Natalie Kulasekere

Natalie Kulasekere asked for an update on the fiscal 2026 closings growth outlook, previously guided at 5%-10%, and inquired whether the weakness in the first quarter was concentrated in specific markets or broad-based across divisions.

Answer

Allan Merrill, Chairman and CEO, emphasized the company's focus on EBITDA and book value per share growth, noting that closings growth depends on the selling season. David Goldberg, SVP and CFO, explained that Q1 weakness was broad-based, with most divisions seeing flat or down sales pace, resulting in a shortfall of 100-150 sales. Merrill added that the company chose not to aggressively discount in December.

Natalie Kulasekere asked for an update on the fiscal 2026 closings growth expectation, previously 5-10%, and whether the company still anticipates growth. She also sought clarification on the reasons for the first quarter's underperformance, specifically if it was market-specific or broad-based.

Answer

Allan Merrill, Chairman and CEO, emphasized the company's focus on achieving growth in EBITDA and book value per share, independent of EBITDA growth, through increased land sales and reduced spending. David Goldberg, SVP and CFO, explained that Q1 weakness was broad-based, with most divisions seeing flat or declining sales pace, though a few were up. He noted the company was about 100-150 sales short, representing a small fraction of annual orders, and chose not to aggressively discount homes at year-end.

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.

Natalie Kulasekere asked for clarification on the projected SG&A as a percentage of sales of 14.5% for Q1 2026, noting it was higher than the previous run rate, and requested an explanation of the contributing factors. She also questioned management's confidence in reducing incentives if year-over-year order activity continued to trend lower.

Answer

Scott Dixon, Chief Financial Officer, clarified that Q1 is typically the lowest closing quarter, which naturally results in a higher SG&A percentage. He added that the ASP in backlog and the implied guidance also factored into the 14.5% projection for Q1. Rob Francescon, CEO and President, stated that the company would have to wait and see how the market plays out regarding incentive reductions, expressing hope for a better spring selling season in 2026 compared to 2025, despite current order pace being slightly behind.

Natalie Kulasekere questioned the projected SG&A as a percentage of sales for Q1 2026, seeking clarification on the factors contributing to its increase, and inquired about the company's confidence in reducing incentives given slower year-over-year order activity in January.

Answer

Scott Dixon, Chief Financial Officer, confirmed the SG&A as a percentage of sales for Q1 2026 at 14.5%, explaining that Q1 is typically the lowest closing quarter, which naturally elevates the percentage. He also cited the average sales price (ASP) in backlog and implied guidance as contributing factors. Rob Francescon, Chief Executive Officer and President, addressed incentive confidence, stating the company would need to observe how the spring selling season unfolds, acknowledging that while January's order activity was behind pace year-over-year, it was not significantly so.

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 (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.