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HOV Hovnanian Enterprises

Filed: 9 Sep 21, 4:10pm
 

Table of Contents

 

UNITED STATES

 

SECURITIES AND EXCHANGE COMMISSION

 

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

 

(Mark One)

Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended July 31, 2021

OR

 

Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

Commission file number 1-8551

 

Hovnanian Enterprises, Inc. (Exact Name of Registrant as Specified in Its Charter)

 

Delaware (State or Other Jurisdiction of Incorporation or Organization)

 

22-1851059 (I.R.S. Employer Identification No.)

 

90 Matawan Road, 5th Floor, Matawan, NJ 07747 (Address of Principal Executive Offices)

 

732-747-7800 (Registrant’s Telephone Number, Including Area Code)

 

N/A (Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading symbol(s)

Name of each exchange on which registered

Class A Common Stock, $0.01 par value per share

HOV

New York Stock Exchange

Preferred Stock Purchase Rights(1)

N/A

New York Stock Exchange

Depositary Shares each representing

1/1,000th of a share of 7.625% Series A

Preferred Stock

HOVNP

The Nasdaq Stock Market LLC

 

(1) Each share of Common Stock includes an associated Preferred Stock Purchase Right. Each Preferred Stock Purchase Right initially represents the right, if such Preferred Stock Purchase Right becomes exercisable, to purchase from the Company one ten-thousandth of a share of its Series B Junior Preferred Stock for each share of Common Stock. The Preferred Stock Purchase Rights currently cannot trade separately from the underlying Common Stock.

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes ☒  No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large Accelerated Filer ☐

Accelerated Filer ☒ 

Nonaccelerated Filer ☐  

Smaller Reporting Company ☐

Emerging Growth Company ☐

          

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ☐  No ☒

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. 5,595,610 shares of Class A Common Stock and 659,219 shares of Class B Common Stock were outstanding as of September 2, 2021.

 

 

 

 

HOVNANIAN ENTERPRISES, INC.  

 

FORM 10-Q  

 

INDEX

PAGE

NUMBER

  

  

PART I.  Financial Information

  

Item l.  Financial Statements:

  

  

  

Condensed Consolidated Balance Sheets (unaudited) as of July 31, 2021 and October 31, 2020

3

  

  

Condensed Consolidated Statements of Operations (unaudited) for the three and nine months ended July 31, 2021 and 2020

4

  

  

Condensed Consolidated Statements of Changes in Equity (Deficit) (unaudited) for the nine months ended July 31, 2021 and 2020

5

  

  

Condensed Consolidated Statements of Cash Flows (unaudited) for the nine months ended July 31, 2021 and 2020

7

  

  

 

 

Notes to Condensed Consolidated Financial Statements (unaudited)

9

  

  

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

33

  

  

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

56

  

  

Item 4.  Controls and Procedures

56

  

  

 

 

PART II.  Other Information

  

Item 1.  Legal Proceedings

57

  

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

57

  
Item 5. Other Information57

 

 

Item 6.  Exhibits

58

  

  

Signatures

60

 

 

 

HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In Thousands)

 

  

July 31,

  

October 31,

 
  

2021

  

2020

 
   (Unaudited)     

ASSETS

        

Homebuilding:

        

Cash and cash equivalents

 $172,748  $262,489 

Restricted cash and cash equivalents

  15,100   14,731 

Inventories:

        

Sold and unsold homes and lots under development

  1,119,876   921,594 

Land and land options held for future development or sale

  95,416   91,957 

Consolidated inventory not owned

  98,053   182,224 

Total inventories

  1,313,345   1,195,775 

Investments in and advances to unconsolidated joint ventures

  68,900   103,164 

Receivables, deposits and notes, net

  37,735   33,686 

Property, plant and equipment, net

  17,974   18,185 

Prepaid expenses and other assets

  58,571   58,705 

Total homebuilding

  1,684,373   1,686,735 
         

Financial services

  180,218   140,607 
         

Deferred tax assets, net

  447,453   0 

Total assets

 $2,312,044  $1,827,342 
         

LIABILITIES AND EQUITY

        

Homebuilding:

        

Nonrecourse mortgages secured by inventory, net of debt issuance costs

 $118,020  $135,122 

Accounts payable and other liabilities

  401,283   359,274 

Customers’ deposits

  76,729   48,286 

Liabilities from inventory not owned, net of debt issuance costs

  69,627   131,204 

Senior notes and credit facilities (net of discounts, premiums and debt issuance costs)

  1,317,524   1,431,110 

Accrued Interest

  47,460   35,563 

Total homebuilding

  2,030,643   2,140,559 
         

Financial services

  158,226   119,045 

Income taxes payable

  2,484   3,832 

Total liabilities

  2,191,353   2,263,436 
         

Equity:

        

Hovnanian Enterprises, Inc. stockholders' equity deficit:

        

Preferred stock, $0.01 par value - authorized 100,000 shares; issued and outstanding 5,600 shares with a liquidation preference of $140,000 at July 31, 2021 and October 31, 2020

  135,299   135,299 

Common stock, Class A, $0.01 par value - authorized 16,000,000 shares; issued 6,064,070 shares at July 31, 2021 and 5,990,310 shares at October 31, 2020

  61   60 

Common stock, Class B, $0.01 par value (convertible to Class A at time of sale) - authorized 2,400,000 shares; issued 686,888 shares at July 31, 2021 and 649,886 shares at October 31, 2020

  7   7 

Paid in capital - common stock

  719,770   718,110 

Accumulated deficit

  (619,708)  (1,175,045)

Treasury stock - at cost – 470,430 shares of Class A common stock and 27,669 shares of Class B common stock at July 31, 2021 and October 31, 2020

  (115,360)  (115,360)

Total Hovnanian Enterprises, Inc. stockholders’ equity (deficit)

  120,069   (436,929)

Noncontrolling interest in consolidated joint ventures

  622   835 

Total equity (deficit)

  120,691   (436,094)

Total liabilities and equity

 $2,312,044  $1,827,342 

 

See notes to condensed consolidated financial statements (unaudited).

 

 

 

HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In Thousands Except Per Share Data)

(Unaudited)

 

  

Three Months Ended July 31,

  

Nine Months Ended July 31,

 
  

2021

  

2020

  

2021

  

2020

 

Revenues:

                

Homebuilding:

                

Sale of homes

 $663,279  $605,933  $1,894,159  $1,608,513 

Land sales and other revenues

  7,559   908   13,280   2,360 

Total homebuilding

  670,838   606,841   1,907,439   1,610,873 

Financial services

  19,845   21,295   61,070   49,670 

Total revenues

  690,683   628,136   1,968,509   1,660,543 
                 

Expenses:

                

Homebuilding:

                

Cost of sales, excluding interest

  521,868   499,695   1,498,040   1,324,077 

Cost of sales interest

  19,240   21,814   58,130   58,539 

Inventory impairment loss and land option write-offs

  1,309   2,364   3,267   6,202 

Total cost of sales

  542,417   523,873   1,559,437   1,388,818 

Selling, general and administrative

  42,988   40,608   125,417   121,887 

Total homebuilding expenses

  585,405   564,481   1,684,854   1,510,705 
                 

Financial services

  11,238   10,493   32,953   29,677 

Corporate general and administrative

  17,284   19,321   81,149   54,340 

Other interest

  19,158   27,072   65,166   78,944 

Other operations

  504   266   1,233   674 

Total expenses

  633,589   621,633   1,865,355   1,674,340 

(Loss) gain on extinguishment of debt

  (306)  4,055   (306)  13,337 

Income from unconsolidated joint ventures

  5,011   5,658   9,568   13,419 

Income before income taxes

  61,799   16,216   112,416   12,959 

State and federal income tax provision (benefit):

                

State

  1,476   853   (89,272)  2,665 

Federal

  12,621   0   (353,649)  0 

Total income taxes

  14,097   853   (442,921)  2,665 

Net income

 $47,702  $15,363  $555,337  $10,294 
                 

Per share data:

                

Basic:

                

Net income per common share

 $6.85  $2.27  $80.02  $1.52 

Weighted-average number of common shares outstanding

  6,315   6,201   6,263   6,178 

Assuming dilution:

                

Net income per common share

 $6.72  $2.16  $78.51  $1.44 

Weighted-average number of common shares outstanding

  6,434   6,518   6,370   6,502 

 

See notes to condensed consolidated financial statements (unaudited).

 

 

 

HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (DEFICIT)

Nine MONTH PERIOD ENDED July 31, 2021

(In Thousands Except Share Amounts)

(Unaudited)

 

  

A Common Stock

  

B Common Stock

  

Preferred Stock

                     
  

Shares

      

Shares

      

Shares

                         
  

Issued and

      

Issued and

      

Issued and

      

Paid-In

  

Accumulated

  

Treasury

  

Noncontrolling

     
  

Outstanding

  

Amount

  

Outstanding

  

Amount

  

Outstanding

  

Amount

  

Capital

  

Deficit

  

Stock

  

Interest

  

Total

 
                                             

Balance, October 31, 2020

  5,519,880  $60   622,217  $7   5,600  $135,299  $718,110  $(1,175,045) $(115,360) $835  $(436,094)
                                             

Stock options, amortization and issuances

  0   0   0   0   0   0   54   0   0   0   54 
                                             

Restricted stock amortization, issuances and forfeitures

  7,207   0   2,370   0   0   0   668   0   0   0   668 
                                             

Conversion of Class B to Class A common stock

  45   0   (45)  0   0   0   0   0   0   0   0 
                                             

Changes in noncontrolling interest in consolidated joint ventures

      0       0       0   0   0   0   78   78 
                                             

Net income

      0       0       0   0   18,959   0   0   18,959 
                                             

Balance, January 31, 2021

  5,527,132  $60   624,542  $7   5,600  $135,299  $718,832  $(1,156,086) $(115,360) $913  $(416,335)
                                             

Stock options, amortization and issuances

  33,316   0   5,368   0   0   0   (255)  0   0   0   (255)
                                             

Restricted stock amortization, issuances and forfeitures

      0       0       0   770   0   0   0   770 
                                             

Conversion of Class B to Class A common stock

  25   0   (25)  0   0   0   0   0   0   0   0 
                                             

Changes in noncontrolling interest in consolidated joint ventures

      0       0       0   0   0   0   (142)  (142)
                                             

Net income

      0       0       0   0   488,676   0   0   488,676 
                                             

Balance, April 30, 2021

  5,560,473  $60   629,885  $7   5,600  $135,299  $719,347  $(667,410) $(115,360) $771  $72,714 
                                             

Stock options, amortization and issuances

  6,806   0   0   0   0   0   128   0   0   0   128 
                                             

Restricted stock amortization, issuances and forfeitures

  26,357   1   29,338   0   0   0   295   0   0   0   296 
                                             

Conversion of Class B to Class A common stock

  4   0   (4)  0   0   0   0   0   0   0   0 
                                             

Changes in noncontrolling interest in consolidated joint ventures

      0       0       0   0   0   0   (149)  (149)
                                             

Net income

      0       0       0   0   47,702   0   0   47,702 
                                             

Balance, July 31, 2021

  5,593,640  $61   659,219  $7   5,600  $135,299  $719,770  $(619,708) $(115,360) $622  $120,691 

 

See notes to condensed consolidated financial statements (unaudited).

 

 

HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (DEFICIT)

Nine MONTH PERIOD ENDED July 31, 2020

(In Thousands Except Share Amounts)

(Unaudited)

 

  

A Common Stock

  

B Common Stock

  

Preferred Stock

                     
  

Shares

      

Shares

      

Shares

                         
  

Issued and

      

Issued and

      

Issued and

      

Paid-In

  

Accumulated

  

Treasury

  

Noncontrolling

     
  

Outstanding

  

Amount

  

Outstanding

  

Amount

  

Outstanding

  

Amount

  

Capital

  

Deficit

  

Stock

  

Interest

  

Total

 
                                             

Balance, October 31, 2019

  5,503,297  $60   622,694  $7   5,600  $135,299  $715,504  $(1,225,973) $(115,360) $687  $(489,776)
                                             

Stock options, amortization and issuances

  0   0   0   0   0   0   162   0   0   0   162 
                                             

Restricted stock amortization, issuances and forfeitures

  3,000   0   1,796   0   0   0   (330)  0   0   0   (330)
                                             

Conversion of Class B to Class A common stock

  4   0   (4)  0   0   0   0   0   0   0   0 
                                             

Changes in noncontrolling interest in consolidated joint ventures

      0       0       0   0   0   0   13   13 
                                             

Net (loss)

      0       0       0   0   (9,148)  0   0   (9,148)
                                             

Balance January 31, 2020

  5,506,301  $60   624,486  $7   5,600  $135,299  $715,336  $(1,235,121) $(115,360) $700  $(499,079)
                                             

Stock options, amortization and issuances

  0   0   0   0   0   0   96   0   0   0   96 
                                             

Restricted stock amortization, issuances and forfeitures

  869   0   0   0   0   0   (189)  0   0   0   (189)
                                             

Conversion of Class B to Class A common stock

  1   0   (1)  0   0   0   0   0   0   0   0 
                                             

Changes in noncontrolling interest in consolidated joint ventures

      0       0       0   0   0   0   20   20 
                                             

Net income

      0       0       0   0   4,079   0   0   4,079 
                                             

Balance, April 30, 2020

  5,507,171  $60   624,485  $7   5,600  $135,299  $715,243  $(1,231,042) $(115,360) $720  $(495,073)
                                             

Stock options, amortization and issuances

  0   0   0   0   0   0   79   0   0   0   79 
                                             

Restricted stock amortization, issuances and forfeitures

  7,077   0   0   0   0   0   82   0   0   0   82 
                                             

Conversion of Class B to Class A common stock

                                          - 
                                             

Changes in noncontrolling interest in consolidated joint ventures

      0       0       0   0   0   0   30   30 
                                             

Net income

      0       0       0   0   15,363   0   0   15,363 
                                             

Balance, July 31, 2020

  5,514,248  $60   624,485  $7   5,600  $135,299  $715,404  $(1,215,679) $(115,360) $750  $(479,519)

  

See notes to condensed consolidated financial statements (unaudited). 

 

 

 

HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

(Unaudited)

 

  

Nine Months Ended

 
  

July 31,

 
  

2021

  

2020

 

Cash flows from operating activities:

        

Net income

 $555,337  $10,294 

Adjustments to reconcile net income to net cash provided by operating activities:

        

Depreciation

  4,091   3,897 

Compensation from stock options and awards

  5,309   38 

Amortization of bond discounts, premiums and deferred financing costs

  490   1,718 

Gain on sale and retirement of property and assets

  (11)  (84)

Income from unconsolidated joint ventures

  (9,568)  (13,419)

Distributions of earnings from unconsolidated joint venture

  8,933   30,411 

Loss (gain) on extinguishment of debt

  306   (13,337)

Noncontrolling interest in consolidated joint ventures

  310   63 

Inventory impairment and land option write-offs

  3,267   6,202 

(Increase) decrease in assets:

        

Origination of mortgage loans

  (1,087,731)  (931,602)

Sale of mortgage loans

  1,060,423   998,935 

Receivables, prepaids, deposits and other assets

  (1,972)  14,381 

Inventories

  (96,576)  72,780 

Deferred tax assets

  (447,453)  0 

(Decrease) increase in liabilities:

        

State income tax payable

  (1,348)  256 

Customers’ deposits

  28,443   5,120 

Accounts payable, accrued interest and other accrued liabilities

  60,022   7,181 

Net cash provided by operating activities

  82,272   192,834 

Cash flows from investing activities:

        

Proceeds from sale of property and assets

  30   104 

Purchase of property, equipment, and other fixed assets and acquisitions

  (3,889)  (2,648)

Investment in and advances to unconsolidated joint ventures

  (16,337)  (19,924)

Distributions of capital from unconsolidated joint ventures

  27,175   4,161 

Net cash provided by (used in) investing activities

  6,979   (18,307)

Cash flows from financing activities:

        

Proceeds from mortgages and notes

  160,604   210,498 

Payments related to mortgages and notes

  (178,251)  (235,498)

Proceeds from model sale leaseback financing programs

  5,638   18,355 

Payments related to model sale leaseback financing programs

  (18,233)  (16,764)

Proceeds from land bank financing programs

  27,636   57,120 

Payments related to land bank financing programs

  (77,313)  (55,173)

Proceeds from partner distributions to consolidated joint venture

  40   0 

Payments for partner distributions to consolidated joint venture

  (563)  0 

Net proceeds (payments) related to mortgage warehouse lines of credit

  29,216   (55,030)

Net borrowings from senior secured credit facility

  0   125,000 

Payments related to senior secured credit facility

  0   (125,000)

Payments related to senior secured notes, net of discount

  (111,214)  (21,240)

Deferred financing costs from land banking financing programs and note issuances

  (1,205)  (12,801)

Net cash used in financing activities

  (163,645)  (110,533)

Net (decrease) increase in cash and cash equivalents, and restricted cash and cash equivalents

  (74,394)  63,994 

Cash and cash equivalents, and restricted cash and cash equivalents balance, beginning of period

  309,460   182,266 

Cash and cash equivalents, and restricted cash and cash equivalents balance, end of period

 $235,066  $246,260 
         

Supplemental disclosures of cash flows:

        

Cash paid received during the period for:

        

Interest, net of capitalized interest (see Note 3 to the Condensed Consolidated Financial Statements)

 $54,823  $49,395 

Income taxes

 $5,847  $2,478 
         

Reconciliation of Cash, cash equivalents and restricted cash

        

Homebuilding: Cash and cash equivalents

 $172,748  $198,098 

Homebuilding: Restricted cash and cash equivalents

  15,100   13,433 

Financial Services: Cash and cash equivalents, included in Financial services assets

  6,187   7,536 

Financial Services: Restricted cash and cash equivalents, included in Financial services assets

  41,031   27,193 

Total cash, cash equivalents and restricted cash shown in the statement of cash flows

 $235,066  $246,260 

 

 

HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands - Unaudited)

(Continued)

 

 

 

 

Supplemental disclosure of noncash investing and financing activities:

 

In the third quarter of fiscal 2021, we acquired the remaining assets of one of our unconsolidated joint ventures, resulting in a $24.3 million reduction in our investment in the joint venture and a corresponding increase to inventory.

 

In accordance with the adoption of ASU 2016-02, in the first quarter of fiscal 2020, we recorded a beginning right-of-use asset of $23.3 million and a right-of-use lease liability of $24.4 million. 

 

In the first quarter of fiscal 2020, K. Hovnanian, the issuer of our notes, completed a debt for debt exchange whereby it issued $158.5 million aggregate principal amount of 10.0% 1.75 Lien Notes due 2025 in exchange for $23.2 million in aggregate principal amount of its outstanding 10.0% Senior Secured Notes due 2022 and $141.7 million in aggregate principal amount of its outstanding 10.5% Senior Secured Notes due 2024. K. Hovnanian also exchanged $163.0 million in aggregate principal amount of its unsecured term loans for $81.5 million in aggregate principal amount of 1.75 Lien secured term loans made under a new Senior Secured 1.75 Lien Term Loan Credit Facility due January 31, 2028.

