Hovnanian Enterprises, Inc. (HOV) Q2 2026 Earnings Report, Transcript and Summary

Good morning, and thank you for joining us today for Hovnanian Enterprises Fiscal 26 Second Quarter Earnings Conference Call. An archive of the webcast will be available after 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 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 Jeffrey O'Keefe, Vice President, Investor Relations. Jeffrey, please go ahead.

Thank you, Didi, and thank you all for participating in this morning's call 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 the Safe Harbor provisions of the Private Securities Litigation Reform Act of 2000. 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 financial results for future financial periods. Although we believe that 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 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 10/31/2025 and subsequent filings with the Securities and Exchange Commission. Except as otherwise required by applicable security 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 reasons. Joining me today are Ara K. Hovnanian, Chairman and CEO; Brad O'Connor, CFO; David Mitrisin, Vice president corporate Controller; Paul Eberly, Vice President, Finance and treasurer. I will now turn the call over to Ara.

Thanks, Jeffrey. Before we begin, let's take a moment to remember Ed Kangus, who passed this week, as our longest serving independent director, chair of our audit committee, and lead independent director, Ed brought valued judgment, integrity, and steady guidance to our board and our management team. His leadership and his dedication to Hovnanian's spanned many years as he joined our board shortly after retiring as chairman of Deloitte. Beyond his many professional contributions, he was also a trusted friend who will be deeply missed by everyone who knew him. The board of directors and everyone at the company extends heartfelt condolences for his family. I will also apologize in advance if my voice sounds raspy. I am on the tail end of a nasty virus that hopefully will be gone soon. Moving on to our results for the quarter. I will begin with a quick overview of our second quarter results and the progress we are making against our strategy in today's housing environment. Brad will then follow me with more details on our financial performance. Capital position, and outlook before we open the floor for questions. Turning to slide 5, this slide highlights our second quarter performance relative to the guidance we provided at the start of the period. Despite a continued choppy demand environment, we delivered solid execution coming in at or above nearly all of our targeted metrics including a meaningful outperformance in our adjusted gross margin. Starting on the top line, we generated total revenues of $668 million close to the midpoint of our projected range. Notably, our adjusted gross margin was 14.3% for the quarter exceeding the upper end of our forecast and improving sequentially from 13.4% in the first quarter which we believe marked the trough. We projected a trough in the first quarter with a rebound beginning in the second quarter and that scenario has come to fruition. Our SG&A came in at 12.6% right at the lower end and thus better end of what we expected. Our unconsolidated joint ventures contribute a $1 million loss this quarter modestly below our expectations This reflects start up costs ahead of our first deliveries in several joint venture communities, which is typical in the early stages of these projects. For the quarter, our adjusted EBITDA reached $41 million coming in above our projected range. And our adjusted pretax income totaled $9 million landing at the top end of our forecasted range. Stepping back the results this quarter reflect the core of our current approach. Supporting affordability with targeted mortgage rate buy downs to maintain sales pace while we work through older lower margin lots and quick move in inventory. At the same time, we are transitioning toward newer communities where today's incentive environment is already built into the land underwriting which we believe supports a path to better margins and returns over time. On slide 6, you will see this year's second quarter results along last year's second quarter. These comparisons are more challenging given the lower delivery volume slower housing market, and higher incentives in the current market. But it also helps illustrate the progress we are making as the business transitions to a better margin profile. Total revenues declined 3% year over year primarily because we delivered 12% fewer homes amid a more competitive selling environment. A land sale completed during the second quarter partially offset the impact of lower deliveries. Adjusted gross margin was lower than a year ago largely due to the higher incentives used to support affordability and sustain sales pace. Importantly, these incentives are deliberate target levers in our current strategy And, again, as we efficiently work through older lower margin lots, and quick move in inventory. Despite the year over year decline, gross margin improved sequentially in the second quarter. As I mentioned earlier, we believe the first quarter represented a trough. Looking ahead, we expect margins to benefit as we continue to open and deliver from newer communities where today's incentive environment was already incorporated in land underwriting. Assuming the market does not require meaningfully higher and incentives, we believe this mix shift supports a continued gradual improvement trend. During the second quarter, incentives represented 11.9% of our average sales price. With the majority tied to mortgage rate buy downs. Compared to the first quarter of 2026, this represented a 70 basis point decline and marks the first time in nearly 2 years that incentive levels have decreased sequentially. We will show more detail on the incentive trends in a few slides. Offsetting the year over year incentives, our construction costs decreased 2% year over year in the second quarter. Additionally, cycle times for single family homes improved by 6 days to 138 calendar days versus the same quarter last year. SG&A increased modestly year over year largely reflecting lower revenue. Even so, profitability for the quarter came in at the upper end of our guidance range. We continue to prioritize disciplined inventory management and a steady sales pace positioning ourselves to capitalize on attractive land opportunities that we are finding in the marketplace. I will repeat myself again, but we believe these new land can help drive stronger margins and improve returns given that we are underwriting with heavy incentives today. Looking at the sales environment in slide 7, we had a slight year over year increase of 38 contracts. In a home selling environment that was impacted by decreasing consumer confidence. Without the incentives we are offering, we believe that our contracts would have decreased dramatically compared to year ago levels. Due to ongoing market challenges and low consumer confidence. If you look at slide 8, you will notice that the monthly community traffic through November and April mostly trended up with 4 of the 6 months showing strong year over year