Ara K. Hovnanian, W’79, WG’79, Hovnanian Enterprises, President, CEO and Chairman of the Board
Ara K. Hovnanian, W’79, WG’79, is CEO of New Jersey-based Hovnanian Enterprises, the parent company of K. Hovnanian Homes, which has designed, built, marketed and delivered over 312,000 homes since the company was founded in 1959. His family, Armenians from Iraq, traversed the classic American journey, arriving with nothing but an appreciation for the fundamentals: private property, capital markets and an ethic to deliver value. Ara is one of a
few submatriculants at Wharton, finishing his undergraduate degrees in accounting , finance and real estate and his MBA in four years.
He helped his father build their company to $6 billion in revenues, got caught in the recession, and today is rebuilding their dream company.
The housing industry is a significant player in the economy. What key drivers make it cyclical? What place does Hovnanian Enterprises fit in this industry?
The long-term business driver is household formation. The inputs to the demographic black box are birth rates, marriage rates, divorce rates, immigration and longevity. All these factors, except for marriage age, are moving demand for shelter in the right long-term direction. What makes the short-term cycles vary include interest rates, overbuilding, the overall economy and mortgage issues.
Hovnanian is in the suburban, “for sale” part of the housing industry, very different from rental properties. Most (98%) of our homes are low-rise construction, which means three stories or less, although we are in the process of creating a 14-story condominium building in Weehawken, New Jersey, facing New York City. Depending on how you benchmark us, we are between the sixth and tenth largest homebuilder in the U.S., and we operate in about 16 states, from California to New York.
Can you talk about some noteworthy developments created by Hovnanian?
Unlike high-rise developers that do a few major projects, we create many developments. Right now, we have 300 different communities across the country that are open for sale. One noteworthy project in our history is Society Hill at Newark, where we built almost 2,000 homes that transformed an area that was unsafe to walk in, even during the day, to a safe and thriving community. In another more recent project, we hired Dutch designer, Piet Boon, and created a series of modern homes in Scottsdale, Arizona and Washington, D.C. suburbs, that are unusual for a production home builder such as ourselves. We executed them well, and they were both popular and profitable. Third, we specialize in a genre of housing, “lifestyle over 55” communities. We understand and offer the amenities, staff, club director and activities that this market desires.
We directly employ over 2,500 people, and indirectly employ 25,000 people, including the electricians, carpenters and craftsmen on the job. Providing a home that people live in, and that becomes their biggest financial investment, is very fulfilling.
Do any of these point toward a future for Hovnanian?
All of them. Our niche is that we are not a one-niche builder. Our homes are priced from $100,000 to $3 million. They range from single-family homes on 3-acre lots, to 13 townhouses per acre. We cater to everyone from first-time homebuyers to empty nesters to seniors.
Can you talk a bit about your father’s story in starting the company?
My father’s family moved to Baghdad, Iraq, in the early 20th century. Although Iraq wasn’t the friendliest country for Armenian Christians, there was stability. When his father became ill, my father dropped out of school and took over his father’s small contracting business, which he then built into a major road-building business. When King Faisal was overthrown by the Baathists, our family and my relatives came to America. My father and his three brothers with limited resources started building homes. As the business grew, they ended up going their own ways, in a friendly way.
When did you start working for your father?
From the age of 5, on weekends, I drove around to the different projects with my father. In high school and summers during college, I did construction labor, and got my broker’s license at the age of 16 and sold homes from the age of 17. In 1979, upon my graduation from Wharton, my father made it clear that he would be proud if I chose to work in his business, if I was interested, but would be supportive of whatever career choice I made. It was important to me that he didn’t make me feel pressured to enter the business, and I’ve taken the same position with my son, who recently decided to enter the business.
What part of the business appealed to you?
I liked touching all of the parts. Good or bad, I’m a generalist. I started as a laborer, sweeping houses, cleaning bathrooms, moving appliances and selling houses, so I combined the nitty gritty of the business with a degree from Wharton. I became comfortable with all aspects of the business — from construction, to human resources, to making finance presentations.
What did you learn from your father?
Making sure your word is your bond. He wanted to show the world that he stood behind what he did by putting his difficult-to-pronounce Armenian name on the company. People advised against it, but he said, “No, it’s my name. I stand behind the product.”
The other one is — and it’s apropos of the difficulties our industry and our company have endured the past 10 years — “You can make a lot of mistakes in business. You can hire the wrong people, have the wrong product and invest in the wrong technology. But the one mistake you can’t make is to run out of cash.” This is especially true because real estate is both capital-intensive and cyclical. After 2008, a lot of the top public builders went bankrupt, entered a forced merger or were taken over by bondholders. We did not anticipate the Great Recession, and were particularly aggressive in 2004 to 2005. We didn’t think that we were highly leveraged, with 50% equity and 50% leverage. In the past eight years, we did focus on that motto — “Never run out of cash” — and we have been able to survive.
Didn’t another alumnus play a role in Hovnanian’s public offering?
Yes. The faith, Mike Millken, WG’70 had in us was a key part of our story to go from a small builder to one of the top 10 builders in the country. Drexel Burnham Lambert was particularly proud of funding entry-level housing.
Two years after graduating, I was on the road touting our first public bond offering, which we did with Drexel in 1981. Our first meeting with Michael was on a Saturday morning at 7:00 a.m. in Los Angeles. We were in a conference room, and it was at 7:05 a.m. I said to his associate, “I knew he wouldn’t be here at 7:00 a.m. Who would be here at 7:00 a.m. on Saturday?” The associate said, “Oh, no. Mike’s been here since 6:00 a.m. — he’s just finishing up in the next room.” Sure enough, Mike soon came in, closing one briefcase and opening another with our materials. That was our first experience with Mike, and we went on to do many high-yield bond offerings with Drexel, and Drexel took us public as well, in 1983.
How has your education at and relationship to Wharton played a role in your career?
Wharton taught me the language of business, from the fundamentals of accounting and finance, to sales and management. You have to learn to speak English if you want to write, and you have to speak business to be a businessman. Today, I serve on the Board of Overseers of UPenn’s School of Design, where I had taken architectural design classes. I speak occasionally at Wharton, and am a Research Sponsor at the Samuel Zell and Robert Lurie Real Estate Center.
What drives you to keep working after you reached a level of success?
My father drove the same car and lived in the same house from when he started the business to becoming a billionaire. Money wasn’t what motivated him. He wanted to create a great company and leave a legacy, and he achieved that.
I have some of the same dreams, although I’ve had to take a step back, because housing got hit by the whirlpool of the 2008 recession. I have to work to restore the company to what it was. Notwithstanding that, I love what we do. I eat, sleep and breathe the business. We were making $6.5 billion in revenues and had $2 billion in equity at the peak of the market; at the bottom, we made $1 billion in revenues and lost our equity, and the debt remained. This year, our revenues are on target for $3 billion in revenues, so we are building our company again. We will steer ourselves through this challenging financial situation and adverse times, to attain our position as a leader in this industry once more.