 

In the second quarter of fiscal 2020, K. Hovnanian, the issuer of our notes, completed a debt for debt exchange whereby it issued $59.1 million aggregate principal amount of 11.25% Senior Secured 1.5 Lien Notes due 2026 in exchange for $59.1 million aggregate principal amount of 10.0% Senior Secured Notes due 2022.

 

See Note 12 for further information.

 

 

HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED

 

 

 

1.

Basis of Presentation

 

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). HEI has reportable segments consisting of six Homebuilding segments (Northeast, Mid-Atlantic, Midwest, Southeast, Southwest and West) and the Financial Services segment (see Note 17).

 

The accompanying unaudited Condensed Consolidated Financial Statements include HEI's accounts and those of all of its consolidated subsidiaries after elimination of all of its significant intercompany balances and transactions. Noncontrolling interest represents the proportionate equity interest in a consolidated joint venture that is not 100% owned by the Company. One of HEI's subsidiaries owns a 99% controlling interest in the consolidated joint venture, and therefore HEI is required to consolidate the joint venture within its Condensed Consolidated Financial Statements. The 1% that we do not own is accounted for as noncontrolling interest. Another one of HEI's subsidiaries owns an 80% controlling interest in a consolidated joint venture, and therefore HEI is required to consolidate the joint venture within its Condensed Consolidated Financial Statements. The 20% that we do not own is accounted for as noncontrolling interest. 

 

The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X, and accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. These Condensed Consolidated Financial Statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended October 31, 2020. In the opinion of management, all adjustments for interim periods presented have been made, which include normal recurring accruals and deferrals necessary for a fair presentation of our condensed consolidated financial position, results of operations and cash flows. The preparation of Condensed Consolidated Financial Statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates, and these differences could have a significant impact on the Condensed Consolidated Financial Statements. Results for interim periods are not necessarily indicative of the results which might be expected for a full year.  

 

 

2.

Stock Compensation

 

For the three and nine months ended July 31, 2021, the Company’s total stock-based compensation expense was $3.6 million ($2.7 million net of tax) and $5.3 million ($4.1 million net of tax), respectively.  For the three and nine months ended July 31, 2020, the Company’s total stock-based compensation expense was $0.2 million (pre and post-tax) and $38 thousand ($30 thousand net of tax), respectively. These amounts are net of any credits to expense as a result of the cancellation of certain Market Stock Units based on performance conditions which were not met. Included in total stock-based compensation expense was the vesting of stock options of $0.1 million and $0.2 million for the three and nine months ended July 31, 2021, respectively, and $0.1 million and $0.3 million for the three and nine months ended July 31, 2020, respectively. See Item 2 "Management's Discussion and Analysis of Financial Condition and Results of Operation" for a discussion of our phantom stock awards under our 2019 Long Term Incentive Plan (“2019 LTIP”), the expense for which varies depending on our common stock price, which has significantly increased. As these awards are cash-settled, such awards are not included in the above expense amounts.

 

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3.

Interest

 

Interest costs incurred, expensed and capitalized were:

 

  

Three Months Ended

  

Nine Months Ended

 
  

July 31,

  

July 31,

 

(In thousands)

 

2021

  

2020

  

2021

  

2020

 

Interest capitalized at beginning of period

 $59,772  $67,744  $65,010  $71,264 

Plus interest incurred(1)

  39,181   45,140   122,508   134,797 

Less cost of sales interest expensed

  19,240   21,814   58,130   58,539 

Less other interest expensed(2)(3)

  19,158   27,072   65,166   78,944 

Less interest contributed to unconsolidated joint venture(4)

  0   0   3,667   4,580 

Plus interest acquired from unconsolidated joint venture(5)

  3,118   0   3,118   0 

Interest capitalized at end of period(6)

 $63,673  $63,998  $63,673  $63,998 

 

(1)

Data does not include interest incurred by our mortgage and finance subsidiaries.

(2)

Other interest expensed includes interest that does not qualify for interest capitalization because our assets that qualify for interest capitalization (inventory under development) do not exceed our debt, which amounted to $14.4 million and $15.9 million for the three months ended July 31, 2021 and 2020, respectively, and $48.1 million and $44.6 million for the nine months ended July 31, 2021 and 2020, respectively. Other interest also includes interest on completed homes, land in planning and fully developed lots without homes under construction, which does not qualify for capitalization and therefore is expensed. This component of other interest was $4.8 million and $11.2 million for the three months ended July 31, 2021 and 2020, respectively, and $17.1 million and $34.3 million for the nine months ended July 31, 2021 and 2020, respectively.

(3)

Cash paid for interest, net of capitalized interest, is the sum of other interest expensed, as defined above, and interest paid by our mortgage and finance subsidiaries adjusted for the change in accrued interest on notes payable, which is calculated as follows:

 

  

Three Months Ended

  

Nine Months Ended

 
  July 31,  July 31, 

(In thousands)

 

2021

  

2020

  

2021

  

2020

 

Other interest expensed

 $19,158  $27,072  $65,166  $78,944 

Interest paid by our mortgage and finance subsidiaries

  602   419   1,554   1,698 

Increase in accrued interest

  (12,139)  (13,876)  (11,897)  (31,247)

Cash paid for interest, net of capitalized interest

 $7,621  $13,615  $54,823  $49,395 

 

(4)

Represents capitalized interest which was included as part of the assets contributed to joint ventures, as discussed in Note 18. There was no impact to the Condensed Consolidated Statement of Operations as a result of these transactions.
(5)Represents capitalized interest which was included as part of the assets purchased from joint ventures, as discussed in Note 18. There was no impact to the Condensed Consolidated Statement of Operations as a result of these transactions.

(6)

Capitalized interest amounts are shown gross before allocating any portion of impairments, if any, to capitalized interest.

   

 

 

4.

Reduction of Inventory to Fair Value

 

We record impairment losses on inventories related to communities under development and held for future development when events and circumstances indicate that they may be impaired and the undiscounted cash flows estimated to be generated by those assets are less than their related carrying amounts. If the expected undiscounted cash flows are less than the carrying amount, then the community is written down to its fair value. We estimate the fair value of each impaired community by determining the present value of the estimated future cash flows at a discount rate commensurate with the risk of the respective community. For the nine months ended July 31, 2021, our discount rates used for the impairments recorded ranged from 18.3% to 19.3%. In the first three quarters of fiscal 2020, we did not record any impairment losses. Should the estimates or expectations used in determining cash flows or fair value decrease or differ from current estimates in the future, we may need to recognize additional impairments.

 

During the nine months ended July 31, 2021 and 2020, we evaluated inventories of all 374 and 354 communities under development and held for future development or sale, respectively, for impairment indicators through preparation and review of detailed budgets or other market indicators of impairment. We performed undiscounted future cash flow analyses during the nine months ended July 31, 2021 for three of those communities (i.e., they had projected operating losses or other impairment indicators), with an aggregate carrying value of $11.5 million. As a result of our undiscounted future cash flow analyses, we performed discounted cash flow analyses and recorded impairment losses of $1.2 million in two communities for the three months ended July 31, 2021 and $2.0 million in three communities for the nine months ended July 31, 2021, which are included in the Condensed Consolidated Statement of Operations on the line entitled “Homebuilding: Inventory impairment loss and land option write-offs” and deducted from inventory. We performed undiscounted future cash flow analyses during the nine months ended July 31, 2020 for one of the 354 communities (i.e., it had projected operating losses or other impairment indicators), with an aggregate carrying value of $0.6 million. As a result of our undiscounted future cash flow analyses, the community did not require a discounted cash flow analysis to be performed, and therefore, no impairment loss was recorded for the nine months ended July 31, 2020. We did not perform undiscounted future cash flow analyses on any communities during the three months ended July 31, 2020.

  

10

 

The Condensed Consolidated Statement of Operations line entitled “Homebuilding: Inventory impairment loss and land option write-offs” also includes write-offs of options and approval, engineering and capitalized interest costs that we record when we redesign communities and/or abandon certain engineering costs and we do not exercise options in various locations because the communities' pro forma profitability is not projected to produce adequate returns on investment commensurate with the risk. Total aggregate write-offs related to these items were $0.1 million and $2.4 million for the three months ended July 31, 2021 and 2020, respectively, and $1.3 million and $6.2 million for the nine months ended July 31, 2021 and 2020, respectively. Occasionally, these write-offs are offset by recovered deposits (sometimes through legal action) that had been written off in a prior period as walk-away costs. Historically, these recoveries have not been significant in comparison to the total costs written off. The number of lots walked away from during the three months ended July 31, 2021 and 2020 were 851 and 1,131, respectively, and 1,420 and 3,495 during the nine months ended July 31, 2021 and 2020, respectively. The walk-aways were located in the Mid-Atlantic, Southeast, Southwest and West segments in the first three quarters of fiscal 2021 and in all segments in the first three quarters of fiscal 2020.

 

We decide to mothball (or stop development on) certain communities when we determine that the current performance does not justify further investment at the time. When we decide to mothball a community, the inventory is reclassified on our Condensed Consolidated Balance Sheets from “Sold and unsold homes and lots under development” to “Land and land options held for future development or sale.” During the first three quarters of fiscal 2021, we did not mothball any additional communities, but we sold two previously mothballed communities and we re-activated two previously mothballed communities and portions of two previously mothballed communities. As of July 31, 2021 and October 31, 2020, the net book value associated with our eight and 12 total mothballed communities was $4.4 million and $11.4 million, respectively, which was net of impairment charges recorded in prior periods of $61.5 million and $122.2 million, respectively.

 

We sell and lease back certain of our model homes with the right to participate in the potential profit when each home is sold to a third party at the end of the respective lease. As a result of our continued involvement, for accounting purposes in accordance with ASC 606-10-55-68, these sale and leaseback transactions are considered a financing rather than a sale. Therefore, for purposes of our Condensed Consolidated Balance Sheets, at July 31, 2021 and October 31, 2020, inventory of $36.0 million and $48.8 million, respectively, was recorded to “Consolidated inventory not owned,” with a corresponding amount of $34.9 million and $47.2 million (net of debt issuance costs), respectively, recorded to “Liabilities from inventory not owned” for the amount of net cash received from the transactions.

 

We have land banking arrangements, whereby we sell our land parcels to the land bankers and they provide us an option to purchase back finished lots on a predetermined schedule. Because of our options to repurchase these parcels, for accounting purposes, in accordance with ASC 606-10-55-70, these transactions are considered a financing rather than a sale. For purposes of our Condensed Consolidated Balance Sheets, at July 31, 2021 and October 31, 2020, inventory of $62.1 million and $133.4 million, respectively, was recorded to “Consolidated inventory not owned,” with a corresponding amount of $34.7 million and $84.0 million (net of debt issuance costs), respectively, recorded to “Liabilities from inventory not owned” for the amount of net cash received from the transactions.

 

 

5.

Variable Interest Entities

 

The Company enters into land and lot option purchase contracts to procure land or lots for the construction of homes. Under these contracts, the Company will fund a stated deposit in consideration for the right, but not the obligation, to purchase land or lots at a future point in time with predetermined terms. Under the terms of the option purchase contracts, many of the option deposits are not refundable at the Company's discretion. Under the requirements of ASC 810, certain option purchase contracts may result in the creation of a variable interest in the entity (“VIE”) that owns the land parcel under option.

 

In compliance with ASC 810, the Company analyzes its option purchase contracts to determine whether the corresponding land sellers are VIEs and, if so, whether the Company is the primary beneficiary. Although the Company does not have legal title to the underlying land, ASC 810 requires the Company to consolidate a VIE if the Company is determined to be the primary beneficiary. In determining whether it is the primary beneficiary, the Company considers, among other things, whether it has the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance. Such activities would include, among other things, determining or limiting the scope or purpose of the VIE, selling or transferring property owned or controlled by the VIE, or arranging financing for the VIE. The Company also considers whether it has the obligation to absorb losses of the VIE or the right to receive benefits from the VIE. As a result of its analyses, the Company determined that, as of July 31, 2021 and October 31, 2020, it was not the primary beneficiary of any VIEs from which it is purchasing land under option purchase contracts.

 

We will continue to secure land and lots using options, some of which are with VIEs. Including deposits on our unconsolidated VIEs, at July 31, 2021, we had total cash deposits amounting to $89.5 million to purchase land and lots with a total purchase price of $1.5 billion. The maximum exposure to loss with respect to our land and lot options is limited to the deposits plus any pre-development costs invested in the property, although some deposits are refundable at our request or refundable if certain conditions are not met.

 

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6.

Warranty Costs

 

General liability insurance for homebuilding companies and their suppliers and subcontractors is very difficult to obtain. The availability of general liability insurance is limited due to a decreased number of insurance companies willing to underwrite for the industry. In addition, those few insurers willing to underwrite liability insurance have significantly increased the premium costs. To date, we have been able to obtain general liability insurance but at higher premium costs with higher deductibles. Our subcontractors and suppliers have advised us that they have also had difficulty obtaining insurance that also provides us coverage. As a result, we have an owner controlled insurance program for certain of our subcontractors whereby the subcontractors pay us an insurance premium (through a reduction of amounts we would otherwise owe such subcontractors for their work on our homes) based on the risk type of the trade. We absorb the liability associated with their work on our homes as part of our overall general liability insurance at no additional cost to us because our existing general liability and construction defect insurance policy and related reserves for amounts under our deductible covers construction defects regardless of whether we or our subcontractors are responsible for the defect. For the three and nine months ended July 31, 2021 and 2020, we received $1.4 million and $0.8 million, respectively, and $4.5 million and $3.3 million, respectively, from subcontractors related to the owner-controlled insurance program, which we accounted for as reductions to inventory.

 

We accrue for warranty costs that are covered under our existing general liability and construction defect policy as part of our general liability insurance deductible. This accrual is expensed as selling, general and administrative costs. For homes delivered in fiscal 2021 and 2020, our deductible under our general liability insurance is or was a $20 million aggregate for construction defect and warranty claims. For bodily injury claims, our deductible per occurrence in fiscal 2021 and 2020 is or was $0.25 million, up to a $5 million limit. Our aggregate retention for construction defect, warranty and bodily injury claims is or was $20 million for fiscal 2021 and 2020. In addition, we establish a warranty accrual for lower cost-related issues to cover home repairs, community amenities and land development infrastructure that are not covered under our general liability and construction defect policy. We accrue an estimate for these warranty costs as part of cost of sales at the time each home is closed and title and possession have been transferred to the homebuyer. Additions and charges in the warranty reserve and general liability reserve for the three and nine months ended July 31, 2021 and 2020 were as follows:

 

  

Three Months Ended

  

Nine Months Ended

 
  

July 31,

  

July 31,

 

(In thousands)

 

2021

  

2020

  

2021

  

2020

 
                 

Balance, beginning of period

 $90,025  $87,139  $86,417  $89,371 

Additions – Selling, general and administrative

  2,047   2,130   6,504   6,121 

Additions – Cost of sales

  6,058   3,250   10,059   7,173 

Charges incurred during the period

  (3,513)  (1,821)  (10,249)  (13,037)

Changes to pre-existing reserves

  789   (302)  2,675   768 

Balance, end of period

 $95,406  $90,396  $95,406  $90,396 

 

Warranty accruals are based upon historical experience. We engage a third-party actuary that uses our historical warranty and construction defect data to assist our management in estimating our unpaid claims, claim adjustment expenses and incurred but not reported claims reserves for the risks that we are assuming under the general liability and construction defect programs. The estimates include provisions for inflation, claims handling and legal fees. The majority of the charges incurred during the third quarter of fiscal 2020 represented a payment for construction defects related to the settlement of a litigation matter.

 

Insurance claims paid by our insurance carriers, excluding insurance deductibles paid, were $0.1 million and less than $0.1 million, respectively, for the nine months ended July 31, 2021 and 2020 for prior year deliveries.

 

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7.

Commitments and Contingent Liabilities

 

We are involved in litigation arising in the ordinary course of business, none of which is expected to have a material adverse effect on our financial position, results of operations or cash flows, and we are subject to extensive and complex laws and regulations that affect the development of land and home building, sales and customer financing processes, including zoning, density, building standards and mortgage financing. These laws and regulations often provide broad discretion to the administering governmental authorities. This can delay or increase the cost of development or homebuilding. The significant majority of our litigation matters are related to construction defect claims. Our estimated losses from construction defect litigation matters, if any, are included in our construction defect reserves.

 

We also are subject to a variety of local, state, federal and foreign laws and regulations concerning protection of health and the environment, including those regulating the emission or discharge of materials into the environment, the management of storm water runoff at construction sites, the handling, use, storage and disposal of hazardous substances, impacts to wetlands and other sensitive environments, and the remediation of contamination at properties that we have owned or developed or currently own or are developing (“environmental laws”). The particular environmental laws that apply to a site may vary greatly according to the community site, for example, due to the community, the environmental conditions at or near the site, and the present and former uses of the site. These environmental laws may result in delays, may cause us to incur substantial compliance, remediation and/or other costs, and can prohibit or severely restrict development and homebuilding activity. In addition, noncompliance with these laws and regulations could result in fines and penalties, obligations to remediate, permit revocations or other sanctions; and contamination or other environmental conditions at or in the vicinity of our developments may result in claims against us for personal injury, property damage or other losses.

 

We anticipate that increasingly stringent requirements will continue to be imposed on developers and homebuilders in the future. In addition, some of these laws and regulations that significantly affect how certain properties may be developed are contentious, attract intense political attention, and may be subject to significant changes over time.  For example, regulations governing wetlands permitting under the federal Clean Water Act have been the subject of extensive rulemakings for many years, resulting in several major joint rulemakings by the EPA and the U.S. Army Corps of Engineers that have expanded and contracted the scope of wetlands subject to regulation; and such rulemakings have been the subject of many legal challenges, some of which remain pending. It is unclear how these and related developments, including at the state or local level, ultimately may affect the scope of regulated wetlands where we operate. Although we cannot reliably predict the extent of any effect these developments regarding wetlands, or any other requirements that may take effect may have on us, they could result in time-consuming and expensive compliance programs and in substantial expenditures, which could cause delays and increase our cost of operations. In addition, our ability to obtain or renew permits or approvals and the continued effectiveness of permits already granted or approvals already obtained is dependent upon many factors, some of which are beyond our control, such as changes in policies, rules and regulations and their interpretations and application.

