Our market concentration strategy is a key factor
that enables us to achieve powers and economies of scale and differentiate ourselves from most of our competitors. Our goal is to become a significant
builder in each of the selected markets in which we operate.
We offer a broad product array to provide housing to
a wide range of customers. Our customers consist of first-time buyers, first- and second-time move-up buyers, luxury buyers, active adult buyers and
empty nesters. Our diverse product array includes single family detached, attached townhomes and condominiums, urban infill and active adult
homes.
We are committed to customer satisfaction and
quality in the homes that we build. We recognize that our future success rests in the ability to deliver quality homes to satisfied customers. We seek
to expand our commitment to customer service through a variety of quality initiatives. In addition, our focus remains on attracting and developing
quality associates. We use several leadership development and mentoring programs to identify key individuals and prepare them for positions of greater
responsibility within the Company.
We focus on achieving high return on invested
capital. Each new community, whether through organic growth or acquisition, is evaluated based on its ability to meet or exceed internal rate of return
projections. Incentives for both local and senior management are based, primarily, on the ability to generate returns on capital deployed. Our belief
is that the best way to create lasting value for our shareholders is through a strong focus on return on invested capital.
We utilize a risk adverse land strategy. We attempt
to acquire land with a minimum cash investment and negotiate takedown options, thereby limiting the financial exposure to the amounts invested in
property and predevelopment costs. This policy significantly reduces our risk and generally allows us to obtain necessary development approvals before
acquisition of the land.
We adhere to a strategy of achieving growth through
expansion of our organic operations and through the selected acquisition of other homebuilders. In our existing markets, we continue to introduce a
broader product array to gain market share and reach a more diverse group of customers. Selective acquisitions have expanded our geographic footprint,
strengthened our market share in existing markets and further diversified our product offerings. Integration of acquired companies is our core strength
and organic growth after an acquisition is boosted by deployment of our broad product array. Acquisitions limit our market-specific start-up costs, and
allow us to gain an immediate foothold in a market, without the usual learning curve and associated risks.
We seek to expand our financial services operations
to better serve all of our homebuyers. Our current mortgage financing and title service operations enhance the profitability and growth of our
company.
We are committed to becoming a better and more
efficient homebuilding company. Over the past few years, our strategies have included several initiatives to fundamentally transform our traditional
practices used to design, build and sell homes and focus on “building better.” These performance enhancing initiatives, processes and systems
have been successfully used in other manufacturing industries and include implementation of standardized “best practice processes”, rapid
cycle times, vendor consolidation, vendor partnering, distribution, fabrication and installation, and just-in-time material procurement. Other
initiatives include standardized home designs that can be deployed in multiple geographic markets with minimal architectural
modification.
Operating Policies and Procedures
We attempt to reduce the effect of certain risks
inherent in the housing industry through the following policies and procedures:
Training is designed to provide our associates with
the knowledge, attitudes, skill and habits necessary to succeed at their jobs. Our Training Department regularly conducts training classes in sales,
construction, administration, and managerial skills.
Through our presence in multiple geographic markets,
our goal is to reduce the effects that housing industry cycles, seasonality and local conditions in any one area may have on our
business.
Land Acquisition, Planning and Development
– Before entering into a contract to acquire land, we complete extensive comparative studies and analyses which assist us in evaluating the
economic feasibility of such land acquisition. We generally follow a policy of acquiring options to purchase land for future community
developments.
· |
|
We typically acquire land for future development principally
through the use of land options which need not be exercised before the completion of the regulatory approval process. We attempt to structure these
options with flexible take down schedules rather than with an obligation to take down the entire parcel upon approval. Additionally, we purchase
improved lots in certain markets by acquiring a small number of improved lots with an option on |
2
|
|
additional lots. This allows us to minimize the economic costs and risks of
carrying a large land inventory, while maintaining our ability to commence new developments during favorable market periods.
|
· |
|
Our
option and purchase agreements are typically subject to numerous conditions, including,
but not limited to, our ability to obtain necessary governmental approvals for the
proposed community. Generally, the deposit on the agreement will be returned to us if
all approvals are not obtained, although predevelopment costs may not be recoverable. By
paying an additional, nonrefundable deposit, we have the right to extend a significant
number of our options for varying periods of time. In most instances, we have the right
to cancel any of our land option agreements by forfeiture of our deposit on the
agreement. In such instances, we generally are not able to recover any predevelopment
costs. |
We offer a wide range of customer options to satisfy
individual customer tastes. We have large regional home design galleries in New Jersey, Virginia, Maryland, North Carolina, Texas, and
California.