gains. While the last 2 months showed some softening among increased macro uncertainty related to the Iran war April's rate of decline moderated versus March which we view as a constructive signal. Our take away from this chart is that underlying demand from consumers remains present And as uncertainty eases, we believe the demand can translate to improved sales activity. As shown on slide 9, contracts over the past 12 months have fluctuated month to month reflecting a volatile housing market and shifts in consumer confidence. February's gain was the strongest year over year increase on the slide, followed by an 8% year over year decline in March impacted by the start of the Iran war and then a 3% increase in April. As of yesterday, our month to date contracts in May were up 12% versus the prior year, which would represent an increased trend if it holds through the end of the month. On slide 10, despite the impact of the war, you can see that second quarter contracts per community increased ever so slightly compared to last year. This year's 11.3 contracts per community was close to the average second quarter absorption pace since 97. On slide 11, we provide a closer look at monthly contracts per community comparing each month in the second quarter to the same month last year For February, the first month of the quarter, the sales pace was significantly higher than the same month last year. But the March sales pace was worse than a year ago. And then April was flat year over year. Summing up the slide in 1 word, the environment is choppy. If you refer to slide 12, we present contracts per community as if our quarter ended on March 31, which allows for direct comparison with all of our peers that report contracts per community on a calendar quarter basis which is most of them. Our 11.2 contracts per community sales pace ranks as the second highest among publicly traded homebuilders on this slide. As illustrated on slide 13, our contracts per community increased 4% year over year. We are 1 of only 2 builders on this chart with year over year increases for this metric. Again, our performance for these comparisons was based on an adjusted quarter ending in March for us, which allows us to have a direct comparison to our peers. Takeaway from these 2 slides is clear, Our focus on sales pace over price is delivering above average sales results and helping us work through older, less profitable communities more quickly. If you turn to slide 14, which tracks incentives, and if you look to the blue bar on the right, you can see what I mentioned earlier that incentives have finally begun to decline after 3 years of increases. The most dramatic jump happened at the start of 2023 when incentives climbed from 3.9% in the fourth quarter of 22 to 7.4% in the first quarter of 23. Incentives have steadily increased over the past 3 years. While these higher incentives have put short term pressure on our margins, They have been essential for maintaining a steady sales pace and allowing us to move our inventory. Even though we saw incentives decrease in the second quarter from the first quarter, it is still up 140 basis points compared to a year ago, and higher by 890 basis points versus the full year in 2022 which is the last full year of normal incentives before mortgage rates spike and it began to affect our margins and our deliveries. To make homeownership more accessible for homebuyers, and again, moving through our inventory We provided a variety of quick move in homes across our communities This gives buyers an opportunity to benefit from the incentives, lock their mortgage rate, and purchase a home faster and at a more affordable monthly cost. it is important to note that our recent land acquisitions, again, are underwritten to include these incentives while still meeting our return targets. As our new communities come online, again, I will keep repeating this, we do expect to see stronger margins going forward. On Slide 15, you will see that at the end of the second quarter, we had 5.8 quick move ins. Per community. This pretty much matches the previous quarter and highlights our progress. In streamlining our inventory, excuse me. excuse me. By closely coordinating starts with our sales pace, we have reduced our QMI count and kept inventory levels balanced. QMIs are homes that are under construction from the moment they begin or have been completed but have not yet been sold. Looking at slide 16, our number of QMIs have dropped from 1.16 thousand at the January 2025 to 731 at the April 2026. A 37% reduction in just over a year. In the second quarter, QMIs accounted for 68% of total sales, While this is down from the previous high of 79%, it is significantly higher than our historical average of about 40%. Meanwhile, sales of to-be-built homes those constructed based on customers' orders rose from 21% to 32% If these patterns hold we expect to see more to-be-built deliveries in the second half of 26 and into fiscal 27. As is typical, to-be-built margins in the second quarter were higher than our QMI margin. Having more to-be-built deliveries going forward will be beneficial to our gross margin and our overall profitability. With our current inventory of 731 quick move in homes were well positioned to satisfy existing home buyer demand. We will continue to adjust our starts as needed making sure we maintain the right balance. Enough QMIs to meet demand without overshooting. This strategy allows us to sign contracts and close on homes more quickly within the same quarter leading to fewer homes left in backlog and a higher conversion rate from backlog to deliveries. In the second quarter of 26, 41% of the homes we delivered were both sold and closed in the same quarter. that is the highest percentage we have recorded since we began tracking this metric in 2023. While this makes it a bit harder to predict next quarter results, it led to a backlog conversion rate of 85% much higher than our historical average of 61%. for the second quarter since 2098. We continue to closely manage our QMIs for each quarter making sure that the rate at which we start homes matches the rate at which we sell them. We try to sell the QMIs before they are finished. Over the past year, our finished QMIs decreased 55% from 304 at the end of last year's second quarter to 137 finished QMIs at the end of the second quarter of 26. If you look at slide 17, you will see that despite higher mortgage rates, and slower sales pace nationwide, we managed to increase prices, net prices, in 44% of our communities during the second quarter. This quarter, we raised prices or decreased incentives in a larger percentage of our communities than we have over the last 2 years. As the number of communities with price increases has increased, so is the geographic dispersion of those communities. To wrap up, we are actively managing our inventory to speed up sales, of quick move in homes, steadily clearing our lower margin land, and keeping our sales pace consistent. At the same time, we are positioning ourselves on new land to capitalize on new land opportunities that promise better margins and higher returns. I will now turn it over to Brad O'Connor, with hopefully a less raspy voice than mine, our chief financial officer. Take it away, Brad.

