HOVNANIAN ENTERPRISES INC (HOV)

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Hovnanian Enterprises, Inc. (“HEI”) conducts all of its homebuilding and financial services operations through its subsidiaries (references herein to the “Company,” “we,” “us” or “our” refer to HEI and its consolidated subsidiaries and should be understood to reflect the consolidated business of HEI’s subsidiaries).

Key Performance Indicators

The following key performance indicators are commonly used in the homebuilding industry and by management as a means to better understand our operating performance and trends affecting our business and compare our performance with the performance of other homebuilders. We believe these key performance indicators also provide useful information to investors in analyzing our performance:

On January 1, 2026, we acquired a controlling interest in a previously unconsolidated joint venture in the Kingdom of Saudi Arabia ("KSA"), that operates and markets itself under the trade name HOV Global. Beginning in the first quarter of fiscal 2026, the results from KSA are included in our consolidated financial statements. Consistent with our historical presentation, we will continue to exclude the results of our KSA operations from these key performance indicators generally (unless otherwise indicated) because such operations are not expected to have a material impact on our financial results for fiscal 2026. Where we have excluded the KSA operations, we refer to such metrics as being for our “domestic” operations.

Overview

Market Conditions and Operating Results

The demand for new and existing homes is dependent on a variety of demographic and economic factors, including job and wage growth, household formation, consumer confidence, mortgage financing, interest rates, inflation and overall housing affordability.

During fiscal 2025 and continuing through the first half of fiscal 2026, mortgage rates have fluctuated but still remain at a persistently high level. As a result, affordability generally remains challenging for homebuyers. We have stayed aggressive in our pricing, incentives and concessions in order to align with the current market.

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We continue to use our increased inventory of quick move-in homes ("QMI homes") to help meet buyers’ needs for more affordable housing in the existing uncertain interest rate environment. The time between contract signing and closing is shorter with a QMI home as compared to a to be built home, which provides customers with more certainty on their mortgage pricing. The availability of QMI homes also allows us to offer mortgage interest rate buydown assistance, which is a tool we offer through our wholly-owned mortgage banking subsidiary ("K. Hovnanian Mortgage"), to help ease the impact of higher monthly payments from rising interest rates. We pay the cost of interest rate buydowns for customers that qualify through K. Hovnanian Mortgage and decide to use the program. The level of interest rate based incentives utilized differs across our markets and is one of several available options we use to drive sales and close homes.

Our emphasis on driving sales pace versus price resulted in domestic net contracts increasing by 1.0% in the second quarter of fiscal 2026 compared to the prior year second quarter and 2.0% for the six months ended April 30, 2026 compared to the same period of the prior year. Within the six-month period, net contracts fluctuated from month to month, reflecting ongoing shifts in market conditions and consumer sentiment, including increased hesitancy from buyers, which we believe was partially attributed to the Iran war. Even with the volatility in the broader economy and affordability constraints, we were able to raise prices or decrease incentives in approximately 44% of our domestic communities during the second quarter of fiscal 2026.

While the long-term fundamentals of the new home market remain favorable, there remains a great degree of uncertainty due to inflation, tariffs, the continued possibility of an economic recession, employment risk, geopolitical events and the potential for further mortgage rate increases. While we continue to experience some supply chain issues, we remain focused on continuing to shorten our construction cycle times and building on our national initiatives to drive down costs with our material providers and trade partners. The changing conditions in the housing market, and in the general economy, makes it difficult to predict how strongly our business will be impacted by these external factors over fiscal 2026 and beyond.

During the six months ended April 30, 2026, our cash position allowed us to spend $413.0 million on domestic land purchases and land development for long-term growth and repurchase $18.5 million of our common stock and still have total liquidity of $442.0 million, including $310.9 million of homebuilding cash and cash equivalents and $125.0 million of borrowing capacity under our senior secured revolving credit facility as of April 30, 2026.