 

In March 2013, we received a letter from the Environmental Protection Agency (“EPA”) requesting information about our involvement in a housing redevelopment project in Newark, New Jersey that a Company entity undertook during the 1990s. We understand that the development is in the vicinity of a former lead smelter and that tests on soil samples from properties within the development conducted by the EPA showed elevated levels of lead. We also understand that the smelter ceased operations many years before the Company entity involved acquired the properties in the area and carried out the re-development project. We responded to the EPA’s request. In August 2013, we were notified that the EPA considers us a potentially responsible party (or “PRP”) with respect to the site, that the EPA will clean up the site, and that the EPA is proposing that we fund and/or contribute towards the cleanup of the contamination at the site. We began preliminary discussions with the EPA concerning a possible resolution but do not know the scope or extent of the Company’s obligations, if any, that may arise from the site and therefore cannot provide any assurance that this matter will not have a material impact on the Company. The EPA requested additional information in April 2014 and again in March 2017 and the Company responded to the information requests. On May 2, 2018 the EPA sent a letter to the Company entity demanding reimbursement for 100% of the EPA’s costs to clean-up the site in the amount of $2.7 million. The Company responded to the EPA’s demand letter on June 15, 2018 setting forth the Company’s defenses and expressing its willingness to enter into settlement negotiations. Two other PRPs identified by the EPA are now also in negotiations with the EPA and in preliminary negotiations with the Company regarding the site. In the course of negotiations, the EPA informed the Company that the New Jersey Department of Environmental Protection ("NJDEP") has also incurred costs remediating part of the site. The EPA has since requested that the three PRPs present a joint settlement offer to the EPA. The Company and the other two PRPs are parties to a series of agreements tolling the statute of limitations on the EPA's claims for reimbursement, most recently extending the date until October 20, 2021. We believe that we have adequate reserves for this matter.

 

   

13

 

In 2015, the condominium association of the Four Seasons at Great Notch condominium community (the “Great Notch Plaintiff”) filed a lawsuit in the Superior Court of New Jersey, Law Division, Passaic County (the “Court”) alleging various construction defects, design defects, and geotechnical issues relating to the community. The operative complaint (“Complaint”) asserts claims against Hovnanian Enterprises, Inc. and several of its affiliates, including K. Hovnanian at Great Notch, LLC, K. Hovnanian Construction Management, Inc., and K. Hovnanian Companies, LLC. The Complaint also asserts claims against various other design professionals and contractors. The Great Notch Plaintiff has also filed a motion, which remains pending, to permit it to pursue a claim to pierce the corporate veil of K. Hovnanian at Great Notch, LLC to hold its alleged parent entities liable for any damages awarded against it. To date, the Hovnanian-affiliated defendants have reached a partial settlement with the Great Notch Plaintiff as to a portion of the Great Notch Plaintiff’s claims against them for an amount immaterial to the Company. On its remaining claims against the Hovnanian-affiliated defendants, the Great Notch Plaintiff has asserted damages of approximately $119.5 million, which amount is potentially subject to treble damages pursuant to the Great Notch Plaintiff’s claim under the New Jersey Consumer Fraud Act. The trial is currently scheduled for December 6, 2021. Mediation was held in September 2020 with further mediation sessions anticipated in the future. The Hovnanian-affiliated defendants intend to defend these claims vigorously.

 

In December 2020, the NJDEP and the Administrator of the New Jersey Spill Compensation Fund (the “Spill Fund”) filed a lawsuit in the Superior Court of New Jersey, Law Division, Union County against Hovnanian Enterprises, Inc. in addition to other unrelated parties, in connection with contamination at Hickory Manor, a residential condominium development. Alleged predecessors of certain defendants had used the Hickory Manor property for decades for manufacturing purposes. In 1998, NJDEP confirmed that groundwater at this site was impacted from an off-site source. The site was later remediated, resulting in the NJDEP issuing an unconditional site-wide No Further Action determination letter and Covenant Not to Sue in 1999. Subsequently, one of our affiliates was involved in redeveloping the property as a residential community. The complaint asserts claims under the New Jersey Spill Act and other state law claims and alleges that the NJDEP and the Spill Fund have incurred over $5.3 million since 2009 to investigate vapor intrusion at the development and to install vapor mitigation systems. Among other things, the complaint seeks recovery of the costs incurred, an order that defendants perform additional required remediation and disgorgement of profits on our affiliate’s sales of the units in the development. No formal discovery has commenced. Hovnanian Enterprises, Inc. intends to defend these claims vigorously.   

 

 

8.

Cash and Cash Equivalents, Restricted Cash and Cash Equivalents and Customer's Deposits

 

Cash represents cash deposited in checking accounts. Cash equivalents include certificates of deposit, Treasury bills and government money–market funds with maturities of 90 days or less when purchased. Our cash balances are held at a few financial institutions and may, at times, exceed insurable amounts. We believe we help to mitigate this risk by depositing our cash in major financial institutions. At July 31, 2021 and October 31, 2020, $17.9 million and $15.5 million, respectively, of the total cash and cash equivalents was in cash equivalents and restricted cash equivalents, the book value of which approximates fair value.

 

Homebuilding - Restricted cash and cash equivalents on the Condensed Consolidated Balance Sheets totaled $15.1 million and $14.7 million as of July 31, 2021 and October 31, 2020, respectively, which primarily consists of cash collateralizing our letter of credit agreements and facilities as discussed in Note 12.

 

Financial services restricted cash and cash equivalents, which are included in Financial services assets on the Condensed Consolidated Balance Sheets, totaled $41.0 million and $27.4 million as of July 31, 2021 and October 31, 2020, respectively. Included in these balances were (1) financial services customers’ deposits of $36.6 million at July 31, 2021 and $25.4 million as of October 31, 2020, which are subject to restrictions on our use, and (2) $4.4 million at July 31, 2021 and $2.0 million as of October 31, 2020 of restricted cash under the terms of our mortgage warehouse lines of credit.

 

Total Homebuilding Customers’ deposits are shown as a liability on the Condensed Consolidated Balance Sheets. These liabilities are significantly more than the applicable periods’ restricted cash balances because, in some states, the deposits are not restricted from use and, in other states, we are able to release the majority of these customer deposits to cash by pledging letters of credit and surety bonds.

 

 

9.

Leases

 

We lease certain office space for use in our operations. We assess each of these contracts to determine whether the arrangement contains a lease as defined by ASC 842 “Leases” ("ASC 842"). In order to meet the definition of a lease under ASC 842, the contractual arrangement must convey to us the right to control the use of an identifiable asset for a period of time in exchange for consideration. We recognize lease expense for these leases on a straight-line basis over the lease term and combine lease and non-lease components for all leases. Our office lease terms are generally from three to five years and generally contain renewal options. In accordance with ASC 842, our lease terms include those renewals only to the extent that they are reasonably certain to be exercised. The exercise of these lease renewal options is generally at our discretion. In accordance with ASC 842, the lease liability is equal to the present value of the remaining lease payments while the right of use (“ROU”) asset is based on the lease liability, subject to adjustment, such as for lease incentives. Our leases do not provide a readily determinable implicit interest rate and therefore, we must estimate our incremental borrowing rate. In determining the incremental borrowing rate, we consider the lease period and our collateralized borrowing rates.

 

14

 

Our lease population at July 31, 2021 is comprised of operating leases where we are the lessee, and these leases are primarily real estate for office space for our corporate office, division offices and design centers. As allowed by ASC 842, we adopted an accounting policy election to not record leases with lease terms of twelve months or less on our Condensed Consolidated Balance Sheets.

 

 

Lease cost included in our Condensed Consolidated Statements of Operations in Selling, general and administrative expenses and payments on our lease liabilities are presented in the table below. Our short-term lease costs and sublease income are de minimis.

 

  

Three Months Ended

  

Nine Months Ended

 

(In thousands)

 

July 31, 2021

  

July 31, 2020

  

July 31, 2021

  

July 31, 2020

 

Operating lease cost

 $2,760  $2,621  $7,970  $7,837 

Cash payments on lease liabilities

 $2,483  $2,266  $7,171  $6,890 

 

ROU assets are classified within Prepaids and other assets on our Condensed Consolidated Balance Sheets, while lease liabilities are classified within Accounts payable and other liabilities on our Condensed Consolidated Balance Sheets. During the three and nine months ended July 31, 2021, the Company recorded an additional $0.6 million and $4.6 million, respectively, to both its ROU assets and lease liabilities as a result of new leases that commenced during the period. The following table contains additional information about our leases:

 

(In thousands)

 

At July 31, 2021

  

At October 31, 2020

 

ROU assets

 $18,108  $20,016 

Lease liabilities

 $19,135  $21,049 

Weighted-average remaining lease term (in years)

  3.1   3.5 

Weighted-average discount rate (incremental borrowing rate)

  9.4%  9.6%

 

Maturities of our operating lease liabilities as of July 31, 2021 are as follows:

 

Year ended October 31,

 

(in thousands)

 

2021 (excluding the nine months ended July 31, 2021)

 $2,380 

2022

  8,587 

2023

  5,341 

2024

  2,627 

2025

  2,126 

Thereafter

  1,162 

Total payments

  22,223 

Less: imputed interest

  (3,088)

Present value of lease liabilities

 $19,135 

 

 

10.

Mortgage Loans Held for Sale

 

Our wholly owned mortgage banking subsidiary, K. Hovnanian American Mortgage, LLC (“K. Hovnanian Mortgage”), originates mortgage loans, primarily from the sale of our homes. Such mortgage loans are sold in the secondary mortgage market within a short period of time of origination. Mortgage loans held for sale consist primarily of single-family residential loans collateralized by the underlying property. We have elected the fair value option to record loans held for sale, and therefore these loans are recorded at fair value with the changes in the value recognized in the Condensed Consolidated Statements of Operations in “Revenues: Financial services.” We currently use forward sales of mortgage-backed securities (“MBS”), interest rate commitments from borrowers and mandatory and/or best efforts forward commitments to sell loans to third-party purchasers to protect us from interest rate fluctuations. These short-term instruments, which do not require any payments to be made to the counterparty or purchaser in connection with the execution of the commitments, are recorded at fair value. Gains and losses on changes in the fair value are recognized in the Condensed Consolidated Statements of Operations in “Revenues: Financial services.”

 

At July 31, 2021 and October 31, 2020, $119.1 million and $87.9 million, respectively, of mortgages held for sale were pledged against our mortgage warehouse lines of credit (see Note 11). We may incur losses with respect to mortgages that were previously sold that are delinquent and which had underwriting defects, but only to the extent the losses are not covered by mortgage insurance or resale value of the home. The reserves for these estimated losses are included in the “Financial services” balances on the Condensed Consolidated Balance Sheets. As of July 31, 2021 and 2020, we had reserves specifically for 16 and 21 identified mortgage loans, respectively, as well as reserves for an estimate for future losses on mortgages sold but not yet identified to us.

 

 

15

 

The activity in our loan origination reserves during the three and nine months ended July 31, 2021 and 2020 was as follows:

 

  

Three Months Ended

  

Nine Months Ended

 
  

July 31,

  

July 31,

 

(In thousands)

 

2021

  

2020

  

2021

  

2020

 
                 

Loan origination reserves, beginning of period

 $1,524  $1,358  $1,458  $1,268 

Provisions for losses during the period

  58   56   167   140 

Adjustments to pre-existing provisions for losses from changes in estimates

  0   0   (43)  6 

Loan origination reserves, end of period

 $1,582  $1,414  $1,582  $1,414 

 

 

11.

Mortgages

 

Nonrecourse. We have nonrecourse mortgage loans for certain communities totaling $118.0 million and $135.1 million (net of debt issuance costs) at July 31, 2021 and October 31, 2020, respectively, which are secured by the related real property, including any improvements, with an aggregate book value of $421.9 million and $368.1 million, respectively. The weighted-average interest rate on these obligations was 4.8% and 6.4% at July 31, 2021 and October 31, 2020, respectively, and the mortgage loan payments on each community primarily correspond to home deliveries.

 

Mortgage Loans. K. Hovnanian Mortgage originates mortgage loans primarily from the sale of our homes. Such mortgage loans and related servicing rights are sold in the secondary mortgage market within a short period of time. In certain instances, we retain the servicing rights for a small amount of loans. K. Hovnanian Mortgage finances the origination of mortgage loans through various master repurchase agreements, which are recorded in "Financial services" liabilities on the Condensed Consolidated Balance Sheets.

 

Our secured Master Repurchase Agreement with JPMorgan Chase Bank, N.A. (“Chase Master Repurchase Agreement”), which was amended on July 2, 2021 to extend the maturity date to June 30, 2022, is a short-term borrowing facility that provides up to $50.0 million through its maturity. The loan is secured by the mortgages held for sale and is repaid when we sell the underlying mortgage loans to permanent investors. Interest is payable monthly on outstanding advances at an adjusted LIBOR rate, which was 0.09% at July 31, 2021, plus the applicable margin of 2.5%. As of July 31, 2021 and October 31, 2020, the aggregate principal amount of all borrowings outstanding under the Chase Master Repurchase Agreement was $39.1 million and $23.5 million, respectively.

 

K. Hovnanian Mortgage has another secured Master Repurchase Agreement with Customers Bank (“Customers Master Repurchase Agreement”), which is a short-term borrowing facility that provides up to $50.0 million through its maturity on March 9, 2022. The loan is secured by the mortgages held for sale and is repaid when we sell the underlying mortgage loans to permanent investors. Interest is payable daily or as loans are sold to permanent investors on outstanding advances at the current LIBOR rate, plus the applicable margin ranging from 2.125% to 4.75% based on the type of loan and the number of days outstanding on the warehouse line. As of July 31, 2021 and October 31, 2020, the aggregate principal amount of all borrowings outstanding under the Customers Master Repurchase Agreement was $45.5 million and $31.1 million, respectively.

 

K. Hovnanian Mortgage also has a secured Master Repurchase Agreement with Comerica Bank (“Comerica Master Repurchase Agreement”), which was amended on July 12, 2021 to extend the maturity date to June 28, 2022, and which is a short-term borrowing facility through its maturity. The Comerica Master Repurchase Agreement provides up to $60.0 million on the 15th day of the last month of the Company's fiscal quarters, and reverts back to up to $50.0 million 30 days thereafter. The loan is secured by the mortgages held for sale and is repaid when we sell the underlying mortgage loans to permanent investors. Interest is payable monthly at the current LIBOR rate, subject to a floor of 0.25%, plus the applicable margin of 1.875% or 3.25% based upon the type of loan. As of July 31, 2021 and October 31, 2020, the aggregate principal amount of all borrowings outstanding under the Comerica Master Repurchase Agreement was $31.8 million and $32.6 million, respectively.

 

The Chase Master Repurchase Agreement, Customers Master Repurchase Agreement and Comerica Master Repurchase Agreement (together, the “Master Repurchase Agreements”) require K. Hovnanian Mortgage to satisfy and maintain specified financial ratios and other financial condition tests. Because of the extremely short period of time mortgages are held by K. Hovnanian Mortgage before the mortgages are sold to investors (generally a period of a few weeks), the immateriality to us on a consolidated basis of the size of the Master Repurchase Agreements, the levels required by these financial covenants, our ability based on our immediately available resources to contribute sufficient capital to cure any default, were such conditions to occur, and our right to cure any conditions of default based on the terms of the applicable agreement, we do not consider any of these covenants to be substantive or material. As of July 31, 2021, we believe we were in compliance with the covenants under the Master Repurchase Agreements.

 

16

 

 

12.

Senior Notes and Credit Facilities

 

Senior notes and credit facilities balances as of July 31, 2021 and October 31, 2020, were as follows:

 

  

July 31,

  

October 31,

 

(In thousands)

 

2021

  

2020

 

Senior Secured Notes:

        

10.0% Senior Secured Notes due July 15, 2022

 $0  $111,214 

10.5% Senior Secured Notes due July 15, 2024

  69,683   69,683 

10.0% Senior Secured 1.75 Lien Notes due November 15, 2025

  158,502   158,502 

7.75% Senior Secured 1.125 Lien Notes due February 15, 2026

  350,000   350,000 

10.5% Senior Secured 1.25 Lien Notes due February 15, 2026

  282,322   282,322 

11.25% Senior Secured 1.5 Lien Notes due February 15, 2026

  162,269   162,269 

Total Senior Secured Notes

 $1,022,776  $1,133,990 

Senior Notes:

        

8.0% Senior Notes due November 1, 2027 (1)

 $-  $- 

13.5% Senior Notes due February 1, 2026

  90,590   90,590 

5.0% Senior Notes due February 1, 2040

  90,120   90,120 

Total Senior Notes

 $180,710  $180,710 

Senior Unsecured Term Loan Credit Facility due February 1, 2027

 $39,551  $39,551 

Senior Secured 1.75 Lien Term Loan Credit Facility due January 31, 2028

 $81,498  $81,498 

Senior Secured Revolving Credit Facility (2)

 $-  $- 

Subtotal notes payable

 $1,324,535  $1,435,749 

Net (discounts) premiums

 $11,661  $17,521 

Net debt issuance costs

 $(18,672) $(22,160)

Total notes payable, net of discounts, premiums and debt issuance costs

 $1,317,524  $1,431,110 

 

(1) $26.0 million of 8.0% Senior Notes due 2027 (the "8.0% 2027 Notes") are owned by a wholly-owned consolidated subsidiary of HEI. Therefore, in accordance with GAAP, such notes are not reflected on the Condensed Consolidated Balance Sheets of HEI. On November 1, 2019, the maturity of the 8.0% 2027 Notes was extended to November 1, 2027.

 

(2) At July 31, 2021, provides for up to $125.0 million in aggregate amount of senior secured first lien revolving loans. Availability thereunder will terminate on December 28, 2022.

 

General

 

Except for K. Hovnanian, the issuer of the notes and borrower under the Credit Facilities (as defined below), our home mortgage subsidiaries, certain of our title insurance subsidiaries, joint ventures and subsidiaries holding interests in our joint ventures, we and each of our subsidiaries are guarantors of the Credit Facilities, the senior secured notes (subject in the case of the 10.5% 2024 Notes (as defined below), to the 10.5% 2024 Notes Supplemental Indenture (as defined below)) and senior notes outstanding (except for the 8.0% 2027 Notes which are not guaranteed by K. Hovnanian at Sunrise Trail III, LLC, a wholly-owned subsidiary of the Company) at July 31, 2021 (collectively, the “Notes Guarantors”).