Thank you, Ara. Turning to Slide 18. We ended the second quarter with $442 million in liquidity. Well above our target range even after spending $232 million on land and land development and $10 million on stock repurchases. This is the third quarter in a row that our liquidity was above $400 million reflecting our disciplined approach to capital and land management. Turning to Slide 19. As of 04/30/2026, our maturity ladder reflects the refinancing we completed last fall. Today, except for our revolving credit facility, all outstanding debt is unsecured. This provides greater financial flexibility, further reduces risk, and supports our long term plans. On slide 20, we highlight the progress we have made over the past few years in increasing equity and reducing debt. Over that time, equity has grown by $13 billion and debt has been reduced by $749 million Net debt to capital is now 43.1%. A substantial improvement from 146.2% at the start of fiscal 2020. While we still have work to do, we remain on track for our 30% net debt-to-capital target. With $222 million in deferred tax assets, we do not expect to pay federal income taxes on approximately $700 million of future pre tax earnings which supports cash flow and capital flexibility. Turning to slide 21. This quarter, we had 148 communities open for sale unchanged from last year. While the total count is steady, there is been meaningful activity over the past year as we opened 75 new communities and closed 75 others. The flat count reflects the balance of those, not a lack of portfolio refresh. Looking forward, our newer communities are positioned to outperform older ones and we believe they will increasingly support improved margins and returns as they become a larger part of our delivery mix. Slide 22 details our land position. We ended the second quarter with 33.6 thousand domestically controlled lots, equivalent to a 6.5-year supply. Including joint ventures, we now control 36.6 thousand lots. This excludes lots in our Saudi operation. Our total domestic lot count declined 21% year over year. Reflecting our intentional approach to land and our willingness to step away from opportunities that do not meet our underwriting standards. Our inventory of owned lots has also trended down consistent with our continued shift toward a more land light model. Slide 23 shows the age of our lot position both owned and optioned. Broken down by the year each lot was controlled. The number in each bar represents the total lots controlled in that year. The number below each bar indicates the percentage of incentives used on homes delivered during that year. This slide illustrates that by the second quarter of 26, slightly more than 22 thousand or 66% of our owned and optioned lots were initially controlled after fiscal 23. When we began underwriting land acquisitions assuming a meaningfully higher incentive environment. In the second quarter, 45% of our deliveries came from lots acquired in 2023 or earlier, which creates margin pressure because those lots were purchased assuming materially lower incentives but less so than we would experienced in previous quarters when more than 50% of our deliveries were from similarly aged plots. We are making a measured transition from older, lower margin lots to newer land that better fits today's incentive landscape. To help navigate current market conditions, we are also working constructively with certain land sellers where we have option agreements with the goal of appropriately sharing the pain and aligning on outcomes that work for both parties. Encouragingly, even with today's incentive environment, we continue to see attractive opportunities that meet our margin and IRR thresholds. On Slide 24, you can see our land and development spending trends over the past 6 quarters. Along with the quarterly average for 2024. We scaled back land and development investment as we responded to changing market dynamics, with a modest uptick in the second quarter reflecting development activity to bring new communities online. Each acquisition is carefully evaluated factoring in current pricing, incentives, construction costs, and sales velocity. So we can allocate capital thoughtfully to remain responsive to market conditions. Our focus remains on sustainable growth in both revenue and profitability. Supported by disciplined underwriting, a land light approach, and active capital management. As part of the updated strategy we discussed last quarter, we are concentrating on acquiring land for move-up homes in desirable A and B locations. We are also expanding our pursuit of active adult communities while reducing investment in lower margin entry level development on the outskirts. Given the continued variability in the sales environment, and the timing effects associated with quick move-in home delivery, we are providing financial guidance for the next quarter only. Our outlook assumes market conditions remain broadly stable. With no major increases in mortgage rates, tariffs, inflation, cancellation rates, construction cycle times. As a greater portion of our deliveries come from QMIs, quarterly results can be more sensitive to closing timing and mix. Our forecast includes ongoing use of mortgage rate buy downs, similar incentives, and it does not include any changes to SG&A from Phantom stock expense tied to stock price movements from the 112.44 closing price at the end of the second quarter of fiscal 26. Slide 25 shows our guidance for the third quarter of fiscal 2026. We expect total revenues between $650 million and $750 million. Adjusted gross margin is expected to be in the range of 14% to 15%, We expect SG&A as a percentage of total revenues to be between 12.5% and 13.5% which remains above our long term objective. We expect income from joint ventures to be between breakeven and $10 million and our guidance for adjusted EBITDA is between $30 million and $40 million Our expected our expectation for adjusted pretax income in the third quarter is between breakeven and $10 million While our third quarter profit outlook remains modest, we anticipate a rebound in adjusted pretax income during the fourth quarter of fiscal 2020. The upcoming delivery of homes from our newer higher margin communities should further enhance results primarily in the fourth quarter and beyond. On slide 26, we show that 86% of our lots are controlled via option up from 45% in the second quarter of fiscal 2020. Reflecting our strategic focus on a land-light strategy. Looking at slide 27, we compare well to our peers in controlling land through options. In fact, we have the fourth highest percentage of option lots placing us well above the industry median. On slide 28, we have the second highest inventory turnover rate among our peers, This is an important part of our strategy because it means we sell and replace our inventory more quickly than most competitors demonstrating a more efficient use of our capital. Our strong inventory turnover is driven not just by our land light approach, but also by our ongoing efforts to streamline operations. By increasing our use of land options and shortening the time from lot purchase to construction start as well as speeding up construction completion, we are able to turn our inventory more efficiently. On slide 29, we show that compared to our midsized peers, we have the highest adjusted EBIT return on investment at 15.9%. On slide 30, we show our price to book value compared to our peers, We are trading at about 20% below book value and below the median for all the peers shown on this slide. Given our high return on investment, combined with our rapidly improving balance sheet, we believe our stock continues to be undervalued. I will now turn it back to Ara for some brief closing remarks.