Information on our operating results for the three and six months ended April 30, 2026 are as follows:

● Sale of homes revenues decreased to $604.2 million for the three months ended April 30, 2026 from $650.3 million for the three months ended April 30, 2025, and was $1.2 billion for the six months ended April 30, 2026 and $1.3 billion for the six months ended April 30, 2025. There was an 11.8% and 12.1% decrease in the number of home deliveries for the three and six months ended April 30, 2026, respectively, compared to the same periods of the prior year, partially offset by an increase in average price of 5.3% and 3.4% for the three and six months ended April 30, 2026, respectively, compared to the same periods of the prior year.

● Gross margin dollars decreased 31.0% and 36.0% for the three and six months ended April 30, 2026, respectively, as compared to the same periods of the prior year. Gross margin percentage decreased to 10.2% for both the three and six months ended April 30, 2026 from 13.8% and 14.5% for the three and six months ended April 30, 2025, respectively. Gross margin percentage, before cost of sales interest expense and land charges, decreased to 14.3% for the three months ended April 30, 2026 from 17.3% for the three months ended April 30, 2025 and decreased to 13.9% for the six months ended April 30, 2026 from 17.8% for the six months ended April 30, 2025. The decrease in gross margin percentage was primarily due to increased use of incentives and concessions, including additional mortgage interest rate buydowns, to make our homes more affordable. In the current homebuilding environment, we remain focused on driving financial performance by increasing our sales pace versus achieving a higher gross margin.

● Selling, general and administrative costs (including corporate general and administrative expenses) ("Total SGA") was $84.0 million, or 12.6% of total revenues, in the three months ended April 30, 2026 compared with $80.6 million, or 11.7% of total revenues, in the three months ended April 30, 2025, and $168.0 million, or 12.9% of total revenues, in the six months ended April 30, 2026 compared with $167.5 million, or 12.3% of total revenues, in the six months ended April 30, 2025. The increase in Total SGA percentage is primarily due to the decrease in sale of homes revenue for the same periods of the prior year.

● Income before income taxes decreased to $0.3 million for the three months ended April 30, 2026 from $26.5 million for the three months ended April 30, 2025 and decreased to $29.0 million for the six months ended April 30, 2026 from $66.4 million for the six months ended April 30, 2025. Net income decreased to a loss of $0.6 million for the three months ended April 30, 2026 from $19.7 million for the three months ended April 30, 2025 and decreased to $20.3 million for the six months ended April 30, 2026 from $47.9 million for the six months ended April 30, 2025. Included in income before income taxes for the three months ended April 30, 2026 and 2025 were land sales of $33.5 million and $12.6 million, respectively. Included in income before income taxes for the six months ended April 30, 2026 and 2025 was a $26.8 million gain on consolidation of joint ventures and a $22.7 million gain on the contribution of assets to a new joint venture, respectively, along with land sales of $68.2 million and $19.4 million, respectively. Earnings per share, both basic and diluted, decreased to a loss of $(0.46) for the three months ended April 30, 2026 compared to $2.64 and $2.43, respectively, for the three months ended April 30, 2025. Earnings per share, basic and diluted, decreased to $2.36 and $2.20, respectively, for the six months ended April 30, 2026 compared to $6.53 and $6.02, respectively, for the six months ended April 30, 2025.

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● Net domestic contracts increased 1.0% and 2.0% for the three and six months ended April 30, 2026, respectively, compared to the same periods of the prior year. The increase for the three and six months ended is primarily due to our current strategy of using increased incentives to drive sales pace, although the incentives needed decreased this quarter from the first quarter of fiscal 2026.

● Net domestic contracts per active selling community increased slightly to 11.3 and 21.2 for the three and six months ended April 30, 2026, respectively, compared to 11.2 and 20.8 in the same periods of the prior year.

