $173 6.250% $196 8.625% $29 18.000% '09 '10 '11 '12 '13 '14 '15 '16 '17 29 Reduced by $226 million in Fiscal 2009 Reduced by $513 million in Fiscal 2009
Recent Transactions Overview Issued $785 million of Senior Secured 1 st Lien Notes in October 2009 The proceeds of the 1 st Lien Notes were used to fund previously announced tender offers for all of the existing secured debt (11 1/2% 2 nd Lien Notes 18% 3 rd Lien Notes) and certain existing senior unsecured notes The primary benefits of the 1 st Lien Notes offering and tender offers were: Reduced our 2013 debt maturities by $599.5 million Extended our weighted average debt maturity profile Captured discount on repurchased Unsecured Notes $52.9 million of face value of debt was repurchased in the open market for approximately $33.9 million of cash 30
Well Structured Debt Maturity Profile as of October 31, 2009 Senior Sub. Notes Senior Unsecured Notes Senior Secured Notes ($ in millions) $785 10.625% $173 6.250% $172 7.500% $196 8.625% $14 6.000% $68 8.875% $36 8.000% $64 7.750% $0.5 11.500% $84 $81 6.375% $82 6.500% 6.250% $12 18.000% '09 '10 '11 '12 '13 '14 '15 '16 '17 31
Homebuilding Cash ($ in millions) $838 $843 $779 $677 $546 $555 $12 $73 $120 Oct. 07 Jan. 08 Apr. 08 Jul. 08 Oct. 08 Jan. 09 Apr-09 Jul-09 Oct-09 32 Due to recent change in tax legislation, we expect $275 million to $295 million in a federal tax refund during our second quarter of fiscal 2010 *October 2009 cash includes $135 million of restricted cash required to collateralize letters of credit.
Consolidation Will Likely Continue as Weaker Builders Fail Market Share of Top 10 Homebuilders 30% 20% 23% 10% 19% 9% 0% (New Homes as a % of New Home Sales) 1996 2002 2008 Source: Builder Magazine 33 Imploded Builders TM Since late 2006 84 major builders have imploded (plus 53 additional tiny implosions) CP Morgan Homes Choice Homes Fulton Homes Jim Walter Homes John Laing Homes Kimball Hill Levitt and Sons Mercedes Homes Neumann Homes Pasquinelli Homes Technical Olympic USA WCI Communities Source: www.builder-implode.com
34