Thanks, Brad. We are realistic about the environment we are operating in. As mortgage rates moved higher, incentives increased, margins compressed, and land values decreased accordingly, including land that we have. that is the reality of this part of the cycle. What matters is how you respond. And we are finding and underwriting new land that meets our IRR hurdles even with today's higher incentive levels. We are being disciplined, selective, and patient without losing sight of our long term returns. We are also respectful of the landholders that have option lots to us sharing in the pain as we burn through older land at lower margins. Unfortunately, in the near term, that means accepting lower margins while the market works through this uncertainty. We are not sacrificing the future. Or making short term decisions that compromise long term value even as the housing market slows amid broader geopolitical and macro pressures. I think about airlines in periods of elevated jet fuel prices like they are seeing today, they do not stop flying planes but they manage through it, control what they can, and position themselves for stronger profitability when the fuel prices normalize. And that is what exactly what we are doing as a homebuilder. Working through higher land and incentive costs while deliberately replacing older land with better underwritten land that supports materially higher margins over time. In today's environment, it is difficult to provide meaningful visibility beyond the next quarter. However, we believe we are well positioned for meaningful improvement in the fourth quarter particularly in volume and gross margins as newer communities begin to deliver. Although demand may continue to fluctuate in the near term, as we have shown in some of our slides, we remain focused on execution and believe that focus can help us finish the year with solid momentum. We have a strong franchise and outstanding people and great liquidity. We focused on execution, managing inventory tightly, monetizing our QMIs, and accelerating the transition to newer, more profitable communities. We believe this disciplined approach positions us to emerge from this period stronger, more efficient, and better positioned to create value for our shareholders when conditions approve. Improve. That concludes our formal comments and I will be happy to turn it over for questions.