Design – Our residential communities are
generally located in suburban areas near major highways. Our communities are designed as neighborhoods that fit existing land characteristics. We
strive to create diversity within the overall planned community by offering a mix of homes with differing architecture, textures and colors.
Recreational amenities such as swimming pools, tennis courts, club houses and tot lots are frequently included.
Construction – We design and supervise
the development and building of our communities. Our homes are constructed according to standardized prototypes which are designed and engineered to
provide innovative product design while attempting to minimize costs of construction. We employ subcontractors for the installation of site
improvements and construction of homes. Agreements with subcontractors are generally short term and provide for a fixed price for labor and materials.
We rigorously control costs through the use of computerized monitoring systems. Because of the risks involved in speculative building, our general
policy is to construct an attached condominium or townhouse building only after signing contracts for the sale of at least 50% of the homes in that
building. A majority of our single family detached homes are constructed after the signing of a contract and mortgage approval has been obtained. This
limits the build-up of inventory of unsold homes and the costs of maintaining and carrying that inventory.
Materials and Subcontractors – We
attempt to maintain efficient operations by utilizing standardized materials available from a variety of sources. In addition, we contract with
subcontractors to construct our homes. Hovnanian has reduced construction and administrative costs by consolidating the number of vendors serving
markets and by executing national purchasing contracts with select vendors. In recent years, Hovnanian has experienced no significant construction
delays due to shortages of materials or labor. Hovnanian cannot predict, however, the extent to which shortages in necessary materials or labor may
occur in the future.
Marketing and Sales – Our residential
communities are sold principally through on-site sales offices. In order to respond to our customers’ needs and trends in housing design, we rely
upon our internal market research group to analyze information gathered from, among other sources, buyer profiles, exit interviews at model sites,
focus groups and demographic data bases. We make use of newspaper, radio, magazine, our website, billboard, video and direct mail advertising, special
promotional events, illustrated brochures, full-sized and scale model homes in our comprehensive marketing program. In addition, we have opened home
design galleries in our Northeast Region, Virginia, Maryland, Texas, North Carolina, and California, which have increased option sales and
profitability in these markets.
Customer Service and Quality Control –
Associates responsible for customer service participate in pre-closing quality control inspections as well as responding to post-closing customer
needs. Prior to closing, each home is inspected and any necessary completion work is undertaken by us. In some of our markets, our homes are enrolled
in a standard limited warranty program which, in general, provides a homebuyer with a one-year warranty for the home’s materials and workmanship,
a two-year warranty for the home’s heating, cooling, ventilating, electrical and plumbing systems and a ten-year warranty for major structural
defects. All of the warranties contain standard exceptions, including, but not limited to, damage caused by the customer.
Customer Financing – We sell our homes
to customers who generally finance their purchases through mortgages. During the year ended October 31, 2003, 8.3% of our homebuyers paid in cash and
over 74% of our non-cash homebuyers obtained mortgages originated by one of our wholly-owned mortgage banking subsidiaries or our mortgage joint
venture in California. Mortgages originated by our wholly-owned mortgage banking subsidiaries are sold in the secondary market.
3
Residential Development Activities
Our residential development activities include
evaluating and purchasing properties, master planning, obtaining governmental approvals and constructing, marketing and selling homes. A residential
development generally includes single family detached homes and/or a number of residential buildings containing from two to twenty-four individual
homes per building, together with amenities such as recreational buildings, swimming pools, tennis courts and open areas.
Our development activities include site planning and
engineering, obtaining environmental and other regulatory approvals and constructing roads, sewer, water and drainage facilities, and for our
residential developments, recreational facilities and other amenities. These activities are performed by our staff, together with independent
architects, consultants and contractors. Our staff also carries out long-term planning of communities.
