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New Jersey-based Hovnanian Enterprises, Inc. designs, constructs, and markets condominium apartments and attached townhouses (mainly for first-time buyers) and moderately priced townhouses with garages and single-family detached homes (primarily to first- and second-time move-up buyers and to active adult buyers). The company also provides mortgage loans and title insurance, both to its home buyers and to third parties. The company was active in six states, Washington, D.C., and Poland in 1998. Founded by Kevork S. Hovnanian in 1959, the enterprise was still under his control 40 years later.
Low-Cost Private Builder: 1959--83
Born and raised in Iraq, Kevork Hovnanian was an ethnic Armenian in charge of Iraq's largest roadpaving company when the king of Iraq was overthrown in 1958 by left-wing revolutionaries who nationalized the firm. Hovnanian escaped to the United States the following year, and was soon followed by his three brothers and two sisters.
In America, the Hovnanian siblings were able to secure a loan of $20,000 from one of the brother's in-laws to start a business of their own. Together they decided to get into the building business, erecting a few houses on speculation in Toms River, New Jersey. When these homes were sold at a profit, Kevork Hovnanian was in the home-building business to stay, as president of newly founded Hovnanian Brothers, Inc.
By 1964, however, Hovnanian had switched from custom-built homes to condominiums, which were still a rarity in the region. Discussing the reason for the change in a 1986 interview with Thomas J. Lueck of the New York Times, Hovnanian recalled that he couldn't estimate the costs of custom-built homes properly, which "irritated me no end."
The Hovnanian brothers' early houses, which sold rapidly, were small and inexpensive: 950 square feet of floor space for $18,000 to $19,000. Between 1966 and 1969 Jirair Hovnanian, another brother who had left Iraq earlier, joined the firm, which was reincorporated as K. Hovnanian Enterprises in 1967. Jirair then left to form his own New Jersey-based home-building company, J.S. Hovnanian and Sons Inc. The other brothers also left in 1969 to found their own building companies.
The 1970s brought expanded markets, as Hovnanian Enterprises entered the Florida market in 1970, Texas and Georgia in 1973, and Pennsylvania in 1976. Revenues during this time were around $9.5 million, and Hovnanian soon found himself overextended financially. He had to stretch out his loans, which he would pay off entirely by the end of 1980. The founder's son, Ara, a graduate of the University of Pennsylvania's Wharton School, joined the firm as executive vice-president in 1979.
That year, the company had net income of about $500,000 on revenues of $25.2 million. During this time, Hovnanian Enterprises made a decision to mine the "baby boom" market by building smaller, more affordable houses as its main product. The firm's approach to keeping prices down involved high volume, rapid sales, and rapid delivery. To expedite its mortgage processing procedures, the firm acquired R.E. Scott Co., a mortgage brokerage concern, in 1982. In order to hold down costs further, it also purchased Najarian & Associates, an engineering company, the same year.
For the fiscal year ended February 1983, Hovnanian Enterprises built 1,250 single-family attached condominiums and townhouses and had revenues of $70.2 million. These were impressive results, given a lingering recession brought on by high interest rates that devastated the market for new housing. Net income fell from the previous year's peak of $3 million, however.
Hovnanian Enterprises sold 466 of its homes in New Jersey in 1983, most of them built on 63 acres off Route 1 in North Brunswick. This development, Society Hill North, was followed by another Society Hill development in neighboring East Brunswick. The starting price of $51,000 for a 1,133-square-foot condominium unit with two bedrooms and a bath was $10,000 below any other new house in the area. Society Hill also offered one- and two-bedroom townhouses for $60,000 to $63,000, as well as a two-bedroom, 2 1/2-bath townhouse model with 1,048 square feet of space for $73,500. No garages, community buildings, swimming pools, or special financing deals were offered for these homes. In other markets, such as Florida and Georgia, Hovnanian was building new homes for as little as $38,000.