Thank you. To ask a question, please press *11 on your telephone and wait for your name to be announced. And our first question comes from Steven Carlson of Cottonwood Capital. Your line is open.

Hi, guys. Thanks for taking the question. Just curious, on comments for an improved Q4. If you could elaborate on what you mean by that. Are you talking about year over year EBITDA improvement delayed a little bit? Or is that something that might be Longer?

I will try to elaborate. And, again, as I will preface my comments with repeating the fact that it is very difficult to forecast beyond the current quarter and the next quarter But having said that, we at as I mentioned, we anticipate higher volume sequentially that would means higher delivery volume and higher revenues, And, hopefully, if this trend continues and the market stays steady, we expect continued improvement in gross margins. So I do not wanna get more specific than that given the volatility that I have demonstrated through the slides earlier. But we are feeling optimistic that the lower margins and lower profit returns that we reported this quarter and we are projecting the third quarter will improve quite a bit in the fourth quarter.

Yeah. But the and the improvement is, as Ara mentioned, sequential. We are not commenting on improvement over last year. We are commenting on improvement sequentially. Okay. Great. Thank you for clarifying that. And then just on the cash balance, I noticed this slight dip. I assume that was just from working capital use consistent with the working capital use I see last year. But there was not a cash flow statement. So Yeah. No. it is it is actually typical for us to have our highest gas balance at year end. We tend to have our highest delivery volume in the fourth quarter. And then normally, you would actually see us frankly, lower than this in the first and second quarter that we were where we are run we have been running this year because the current environment we have not done as much land acquisition. There has not been as many deals that you can underwrite in the current environment. So we actually have more liquidity and more cash than we typically would. In the second quarter with liquidity over $400 million at the end of the second quarter. But, yes, we will be buying All working capital. Yeah.

I will just elaborate just even further. it is not only higher than what is typical, as Brad mentioned, but it is way above our cash and liquidity targets We love to have less cash, actually, which would mean that we would have invested more in new land opportunities Thankfully, we are finding good land opportunities, but just not quite enough to absorb all of our excess cash. Right now.

