Natalie Kulasekere

Natalie Kulasekere (Zelman) inquired about K. Hovnanian's strategies to mitigate gross margin pressure, specifically asking about direct cost improvements and vendor negotiations. She also followed up on the expected drivers for gross margin improvement in the next fiscal year.

Answer

CFO Brad O'Connor stated that K. Hovnanian consistently re-bids with suppliers and trade partners, achieving significant cost reductions on a per-square-foot basis from two years ago, with costs holding steady this year. CEO Ara Hovnanian added that the company plans to aggressively promote seven-year ARM mortgage buy-downs, which could improve margins by qualifying buyers at lower rates and reducing costs. Brad O'Connor further clarified that the anticipated gross margin improvement in the next fiscal year would be driven by a mix shift, as the company sells through older, more challenging properties and brings on newer land deals underwritten with higher assumed incentives.

Natalie Kulasekere of Wedbush Securities inquired about recent land acquisitions, asking if lower land prices were being seen despite commentary on stickiness, which markets offered easier terms, and the drivers behind the Q3 gross margin guidance.

Answer

Ara Hovnanian, Chairman, President and CEO, explained that while land sellers are slow to adjust, the company is finding enough opportunities to meet its return hurdles, particularly in markets like Delaware, Virginia, and New Jersey. He noted that Q3 margin confidence comes from community-by-community analysis and cost reduction efforts. CFO Brad O'Connor added that the Q3 margin guidance of 17-18% is very close to the 17.3% just reported, suggesting stability rather than a significant increase.

Natalie Kulasekere asked for more details on the SG&A upside, seeking to understand whether it was driven by operational efficiencies, headcount reductions, or other factors, and what a sustainable rate might be going forward. She also inquired about the significant number of lots Century Communities walked away from during the quarter, including their vintage and stage of due diligence.

Answer

Jim Francescon, CEO and President, and Scott Dixon, Chief Financial Officer, attributed SG&A improvements to ongoing cost control activities, back-office efficiencies, appropriate headcount, and compensation-related benefits. Mr. Dixon provided Q4 SG&A guidance and noted continued focus on efficiency. Regarding abandoned lots, Mr. Dixon explained they were near-term projects that no longer met current underwriting conditions, a trend observed throughout 2025, and confirmed the company has sufficient owned land for the next couple of years.

Natalie Kulasekere asked about the impact of adjusted growth plans on overhead leverage, the strategy for potentially uneconomical land deals, and the ability to maintain a price premium for Zero Energy Ready homes amid competitor incentives.

Answer

Executives David Goldberg and Allan Merrill confirmed they still expect to achieve overhead leverage, as near-term growth investments are already made. Merrill stated they have discretion to walk away from or renegotiate land deals and affirmed his belief they can earn a premium on Zero Energy Ready homes, which have consistently shown better margins.