● Domestic contract backlog decreased from 1,711 homes at April 30, 2025 to 1,613 homes at April 30, 2026, and the dollar value of domestic contract backlog decreased to $938.4 million, a 5.0% decrease in dollar value compared to the prior year, as our domestic backlog conversion ratio has incr

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ITEM 7

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Hovnanian Enterprises, Inc. (“HEI”) conducts all of its homebuilding and financial services operations through its subsidiaries (references herein to the “Company”, “we”, “us” or “our” refer to HEI and its consolidated subsidiaries and should be understood to reflect the consolidated business of HEI’s subsidiaries).

The following tables and related discussion set forth key operating and financial data for our homebuilding and financial services operations as of and for the fiscal years ended October 31, 2025 and 2024. For similar operating and financial data and discussion of our fiscal 2024 results compared to our fiscal 2023 results, refer to Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our annual report on Form 10-K for the fiscal year ended October 31, 2024, which was filed with the SEC on December 18, 2024.

Key Performance Indicators

The following key performance indicators are commonly used in the homebuilding industry and by management as a means to better understand our operating performance and trends affecting our business and compare our performance with the performance of other homebuilders. We believe these key performance indicators also provide useful information to investors in analyzing our performance:

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Overview

Market Conditions and Operating Results

The demand for new and existing homes is dependent on a variety of demographic and economic factors, including job and wage growth, household formation, consumer confidence, mortgage financing, interest rates, inflation and overall housing affordability.

From January 2022 to October 2023, 30-year mortgage rates more than doubled. The sharp increase in interest rates, persistently high levels of inflation and doubt about the stability of the economy negatively impacted housing demand beginning in the second half of fiscal 2022 and into fiscal 2023. During the first quarter of fiscal 2024, mortgage rates declined, which had a positive effect on our sales pace. Rates fluctuated for the remainder of fiscal 2024 and throughout fiscal 2025 but still remain persistently high. As a result, affordability generally remains challenging for homebuyers. We have stayed aggressive in our pricing, incentives and concessions in order to align with the current market.

We continue to use our increased inventory of quick move-in homes (“QMI homes”) to help meet buyers’ needs for more affordable housing in the existing uncertain interest rate environment. The time between contract signing and closing is shorter with a QMI home as compared to a to be built home, which provides customers with more certainty on their mortgage pricing. The availability of QMI homes also allows us to offer mortgage interest rate buydown assistance, which is a tool we offer through our wholly-owned mortgage banking subsidiary (“K. Hovnanian Mortgage”), to help ease the impact of higher monthly payments from rising interest rates. We pay the cost of interest rate buydowns for customers that qualify through K. Hovnanian Mortgage and decide to use the program. The level of interest rate based incentives utilized differs across our markets and is one of several available options we use to drive sales and close homes.

Although the long-term fundamentals of
the new home market remain favorable, during fiscal 2025, volatility in
the broader economy and affordability constraints caused many consumers to
delay purchasing a new home. As a result of this more difficult sales
environment, we experienced a decrease in net contracts compared to fiscal 2024. Even as mortgage rates increased and we focused on increasing sales
pace versus price, we were still able to raise net prices in approximately 36% of our communities during the fourth quarter of fiscal 2025.

There remains a great degree of
uncertainty due to inflation, tariffs, the continued possibility of an economic
recession, employment risk and the potential for further mortgage rate
increases. While we continue to experience certain supply chain issues, we remain
focused on continuing to shorten our construction cycle times and building on
our national initiatives to drive down costs with our material providers and
trade partners. The changing conditions in the housing market, and in the
general economy, make it difficult to predict how strongly our business will
be impacted by these external factors over fiscal 2026 and
beyond.

Our cash position allowed us to spend $859.4 million on land purchases and land development for long-term growth during fiscal 2025 and still have total liquidity of $404.1 million, including $272.8 million of homebuilding cash and cash equivalents and $125.0 million of borrowing capacity under our senior secured revolving credit facility as of October 31, 2025. In addition, our September 2025 issuance of $900.0
million in aggregate amount of senior unsecured notes to refinance all of our
senior secured notes and secured term loan facility contributed to our ongoing
efforts to manage and simplify the Company’s capital structure and strengthen
its financial position.