 

The credit agreements governing the Credit Facilities and the indentures governing the senior secured and senior notes (together, the “Debt Instruments”) outstanding at July 31, 2021 do not contain any financial maintenance covenants, but do contain restrictive covenants that limit, among other things, the ability of HEI and certain of its subsidiaries, including K. Hovnanian, to incur additional indebtedness (other than non-recourse indebtedness, certain permitted indebtedness and refinancing indebtedness), pay dividends and make distributions on common and preferred stock, repay/repurchase certain indebtedness prior to its respective stated maturity, repurchase (including through exchanges) common and preferred stock, make other restricted payments (including investments), sell certain assets (including in certain land banking transactions), incur liens, consolidate, merge, sell or otherwise dispose of all or substantially all of their assets and enter into certain transactions with affiliates. The Debt Instruments also contain customary events of default which would permit the lenders or holders thereof to exercise remedies with respect to the collateral (as applicable), declare the loans made under the Unsecured Term Loan Facility (defined below) (the “Unsecured Term Loans”), loans made under the Secured Term Loan Facility (defined below) (the “Secured Term Loans”) and loans made under the Secured Credit Agreement (as defined below) (the “Secured Revolving Loans”) or notes to be immediately due and payable if not cured within applicable grace periods, including the failure to make timely payments on the Unsecured Term Loans, Secured Term Loans, Secured Revolving Loans or notes or other material indebtedness, cross default to other material indebtedness, the failure to comply with agreements and covenants and specified events of bankruptcy and insolvency, with respect to the Unsecured Term Loans, Secured Term Loans and Secured Revolving Loans, material inaccuracy of representations and warranties and with respect to the Unsecured Term Loans, Secured Term Loans and Secured Revolving Loans, a change of control, and, with respect to the Secured Term Loans, Secured Revolving Loans and senior secured notes, the failure of the documents granting security for the obligations under the secured Debt Instruments to be in full force and effect, and the failure of the liens on any material portion of the collateral securing the obligations under the secured Debt Instruments to be valid and perfected. As of July 31, 2021, we believe we were in compliance with the covenants of the Debt Instruments.

 

17

 

If our consolidated fixed charge coverage ratio is less than 2.0 to 1.0, as defined in the applicable Debt Instrument, we are restricted from making certain payments, including dividends (in the case of the payment of dividends, our secured debt leverage ratio must also be less than 4.0 to 1.0), and from incurring indebtedness other than certain permitted indebtedness, refinancing indebtedness and nonrecourse indebtedness. As a result of this ratio restriction, we are currently restricted from paying dividends, which are not cumulative, on our 7.625% Series A Preferred Stock. Our inability to pay dividends is in accordance with covenant restrictions and will not result in a default under our Debt Instruments or otherwise affect compliance with any of the covenants contained in our Debt Instruments.

 

Under the terms of our Debt Instruments, we have the right to make certain redemptions and prepayments and, depending on market conditions, our strategic priorities and covenant restrictions, may do so from time to time. We also continue to actively analyze and evaluate our capital structure and explore transactions to simplify our capital structure and to strengthen our balance sheet, including those that reduce leverage, interest rates and/or extend maturities, and will seek to do so with the right opportunity. We may also continue to make debt purchases and/or exchanges for debt or equity from time to time through tender offers, exchange offers, redemptions, open market purchases, private transactions, or otherwise, or seek to raise additional debt or equity capital, depending on market conditions and covenant restrictions.

 

Fiscal 2021

 

On July 30, 2021, K. Hovnanian redeemed in full all of the $111.2 million aggregate principal amount of 10.0% Senior Secured Notes due 2022 (the "10.0% 2022 Notes"). The aggregate purchase price for this redemption was $111.7 million, which included accrued and unpaid interest and which was funded with cash on hand. This redemption resulted in a loss on extinguishment of debt of $0.3 million for the three months ended July 31, 2021, net of the write-off of unamortized financing costs and fees. The loss from the redemption is included in the Condensed Consolidated Statement of Operations as "Loss on extinguishment of debt".

 

On August 2, 2021, K. Hovnanian redeemed in full all of the $69.7 million aggregate principal amount of 10.5% Senior Secured Notes due 2024 (the "10.5% 2024 Notes"). See Note 22 for further information.

 

Fiscal 2020

 

On December 10, 2019, K. Hovnanian consummated an exchange offer (the "1.75 Lien Exchange Offer") pursuant to which it issued $158.5 million aggregate principal amount of 10.0% 1.75 Lien Notes due 2025 (the “1.75 Lien Notes”) in exchange for $23.2 million in aggregate principal amount of its outstanding 10.0% 2022 Notes and $141.7 million in aggregate principal amount of its outstanding 10.5% 2024 Notes. K. Hovnanian also exchanged $163.0 million in aggregate principal amount of its Unsecured Term Loans for $81.5 million in aggregate principal amount of Secured Term Loans made under a new Senior Secured 1.75 Lien Term Loan Credit Facility due January 31, 2028 (the “Secured Term Loan Facility”). There was no cash consideration in these exchanges. These secured notes and term loan exchanges were accounted for in accordance with ASC 470-60, resulting in a carrying value of $164.9 million and $148.8 million, respectively, for the $158.5 million of 1.75 Lien Notes and $81.5 million of Secured Term Loans, respectively, and a net gain on extinguishment of debt of $9.2 million (including additional costs of $0.1 million incurred in the third quarter of fiscal 2020), which is included as “(Loss) gain on extinguishment of debt” on the Condensed Consolidated Statement of Operations. The effect of this gain on a per share basis, assuming dilution, for the nine months ended July 31, 2020 was $1.42, excluding the impact of taxes, as our deferred tax assets were fully reserved by a valuation allowance.

 

In connection with the 1.75 Lien Exchange Offer, K. Hovnanian obtained consents from a majority of the holders of the 10.5% 2024 Notes (as defined below) to amendments to the indenture under which such 10.5% 2024 Notes were issued and entered into the Tenth Supplemental Indenture dated as of December 6, 2019 among HEI, K. Hovnanian, the guarantors party thereto and Wilmington Trust, National Association, as trustee and collateral agent (the “10.5% 2024 Notes Supplemental Indenture”) to provide for such amendments, which became operative on December 10, 2019. The amendments eliminate most of the restrictive covenants, certain of the affirmative covenants and certain events of default, including eliminating the obligations of subsidiaries that are formed after December 10, 2019 to become guarantors of the 10.5% 2024 Notes and to provide collateral in respect of their assets. As a result, the 10.5% 2024 Notes do not have the same guarantors or collateral as K. Hovnanian’s other secured debt obligations.

 

The 1.75 Lien Notes were issued under an Indenture, dated as of December 10, 2019, among HEI, K. Hovnanian, the guarantors party thereto and Wilmington Trust, National Association, as trustee and collateral agent. The 1.75 Lien Notes are guaranteed by HEI and the Notes Guarantors and are secured by substantially all of the assets owned by K. Hovnanian and the Notes Guarantors, subject to permitted liens and certain exceptions. Interest on the 1.75 Lien Notes is payable semi-annually on May 15 and November 15 of each year to holders of record at the close of business on May 1 or November 1, as the case may be, immediately preceding each such interest payment date. The 1.75 Lien Notes have a maturity of November 15, 2025.

 

The 1.75 Lien Notes are redeemable in whole or in part at K. Hovnanian’s option at any time prior to November 15, 2021 at a redemption price equal to 100.0% of their principal amount plus an applicable “Make-Whole Amount”. At any time and from time to time on or after November 15, 2021 and prior to November 15, 2022, K. Hovnanian may redeem some or all of the 1.75 Lien Notes at a redemption price equal to 105.00% of their principal amount, at any time and from time to time after November 15, 2022 and prior to November 15, 2023, K. Hovnanian may redeem some or all of the 1.75 Lien Notes at a redemption price equal to 102.50% of their principal amount and at any time and from time to time after November 15, 2023, K. Hovnanian may redeem some or all of the 1.75 Lien Notes at a redemption price equal to 100.0% of their principal amount. In addition, K. Hovnanian may also redeem up to 35.0% of the aggregate principal amount of the 1.75 Lien Notes prior to November 15, 2021 with the net cash proceeds from certain equity offerings at 110.00% of principal.  

 

The Secured Term Loans and the guarantees thereof are secured on a pari passu basis with the 1.75 Lien Notes by the same assets that secure the 1.75 Lien Notes, subject to permitted liens and certain exceptions. The Secured Term Loans bear interest at a rate equal to 10.0% per annum and will mature on January 31, 2028, with interest payable in arrears on the last business day of each fiscal quarter. The Secured Term Loans may be voluntarily prepaid in whole or in part at K. Hovnanian’s option at any time prior to November 15, 2021 at a prepayment price equal to 100.0% of their principal amount plus any applicable “Make-Whole Amount”. At any time and from time to time on or after November 15, 2021 and prior to November 15, 2022, K. Hovnanian may voluntarily prepay some or all of the Secured Term Loans at a prepayment price equal to 105.00% of their principal amount, at any time and from time to time after November 15, 2022 and prior to November 15, 2023, K. Hovnanian may voluntarily prepay some or all of the Secured Term Loans at a prepayment price equal to 102.50% of their principal amount and at any time and from time to time after November 15, 2023, K. Hovnanian may voluntarily prepay some or all of the Secured Term Loans at a prepayment price equal to 100.0% of their principal amount.

 

18

 

On March 25, 2020, K. Hovnanian consummated a private exchange (the “Exchange”) pursuant to which it issued $59.1 million aggregate principal amount of additional 1.5 Lien Notes (defined below) (the “Additional 1.5 Lien Notes”) in exchange for $59.1 million aggregate principal amount of 10.0% 2022 Notes held by certain participating bondholders (the “Exchange Holders”) pursuant to an Exchange Agreement, dated March 25, 2020 (the “Exchange Agreement”), among the K. Hovnanian, the Notes Guarantors, the Exchanging Holders and certain holders of the Initial 1.5 Lien Notes (defined below) (the “Consenting Holders”). In connection therewith, the Consenting Holders provided their consents (the “Consents”) under the Indenture under which the 1.5 Lien Notes were issued to permit the issuance of the Additional 1.5 Lien Notes.

 

The Additional 1.5 Lien Notes were issued as additional notes of the same series as the $103.1 million aggregate principal amount of K. Hovnanian’s 11.25% Senior Secured 1.5 Lien Notes due 2026 issued on October 31, 2019 (the “Initial 1.5 Lien Notes” and, together with the Additional 1.5 Lien Notes, the “1.5 Lien Notes”). In connection with the issuance of the Additional 1.5 Lien Notes in the Exchange, K. Hovnanian, the Notes Guarantors and Wilmington Trust, National Association, as trustee (the “Trustee”) and collateral agent (the “Collateral Agent”), entered into the Fourth Supplemental Indenture, dated as of March 25, 2020 (the “Supplemental Indenture”), to the Indenture, dated as of October 31, 2019 (as amended and supplemented prior to the Supplemental Indenture, the “Indenture”), among the K. Hovnanian, the Notes Guarantors, the Trustee and the Collateral Agent. The Supplemental Indenture also amends the Indenture in accordance with the Consents to permit K. Hovnanian and the Notes Guarantors to secure up to $162.3 million of 1.5 Lien Obligations (as defined in the Indenture). As of March 25, 2020, after giving effect to the issuance of the Additional 1.5 Lien Notes, $162.3 million aggregate principal amount of 1.5 Lien Obligations, which consist of the 1.5 Lien Notes, were outstanding.  For a discussion of the 1.5 Lien Notes see “—Secured Obligations” below.

 

During the three months ended July 31, 2020, the Company repurchased in open market transactions $25.5 million aggregate principal amount of the 10.0% 2022 Notes. The aggregate purchase price for these repurchases was $21.4 million, which included accrued and unpaid interest. These repurchases resulted in a gain on extinguishment of debt of $4.1 million for the three months ended July 31, 2020, net of the write-off of unamortized financing costs and fees. The gains from the repurchases are included in the Condensed Consolidated Statement of Operations as "Gain on extinguishment of debt".

 

Secured Obligations

 

On October 31, 2019, K. Hovnanian, HEI, the Notes Guarantors, Wilmington Trust, National Association, as administrative agent, and affiliates of certain investment managers (the “Investors”), as lenders, entered into a credit agreement (the “Secured Credit Agreement” and, together with the Unsecured Term Loan Facility (defined below) and the Secured Term Loan Facility, the “Credit Facilities”) providing for up to $125.0 million in aggregate amount of Secured Revolving Loans to be used for general corporate purposes, upon the terms and subject to the conditions set forth therein. Secured Revolving Loans are to be borrowed by K. Hovnanian and guaranteed by the Notes Guarantors. Availability under the Secured Credit Agreement will terminate on December 28, 2022. The Secured Revolving Loans bear interest at a rate per annum equal to 7.75%, and interest is payable in arrears, on the last business day of each fiscal quarter.

 

The 10.5% 2024 Notes had a maturity of July 15, 2024 and bore interest at a rate of 10.5% per annum payable semi-annually on January 15 and July 15 of each year, to holders of record at the close of business on January 1 and July 1, as the case may be, immediately preceding such interest payment dates. K. Hovnanian may redeem some or all of the 10.5% 2024 Notes at 105.25% of principal commencing July 15, 2020, at 102.625% of principal commencing July 15, 2021 and at 100.0% of principal commencing July 15, 2022. On August 2, 2021, the Company redeemed in full all of the $69.7 million aggregate principal amount of 10.5% 2024 Notes. See Note 22 for further information.

 

The 7.75% Senior Secured 1.125 Lien Notes due 2026 (the "1.125 Lien Notes") have a maturity of February 15, 2026 and bear interest at a rate of 7.75% per annum payable semi-annually on February 15 and August 15 of each year, to holders of record at the close of business on February 1 and August 1, as the case may be, immediately preceding such interest payment dates. The 1.125 Lien Notes are redeemable in whole or in part at our option at any time prior to February 15, 2022 at 100.0% of their principal amount plus an applicable “Make-Whole Amount.” In addition, up to 35% of the original aggregate principal amount of the 1.125 Lien Notes may be redeemed with the net cash proceeds from certain equity offerings at 107.75% of principal at any time prior to February 15, 2022. K. Hovnanian may also redeem some or all of the 1.125 Lien Notes at 103.875% of principal commencing February 15, 2022, at 101.937% of principal commencing February 15, 2023 and at 100.0% of principal commencing February 15, 2024.

 

The 10.5% Senior Secured 1.25 Lien Notes due 2026 (the "1.25 Lien Notes") have a maturity of February 15, 2026 and bear interest at a rate of 10.5% per annum payable semi-annually on February 15 and August 15 of each year to holders of record at the close of business on February 1 and August 1, as the case may be, immediately preceding such interest payment dates. The 1.25 Lien Notes are redeemable in whole or in part at our option at any time prior to February 15, 2022 at 100.0% of their principal amount plus an applicable “Make-Whole Amount.” In addition, up to 35% of the original aggregate principal amount of the 1.25 Lien Notes may be redeemed with the net cash proceeds from certain equity offerings at 110.5% of principal at any time prior to February 15, 2022. K. Hovnanian may also redeem some or all of the 1.25 Lien Notes at 105.25% of principal commencing February 15, 2022, at 102.625% of principal commencing February 15, 2023 and at 100.0% of principal commencing February 15, 2024.

 

The 11.25% Senior Secured 1.5 Lien Notes due 2026 (the "1.5 Lien Notes") have a maturity of February 15, 2026 and bear interest at a rate of 11.25% per annum payable semi-annually on February 15 and August 15 of each year to holders of record at the close of business on February 1 and August 1, as the case may be, immediately preceding such interest payment dates. The 1.5 Lien Notes are redeemable in whole or in part at our option at any time prior to February 15, 2026 at 100.0% of their principal amount.

 

See “—Fiscal 2020 for a discussion of the 1.75 Lien Notes and the Secured Term Loans.

 

 

  

19

 

Each series of secured notes (subject in the case of the 10.5% 2024 Notes, to the 10.5% 2024 Notes Supplemental Indenture) and the guarantees thereof, the Secured Term Loans and the guarantees thereof and the Secured Credit Agreement and the guarantees thereof are secured by the same assets. Among the secured debt, the liens securing the Secured Credit Agreement are senior to the liens securing all of K. Hovnanian’s other secured notes and the Secured Term Loan. The liens securing the 1.125 Lien Notes are senior to the liens securing the 1.25 Lien Notes, 1.5 Lien Notes, the 1.75 Lien Notes, the Secured Term Loans, the 10.5% 2024 Notes and any other future secured obligations that are junior in priority with respect to the assets securing the 1.125 Lien Notes, the liens securing the 1.25 Lien Notes are senior to the liens securing the 1.5 Lien Notes, the 1.75 Lien Notes, the Secured Term Loans, the 10.5% 2024 Notes and any other future secured obligations that are junior in priority with respect to the assets securing the 1.25 Lien Notes, the liens securing the 1.5 Lien Notes are senior to the liens securing the 1.75 Lien Notes, the Secured Term Loans, the 10.5% 2024 Notes and any other future secured obligations that are junior in priority with respect to the assets securing the 1.5 Lien Notes, the liens securing the 1.75 Lien Notes and the Secured Term Loans (which are secured on a pari passu basis with each other) are senior to the liens securing the 10.5% 2024 Notes and any other future secured obligations that are junior in priority with respect to the assets securing the 1.75 Lien Notes and the Secured Term Loans, in each case, with respect to the assets securing such debt.

 

As of July 31, 2021, the collateral securing the Secured Credit Agreement, the Secured Term Loan Facility and the secured notes (subject in the case of the 10.5% 2024 Notes, to the 10.5% 2024 Notes Supplemental Indenture) included (1) $177.7 million of cash and cash equivalents, which included $10.0 million of restricted cash collateralizing certain letters of credit (subsequent to such date, fluctuations as a result of cash uses include general business operations and real estate and other investments along with cash inflow primarily from deliveries); (2) $514.2 million aggregate book value of real property, which does not include the impact of inventory investments, home deliveries or impairments thereafter and which may differ from the value if it were appraised; and (3) equity interests in joint venture holding companies with an aggregate book value of $124.9 million.

 

Unsecured Obligations

 

The 13.5% Senior Notes due 2026 (the “13.5% 2026 Notes”) bear interest at 13.5% per annum and mature on February 1, 2026. Interest on the 13.5% 2026 Notes is payable semi-annually on February 1 and August 1 of each year to holders of record at the close of business on January 15 or July 15, as the case may be, immediately preceding each such interest payment date. The 13.5% 2026 Notes are redeemable in whole or in part at K. Hovnanian’s option at any time prior to February 1, 2025 at a redemption price equal to 100% of their principal amount plus an applicable “Make Whole Amount”. At any time and from time to time on or after February 1, 2025, K. Hovnanian may also redeem some or all of the 13.5% 2026 Notes at a redemption price equal to 100.0% of their principal amount.

 

The 5.0% Senior Notes due 2040 (the “5.0% 2040 Notes”) bear interest at 5.0% per annum and mature on February 1, 2040. Interest on the 5.0% 2040 Notes is payable semi-annually on February 1 and August 1 of each year to holders of record at the close of business on January 15 or July 15, as the case may be, immediately preceding each such interest payment date. At any time and from time to time after February 1, 2021, K. Hovnanian may redeem some or all of the 2040 Notes at a redemption price equal to 100.0% of their principal amount. 