Is this last question for me on that point. Any thoughts about other than land opportunities, plans to use the cash or a you know, I guess the only prepayable debt you have is really the preferreds, but you know, any thoughts on usage of cash out of out of the ordinary?

No. I mean, you saw us opportunistically take it you know, spend some cash in the quarter on stock repurchases. We still have available capacity under the board approval for additional stock repurchases if we thought that was good use of the cash. We would like to also continue to maintain this excess liquidity while waiting for better land deals to come along. We would like to have some dry powder available to invest when the right time comes. But you might see us opportunistically taking some stock. Repurchase. That would be difficult as you point out. it is not really callable other than very expensive. So Okay.

Thanks very much.

Mhmm. Thank you. And our next question comes from Alan Ratner of Zelman. Your line is open.

Hey, guys. Good morning. Thanks for all the detail and taking the questions. First, you know, on the land, comments you guys made, I think you kind of alluded to having some renegotiations with land sellers and land bankers, and you kind of alluded to, you know, sharing the pain a little bit. I am just curious if you can kind of quantify what percentage of your land book at this point have you gone back and renegotiated and actually gotten better pricing on? Is this something that is kind of still in the early innings? Or have you actually know, made, know, significant headway as far as your current portfolio of land? I am just curious.

So, Alan, I will I will I will make a couple comments to try to help answer the question. We have about, I think, 19% of our option lots are actually option with land bankers. A lot of the options are still with the original seller until it is they are going through the approval process. And, therefore, you know, we would not renegotiate those until it was time to take them down. And potentially either not move forward So to your to your point, of the land banking volume, I could not give you a percentage in terms of how many we have gone back and renegotiated, but we have had we go community by community where we are struggling with an individual community and for the most part, I would say land bankers have been helpful in deferrals, primarily deferrals. But there is been some assistance on price on some, you know, more struggling communities. We both sides really wanna work it out. And not have to exit. And so far, I have had pretty good success with that.

Great. I appreciate that extra color. Second question, just on the pricing environment. I am curious, we have heard from some others that perhaps maybe mortgage rate buydowns are not having quite the impact that they were having a couple of years ago when rates initially surged, you know, in terms of traffic and even getting buyers off the sidelines. We have seen some other builders kinda pivot more towards base price adjustments. So first is more of a housekeeping question. When you give those incentive numbers, is that an all in kind of price adjustment number, incentives plus base price, or is that only incentives And then the follow-up to that is, have you also begun to maybe pivot more towards base price adjustments versus, incentives?

Thank you. I would say it is really situational At this point, I mean, you heard a comment from other builders that mortgage rates are not necessarily driving customers. The reality is the lack of confidence with everything that is going on globally is really the driving fact So whether it is incentives, buy downs, base price reductions, customers are just a little more hesitant. At the moment. So you know, we deal with every single community individually. In some cases, mortgage rate buy downs are important. Depending on what our competitors are doing and how customers are reacting. In some cases, a little mortgage rate buy down may be appropriate, in other cases, base price reductions. Yeah. You name it, we will customize it to the situation at hand.

But I think, Alan, we have not to my knowledge, we have not seen a significant change in the usage of mortgage rate buy downs. And when I say that, I mean, any level of mortgage rate buy downs. So some customers may only take a smaller buy down along with a different incentive, so they might just buy it down to 5.5 or something like that. But there is still a significant number of customers that are doing some form of rate buy down in their use of our own sellers.

Got it. And just the other part of my question, just wanted to confirm, the incentive numbers that you gave, percentage of, I guess, original price would that also include if you were to reduce base price? Is that embedded within that percentage?

Do not think it is, but, frankly, we have not seen widespread base price reductions. that is right. Very, you know, very isolated. Yeah. I agree with that. it is not in the number, but it would not be very meaningful because it been many places we have done that.

Okay. Got it. So because I should not interpret then that sequential decline that you saw in incentive there, the shift towards more coming at a base price? Is that sounds like a okay. Perfect. Great. Thanks a lot, guys. I appreciate it.

Yep. Mhmm. Thank you. And our next question comes from Alex Barrón of Housing Research Center. Your line is open.