Additional information on our results for the year ended October 31, 2025 were as follows:

● For the year ended October 31, 2025, sale of homes revenues decreased 0.8% as compared to the prior year, due to a 3.5% decrease in average sales prices, partially offset by a 2.8% increase in homes delivered. The increase in deliveries in fiscal 2025 was primarily the result of a 7.7% increase in community count as well as an increase in QMI contracts.

● Homebuilding gross margin percentage decreased from 18.7% for the year ended October 31, 2024 to 12.7% for the year ended October 31, 2025, and homebuilding gross margin percentage, before cost of sales interest expense and land charges, decreased from 22.0% for the year ended October 31, 2024 to 17.2% for the year ended October 31, 2025. The decreases were primarily due to the increased use of incentives and concessions, including additional mortgage interest rate buydowns, to make our homes more affordable. In the current homebuilding
environment, we remain focused on driving financial performance by increasing
our sales pace versus achieving a higher gross margin.

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● Selling, general and administrative expenses (including corporate general and administrative) increased $7.6 million for the year ended October 31, 2025 as compared to the prior year, however, as a percentage of total revenue, such costs were relatively flat at 11.7% for the year ended October 31, 2025 compared to 11.4% for the year ended October 31, 2024. The increase was primarily due to an increase in advertising expenses and compensation expense, mainly related to increased headcount and annual merit increases, as well as fees incurred on unused builder forward commitments. The increase in headcount was in preparation for expected growth in community count and deliveries in fiscal 2025 and fiscal 2026.

● Other interest increased to $35.4 million for the year ended October 31, 2025 from $30.8 million for the year ended October 31, 2024, primarily due to an increase in communities in planning, along with an increase in land banking and model lease financing interest, as our inventory not owned increased during fiscal 2025.

● Income before income taxes decreased to $86.1 million for the year ended October 31, 2025 from $317.1 million for the year ended October 31, 2024. Similarly, net income declined to $63.9 million for fiscal 2025, compared to $242.0 million in the previous fiscal year. Several key factors contributed to these
reductions. Although both fiscal years
included gains resulting from the consolidation of previously unconsolidated
joint ventures, the gain in fiscal 2024 was $45.7 million whereas the gain
for fiscal 2025 was $18.9 million. Additionally, the results for the year ended October 31, 2025 reflected
a loss on extinguishment of debt totaling $33.1 million. In contrast, the year
ended October 31, 2024 included a gain on extinguishment of debt totaling $1.4
million. Net income was also negatively impacted by inventory impairments and
land option write-offs of $39.6 million and $11.6 million for the years ended
October 31, 2025 and 2024, respectively.

● Earnings per share, basic and diluted, decreased to $7.95 and $7.43, respectively, for the year ended October 31, 2025, compared to earnings per share, basic and diluted of $34.40 and $31.79, respectively, for the year ended October 31, 2024.

● Net contracts decreased 3.1% to 5,023 for the year ended October 31, 2025, compared to 5,186 in the prior year. Included in the year ended October 31, 2025 and 2024, respectively, were 44 and 276 build-for-rent contracts.

● Net contracts per active selling community decreased to 35.9 for the year ended October 31, 2025 compared to 39.9 in the prior year. The decrease was due to the decrease in net contracts from October 31, 2024 to October 31, 2025.

● Active selling communities increased to 140 at October 31, 2025 compared to 130 at October 31, 2024, while our total lots controlled decreased to 35,883 at October 31, 2025 compared to 41,891 at October 31, 2024. This reduction in the number of total lots controlled was primarily the result of our decision to walk away from certain lower
margin lots. These lots had been originally underwritten prior to the escalation
of sales incentives that are necessary in the current market environment in order to make home purchases more affordable. We expect our community count will continue to grow in fiscal 2026.

● Contract backlog decreased from 1,649 homes at October 31, 2024 to 1,242 homes at October 31, 2025, and the dollar value of contract backlog

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