 

The Unsecured Term Loans bear interest at a rate equal to 5.0% per annum and interest is payable in arrears, on the last business day of each fiscal quarter. The Unsecured Term Loans will mature on February 1, 2027.

 

Other

 

We have certain stand-alone cash collateralized letter of credit agreements and facilities under which there was a total of $9.8 million and $11.3 million letters of credit outstanding at July 31, 2021 and October 31, 2020, respectively. These agreements and facilities require us to maintain specified amounts of cash as collateral in segregated accounts to support the letters of credit issued thereunder, which will affect the amount of cash we have available for other uses. At July 31, 2021 and October 31, 2020, the amount of cash collateral in these segregated accounts was $10.0 million and $11.6 million, respectively, which is reflected in “Restricted cash and cash equivalents” on the Condensed Consolidated Balance Sheets.

 

 

13.

Per Share Calculation

 

Basic earnings per share is computed by dividing net income (the “numerator”) by the weighted-average number of common shares outstanding, adjusted for nonvested shares of restricted stock (the “denominator”) for the period. Computing diluted earnings per share is similar to computing basic earnings per share, except that the denominator is increased to include the dilutive effects of options and nonvested shares of restricted stock. Any options that have an exercise price greater than the average market price are considered to be anti-dilutive and are excluded from the diluted earnings per share calculation.   

  

20

 

All outstanding nonvested shares that contain nonforfeitable rights to dividends or dividend equivalents that participate in undistributed earnings with common stock are considered participating securities and are included in computing earnings per share pursuant to the two-class method. The two-class method is an earnings allocation formula that determines earnings per share for each class of common stock and participating securities according to dividends or dividend equivalents and participation rights in undistributed earnings in periods when we have net income. The Company’s restricted common stock (“nonvested shares”) are considered participating securities.

 

Basic and diluted earnings per share for the periods presented below were calculated as follows:

 

  

Three Months Ended

  

Nine Months Ended

 
  

July 31,

  

July 31,

 

(In thousands, except per share data)

 

2021

  

2020

  

2021

  

2020

 
                 

Numerator:

                

Net earnings attributable to Hovnanian

 $47,702  $15,363  $555,337  $10,294 

Less: undistributed earnings allocated to nonvested shares

  (4,426)  (1,294)  (54,165)  (902)

Numerator for basic earnings per share

 $43,276  $14,069  $501,172  $9,392 

Plus: undistributed earnings allocated to nonvested shares

  4,426   1,294   54,165   902 

Less: undistributed earnings reallocated to nonvested shares

  (4,436)  (1,294)  (55,259)  (902)

Numerator for diluted earnings per share

 $43,266  $14,069  $500,078  $9,392 

Denominator:

                

Denominator for basic earnings per share – weighted average shares outstanding

  6,315   6,201   6,263   6,178 

Effect of dilutive securities:

                

Share based payments

  119   317   107   324 

Denominator for diluted earnings per share – weighted average shares outstanding

  6,434   6,518   6,370   6,502 

Basic earnings per share

 $6.85  $2.27  $80.02  $1.52 

Diluted earnings per share

 $6.72  $2.16  $78.51  $1.44 

 

 

Shares related to out-of-the money stock options that could potentially dilute basic earnings per share in the future that were not included in the computation of diluted earnings per share were 25 thousand for both the three and nine months ended July 31, 2021 and 0.2 million for both the three and nine months ended July 31, 2020 because to do so would have been anti-dilutive for the periods presented.   

 

 

 

14.

Preferred Stock

 

On July 12, 2005, we issued 5,600 shares of 7.625% Series A Preferred Stock, with a liquidation preference of $25,000 per share. Dividends on the Series A Preferred Stock are not cumulative and are payable at an annual rate of 7.625%. The Series A Preferred Stock is not convertible into the Company’s common stock and is redeemable in whole or in part at our option at the liquidation preference of the shares. The Series A Preferred Stock is traded as depositary shares, with each depositary share representing 1/1000th of a share of Series A Preferred Stock. The depositary shares are listed on The NASDAQ Stock Market LLC under the symbol “HOVNP.” During the three and nine months ended July 31, 2021 and 2020, we did not pay any dividends on the Series A Preferred Stock due to covenant restrictions in our debt instruments.

    

 

 

15.

Common Stock

 

Each share of Class A Common Stock entitles its holder to one vote per share, and each share of Class B Common Stock generally entitles its holder to ten votes per share. The amount of any regular cash dividend payable on a share of Class A Common Stock will be an amount equal to 110% of the corresponding regular cash dividend payable on a share of Class B Common Stock. If a shareholder desires to sell shares of Class B Common Stock, such stock must be converted into shares of Class A Common Stock at a one to one conversion rate.

  

21

 

On August 4, 2008, our Board of Directors adopted a shareholder rights plan (the “Rights Plan”), which was amended on January 11, 2018 and January 18, 2021, designed to preserve shareholder value and the value of certain tax assets primarily associated with net operating loss (NOL) carryforwards and built-in losses under Section 382 of the Internal Revenue Code. Our ability to use NOLs and built-in losses would be limited if there was an “ownership change” under Section 382. This would occur if shareholders owning (or deemed under Section 382 to own) 5% or more of our stock increase their collective ownership of the aggregate amount of our outstanding shares by more than 50 percentage points over a defined period of time. The Rights Plan was adopted to reduce the likelihood of an “ownership change” occurring as defined by Section 382. Under the Rights Plan, one right was distributed for each share of Class A Common Stock and Class B Common Stock outstanding as of the close of business on August 15, 2008. Effective August 15, 2008, if any person or group acquires 4.9% or more of the outstanding shares of Class A Common Stock without the approval of the Board of Directors, there would be a triggering event causing significant dilution in the voting power of such person or group. However, existing stockholders who owned, at the time of the Rights Plan’s initial adoption on August 4, 2008, 4.9% or more of the outstanding shares of Class A Common Stock will trigger a dilutive event only if they acquire additional shares. The approval of the Board of Directors’ decision to adopt the Rights Plan may be terminated by the Board of Directors at any time, prior to the Rights being triggered. The Rights Plan will continue in effect until August 14, 2024, unless it expires earlier in accordance with its terms. The approval of the Board of Directors’ decision to initially adopt the Rights Plan and the amendments thereto were approved by shareholders. Our stockholders also approved an amendment to our Certificate of Incorporation to restrict certain transfers of Class A Common Stock in order to preserve the tax treatment of our NOLs and built-in losses under Section 382 of the Internal Revenue Code. Subject to certain exceptions pertaining to pre-existing 5% stockholders and Class B stockholders, the transfer restrictions in our Restated Certificate of Incorporation generally restrict any direct or indirect transfer (such as transfers of our stock that result from the transfer of interests in other entities that own our stock) if the effect would be to (i) increase the direct or indirect ownership of our stock by any person (or public group) from less than 5% to 5% or more of our common stock; (ii) increase the percentage of our common stock owned directly or indirectly by a person (or public group) owning or deemed to own 5% or more of our common stock; or (iii) create a new “public group” (as defined in the applicable United States Treasury regulations). Transfers included under the transfer restrictions include sales to persons (or public groups) whose resulting percentage ownership (direct or indirect) of common stock would exceed the 5% thresholds discussed above, or to persons whose direct or indirect ownership of common stock would by attribution cause another person (or public group) to exceed such threshold.

 

On July 3, 2001, our Board of Directors authorized a stock repurchase program to purchase up to 0.2 million shares of Class A Common Stock. There were no shares purchased during the three and nine months ended July 31, 2021. As of July 31, 2021, the maximum number of shares of Class A Common Stock that may yet be purchased under this program is 22 thousand.

 

 

16.

Income Taxes

 

The total income tax expense for the three months ended July 31, 2021 was $14.1 million.  The federal tax expense was primarily related to pretax income generated during the quarter and state tax expense from income generated in states where we do not have net operating loss carryforwards to offset the current year income. The total benefit for the nine months ended July 31, 2021 was $442.9 million.  The benefit was primarily due to the reversal of a substantial portion of our valuation allowance previously recorded against our deferred tax assets.

 

The total income tax expense for the three and nine months ended July 31, 2020 was $0.9 million and $2.7 million, respectively. The total income tax expense was primarily related to state tax expense from income generated that was not offset by tax benefits in states where we fully reserve the tax benefit from net operating losses. In addition, the expense for the nine months ended July 31, 2020 was related to state tax expense from the impact of a cancellation of debt income recorded for tax purposes but not for GAAP purposes, creating a permanent difference.

 

Our federal net operating losses of $1.3 billion expire between 2028 and 2038, and $15.7 million have an indefinite carryforward period. Of our $2.4 billion of state NOLs, $232.6 million expire between 2021 through 2025; $1.3 billion expire between 2026 through 2030; $587.9 million expire between 2031 through 2035; $238.3 million expire between 2036 through 2040; and $48.8 million have an indefinite carryforward period.

 

On December 27, 2020, the Consolidated Appropriations Act (CAA) was enacted and signed into U.S. law to provide additional economic relief in response to the ongoing coronavirus pandemic. The CAA did not have a material impact on the Company’s consolidated financial conditions or results of operations as of and for the nine months ended July 31, 2021. We will continue to monitor additional guidance issued by the U.S. Treasury Department, the Internal Revenue Service and various state agencies.

 

Deferred federal and state income tax assets ("DTAs") primarily represent the deferred tax benefits arising from NOL carryforwards and temporary differences between book and tax income which will be recognized in future years as an offset against future taxable income. If the combination of future years’ income (or loss) and the reversal of the timing differences results in a loss, such losses can be carried forward to future years. In accordance with ASC 740, we evaluate our DTAs quarterly to determine if valuation allowances are required. ASC 740 requires that companies assess whether valuation allowances should be established based on the consideration of all available evidence using a “more likely than not” standard.

 

As of July 31, 2021, we considered all available positive and negative evidence to determine whether, based on the weight of that evidence, our valuation allowance for our DTAs was appropriate in accordance with ASC 740. Listed below, in order of the weighting of each factor, is the available positive and negative evidence that we considered in determining that it is more likely than not that we will realize a substantial portion of our DTAs and that a full valuation allowance is not necessary. In analyzing these factors, overall the positive evidence, both objective and subjective, outweighed the negative evidence. Based on this analysis, we determined that the current valuation allowance for deferred taxes of $102.9 million as of July 31, 2021, which partially reserves for our state DTAs, is appropriate.

 

 

22

 
 

1.

As of July 31, 2021, on a tax basis, the Company had adjusted pre-tax income, which is income before income taxes excluding land-related charges and loss (gain) on extinguishment of debt, on a three-year cumulative basis. On a U.S. GAAP basis, the Company had generated $176.3 million of cumulative pre-tax income in the three years ended July 31, 2021, with $112.4 million of that generated in the last nine months.  We also generated $55.4 million of pre-tax income for our fiscal year ended October 31, 2020.  We believe this positive improvement over the last 24 months will continue given the strength of our contract backlog and the current homebuilding market conditions. (Positive Objective Evidence)

 

2.

Over the last several years, we have completed a number of debt refinancing/restructuring transactions which, by extending our debt maturities, will enable us to allocate cash to invest in new communities and grow our community count to get back to sustained profitability. (Positive Objective Evidence)

 3.On July 30, 2021 we paid off in full $111.2 million of 10.0% 2022 Notes and on August 2, 2021, we paid off in full $69.7 million of 10.5% 2024 Notes. These actions reduced our annual interest incurred by approximately $19 million, enhancing our profitability going forward. (Positive Objective Evidence)
 

4.

We incurred pre-tax losses during the housing market decline that began in 2007 and the slower than expected housing market recovery. Given our current highly leveraged balance sheet, a downturn in the housing market, would be significantly more damaging to the Company than to other better capitalized homebuilders and would make it very difficult for the Company to avoid future losses, given our high interest burden. (Negative Objective Evidence)

 

5.

We exited several geographic markets over the last few years that have historically had losses. By exiting these underperforming markets, the Company has been able to redeploy capital to better performing markets, which over time should improve our profitability. (Positive Subjective Evidence)

 

6.

The historical cyclicality of the U.S. housing market, a more restrictive mortgage lending environment compared to before the housing downturn of 2007-2009, the uncertainty of the overall U.S. economy and government policies and consumer confidence, and impacts of the COVID 19 pandemic, all or any of which could continue to hamper a sustained, stronger recovery of the housing market. (Negative Subjective Evidence)

 

The significant positive improvement in our operations in the last 24 months, which further accelerated in the third quarter ended July 31, 2021, coupled with our contract backlog of $1.8 billion as of July 31, 2021 provided positive evidence to support the conclusion that a full valuation allowance is not necessary for all of our DTAs. As such, we used our go forward projections to estimate our usage of our existing federal and state DTAs. From that review, we concluded that we no longer needed any valuation allowance for our federal DTAs. However, with respect to our state DTAs, we concluded that a valuation allowance of $102.9 million was still necessary related to states that have shorter carryforward periods or from states where we have significantly reduced or eliminated our operations and thus are not able to project that we will fully utilize those DTAs.

 

As of October 31, 2020, we had a valuation allowance of $396.5 million of federal deferred tax assets related to NOLs, as well as other matters, all of which has been reversed as of July 31, 2021. We also had a valuation allowance of $181.0 million of deferred tax assets related to state NOLs as of October 31, 2020, of which $78.1 million was reversed in the second quarter of fiscal 2021 and $102.9 million remains at July 31, 2021.

 

 

17.

Operating and Reporting Segments

 

HEI’s operating segments are components of the Company’s business for which discrete financial information is available and reviewed regularly by the chief operating decision maker, our Chief Executive Officer, to evaluate performance and make operating decisions. Based on this criteria, each of the Company's communities qualifies as an operating segment, and therefore, it is impractical to provide segment disclosures for this many segments. As such, HEI has aggregated the homebuilding operating segments into six reportable segments.

 

HEI’s homebuilding operating segments are aggregated into reportable segments based primarily upon geographic proximity, similar regulatory environments, land acquisition characteristics and similar methods used to construct and sell homes. HEI’s reportable segments consist of the following six homebuilding segments and a financial services segment noted below.

 

Homebuilding:

 

 

(1)

Northeast (New Jersey and Pennsylvania)

 

(2)

Mid-Atlantic (Delaware, Maryland, Virginia, Washington D.C. and West Virginia)

 

(3)

Midwest (Illinois and Ohio)

 

(4)

Southeast (Florida, Georgia and South Carolina)

 

(5)

Southwest (Arizona and Texas)

 

(6)

West (California)

  

23

 

Financial Services

 

Operations of the Homebuilding segments primarily include the sale and construction of single-family attached and detached homes, attached townhomes and condominiums, urban infill and active lifestyle homes in planned residential developments. In addition, from time to time, operations of the homebuilding segments include sales of land. Operations of the Financial Services segment include mortgage banking and title services provided to the homebuilding operations’ customers. Our financial services subsidiaries do not typically retain or service mortgages that we originate but rather sell the mortgages and related servicing rights to investors. 

 

Corporate and unallocated primarily represents operations at our headquarters in New Jersey. This includes our executive offices, information services, human resources, corporate accounting, training, treasury, process redesign, internal audit, construction services, and administration of insurance, quality and safety. It also includes interest income and interest expense resulting from interest incurred that cannot be capitalized in inventory in the Homebuilding segments, as well as the gains or losses on extinguishment of debt from any debt repurchases or exchanges.  

 

Evaluation of segment performance is based primarily on operating earnings from continuing operations before provision or benefit for income taxes (“Income (loss) before income taxes”). Income (loss) before income taxes for the Homebuilding segments consist of revenues generated from the sales of homes and land, income (loss) from unconsolidated entities, management fees and other income, less the cost of homes and land sold, selling, general and administrative expenses and interest expense. Income (loss) before income taxes for the Financial Services segment consist of revenues generated from mortgage financing, title insurance and closing services, less the cost of such services and selling, general and administrative expenses incurred by the Financial Services segment. 

 

Operational results of each segment are not necessarily indicative of the results that would have occurred had the segment been an independent stand-alone entity during the periods presented.

 

 

24

 

Financial information relating to HEI’s segment operations was as follows:

 

  

Three Months Ended

  

Nine Months Ended

 
  

July 31,

  

July 31,

 

(In thousands)

 

2021

  

2020

  

2021

  

2020

 
                 

Revenues:

                

Northeast

 $35,255  $41,370  $97,488  $133,444 

Mid-Atlantic

  106,419   111,402   311,564   288,899 

Midwest

  60,659   63,003   183,895   166,120 

Southeast

  68,854   65,790   195,545   158,933 

Southwest

  213,127   214,918   620,848   549,471 

West

  186,519   110,323   498,084   313,547 

Total homebuilding

  670,833   606,806   1,907,424   1,610,414 

Financial services

  19,845   21,295   61,070   49,670 

Corporate and unallocated

  5   35   15   459 

Total revenues

 $690,683  $628,136  $1,968,509  $1,660,543 
                 

Income before income taxes:

                

Northeast

 $6,765  $5,240  $16,427  $17,703 

Mid-Atlantic

  15,907   11,024   38,618   20,548 

Midwest

  3,358   765   11,070   (3,063)

Southeast

  2,682   (253)  9,540   (4,514)

Southwest

  28,523   20,072   78,848   41,744 

West

  27,189   226   58,729   4,560 

Total homebuilding

  84,424   37,074   213,232   76,978 

Financial services

  8,607   10,802   28,117   19,993 

Corporate and unallocated (1)

  (31,232)  (31,660)  (128,933)  (84,012)

Income before income taxes

 $61,799  $16,216  $112,416  $12,959 

 

(1)

Corporate and unallocated for the three months ended July 31, 2021 included corporate general and administrative costs of $17.3 million, interest expense of $14.4 million (a component of Other interest on our Condensed Consolidated Statements of Operations), $0.3 million of loss on extinguishment of debt and $0.8 million of other income and expenses primarily related to interest income and stock compensation. Corporate and unallocated for the nine months ended July 31, 2021 included corporate general and administrative costs of $81.1 million, interest expense of $48.1 million (a component of Other interest on our Condensed Consolidated Statements of Operations), $0.3 million of loss on extinguishment of debt and $0.6 million of other income and expenses. Corporate and unallocated for the three months ended July 31, 2020 included corporate general and administrative costs of $19.3 million, interest expense of $15.9 million (a component of Other interest on our Condensed Consolidated Statements of Operations), $(4.1) million of gain on extinguishment of debt and $0.6 million of other income and expenses primarily related to interest income and stock compensation. Corporate and unallocated for the nine months ended July 31, 2020 included corporate general and administrative costs of $54.3 million, interest expense of $44.6 million (a component of Other interest on our Condensed Consolidated Statements of Operations), $(13.3) million of gain on extinguishment of debt and $(1.6) million of other income and expenses. 