As far as the improvement in incentives, is that because your competitors are less aggressive at this time than they used to be, and therefore, you do not have to try to match what they are doing? Or is it just you know, buyers are you do not have to offer as much because buyers, you know, are feeling just more confident, regardless of what competitors are doing.

Alexander, I would I would say it is it is multipronged. A lot of it is driven by the fact that we have got a reduced amount of QMIs We felt like we got a little ahead of ourselves with QMIs. And we were getting, more aggressive to move through those. As we brought that, the level of QMIs down, we actually have about less than 1 finish tumor per community right now, we feel like we can be less aggressive in our incentives. That and, you know, mortgage rates, and the buy down cost varies week to week, and, competitors, promotions vary week to week. So there are many reasons, but I would say big chunk of it is that we have less fewer QMIs and feel less motivated, to increase incentives to move through them.

Okay. Yeah. That was gonna be my next question. For perspective, what was your level of finished unsold specs maybe 2 quarters ago or a year ago versus where you are today?

We have it on a slide. We were at 9.3 was our peak, a 9.3 QMIs per community in January 2025, and we are at 5.8. Today. So not quite half but quite a bit less. And it was 8.6 exactly 1 year ago. So you know, significant reductions, from 8.6 a year ago to 5.8 now.

And, Alexander, if you were focused on finished QMIs, we peaked at fourth quarter at 2 and about 2.5 for a community. And as Eric mentioned, we are close to about 1 right now. So significant improvement in our finished reduction in our finished QMIs, which is really where the heavier incentives would be, which is, you further demonstrates this point.

Yeah. that is great to hear. Also, as far as your joint ventures in the Saudi Arabia operation, seems you guys had a slight loss in the joint venture, so I was wondering what drove that and also saw a zero activity in Saudi Arabia. So is that done, or are you guys gonna start some something in the future there?

Yeah. 2 comments. The JV income loss for the quarter loss for the quarter is not related to Saudi at all. it is no longer a joint venture. Just to be clear. And the reason there was a small loss is we have just ramped up a couple of new joint ventures and had finished out some of our older ones over the last previous couple quarters. So you are seeing the start up phase of a couple of the new ones. They will start to deliver and later on this year and as we mentioned, expect them to have a small amount of income in the third quarter from JVs. And then it should grow from there. With respect to the Saudi operation, we do have activity We have a we have a couple of communities that are selling but not yet delivering. So we are expecting deliveries from the Saudi operations the second half, primarily starting you will start really seeing in the fourth quarter. Of this year.

Overall, as you might but first of all, our Saudi operation is really minute in the overall scope. I mean, it is a very small investment and relatively small number of deliveries. But having said that, as you might imagine, given the world situation in The Middle East right now, there is a lot more hesitancy there on the part of consumers than there is here. But fortunately, we are in pretty good position with minimal investment, and we are we are confident that market will improve as soon as the current crisis settles down a bit.

Okay. Well, best of luck.

Thank you for all the details. Thank you. Mhmm. Thank you. And our next question comes from Jay McCanlessCanless of Citizens Bank. Your line is open.

So my first question, you all threw out a stat about dirt starts being 32% this quarter, I think, versus 21%. Was that 32% of orders or closings? And I guess, what is the max you think you could get dirt starts with the current community base?

It was it was 32% of sales for the quarter. Jay, just to be clear. And we are not targeting know, a number, so to speak. But, obviously, you know, we have been we like to sell to be built homes when we can in the right communities Margins tend to be better. As we have commented on, and we have seen it gradually going up over the last couple quarters. Historically, would have about 60% of our sales B2B built, you know, prior to the mortgage rate increase that occurred, and that really pushed us toward QMIs. So I think in you know, over the long run, I would expect us to migrate back towards that kind of number. But how long that will take remains to be seen. As long as customers still value quick moving homes, we are gonna have to get still offer that in some basis.

So I will add that most of our communities offer both QMIs and to be built. So it is not necessarily something that we are driving customers often have the option in the majority overwhelming majority of our communities So it just so happens that we had more, to be built interest than QMI interest the impact is significant. It the QMIs that can deliver typically within 66 or 90 days, where customers are looking for mortgage rate incentives Obviously, on to be built, we do not offer anything like that in the mortgage incentives. So it is helpful to our margins, and we will see where the market goes. In general, we are shifting away from the most affordable entry level housing So that would typically imply and those are the buyers, by the way, that are most dependent on buy downs in order to qualify for the mortgages. So we would expect, but we will see. That, as we continue to shift away from that segment of customer, the tertiary markets, that it would be natural that we would shift to a little less incentive with mortgage rate buy downs. Okay.