Current base prices for our homes in contract
backlog at October 31, 2003 (exclusive of upgrades and options) range from $70,000 to $700,000 in our Northeast Region, from $93,000 to $931,000 in our
Southeast Region, from $84,000 to $654,000 in our Southwest Region, and from $150,000 to $973,000 in our West Region. Closings generally occur and are
typically reflected in revenues from two to nine months after sales contracts are signed.
Information on homes delivered by market area is set
forth below:
|
|
|
|
Year Ended
|
|
(Housing Revenue in Thousands)
|
|
|
|
October
31, 2003
|
|
October
31, 2002
|
|
October
31, 2001
|
Northeast
Region(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Housing
Revenues |
|
|
|
$ |
774,209 |
|
|
$ |
660,250 |
|
|
$ |
570,647 |
|
Homes
Delivered |
|
|
|
|
2,387 |
|
|
|
2,144 |
|
|
|
1,860 |
|
Average
Price |
|
|
|
$ |
324,344 |
|
|
$ |
307,952 |
|
|
$ |
306,799 |
|
Southeast
Region(3):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Housing
Revenues |
|
|
|
$ |
682,210 |
|
|
$ |
660,328 |
|
|
$ |
566,205 |
|
Homes
Delivered |
|
|
|
|
2,720 |
|
|
|
2,806 |
|
|
|
2,743 |
|
Average
Price |
|
|
|
$ |
250,813 |
|
|
$ |
235,327 |
|
|
$ |
206,418 |
|
Southwest
Region(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Housing
Revenues |
|
|
|
$ |
481,634 |
|
|
$ |
240,181 |
|
|
$ |
215,045 |
|
Homes
Delivered |
|
|
|
|
2,431 |
|
|
|
1,033 |
|
|
|
1,003 |
|
Average
Price |
|
|
|
$ |
198,122 |
|
|
$ |
232,508 |
|
|
$ |
214,402 |
|
West
Region(2):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Housing
Revenues |
|
|
|
$ |
1,190,516 |
|
|
$ |
852,373 |
|
|
$ |
280,582 |
|
Homes
Delivered |
|
|
|
|
3,984 |
|
|
|
3,220 |
|
|
|
760 |
|
Average
Price |
|
|
|
$ |
298,824 |
|
|
$ |
264,712 |
|
|
$ |
369,187 |
|
Other(4):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Housing
Revenues |
|
|
|
$ |
1,261 |
|
|
$ |
48,963 |
|
|
$ |
61,238 |
|
Homes
Delivered |
|
|
|
|
9 |
|
|
|
311 |
|
|
|
425 |
|
Average
Price |
|
|
|
$ |
140,111 |
|
|
$ |
157,437 |
|
|
$ |
144,089 |
|
Combined
Total:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Housing
Revenues |
|
|
|
$ |
3,129,830 |
|
|
$ |
2,462,095 |
|
|
$ |
1,693,717 |
|
Homes
Delivered |
|
|
|
|
11,531 |
|
|
|
9,514 |
|
|
|
6,791 |
|
Average Price |
|
|
|
$ |
271,427 |
|
|
$ |
258,787 |
|
|
$ |
249,406 |
|
(1) October 31, 2003 includes deliveries from our Texas,
Ohio, and Arizona acquisitions beginning on November 1, 2002, January 1, 2003, April 1, 2003, and August 13, 2003, respectively.
(2) October 31, 2002 includes deliveries from our
California acquisition beginning on January 10, 2002.
(3) October 31, 2001 includes deliveries from our
Southeast Region acquisition beginning on January 24, 2001.
(4) Other includes operations from markets we have exited
in recent years.
The value of our net sales contracts increased 35.4%
to $3,294.6 million for the year ended October 31, 2003 from $2,432.2 million for the year ended October 31, 2002. This increase was the net result of
a 30.8% increase in the number of homes contracted to 12,285 in 2003 from 9,394 in 2002. By market, on a dollar basis, the Northeast Region increased
38.6%, the Southeast Region increased 27.7%, the Southwest Region increased 111.4% and the West Region increased 24.7%. Excluding acquisitions, our net
contracts increased in all of our regions and we continue to experience solid demand for new homes in all our markets. Our increases were due to
increased sales and increased sales prices in all of our regions except in our Southwest Region where sales prices decreased slightly due to a shift in
our mix of communities to those with more entry level homes.