Hovnanian Enterprises was selling cheap by keeping its costs down through careful planning. A meticulous site-selection process, for example, even allowed for the calculation of how much earth would have to be moved. The company limited the number of models it offered in order to standardize construction. Models offered no variation in wall height, for example; all walls were built of identical lengths of board. This method allowed Hovnanian to assign carpenters and other subcontractors several projects at once, with corresponding gains in speed and efficiency.
Hovnanian Enterprises spared no effort in lining up sales, spending as much as $3,000 to $4,000 per home on marketing and advertising. "Get the sales first, and with the sales you'll get volume and a profit," was what Hovnanian told Howard Rudnitsky of Forbes in 1983. Prospective customers willing to buy into Society Hill before actual construction of the model homes received discounts of a few thousand dollars.
In one well-publicized effort, Hovnanian built a model home within the Empire State Building to help advertise its new development in Florida. The company also offered each home buyer a "Family Plan" certificate worth $1,000 on the purchase, within 24 hours, of another Hovnanian-built home, transferrable to anyone in the buyer's immediate family. Work on a Hovnanian project normally did not begin until firm contracts had been signed for at least half of the units to be made available.
Boom and Bust: 1983--90
Hovnanian Enterprises circumvented the credit crunch of the early 1980s when Drexel Burnham Lambert underwrote a public debt issue, even though the company was still privately owned. This financing enabled the firm to raise $23 million by selling 12-year debentures, which in turn enabled it to borrow $45 million on a two-year revolving loan. When the company went public in 1983, most of the shares remained in the hands of the founder and other family members.
In early 1984 Hovnanian Enterprises had 15 communities under development--nine of them in Florida and New Jersey--consisting of almost 6,000 units priced from $31,450 to $81,450. With the national economy booming again, New Jersey sales surged. In Piscataway, for example, prospective homebuyers set up tents and sleeping bags three days before the opening of a new development. By opening day, some 700 mostly young, first-time buyers were lined up to make down payments on the 370 condominiums and townhouses selling for $75,000 to $93,000, even though no models were available for inspection. Although Florida sales were flat, Hovnanian recorded revenues of $163.9 million in 1985 and record net income of $6.6 million.
Hovnanian Enterprises also extended its reach to Westchester County, New York, offering 91 condominiums in Peekskill, New York, in April 1986 to more than 400 lined-up customers, some of whom had camped out in a neighboring parking lot for five days. The demand for the company's housing was so great that it began holding lotteries for its townhouse condos. The typical Hovnanian condominium remained a duplex with two or three bedrooms and two bathrooms, but no garage, no basement, and no kitchen fixtures or curtains. Revenues reached $228.2 million and net income $11.5 million in 1986. The company's revolving-credit line had reached $150 million by 1987.
Hovnanian Enterprises extended its geographic reach in 1986 by acquiring a controlling share of New Fortis Corp., a builder in North Carolina and Atlanta, for $1.5 million in stock. Hovnanian also began extended its reach into southern New Hampshire. In 1989 Hovnanian ranked 18th among the nation's top 100 home builders and first among builders of attached for-sale homes.
The national housing market peaked that year, however, and by the end of 1990 had contracted by one-third. Hovnanian, which had reported revenues of $410.8 million in 1990, lost $15.2 million on revenues of only $275.4 million in 1991. All markets except New Jersey were unprofitable during this time.
In December 1990 Hovnanian announced it would take a $19-million writedown on unsold properties in New Hampshire, New York, and Florida, auctioning the condominiums at bargain prices. "We expanded at the market's peak and paid top dollar for the land," Ara Hovnanian--who became company president in 1988--later conceded to Dan B. Levine of Business for Central New Jersey. He added, "We also hired people who were familiar neither with those markets nor with us." In New Jersey, the firm withdrew from the condo market to concentrate on building and selling higher-priced houses in the central part of the state.