Thank you. The second question I had on land sales, you all had pretty good sales and profits from that the last 2 quarters. Is that a run rate we should expect going forward? Or how should we think about land sales for the rest of the year?

No. Well, I it is it is not it is really an opportunistic, thing when we see an opportunity to make as much profit flipping a piece of property as building a piece of property depending on division's capacity or need for deliveries, and volume for their overhead? We will take advantage of that. So it is it is not something that is planned or regular. It just comes up from time to time, and we do not have any things specific planned for the next quarter.

Okay. And then, the next question I had kind of if you look at slide 23, and you look at the lots that are 23 and 24 vintage, that is almost 45% of your controlled lots. But those are also the ones that I would assume are probably 1 of the largest drag on gross margins. I mean, how quickly can you work through I think it is almost 16 thousand lots, How quickly do you think you guys can work through that? And is that the driver for community count right now? Is it I guess my question is, can you not get rid of those lots because those are the communities about to come online even though they are the ones that are still a margin drag.

I think the first thing Jay, to keep in mind because you are you are grabbing 23 and 24 together. And if you look at the below the bars, you will see that in 23, we averaged for the year 7.9% incentive, and 24 was 8.1%. And in 2023, when we did my suspicion is that I do not have it off the top of my head, but we probably started year much lower and finished the year much higher and averaged 7 point 9. And then there it kinda more stable in 248%. My point being, that those lots are actually have or underwritten at AGES percent incentives. Now we are now running around 12 but we are still much closer with those vintage lots. Than we are if you go back and look at the lots from 2021 and 2022. So the point that we are trying to make is it is a good thing as we get into the 2023 and especially 2024 vintage lots because we were underwriting it with higher incentives and therefore expect that to, all else being equal, expect that to improve our margins from where they are today as those communities begin to deliver.

K. Alright. that is that is helpful. Thank you, Brad.

The other thing we will mention is lot vintage certainly has, a lot to do with margins, but geographic mix has even more to do with margins. And that is really critical The smile states that have typically done you know, performed very well are certainly having a more challenging time today. Mhmm. You know, Florida, Texas, the West Coast, and our East Coast markets are certainly doing far better. So the geographic mix is probably more important than the vintage.

Okay. Great. Thank you. And then just last question for me. Any idea or outlook on community count for the rest of the year and into 2027?

Think all what we would say on that is you know, we have been relatively flat year over year. We have we do expect community count to grow later this year or early into 2027. We have been we have continued to have challenges with getting communities open timely. For various reasons. it is been that is definitely been a challenge. But we do have some communities coming online. We would expect growth at you know, towards the end of this year.

Yeah. To be I am sure you have heard the same thing, from our, peers The whole industry is having a challenging and with the land development timing and new community openings, But it is also challenging because we do a re underwriting of properties that were under contract before we close on them, So there may be communities we are planning open, but as we get very close to taking down the land, if the economics do not work, there are times when we either renegotiate with the seller or do not move forward as you see from impairments and walkaways that we have had, in all of our industry have had But on the whole, we try to be good partners, and work through some of the difficult land transactions with our partners. We value relationships We are long term players, and we do not wanna be bad partners with everyone.

Understood. Thanks, guys. Appreciate it.

Thank you. I show no further questions at this time. I would like to turn it back to Eraham Nainian for closing remarks.

Thanks very much. We like all of our peers, and I am sure like all of you that invest in our space, are looking forward to stability worldwide and in The US, and we know there is demand out there. Our wet and traffic at our communities is very high. Communities are I mean, customers are engaged They are just hesitant to pull the trigger at volumes that we would consider normal and at margins that we consider normal But this too shall pass. it is part of the quintessential cyclicality of housing, and we look forward to a bright future, particularly as we bring some of our newer land parcels to market. Thank you very much.

This concludes today's conference call. Thank you for participating, and you may now disconnect.