Hovnanian Enterprises Preferred Stock Diversity Comes With Risks (NYSE:HOV)

Introduction

Recently, I have covered numerous banks and the preferred stocks they have issued. Financial institutions are the major source of preferred stocks since they can, for the most part, count them as part of the Tier 1 capital requirements. That said, finding an issue that allows investors to diversify away from bank issues is always worth exploring. Toward that goal, this article will review Hovnanian Enterprises (NYSE:HOV) and the one preferred stock it has issued, the Hovnanian Enterprises, Inc. PFD DEP1/1000A (HOVNP).

Hovnanian Enterprises review

Seeking Alpha describes this homebuilder as:

Hovnanian Enterprises, Inc., through its subsidiaries, designs, constructs, markets, and sells residential homes in the United States. It offers single-family detached homes, attached townhomes and condominiums, urban infill, and active lifestyle homes with amenities, such as clubhouses, swimming pools, tennis courts, tot lots, and open areas. The company markets and builds homes for first-time buyers, first-time and second-time move-up buyers, luxury buyers, active lifestyle buyers, and empty nesters. It also provides mortgage loans, title insurance, and homeowner’s insurance services. The company was founded in 1959 and is headquartered in Matawan, New Jersey.

Source: Seeking Alpha

The following map shows where Hovnanian Enterprises builds homes.

Hovnanian ranks among the largest homebuilding companies in the U.S., with total revenues of $2.76 billion on 5,473 home deliveries in fiscal 2023. Homebuilding revenues by area were: Northeast: 34%; Southeast: 17%; Southwest: 49%. Details per region were also provided.

I was a little surprised that the average home price in the Southeast was close to the Northeast. The website shows city-level data which would be critical in understanding the average selling prices per region.

Controlled lots help indicate where future revenues might come from, as does the average home price in each of the three regions. The pie chart on the right shows which class of buyers are attracted to Hovnanian homes, with first time buyers being tied with upgraders.

With home sales varying widely by quarter, I chose to use annual data for the next part.

Even at the annual level, operating income has not been steady. Things were going so poorly that in 2019, HOV did a 1-25 reverse split. The price chart above shows the loss those pre-2019 investors took if they held on.

So, how protected are the preferred stockholders? For that, we need to look at the balance sheet. While better (it was negative prior to 2021), at 3.5X, the coverage is the smallest I have seen.

HOVNP review

I picked the 10-year chart as it clearly shows the lack of preferred dividends paid for years.

Note the rating which confirms my low coverage concern; you cannot get a much lower rating! The fact this issue was non-cumulative means investors lost out on all expected dividends between 2008 and the end of 2021, fourteen years!

Since common stockholders receive no dividends currently, no payouts to those investors does not provide any protection to HOVNP holders.

Portfolio strategy

A 10.7% yield, plus diversifying one’s preferred stock allocation away from a financial institution dominated one, is very tempting. One reason to diversify isn’t provided by HOVNP, that being adding a cumulative preferred to your portfolio. That proved painful for holders/buyers of this preferred for over a decade.

All my recent preferred stock reviews have been within the banking industry, both money-center and larger regional ones. Yields on those currently range from 5.5%, up to 10.2% for the Citigroup Trust preferred stock (article link). Being there is “no free lunch”, this issue has a floating coupon, is callable, and sells for over $29. Despite its 12+% coupon, Citigroup hasn’t called, but that is a risk investors need to consider compared to whether Hovnanian Enterprise will stay profitable enough to keep paying the dividends owed to holders of HOVNP. For that analysis, I point readers to this Seeking Alpha article: Hovnanian’s Valuation, Ownership, And Debt Concerns: Is It A Viable Investment?

The US housing market is dominated by local builders, and several major players like Hovnanian. High mortgage rates have slowed both new home construction and folks looking to upgrade, the second-largest source of buyers for HOV. Years of low levels of new units coming on market and low-rate mortgages holders not wanting to sell, also add unique inputs builders need to confront. All those add uncertainty to this issue being viable long-term. That said, for investors understanding the risks, probably better than I, HOVNP gets a Buy rating. For the rest of us, look elsewhere for such a rich yield.

Final thoughts

Along with the no payment risk HOVNP’s non-cumulative feature presents, as an investor, I do not look fondly on companies where one class of stock, class B in this case, is controlled by a limited number of insiders and gets 10 votes per share versus only one for HOV class A holders.