Fitch Assigns Hovnanian Ent. $250MM Sr Unsec. Debt 'BB+'

Business Wire, June 5, 2006

NEW YORK -- Fitch Ratings has assigned a 'BB ' rating to Hovnanian Enterprises, Inc.'s $250 million senior unsecured notes due 2017. Fitch affirms Hovnanian's Issuer Default Rating (IDR) of 'BB ', senior unsecured debt and unsecured bank credit facility ratings. Fitch affirms the 'BB-' senior subordinated notes rating. The series A noncumulative perpetual preferred stock rating of 'B ' is also affirmed. The $250 million issue will be ranked on a pari passu basis with all other senior unsecured debt, including Hovnanian's revolving and letter of credit facility. Proceeds from the new debt issue will be used for general corporate purposes and repayment of existing debt. The Rating Outlook is Stable.

Ratings for Hovnanian are based on the company's successful execution of its business model, conservative land policies and geographic, price point and product line diversity. The company has been an active consolidator in the homebuilding industry which has contributed to above average growth during the past seven years, but has kept debt levels somewhat higher than its peers. Management has also exhibited an ability to quickly and successfully integrate its acquisitions. In any case, now that the company has reached current scale there may be somewhat less use of acquisitions going forward and acquisitions may be smaller relative to Hovnanian's current size. Significant insider ownership aligns management's interests with the long term financial health of the company.

Risk factors include the inherent (although somewhat tempered) cyclicality of the homebuilding industry. The ratings also manifest the company's aggressive, yet controlled growth strategy, concentration in California (22% of consolidated deliveries in the first half of fiscal 2006) and Hovnanian's capitalization and size.

The company's EBITDA, EBIT and FFO to interest ratios tend to be somewhat below the average public homebuilder, while inventory turnover tends to be similar. Hovnanian's leverage is higher and debt to EBITDA ratio is slightly above the averages of its peers. Although the company has certainly benefited from the generally strong housing market of recent years, a degree of profit enhancement is also attributed to purchasing design and engineering, access to capital and other scale economies that have been captured by the large national and regional public homebuilders in relation to non-public builders. These economies, the company's presale operating strategy and a return on equity and assets orientation provide the framework to soften the margin impact of declining market conditions in comparison to previous cycles. Hovnanian's ratio of sales value of consolidated backlog to debt since 2001 has ranged between 1.6 times (x) to 3.2x and is currently 2.3x -- a comfortable cushion.

Hovnanian employs conservative land and construction strategies. The company typically purchases land only after necessary entitlements have been obtained so that development or construction may begin as market conditions dictate. Hovnanian extensively uses lot options. The use of land option contracts without specific performance clauses gives the company the ability to renegotiate price/terms or void the option which limits down side risk in market downturns and provides the opportunity to hold land with minimal investment. At present 72% of its lots are controlled through options - a higher percentage than most public builders. Total consolidated lots, including those owned, were 121,829 at April 30, 2006. This represents a 6.1 year supply based on latest twelve months home deliveries. However, the company has one of the lowest owned lot positions in the industry, typically owning only a one to two year supply. An estimated 85%-90% of its homes are pre-sold. The balance is homes under construction or homes completed in advance of a customer's order. Hovnanian's unconsolidated joint venture activity is growing, but is still moderate in size and conservatively levered.

Fitch estimates that in recent years at least half of Hovnanian's growth has resulted from a series of acquisitions - seventeen during the past eight years. (However, in each of the last five years more than 90% of the company's growth in earnings has come from operations owned more than one year.) The acquisitions have enabled the company to grow its position and increase market share, often broadening product and customer bases in existing markets. They have also enabled the company to enter new markets. The combinations typically were funded by debt and to a lesser degree by stock and retained earnings. At times there were earn-outs which reduced risk and served to retain key management. Hovnanian's current acquisition strategy focuses on purchasing smaller builders and land portfolios in current markets and on making selected acquisitions in new markets if there is a good strategic fit and appropriate returns can be achieved. The key analysis will be return on capital as to whether an acquisition will be executed. Fitch believes that management would balance debt and stock as acquisition currency to maintain current credit ratios. The company is publicly committed to maintaining an average net debt/equity ratio of 1.0:1.0.