 

  

July 31,

  

October 31,

 

(In thousands)

 

2021

  

2020

 
         

Assets:

        

Northeast

 $132,020  $107,748 

Mid-Atlantic

  277,378   271,867 

Midwest

  99,851   106,774 

Southeast

  253,522   248,506 

Southwest

  446,355   357,444 

West

  240,815   278,811 

Total homebuilding

  1,449,941   1,371,150 

Financial services (1)

  180,218   140,607 

Corporate and unallocated

  681,885   315,585 

Total assets

 $2,312,044  $1,827,342 

 

(1)   Deferred tax assets for the Financial services segment are included in the Deferred tax assets, net line on the Condensed Consolidated Balance Sheets.

 

 

25

 

 

18.

Investments in Unconsolidated Homebuilding and Land Development Joint Ventures

 

We enter into homebuilding and land development joint ventures from time to time as a means of accessing lot positions, expanding our market opportunities, establishing strategic alliances, managing our risk profile, leveraging our capital base and enhancing returns on capital. Our homebuilding joint ventures are generally entered into with third-party investors to develop land and construct homes that are sold directly to third-party home buyers. Our land development joint ventures include those entered into with developers and other homebuilders as well as financial investors to develop finished lots for sale to the joint venture’s members or other third parties.

  

During the third quarter of fiscal 2021, we purchased the remaining equity interest in one of our unconsolidated joint ventures for $6.3 million of net cash. As a result of this transaction, we took control of four communities, including three active communities. The unconsolidated joint venture was subsequently dissolved.

 

During the second quarter of fiscal 2021, we contributed 6 communities we owned, including 3 active communities, to two new joint ventures for $21.2 million of net cash.

 

During the first quarter of fiscal 2020, we contributed eight communities we owned, including four active communities, to a new joint venture for $29.8 million of net cash.

  

The tables set forth below summarize the combined financial information related to our unconsolidated homebuilding and land development joint ventures that are accounted for under the equity method.

 

(Dollars in thousands)

 

July 31, 2021

 
      

Land

     
  

Homebuilding

  

Development

  

Total

 

Assets:

            

Cash and cash equivalents

 $118,606  $2,165  $120,771 

Inventories

  442,657   0   442,657 

Other assets

  32,271   0   32,271 

Total assets

 $593,534  $2,165  $595,699 
             

Liabilities and equity:

            

Accounts payable and accrued liabilities

 $345,144  $1,873  $347,017 

Notes payable

  78,767   0   78,767 

Total liabilities

  423,911   1,873   425,784 

Equity of:

            

Hovnanian Enterprises, Inc.

  66,303   266   66,569 

Others

  103,320   26   103,346 

Total equity

  169,623   292   169,915 

Total liabilities and equity

 $593,534  $2,165  $595,699 

Debt to capitalization ratio

  32%  0%  32%

 

 

(Dollars in thousands)

 

October 31, 2020

 
      

Land

     
  

Homebuilding

  

Development

  

Total

 

Assets:

            

Cash and cash equivalents

 $120,107  $3,454  $123,561 

Inventories

  389,001   91   389,092 

Other assets

  27,062   488   27,550 

Total assets

 $536,170  $4,033  $540,203 
             

Liabilities and equity:

            

Accounts payable and accrued liabilities

 $207,277  $2,152  $209,429 

Notes payable

  117,179   0   117,179 

Total liabilities

  324,456   2,152   326,608 

Equity of:

            

Hovnanian Enterprises, Inc.

  102,908   1,340   104,248 

Others

  108,806   541   109,347 

Total equity

  211,714   1,881   213,595 

Total liabilities and equity

 $536,170  $4,033  $540,203 

Debt to capitalization ratio

  36%  0%  35%

 

26

 

As of July 31, 2021 and October 31, 2020, we had advances outstanding of $2.3 million and payables outstanding of $1.1 million, respectively, to these unconsolidated joint ventures. These amounts were included in the “Accounts payable and accrued liabilities” balances in the tables above. On our Condensed Consolidated Balance Sheets, our “Investments in and advances to unconsolidated joint ventures” amounted to $68.9 million and $103.2 million at July 31, 2021 and October 31, 2020, respectively. In some cases, our net investment in these unconsolidated joint ventures is less than our proportionate share of the equity reflected in the table above because of the differences between asset impairments recorded against our unconsolidated joint venture investments and any impairments recorded in the applicable unconsolidated joint venture. Impairments of unconsolidated joint venture investments are recorded at fair value while impairments recorded in the unconsolidated joint venture are recorded when undiscounted cash flows trigger the impairment. During the nine months ended July 31, 2021 and 2020, we did not write-down any of our unconsolidated joint venture investments.

 

  

Three Months Ended July 31, 2021

 

(In thousands)

     

Land

     
  

Homebuilding

  

Development

  

Total

 
             

Revenues

 $102,576  $0  $102,576 

Cost of sales and expenses

  (96,622)  (31)  (96,653)

Joint venture net income (loss)

 $5,954  $(31) $5,923 

Our share of net income

 $5,012  $0  $5,012 

 

  

Three Months Ended July 31, 2020

 

(In thousands)

     

Land

     
  

Homebuilding

  

Development

  

Total

 
             

Revenues

 $132,511  $3,688  $136,199 

Cost of sales and expenses

  (127,653)  (2,719)  (130,372)

Joint venture net income

 $4,858  $969  $5,827 

Our share of net income (loss)

 $6,337  $(238) $6,099 

 

  

Nine Months Ended July 31, 2021

 

(In thousands)

     

Land

     
  

Homebuilding

  

Development

  

Total

 
             

Revenues

 $265,566  $691  $266,257 

Cost of sales and expenses

  (255,591)  (208)  (255,799)

Joint venture net income

 $9,975  $483  $10,458 

Our share of net income

 $9,560  $208  $9,768 

 

  

Nine Months Ended July 31, 2020

 

(In thousands)

     

Land

     
  

Homebuilding

  

Development

  

Total

 
             

Revenues

 $332,287  $11,240  $343,527 

Cost of sales and expenses

  (323,657)  (11,120)  (334,777)

Joint venture net income

 $8,630  $120  $8,750 

Our share of net income (loss)

 $13,952  $(663) $13,289 

 

“Income from unconsolidated joint ventures” is reflected as a separate line in the accompanying Condensed Consolidated Statements of Operations and reflects our proportionate share of the income or loss from these unconsolidated homebuilding and land development joint ventures. The difference between our share of the income or loss from these unconsolidated joint ventures in the tables above compared to the Condensed Consolidated Statements of Operations is due primarily to the reclassification of the intercompany portion of management fee income from certain unconsolidated joint ventures and the deferral of income for lots purchased by us from certain unconsolidated joint ventures.

 

The reason “Our share of net income (loss)” is higher or lower than the “Joint venture net income (loss)” shown in the tables above for both the three and nine months ended July 31, 2021 and 2020, respectively, is because we have varying ownership percentages, ranging from 20% to over 50%, in our 12 unconsolidated joint ventures for both periods. Therefore, depending on mix, if the unconsolidated joint ventures in which we have higher sharing percentages are more profitable than our other unconsolidated joint ventures, that results in us having a higher overall percentage of income in the aggregate than would occur if all joint ventures had the same sharing percentage; conversely, if the unconsolidated joint ventures in which we have lower sharing percentages are more profitable than our other unconsolidated joint ventures, that results in us having a lower overall percentage of income in the aggregate than would occur if all joint ventures had the same sharing percentage. For the three months ended July 31, 2021, "Our share of net income (loss)" was lower than the "Joint venture net income (loss)" due to increased income on one of our newer unconsolidated joint ventures during the quarter for which we currently recognize no share percentage of the profit based on the joint venture agreement, and a second unconsolidated joint venture which we recognize a lower profit sharing percentage having higher profit in the current period. In addition, for the nine months ended July 31, 2021 and both the three and nine months ended July 31, 2020, we had written off our investment in two of our unconsolidated joint ventures that are generating losses and therefore we currently do not recognize those losses. Had we not fully written off our investment, our share of the net loss in these unconsolidated joint ventures would have been approximately 50%, which would have reduced our overall share of net income across all of our unconsolidated joint ventures. As a result, these unconsolidated joint ventures losses significantly reduce the profit when looking at all of our 12 unconsolidated joint ventures, in the aggregate, without having any impact on our share of net income or loss recorded in the applicable period.

 

To compensate us for the administrative services we provide as the manager of certain unconsolidated joint ventures, we receive a management fee based on a percentage of the applicable unconsolidated joint venture’s revenues. These management fees, which totaled $3.2 million and $4.7 million for the three months ended July 31, 2021 and 2020, respectively, and $8.5 million and $12.5 million for the nine months ended July 31, 2021 and 2020, respectively, are recorded in “Homebuilding: Selling, general and administrative” on the Condensed Consolidated Statements of Operations.

    

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In determining whether or not we must consolidate joint ventures that we manage, we assess whether the other partners have specific rights to overcome the presumption of control by us as the manager of the joint venture. In most cases, the presumption is overcome because the joint venture agreements require that both partners agree on establishing the operations and capital decisions of the partnership, including budgets in the ordinary course of business.

 

Typically, our unconsolidated joint ventures obtain separate project specific mortgage financing. For some of our unconsolidated joint ventures, obtaining financing was challenging; therefore, some of our unconsolidated joint ventures are capitalized only with equity. The total debt to capitalization ratio of all our unconsolidated joint ventures was 32% as of July 31, 2021. Any unconsolidated joint venture financing is on a nonrecourse basis, with guarantees from us limited only to performance and completion of development, environmental warranties and indemnification, standard indemnification for fraud, misrepresentation and other similar actions, including a voluntary bankruptcy filing. In some instances, the unconsolidated joint venture entity is considered a VIE under ASC 810-10 “Consolidation – Overall” due to the returns being capped to the equity holders; however, in these instances, we have determined that we are not the primary beneficiary, and therefore we do not consolidate these entities.

 

 

19.

Recent Accounting Pronouncements

 

In March 2020, the FASB issued ASU 2020-04, “Facilitation of the Effects of Reference Rate Reform on Financial Reporting” (“ASU 2020-04”). ASU 2020-04 provides companies with optional guidance to ease the potential accounting burden associated with reference rate reform on financial reporting. This guidance became effective for the Company beginning on March 12, 2020, and we may elect to apply the amendments prospectively from now through December 31, 2022. The Company has not yet adopted this guidance and is currently evaluating the potential impact of adoption on our Condensed Consolidated Financial Statements.

 

28

 

 

20.

Fair Value of Financial Instruments

 

ASC 820, “Fair Value Measurements and Disclosures,” provides a framework for measuring fair value, expands disclosures about fair-value measurements and establishes a fair-value hierarchy which prioritizes the inputs used in measuring fair value summarized as follows:

 

 

Level 1:

Fair value determined based on quoted prices in active markets for identical assets.

 

 

Level 2:

Fair value determined using significant other observable inputs.

 

 

Level 3:

Fair value determined using significant unobservable inputs.

   

Our financial instruments measured at fair value on a recurring basis are summarized below:

 

   

Fair Value at

  

Fair Value at

 
 

Fair Value

 

July 31,

  

October 31,

 

(In thousands)

Hierarchy

 

2021

  

2020

 
          

Mortgage loans held for sale (1)

Level 2

 $131,411  $104,378 

Forward contracts

Level 2

  (374)  (28)

Total

 $131,037  $104,350 

Interest rate lock commitments

Level 3

  631   11 

Total

 $131,668  $104,361 

 

(1)  The aggregate unpaid principal balance was $126.9 million and $100.4 million at July 31, 2021 and October 31, 2020, respectively.

 

We elected the fair value option for our loans held for sale in accordance with ASC 825, “Financial Instruments,” which permits us to measure financial instruments at fair value on a contract-by-contract basis. Management believes that the election of the fair value option for loans held for sale improves financial reporting by mitigating volatility in reported earnings caused by measuring the fair value of the loans and the derivative instruments used to economically hedge them without having to apply complex hedge accounting provisions. Fair value of loans held for sale is based on independent quoted market prices, where available, or the prices for other mortgage loans with similar characteristics.

 

The Financial Services segment had a pipeline of loan applications in process of $997.1 million at July 31, 2021. Loans in process for which interest rates were committed to the borrowers totaled $82.0 million as of July 31, 2021. Substantially all of these commitments were for periods of 60 days or less. Since a portion of these commitments is expected to expire without being exercised by the borrowers, the total commitments do not necessarily represent future cash requirements.

 

The Financial Services segment uses investor commitments and forward sales of mandatory MBS to hedge its mortgage-related interest rate exposure. These instruments involve, to varying degrees, elements of credit and interest rate risk. Credit risk is managed by entering into MBS forward commitments, option contracts with investment banks, federally regulated bank affiliates and loan sales transactions with permanent investors meeting the segment’s credit standards. The segment’s risk, in the event of default by the purchaser, is the difference between the contract price and fair value of the MBS forward commitments and option contracts. At July 31, 2021, the segment had open commitments amounting to $24.0 million to sell MBS with varying settlement dates through August 19, 2021.

 

The assets accounted for using the fair value option are initially measured at fair value. Gains and losses from initial measurement and subsequent changes in fair value are recognized in the Condensed Consolidated Financial Statements in “Revenues: Financial services.” The fair values that are included in income are shown, by financial instrument and financial statement line item, below: 

 

  

Three Months Ended July 31, 2021

 
  

Mortgage

  

Interest Rate

     
  

Loans Held

  

Lock

  

Forward

 

(In thousands)

 

For Sale

  

Commitments

  

Contracts

 
             
             

Fair value included in net income all reflected in financial services revenues

 $227  $192  $29 

 

29

 
  

Three Months Ended July 31, 2020

 
  

Mortgage

  

Interest Rate

     
  

Loans Held

  

Lock

  

Forward

 

(In thousands)

 

For Sale

  

Commitments

  

Contracts

 
             
             

Fair value included in net income all reflected in financial services revenues

 $1,485  $(29) $87 

 

  

Nine Months Ended July 31, 2021

 
  

Mortgage

  

Interest Rate

     
  

Loans Held

  

Lock

  

Forward

 

(In thousands)

 

For Sale

  

Commitments

  

Contracts

 
             
             

Fair value included in net income all reflected in financial services revenues

 $4,484  $631  $(374)

 

  

Nine Months Ended July 31, 2020

 
  

Mortgage

  

Interest Rate

     
  

Loans Held

  

Lock

  

Forward

 

(In thousands)

 

For Sale

  

Commitments

  

Contracts

 
             
             

Fair value included in net income all reflected in financial services revenues

 $3,638  $313  $(367)

 

The Company's assets measured at fair value on a nonrecurring basis are those assets for which the Company has recorded valuation adjustments and write-offs during the three and nine months ended July 31, 2021. The Company did not have any assets measured at fair value on a nonrecurring basis during the three and nine months ended July 31, 2020. The assets measured at fair value on a nonrecurring basis are all within the Company's Homebuilding operations and are summarized below:

 

Nonfinancial Assets 

 

   

Three Months Ended

 
   

July 31, 2021

 
   

Pre-

         
 

Fair Value

 

Impairment

         

(In thousands)

Hierarchy

 

Amount

  

Total Losses

  

Fair Value

 
              

Sold and unsold homes and lots under development

Level 3

 $9,236  $(1,166) $8,070 

Land and land options held for future development or sale

Level 3

 $0  $0  $0 

 

   

Nine Months Ended

 
   

July 31, 2021

 
   

Pre-

         
 

Fair Value

 

Impairment

         

(In thousands)

Hierarchy

 

Amount

  

Total Losses

  

Fair Value

 
              

Sold and unsold homes and lots under development

Level 3

 $11,522  $(2,009) $9,513 

Land and land options held for future development or sale

Level 3

 $0  $0  $0 

 

We record impairment losses on inventories related to communities under development and held for future development when events and circumstances indicate that they may be impaired and the undiscounted cash flows estimated to be generated by those assets are less than their related carrying amounts. If the expected undiscounted cash flows are less than the carrying amount, then the community is written down to its fair value. We estimate the fair value of each impaired community by determining the present value of its estimated future cash flows at a discount rate commensurate with the risk of the respective community. Should the estimates or expectations used in determining cash flows or fair value decrease or differ from current estimates in the future, we may be required to recognize additional impairments. We recorded inventory impairments, which are included in the Condensed Consolidated Statements of Operations as “Inventory impairment loss and land option write-offs” and deducted from inventory, of $1.2 million and $2.0 million for the three and nine months ended July 31, 2021, respectively. We did not record any inventory impairments for the three and nine months ended July 31, 2020. See Note 4 for further detail of the communities evaluated for impairment.

 

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The fair value of our cash equivalents, restricted cash and cash equivalents and customers' deposits approximates their carrying amount, based on Level 1 inputs.

 

The fair value of each series of our Notes and Credit Facilities are listed below. Level 2 measurements are estimated based on recent trades or quoted market prices for the same issues or based on recent trades or quoted market prices for our debt of similar security and maturity to achieve comparable yields. Level 3 measurements are estimated based on third-party broker quotes or management’s estimate of the fair value based on available trades for similar debt instruments. As shown in the table below, our 10.5% 2024 Notes were a Level 2 measurement at July 31, 2021 due to recent trades on such notes (whereas such notes were a Level 3 at October 31, 2020). 

 

  

Fair Value as of July 31, 2021

 

(In thousands)

 

Level 1

  

Level 2

  

Level 3

  

Total

 

Senior Secured Notes:

                

10.5% Senior Secured Notes due July 15, 2024

 $0  $71,564  $0  $71,564 

10.0% Senior Secured 1.75 Lien Notes due November 15, 2025

  0   0   166,427   166,427 

7.75% Senior Secured 1.125 Lien Notes due February 15, 2026

  0   0   371,438   371,438 

10.5% Senior Secured 1.25 Lien Notes due February 15, 2026

  0   0   304,908   304,908 

11.25% Senior Secured 1.5 Lien Notes due February 15, 2026

  0   0   162,527   162,527 

Senior Notes:

                

13.5% Senior Notes due February 1, 2026

  0   89,684   0   89,684 

5.0% Senior Notes due February 1, 2040

  0   52,270   0   52,270 

Senior Credit Facilities:

                

Senior Unsecured Term Loan Credit Facility due February 1, 2027

  0   0   26,507   26,507 

Senior Secured 1.75 Lien Term Loan Credit Facility due January 31, 2028

  0   0   91,327   91,327 

Total fair value

 $0  $213,518  $1,123,134  $1,336,652 

 

Fair Value as of October 31, 2020

 

(In thousands)

 

Level 1

  

Level 2

  

Level 3

  

Total

 

Senior Secured Notes:

                

10.0% Senior Secured Notes due July 15, 2022

 $0  $107,878  $0  $107,878 

10.5% Senior Secured Notes due July 15, 2024

  0   0   67,941   67,941 

10.0% Senior Secured 1.75 Lien Notes due November 15, 2025

  0   0   132,246   132,246 

7.75% Senior Secured 1.125 Lien Notes due February 15, 2026

  0   0   353,500   353,500 

10.5% Senior Secured 1.25 Lien Notes due February 15, 2026

  0   0   274,558   274,558 

11.25% Senior Secured 1.5 Lien Notes due February 15, 2026

  0   0   162,723   162,723 

Senior Notes:

                

13.5% Senior Notes due February 1, 2026

  0   54,354   0   54,354 

5.0% Senior Notes due February 1, 2040

  0   10,814   0   10,814 

Senior Credit Facilities:

                

Senior Unsecured Term Loan Credit Facility due February 1, 2027

  0   0   13,091   13,091 

Senior Secured 1.75 Lien Term Loan Credit Facility due January 31, 2028

  0   0   64,465   64,465 

Total fair value

 $0  $173,046  $1,068,524  $1,241,570 

 

The Senior Secured Revolving Credit Facility is not included in the above tables because there were 0 borrowings outstanding thereunder as of July 31, 2021 and October 31, 2020.