4
The following table summarizes our active
communities under development as of October 31, 2003. The contracted not delivered and remaining home sites available in our active communities under
development are included in the 74,298 total home lots under the total residential real estate chart in Item 7 “Management’s Discussion and
Analysis of Financial Condition and Results of Operations.”
|
|
|
|
Communities
|
|
Approved
Lots
|
|
Homes
Delivered
|
|
Contracted
Not
Delivered(1)
|
|
Remaining
Home Sites
Available(2)
|
Northeast
Region |
|
|
|
|
32 |
|
|
|
12,937 |
|
|
|
4,401 |
|
|
|
1,477 |
|
|
|
7,059 |
|
Southeast
Region |
|
|
|
|
107 |
|
|
|
16,360 |
|
|
|
6,197 |
|
|
|
1,761 |
|
|
|
8,402 |
|
Southwest
Region |
|
|
|
|
81 |
|
|
|
10,495 |
|
|
|
3,368 |
|
|
|
989 |
|
|
|
6,138 |
|
West
Region |
|
|
|
|
37 |
|
|
|
14,746 |
|
|
|
7,387 |
|
|
|
793 |
|
|
|
6,566 |
|
Total |
|
|
|
|
257 |
|
|
|
54,538 |
|
|
|
21,353 |
|
|
|
5,020 |
|
|
|
28,165 |
|
(1) Includes 807 lots under option and excludes 741 lots
under our “build on your own lot” program.
(2) Of the total remaining home sites available, 1,354
were under construction or completed (including 275 models and sales offices), 16,267 were under option, and 268 were financed through purchase money
mortgages.
The following table summarizes our total started or
completed unsold homes as of October 31, 2003:
|
|
|
|
Unsold
Homes
|
|
Models
|
|
Total
|
Northeast
Region |
|
|
|
|
130 |
|
|
|
44 |
|
|
|
174 |
|
Southeast
Region |
|
|
|
|
207 |
|
|
|
32 |
|
|
|
239 |
|
Southwest
Region |
|
|
|
|
557 |
|
|
|
94 |
|
|
|
651 |
|
West
Region |
|
|
|
|
185 |
|
|
|
105 |
|
|
|
290 |
|
Total |
|
|
|
|
1,079 |
|
|
|
275 |
|
|
|
1,354 |
|
Backlog
At October 31, 2003 and October 31, 2002, we had a
backlog of signed contracts for 5,761 homes and 3,857 homes, respectively, with sales values aggregating $1,530.4 million and $1,076.7 million,
respectively. Substantially all of our backlog at October 31, 2003 is expected to be completed and closed within the next twelve months. At November
30, 2003 and 2002, our backlog of signed contracts was 6,508 homes and 4,051 homes, respectively, with sales values aggregating $1,716.8 million and
$1,130.8 million, respectively.
Sales of our homes typically are made pursuant to a
standard sales contract that provides the customer with a statutorily mandated right of rescission for a period ranging up to 15 days after execution.
This contract requires a nominal customer deposit at the time of signing. In addition, in the Northeast Region and the Southeast Region we typically
obtain an additional 5% to 10% down payment due 30 to 60 days after signing. The contract may include a financing contingency, which permits the
customer to cancel his obligation in the event mortgage financing at prevailing interest rates (including financing arranged or provided by us) is
unobtainable within the period specified in the contract. This contingency period typically is four to eight weeks following the date of
execution.
Residential Land Inventory
It is our objective to control a supply of land,
primarily through options, consistent with anticipated homebuilding requirements in each of our housing markets. Controlled land as of October 31,
2003, exclusive of communities under development described under “Business and Properties – Residential Development Activities,” is
summarized in the following table. The proposed developable lots in communities under development are included in the 74,298 total home lots under the
total residential real estate chart in Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of
Operations.”
5
(In Thousands)
|
|
|
|
Number of
Proposed
Communities
|
|
Proposed
Developable
Lots
|
|
Total Land
Option
Price
|
|
Book
Value(1)(2)
|
Northeast
Region:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Under
Option |
|
|
|
|
110 |
|
|
|
14,331 |
|
|
$ |
541,472 |
|
|
$ |
76,145 |
|
Owned |
|
|
|
|
5 |
|
|
|
1,413 |
|
|
|
|
|
|
|
56,731 |
|
Total |
|
|
|