New Jersey also became the center for a legal dispute in which Hovnanian became involved in the early 1990s. Specifically, Hovnanian Enterprises was one of several New Jersey builders that filed lawsuits against makers and suppliers of a fire-resistant-treated roofing plywood sheeting. This material had been found to decompose after only a few years, and the company sued on behalf of its 32 New Jersey developments after a section of crumbling roof in a Lawrence condominium collapsed under two workers, injuring one of them. A settlement announced in 1992 allowed 11,000 owners of Hovnanian-built homes in the state to pay only an estimated $200 to $400 each to cover the $2,000 cost of replacing their roofs. Plywood treaters, chemical suppliers, architects, and lumber companies bore most of the cost of the $50-million settlement.
Mixed Fortunes in the 1990s
By fiscal 1992, Hovnanian Enterprises was profitable again. The 1990--91 recession had improved its competitive position by weakening or eliminating many smaller, privately held builders, and allowing the company to acquire options on land in New Jersey and North Carolina at greatly reduced prices. The company was now marketing a new line of townhouses with amenities such as garages, basements, family rooms, and cathedral ceilings designed to look more like single-family homes than condominiums. These dwellings were starting at prices of about $85,000 in New Jersey.
In 1993 Hovnanian Enterprises launched its first large development of single-family detached homes for affluent buyers. Based in Monmouth County, New Jersey, the four- and five-bedroom homes, on three-quarter-acre lots and each accompanied by three-car garages, were priced at from $349,950 to $429,950. That year 72 percent of Hovnanian-built houses were single-family detached houses selling for about $500,000, compared to the eight percent these dwelling represented in 1989. In 1994 the company opened the first phase of an Ocean County, New Jersey, development for buyers aged 55 or older. This project was composed of condominiums, townhouses, and detached houses at introductory prices of $95,000 to $190,000. By this time Hovnanian was the tenth-largest homebuilder in the United States, as well as the largest in New Jersey.
Like many companies in many industries during this time, Ara Hovnanian embraced the total quality management concept in order to improve company performance on every measurable scale. Mark Hodges, the executive charged with implementing this task, later told Professional Builder magazine's William H. Lurz that "when we started in 1993, our relationships with customers were abysmal" and "our buying process was 'one notch above root canal [surgery],' according to one buyer we interviewed." Imposing a stringent measurement and reporting methodology on each of the 150 process-improvement teams operating within the company, this new quality management program was said to have achieved a bottom-line return of $1.2 million to the company in fiscal 1996. Professional Builder extended the company a National Housing Quality Gold Award in 1997 for this effort.
Hovnanian Enterprises entered the California market in 1994 by acquiring Stonebrook Homes, a residential developer that had build several communities in San Diego and Riverside counties. By that time the firm also was active in the Philadelphia area. The mid-1990s also brought slowed sales and higher interest rates, however, and the company lost $10.4 million in the eight-month period ending in October 1994. The following year Hovnanian laid off ten percent of its work force and instituted other restructuring moves in order to combat downward market trends.
Hovnanian's revenues and net income soon rebounded. By late 1997 the company was operating in 100 communities in seven states, and by early 1998 it was building the first townhouse project along the Hudson River in a decade, along the water's edge in West New York, New Jersey, across from midtown Manhattan. Much farther afield, the company also began homebuilding in Poland in 1997.
With sales of $784 million and $942 million in 1997 and 1998, respectively, Hovnanian Enterprises had rebounded nicely as it moved toward the 21st century. Moreover, the company's long-term debt of $301 million was $100 million below the peak at the end of 1995. Kevork Hovnanian yielded the position of chief executive officer to his son in 1997, while continuing as chairman of the board. In early 1999 he held nearly 40 percent of the company's Class A stock and more than three-fourths of the Class B shares. Ara Hovnanian held ten percent of the company's Class A shares and 15.6 percent of its Class B shares.
Principal Subsidiaries: K. Hovnanian Mortgage; K. Hovnanian Investent Properties.
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