 

 

21.

Transactions with Related Parties

 

From time to time, an engineering firm owned by Tavit Najarian, a relative of Ara K. Hovnanian, our Chairman of the Board of Directors and our Chief Executive Officer, provides services to the Company. During both the three months ended July 31, 2021 and 2020, the services provided by such engineering firm to the Company totaled $0.2 million. During the nine months ended July 31, 2021 and 2020, the services provided by such engineering firm to the Company totaled $0.4 million and $0.6 million, respectively. Neither the Company nor Mr. Hovnanian has a financial interest in the relative’s company from whom the services were provided.

 

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22.

Subsequent Events

 

On August 2, 2021, K. Hovnanian redeemed in full all of the $69.7 million aggregate principal amount of 10.5% 2024 Notes. The aggregate purchase price for this redemption was $71.9 million, which included accrued and unpaid interest and which was funded with cash on hand. This redemption will result in a loss on extinguishment of debt of $3.4 million for the fourth quarter of fiscal 2021, net of the write-off of unamortized financing costs and fees.

 

32

 

 

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:

 

 

Net contracts is a volume indicator which represents the number of new contracts executed during the period for the purchase of homes, less cancellations of contracts in the same period. The dollar value of net contracts represents the dollars associated with net contracts executed in the period. These values are an indicator of potential future revenues;

 

 

Contract backlog is a volume indicator which represents the number of homes that are under contract, but not yet delivered as of the stated date. The dollar value of contract backlog represents the dollar amount of the homes in contract backlog. These values are an indicator of potential future revenues;

 

 

Active selling communities is a volume indicator which represents the number of communities which are open for sale with ten or more home sites available as of the end of a period. We identify communities based on product type; therefore at times there are multiple communities at one land site. These values are an indicator of potential revenues;

 

 

Net contracts per average active selling community is used to indicate the pace at which homes are being sold (put into contract) in active selling communities and is calculated by dividing the number of net contracts in a period by the average number of active selling communities in the same period. Sales pace is an indicator of market strength and demand; and

 

 

Contract cancellation rates is a volume indicator which represents the number of sales contracts cancelled in the period divided by the number of gross sales contracts executed during the period. Contract cancellation rates as a percentage of backlog is calculated by dividing the number of cancelled contracts in the period by the contract backlog at the beginning of the period. Cancellation rates as compared to prior periods can be an indicator of market strength or weakness.   

 

Overview

 

Market Conditions  

 

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 and overall housing affordability. In general, at the start of our 2020 fiscal year, factors including rising levels of household formation, a constrained supply of new and used homes, wage growth, strong employment conditions and mortgage rates that continue to be low by historical standards contributed to improving conditions for new home sales. However, overall economic conditions in the United States were impacted negatively by the COVID-19 pandemic, which resulted in, among other things, quarantines, "stay-at-home" or "shelter-in-place" orders, and similar mandates from national, state and local governments that substantially restricted daily activities and caused many businesses to curtail or cease normal operations. While all of the state and local governments in the markets in which we operate have deemed housing to be an essential business, which has allowed us to continue with construction and sales of homes, we cannot predict the magnitude of either the near-term or long-term effects that the pandemic will have on our business. During this fiscal year, the pandemic has adversely affected the global supply chain for many industries, including the homebuilding industry. As a result, our ability to complete construction on homes has been, and may continue to be, impacted by supply chain delays. The impact and the particular materials associated with the delays is varied from market to market, and we are currently experiencing increased construction cycle times by 45 days in many of our markets.

 

During the second quarter of fiscal 2020 when we confronted the initial impact of COVID-19, we experienced adverse business conditions, including a slowdown in customer traffic and sales pace and an increase in cancellations. That said, the homebuilding industry generally was only impacted from mid-March through April of 2020. Towards the end of April, economic conditions in our markets started to improve, and this improvement continued throughout the second half of fiscal 2020 and through the nine months ended July 31, 2021 due to what we believe is a combination of factors, including low interest rates, low inventory levels of existing homes and a general desire for more indoor and outdoor space. Starting during the second half of fiscal 2020 and continuing to date, we returned to our normal activities with respect to land purchases, land development and resuming the construction of unsold homes. As a result, our operating metrics for the nine months ended July 31, 2021 improved significantly as compared to the nine months ended July 31, 2020.

 

 

Operating Results

 

We experienced significant positive operating results for the three and nine months ended July 31, 2021 as follows:

 

● For the three and nine months ended July 31, 2021, sale of homes revenues increased 9.5% and 17.8%, respectively, as compared to the same periods of the prior year, primarily due to an increase in average prices of 13.5% and 7.6%, respectively, as home prices increased in virtually all of our markets, along with the geographic and community mix of our deliveries. Also impacting the increase in sale of homes revenues for the nine months ended July 31, 2021, was a 9.4% increase in the number of home deliveries compared to the prior year period, primarily due to our increased sales absorption pace as discussed below.

 

● Gross margin dollars increased 55.4% and 57.2% for the three and nine months ended July 31, 2021, respectively, as compared to the same periods of the prior year, as a result of our increased revenues. Additionally, gross margin percentage increased to 19.2% for the three months ended July 31, 2021 from 13.6% for the three months ended July 31, 2020 and increased to 18.3% for the nine months ended July 31, 2021 from 13.7% for the nine months ended July 31, 2020. Gross margin percentage, before cost of sales interest expense and land charges, increased from 17.5% and 17.7% for the three and nine months ended July 31, 2020, respectively, to 22.1% and 21.4% for the three and nine months ended July 31, 2021, respectively. The increases were primarily due to price increases in virtually all of our markets.

 

● Selling, general and administrative costs (including corporate general and administrative expenses) ("Total SGA") was $60.3 million, or 8.7% of total revenues, in the three months ended July 31, 2021 compared with $59.9 million, or 9.5% of total revenues, in the three months ended July 31, 2020. During the first nine months of fiscal 2021, total SG&A was $206.6 million, or 10.5% of total revenues, compared with $176.2 million, or 10.6% of total revenues, in the same period of the prior fiscal year. Such costs increased $0.4 million and $30.4 million for the three and nine months ended July 31, 2021, respectively, as compared to the same periods of the prior year. The increase for the nine months ended July 31, 2021 was primarily due to increased compensation costs mainly related to the grants of phantom stock awards under our 2019 Long Term Incentive Plan (“2019 LTIP”) which expense increased due to the significant increase in our stock price from $51.16 at January 31, 2021 to $104.39 at July 31, 2021. Had equity shares rather than phantom shares been utilized for the 2019 LTIP, there would not have been expenses related to the movement in our stock price. Excluding the $12.7 million of incremental phantom stock expense associated with the 2019 LTIP due solely to the increase in the stock price from January 31, 2021 to July 31, 2021, Total SGA would have been $193.9 million, or 9.8% of total revenues for the nine months ended July 31, 2021. 

 

● Pre-tax income increased to $61.8 million for the three months ended July 31, 2021 from pre-tax income of $16.2 million for the three months ended July 31, 2020, and increased to $112.4 million for the nine months ended July 31, 2021 from pre-tax income of $13.0 million for the nine months ended July 31, 2020. Net income increased to $47.7 million for the three months ended July 31, 2021 from net income of $15.4 million for the three months ended July 31, 2020, and increased to $555.3 million for the nine months ended July 31, 2021 from net income of $10.3 million for the nine months ended July 31, 2020. Earnings per share, basic and diluted, increased to $6.85 and $6.72, respectively, for the three months ended July 31, 2021 compared to $2.27 and $2.16, respectively, for the three months ended July 31, 2020. Earnings per share, basic and diluted, increased to $80.02 and $78.51, respectively, for the nine months ended July 31, 2021 compared to $1.52 and $1.44, respectively, for the nine months ended July 31, 2020. The significant increase in net income for the nine months ended July 31, 2021 was due to the full reversal of our federal valuation allowance and a portion of the state valuation allowance in respect of our deferred tax assets in the second quarter of fiscal 2021 (see Note 16 to the Condensed Consolidated Financial Statements).

 

● Net contracts decreased 45.6% and 5.5% for the three and nine months ended July 31, 2021, respectively, compared to the same periods of the prior year.

 

● Net contracts per average active selling community decreased to 12.0 for the three months ended July 31, 2021 compared to 17.8 in the same period of the prior year, and increased to 44.9 for the nine months ended July 31, 2021 compared to 38.1 in the same period of the prior year. The decrease in the third quarter of fiscal 2021 as compared to the same period of the prior year was due to consciously restricting sales in many of our communities in the current period, along with the unprecedented COVID-19 surge in home demand in the third quarter of fiscal 2020. The strong absorption pace for the nine months ended July 31, 2021 resulted in our active selling communities at July 31, 2021 decreasing by 11.1% over last year’s third quarter. However, we are actively pursuing replacement communities, and our total lots controlled has increased each quarter since July 31, 2020. 

 

● Contract backlog increased from 3,056 homes at July 31, 2020 to 3,673 homes at July 31, 2021, with a dollar value of $1.8 billion, representing a 41.8% increase in dollar value compared to the prior year.

 

● Our cash position allowed us to spend $531.2 million on land purchases and land development and repurchase $111.7 million of our 10.0% 2022 Notes during the nine months ended July 31, 2021 and still have total liquidity of $307.7 million, including $172.7 million of homebuilding cash and cash equivalents as of July 31, 2021 and $125.0 million of borrowing capacity under our senior secured revolving credit facility. 

 

 

 

CRITICAL ACCOUNTING POLICIES

  

As disclosed in our annual report on Form 10-K for the fiscal year ended October 31, 2020, our most critical accounting policies relate to income recognition from mortgage loans; inventories; unconsolidated joint ventures; and warranty and construction defect reserves. Since October 31, 2020, there have been no significant changes to those critical accounting policies.

 

CAPITAL RESOURCES AND LIQUIDITY

 

Our operations consist primarily of residential housing development and sales in the Northeast (New Jersey and Pennsylvania), the Mid-Atlantic (Delaware, Maryland, Virginia, Washington D.C. and West Virginia), the Midwest (Illinois and Ohio), the Southeast (Florida, Georgia and South Carolina), the Southwest (Arizona and Texas) and the West (California). In addition, we provide certain financial services to our homebuilding customers.

 

We have historically funded our homebuilding and financial services operations with cash flows from operating activities, borrowings under our credit facilities, the issuance of new debt and equity securities and other financing activities. Due to covenant restrictions in our debt instruments, we are currently limited in the amount of debt we can incur that does not qualify as refinancing indebtedness, even if market conditions, including then-current market available interest rates (in recent years, we have not been able to access the traditional capital and bank lending markets at competitive interest rates due to our highly leveraged capital structure), would otherwise be favorable, which could also impact our ability to grow our business. 

 

Operating, Investing and Financing Activities – Overview

 

Our total liquidity at July 31, 2021 was $307.7 million, including $172.7 million in homebuilding cash and cash equivalents and $125.0 million of borrowing capacity under our senior secured revolving credit facility, after using $111.7 million in the third quarter of fiscal 2021 to repurchase all of our 10.0% 2022 Notes. Our total liquidity was above our target liquidity range of $170.0 to $245.0 million. The unprecedented public health and governmental efforts to contain the COVID-19 pandemic have created significant uncertainty as to general economic and housing market conditions for fiscal 2021 and beyond. We believe that these sources of cash together with available borrowings on our senior secured revolving credit facility will be sufficient through fiscal 2021 to finance our working capital requirements. 

 

We spent $531.2 million on land and land development during the first three quarters of fiscal 2021. After considering this land and land development and all other operating activities, including revenue received from deliveries, cash provided by operations was $82.3 million. During the first three quarters of fiscal 2021, cash provided by in investing activities was $7.0 million, primarily due to distributions from existing unconsolidated joint ventures, partially offset by investments in two new unconsolidated joint ventures. Cash used in financing activities was $163.6 million during the first three quarters of fiscal 2021, which was primarily due to the redemption of the 10.0% 2022 Notes, along with net payments for nonrecourse mortgage financings and land banking and model sale leaseback financings during the period, partially offset by net proceeds from our mortgage warehouse lines of credit. We intend to continue to use nonrecourse mortgage financings, model sale leaseback, joint ventures, and, subject to covenant restrictions in our debt instruments, land banking programs as our business needs dictate.

 

Our cash uses during the nine months ended July 31, 2021 and 2020 were for operating expenses, land purchases, land deposits, land development, construction spending, state income taxes, interest payments, financing transaction costs, debt repurchases and redemptions, litigation matters and investments in unconsolidated joint ventures. During these periods, we provided for our cash requirements from available cash on hand, housing and land sales, financing transactions, model sale leasebacks, land banking transactions, unconsolidated joint ventures, financial service revenues and other revenues.

 

Our net income (loss) historically does not approximate cash flow from operating activities. The difference between net income (loss) and cash flow from operating activities is primarily caused by changes in inventory levels together with changes in receivables, prepaid and other assets, mortgage loans held for sale, interest and other accrued liabilities, deferred income taxes, accounts payable and other liabilities, noncash charges relating to depreciation and stock compensation awards and impairment losses for inventory. When we are expanding our operations, inventory levels, prepaids and other assets increase causing cash flow from operating activities to decrease. Certain liabilities also increase as operations expand and partially offset the negative effect on cash flow from operations caused by the increase in inventory levels, prepaids and other assets. Similarly, as our mortgage operations expand, net income from these operations increases, but for cash flow purposes net income is partially offset by the net change in mortgage assets and liabilities. The opposite is true as our investment in new land purchases and development of new communities decrease, causing us to generate positive cash flow from operations. 

  

 

Debt Transactions

 

Senior notes and credit facilities balances as of July 31, 2021 and October 31, 2020, were as follows:

 

  

July 31,

  

October 31,

 

(In thousands)

 

2021

  

2020

 

Senior Secured Notes:

        

10.0% Senior Secured Notes due July 15, 2022

 $-  $111,214 

10.5% Senior Secured Notes due July 15, 2024

  69,683   69,683 

10.0% Senior Secured 1.75 Lien Notes due November 15, 2025

  158,502   158,502 

7.75% Senior Secured 1.125 Lien Notes due February 15, 2026

  350,000   350,000 

10.5% Senior Secured 1.25 Lien Notes due February 15, 2026

  282,322   282,322 

11.25% Senior Secured 1.5 Lien Notes due February 15, 2026

  162,269   162,269 

Total Senior Secured Notes

 $1,022,776  $1,133,990 

Senior Notes:

        

8.0% Senior Notes due November 1, 2027 (1)

 $-  $- 

13.5% Senior Notes due February 1, 2026

  90,590   90,590 

5.0% Senior Notes due February 1, 2040

  90,120   90,120 

Total Senior Notes

 $180,710  $180,710 

Senior Unsecured Term Loan Credit Facility due February 1, 2027

 $39,551  $39,551 

Senior Secured 1.75 Lien Term Loan Credit Facility due January 31, 2028

 $81,498  $81,498 

Senior Secured Revolving Credit Facility (2)

 $-  $- 

Subtotal notes payable

 $1,324,535  $1,435,749 

Net (discounts) premiums

 $11,661  $17,521 

Net debt issuance costs

 $(18,672) $(22,160)

Total notes payable, net of discounts, premiums and debt issuance costs

 $1,317,524  $1,431,110 

 

(1) $26.0 million of 8.0% Senior Notes due 2027 (the "8.0% 2027 Notes") are owned by a wholly-owned consolidated subsidiary of HEI. Therefore, in accordance with GAAP, such notes are not reflected on the Condensed Consolidated Balance Sheets of HEI. On November 1, 2019, the maturity of the 8.0% 2027 Notes was extended to November 1, 2027.

 

(2) At July 31, 2021, provides for up to $125.0 million in aggregate amount of senior secured first lien revolving loans. Availability thereunder will terminate on December 28, 2022.

 

Except for K. Hovnanian, the issuer of the notes and borrower under the Credit Facilities (as defined below), our home mortgage subsidiaries, certain of our title insurance subsidiaries, joint ventures and subsidiaries holding interests in our joint ventures, we and each of our subsidiaries are guarantors of the Credit Facilities, the senior secured notes (except that certain of the Notes Guarantors (as defined below) do not guarantee the 10.5% Senior Secured Notes due 2024 as discussed in Note 12 to the Condensed and Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q subject  and senior notes (except for the 8.0% 2027 Notes which are not guaranteed by K. Hovnanian at Sunrise Trail III, LLC, a wholly-owned subsidiary of the Company) outstanding at July 31, 2021 (collectively, the “Notes Guarantors”).

 

The credit agreements governing the Credit Facilities and the indentures governing the senior secured and senior notes (together, the “Debt Instruments”) outstanding at July 31, 2021 do not contain any financial maintenance covenants, but do contain restrictive covenants that limit, among other things, the ability of HEI and certain of its subsidiaries, including K. Hovnanian, to incur additional indebtedness (other than non-recourse indebtedness, certain permitted indebtedness and refinancing indebtedness), pay dividends and make distributions on common and preferred stock, repay certain indebtedness prior to its respective stated maturity, repurchase (including through exchanges) common and preferred stock, make other restricted payments (including investments), sell certain assets (including in certain land banking transactions), incur liens, consolidate, merge, sell or otherwise dispose of all or substantially all of their assets and enter into certain transactions with affiliates. The Debt Instruments also contain customary events of default which would permit the lenders or holders thereof to exercise remedies with respect to the collateral (as applicable), declare the loans made under the Unsecured Term Loan Facility (defined below) (the “Unsecured Term Loans”), loans made under the Secured Term Loan Facility (defined below) (the “Secured Term Loans”) and loans made under the Secured Credit Agreement (as defined below) (the “Secured Revolving Loans”) or notes to be immediately due and payable if not cured within applicable grace periods, including the failure to make timely payments on the Unsecured Term Loans, Secured Term Loans, Secured Revolving Loans or notes or other material indebtedness, cross default to other material indebtedness, the failure to comply with agreements and covenants and specified events of bankruptcy and insolvency, with respect to the Unsecured Term Loans, Secured Term Loans and Secured Revolving Loans, material inaccuracy of representations and warranties and with respect to the Unsecured Term Loans, Secured Term Loans and Secured Revolving Loans, a change of control, and, with respect to the Secured Term Loans, Secured Revolving Loans and senior secured notes, the failure of the documents granting security for the obligations under the secured Debt Instruments to be in full force and effect, and the failure of the liens on any material portion of the collateral securing the obligations under the secured Debt Instruments to be valid and perfected. As of July 31, 2021, we believe we were in compliance with the covenants of the Debt Instruments.

 

 

If our consolidated fixed charge coverage ratio is less than 2.0 to 1.0, as defined in the applicable Debt Instrument, we are restricted from making certain payments, including dividends (in the case of the payment of dividends, our secured debt leverage ratio must also be less than 4.0 to 1.0), and from incurring indebtedness other than certain permitted indebtedness, refinancing indebtedness and nonrecourse indebtedness. As a result of this ratio restriction, we are currently restricted from paying dividends, which are not cumulative, on our 7.625% Series A Preferred Stock. Our inability to pay dividends is in accordance with covenant restrictions and will not result in a default under our Debt Instruments or otherwise affect compliance with any of the covenants contained in our Debt Instruments.

 

Under the terms of our Debt Instruments, we have the right to make certain redemptions and prepayments and, depending on market conditions, our strategic priorities and covenant restrictions, may do so from time to time. We also continue to actively analyze and evaluate our capital structure and explore transactions to simplify our capital structure and to strengthen our balance sheet, including those that reduce leverage, interest rates and/or extend maturities, and will seek to do so with the right opportunity. We may also continue to make debt purchases and/or exchanges for debt or equity from time to time through tender offers, exchange offers, redemptions, open market purchases, private transactions, or otherwise, or seek to raise additional debt or equity capital, depending on market conditions and covenant restrictions.

 

Any liquidity-enhancing or other capital raising or refinancing transaction will depend on identifying counterparties, negotiation of documentation and applicable closing conditions and any required approvals. Due to covenant restrictions in our Debt Instruments, we are currently limited in the amount of debt we can incur that does not qualify as refinancing indebtedness, even if market conditions, including then-current market available interest rates (in recent years, we have not been able to access the traditional capital and bank lending markets at competitive interest rates due to our highly leveraged capital structure), would otherwise be favorable, which could also impact our ability to grow our business.

 

We have certain stand-alone cash collateralized letter of credit agreements and facilities under which there was a total of $9.8 million and $11.3 million letters of credit outstanding at July 31, 2021 and October 31, 2020, respectively. These agreements and facilities require us to maintain specified amounts of cash as collateral in segregated accounts to support the letters of credit issued thereunder, which will affect the amount of cash we have available for other uses. At July 31, 2021 and October 31, 2020, the amount of cash collateral in these segregated accounts was $10.0 million and $11.6 million, respectively, which is reflected in “Restricted cash and cash equivalents” on the Condensed Consolidated Balance Sheets.

 

See Note 12 to the Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q for a discussion of the Unsecured Term Loans, the Secured Term Loans and Secured Revolving Loans and K. Hovnanian’s senior secured notes and senior notes, including information with respect to the collateral securing our secured Debt Instruments.

 

Mortgages and Notes Payable

 

We have nonrecourse mortgage loans for certain communities totaling $118.0 million and $135.1 million (net of debt issuance costs) at July 31, 2021 and October 31, 2020, respectively, which are secured by the related real property, including any improvements, with an aggregate book value of $421.9 million and $368.1 million, respectively. The weighted-average interest rate on these obligations was 4.8% and 6.4% at July 31, 2021 and October 31, 2020, respectively, and the mortgage loan payments on each community primarily correspond to home deliveries.

 

Our wholly owned mortgage banking subsidiary, K. Hovnanian American Mortgage, LLC (“K. Hovnanian Mortgage”), originates mortgage loans primarily from the sale of our homes. Such mortgage loans and related servicing rights are sold in the secondary mortgage market within a short period of time. In certain instances, we retain the servicing rights for a small amount of loans. K. Hovnanian Mortgage finances the origination of mortgage loans through various master repurchase agreements, which are recorded in "Financial services" liabilities on the Condensed Consolidated Balance Sheets. The loans are secured by the mortgages held for sale and are repaid when we sell the underlying mortgage loans to permanent investors. As of July 31, 2021 and October 31, 2020, we had an aggregate of $116.4 million and $87.2 million, respectively, outstanding under several of K. Hovnanian Mortgage’s short-term borrowing facilities.

 

See Note 11 to the Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q for a discussion of these agreements.

 

  

 

Inventory Activities

 

Total inventory, excluding consolidated inventory not owned, increased $201.7 million during the nine months ended July 31, 2021 from October 31, 2020. Total inventory, excluding consolidated inventory not owned, increased in the Northeast by $34.5 million, in the Mid-Atlantic by $0.4 million, in the Midwest by $16.3 million, in the Southeast by $37.6 million and in the Southwest by $118.9 million. The increase was partially offset by a decrease in the West of $6.0 million. The net increase was primarily attributable to new land purchases and land development, partially offset by home deliveries during the period. During the nine months ended July 31, 2021, we recorded impairment losses for three communities in the amount of $2.0 million, and wrote-off costs in the amount of $1.3 million related to land options that expired or that we terminated, as the communities’ forecasted profitability was not projected to produce adequate returns on investment commensurate with the risk. In the last few years, we have been able to acquire new land parcels at prices that we believe will generate reasonable returns under current homebuilding market conditions. This trend may not continue in either the near or the long term. Substantially all homes under construction or completed and included in inventory at July 31, 2021 are expected to be delivered during the next six to nine months.  

 

Consolidated inventory not owned decreased $84.1 million. Consolidated inventory not owned consists of options related to land banking and model financing transactions that were added to our Condensed Consolidated Balance Sheet in accordance with US GAAP. The decrease from October 31, 2020 to July 31, 2021 was primarily due to a decrease in land banking transactions and a decrease in the sale and leaseback of certain model homes during the period. We have land banking arrangements, whereby we sell land parcels to the land bankers and they provide us an option to purchase back finished lots on a predetermined schedule. Because of our options to repurchase these parcels, for accounting purposes in accordance with ASC 606-10-55-70, these transactions are considered a financing rather than a sale. For purposes of our Condensed Consolidated Balance Sheet, at July 31, 2021, inventory of $62.1 million was recorded to “Consolidated inventory not owned,” with a corresponding amount of $34.7 million (net of debt issuance costs) recorded to “Liabilities from inventory not owned” for the amount of net cash received from the transactions. In addition, we sell and lease back certain of our model homes with the right to participate in the potential profit when each home is sold to a third party at the end of the respective lease. As a result of our continued involvement, for accounting purposes in accordance with ASC 606-10-55-68, these sale and leaseback transactions are considered a financing rather than a sale. Therefore, for purposes of our Condensed Consolidated Balance Sheet, at July 31, 2021, inventory of $36.0 million was recorded to “Consolidated inventory not owned,” with a corresponding amount of $34.9 million (net of debt issuance costs) recorded to “Liabilities from inventory not owned” for the amount of net cash received from the transactions.

 

When possible, we option property for development prior to acquisition. By optioning property, we are only subject to the loss of the cost of the option and predevelopment costs if we choose not to exercise the option. As a result, our commitment for major land acquisitions is reduced. The costs associated with optioned properties are included in “Land and land options held for future development or sale” on the Condensed Consolidated Balance Sheets. Also included in “Land and land options held for future development or sale” are amounts associated with inventory in mothballed communities. We mothball (or stop development on) certain communities when we determine the current performance does not justify further investment at the time. That is, we believe we will generate higher returns if we decide against spending money to improve land today and save the raw land until such time as the markets improve or we determine to sell the property. As of July 31, 2021, we had mothballed land in eight communities. The book value associated with these communities at July 31, 2021 was $4.4 million, which was net of impairment charges recorded in prior periods of $61.5 million. We continually review communities to determine if mothballing is appropriate. During the first three quarters of fiscal 2021, we did not mothball any additional communities, but we sold two previously mothballed communities and we re-activated two previously mothballed communities and portions of two previously mothballed communities.

 

Inventories held for sale, which are land parcels where we have decided not to build homes and are actively marketing the land for sale, represented $0.1 million and $2.0 million of our total inventories held for sale at July 31, 2021 and October 31, 2020, respectively, and are reported at the lower of carrying amount or fair value less costs to sell. In determining fair value for land held for sale, management considers, among other things, prices for land in recent comparable sale transactions, market analysis studies, which include the estimated price a willing buyer would pay for the land (other than in a forced liquidation sale) and recent bona fide offers received from outside third parties.

 

 

The following tables summarize home sites included in our total residential real estate. The increase in total home sites available at July 31, 2021 compared to October 31, 2020 is attributable to acquiring new land parcels, partially offset by delivering homes and terminating certain option agreements during the period.

 

      

Active

  

Proposed

     
  

Active

  

Communities

  

Developable

  

Total

 
  

Communities(1)

  

Homes

  

Homes

  

Homes

 

July 31, 2021:

                
                 

Northeast

  6   753   2,626   3,379 

Mid-Atlantic

  12   2,083   5,847   7,930 

Midwest

  9   1,199   972   2,171 

Southeast

  18   1,885   2,059   3,944 

Southwest

  45   4,717   5,142   9,859 

West

  14   2,277   1,825   4,102 
                 

Consolidated total

  104   12,914   18,471   31,385 
                 

Unconsolidated joint ventures (2)

  17   4,186   -   4,186 
                 

Owned

      7,631   2,838   10,469 

Optioned

      4,900   15,633   20,533 
                 

Controlled lots

      12,531   18,471   31,002 
                 

Construction to permanent financing lots

      383   -   383 
                 

Consolidated total

      12,914   18,471   31,385 

 

 

(1)

Active communities are open for sale communities with ten or more home sites available. We identify communities based on product type. Therefore, at times there are multiple communities at one land site.

 

 

(2)

Represents active communities and home sites for our unconsolidated homebuilding joint ventures for the period. We provide this data as a supplement to our consolidated results as an indicator of the volume managed in our unconsolidated joint ventures. See Note 18 to the Condensed Consolidated Financial Statements for a further discussion of our unconsolidated joint ventures. 

 

 

      

Active

  

Proposed

     
  

Active

  

Communities

  

Developable

  

Total

 
  

Communities(1)

  

Homes

  

Homes

  

Homes

 

October 31, 2020:

                
                 

Northeast

  2   424   2,619   3,043 

Mid-Atlantic

  17   2,164   3,764   5,928 

Midwest

  11   1,267   899   2,166 

Southeast

  9   1,599   1,472   3,071 

Southwest

  52   4,451   3,190   7,641 

West

  25   2,000   2,495   4,495 
                 

Consolidated total

  116   11,905   14,439   26,344 
                 

Unconsolidated joint ventures (2)

  20   4,724   -   4,724 
                 

Owned

      6,008   3,737   9,745 

Optioned

      5,602   10,702   16,304 
                 

Controlled lots

      11,610   14,439   26,049 
                 

Construction to permanent financing lots

      295   -   295 
                 

Consolidated total

      11,905   14,439   26,344 

 

 

(1)

Active communities are open for sale communities with ten or more home sites available. We identify communities based on product type. Therefore, at times there are multiple communities at one land site.

 

 

 

 

(2)

Represents active communities and home sites for our unconsolidated homebuilding joint ventures for the period. We provide this data as a supplement to our consolidated results as an indicator of the volume managed in our unconsolidated joint ventures. See Note 18 to the Condensed Consolidated Financial Statements for a further discussion of our unconsolidated joint ventures. 

 

 

The following table summarizes our started or completed unsold homes and models, excluding unconsolidated joint ventures, in active and substantially completed communities.

 

  

July 31, 2021

  

October 31, 2020:

 
                         
  

Unsold

          

Unsold

         
  

Homes

  

Models

  

Total

  

Homes

  

Models

  

Total

 
                         

Northeast

  6   5   11   1   5   6 

Mid-Atlantic

  18   19   37   31   10   41 

Midwest

  -   10   10   11   8   19 

Southeast

  17   25   42   42   17   59 

Southwest

  107   24   131   174   16   190 

West

  6   18   24   14   19   33 
                         

Total

  154   101   255   273   75   348 
                         
                         

Started or completed unsold homes and models per active selling communities (1)

  1.5   1.0   2.5   2.4   0.6   3.0 

 

(1)

Active selling communities (which are communities that are open for sale with ten or more home sites available) were 104 and 116 at July 31, 2021 and October 31, 2020, respectively. This ratio does not include substantially completed communities, which are communities with less than ten home sites available.

  

 

Other Balance Sheet Activities

 

Investments in and advances to unconsolidated joint ventures decreased $34.3 million to $68.9 million at July 31, 2021 compared to October 31, 2020. The decrease was primarily due to our purchase of the remaining equity interest in one of our unconsolidated joint ventures in the third quarter of fiscal 2021. As a result of this transaction, we took control of four communities, including three active communities. The unconsolidated joint venture was subsequently dissolved. Also contributing to the decrease were partnership distributions during the period. These decreases were partially offset by an increase due to our entry into two new unconsolidated joint ventures during the first half of fiscal 2021. As of July 31, 2021 and October 31, 2020, we had investments in 11 and ten unconsolidated homebuilding joint ventures, respectively, and one unconsolidated land development joint venture for both periods. We have no guarantees associated with our unconsolidated joint ventures, other than guarantees limited to performance and completion of development activities, environmental indemnification and standard warranty and representation against fraud, misrepresentation and similar actions, including a voluntary bankruptcy.

 

Receivables, deposits and notes, net increased $4.0 million from October 31, 2020 to $37.7 million at July 31, 2021. The increase was primarily due to an increase in receivables due to the timing of home closings, along with increased escrow and municipal deposits during the period, partially offset by a receivable for a settlement which was received in the third quarter of fiscal 2021.

 

Prepaid expenses and other assets were as follows as of:

 

  

July 31,

  

October 31,

  

Dollar

 

(In thousands)

 

2021

  

2020

  

Change

 
             

Prepaid insurance

 $4,730  $2,687  $2,043 

Prepaid project costs

  26,806   28,549   (1,743)

Other prepaids

  8,555   7,022   1,533 

Other assets

  372   431   (59)

Lease right of use asset

  18,108   20,016   (1,908)

Total

 $58,571  $58,705  $(134)

 

 

Prepaid insurance increased during the nine months ended July 31, 2021 due to the timing of premium payments. These costs are amortized over the life of the associated insurance policy, which can be one to three years. Prepaid project costs consist of community specific expenditures that are used over the life of the community. Such prepaid costs are expensed as homes are delivered. Other prepaids increased primarily due to new premiums for the renewal of certain software and related services during the period, partially offset by the amortization of these costs. Lease right of use asset represents the net present value of our operating leases which, in accordance with ASC 842, are required to be recorded as an asset on our Condensed Consolidated Balance Sheets. See Note 9 to the Condensed Consolidated Financial Statements for further information.

   

Financial services assets consist primarily of residential mortgages receivable held for sale of which $129.8 million and $101.8 million at July 31, 2021 and October 31, 2020, respectively, were being temporarily warehoused and are awaiting sale in the secondary mortgage market. The increase in mortgage loans held for sale from October 31, 2020 was related to an increase in the volume of loans originated during the third quarter of 2021 compared to the fourth quarter of 2020, along with an increase in the average loan value. 

 

Deferred tax assets, net, was $447.5 million at July 31, 2021, and zero at October 31, 2020, due to the full reversal of our federal valuation allowance and the reversal of a portion of our state valuation allowance in the second quarter of fiscal 2021.

 

Nonrecourse mortgages secured by inventory decreased to $118.0 million at July 31, 2021 from $135.1 million at October 31, 2020. The decrease was primarily due to the payment of existing mortgages, partially offset by additional loan borrowings on existing mortgages, along with new mortgages for communities in most of our segments obtained during the nine months ended July 31, 2021.

 

Accounts payable and other liabilities were as follows as of:

 

  

July 31,

  

October 31,

  

Dollar

 

(In thousands)

 

2021

  

2020

  

Change

 
             

Accounts payable

 $166,140  $148,541  $17,599 

Reserves

  98,302   89,985   8,317 

Lease liability

  19,135   21,049   (1,914)

Accrued expenses

  16,815   10,680   6,135 

Accrued compensation

  78,821   68,641   10,180 

Other liabilities

  22,070   20,378   1,692 

Total

 $401,283  $359,274  $42,009 

 

The increase in accounts payable was primarily due to an increase in construction spending, which correlates with the increase in backlog for the nine months ended July 31, 2021. Reserves increased due to new accruals primarily for warranty and construction defect claims, partially offset by claim payments during the period. Lease liability represents the net present value of our minimum lease obligations, which as discussed above, are required to be recorded on our Condensed Consolidated Balance Sheets in accordance with ASC 842. Accrued expenses increased primarily due to an accrual for a sales reward program, along with an increase in accrued property taxes. The increase in accrued compensation was primarily due to expenses associated with our 2019 LTIP plan based on the increase in our stock price during fiscal 2021, along with the accrual of fiscal 2021 bonuses, partially offset by the payment of our fiscal year 2020 bonuses during the first quarter of fiscal 2021. Other liabilities increased primarily due to deferred payroll tax withholdings during the period. 

 

Customers’ deposits increased $28.4 million from October 31, 2020 to $76.7 million at July 31, 2021. The increase was primarily related to the increase in backlog during the period.

 

Liabilities from inventory not owned decreased $61.6 million to $69.6 million at July 31, 2021. The decrease was primarily due to a decrease in land banking activity during the period and a decrease in the sale and leaseback of certain model homes, both accounted for as financing transactions as described above.

 

Financial Services (liabilities) increased $39.2 million from $119.0 million at October 31, 2020 to $158.2 million at July 31, 2021. The increase was primarily due to an increase in amounts outstanding under our mortgage warehouse lines of credit and directly correlates to the increase in the volume of mortgage loans held for sale during the period.

 

Accrued interest increased $11.9 million from $35.6 million at October 31, 2020, to $47.5 at July 31, 2021. The increase was primarily due to timing of new accruals, partially offset by payments, related to our senior notes during the period.

 

 

 

RESULTS OF OPERATIONS FOR THE three and nine months ended July 31, 2021 COMPARED TO THE three and nine months ended July 31, 2020

 

Total Revenues

 

Compared to the same prior period, revenues increased as follows:

 

  

Three Months Ended

 
                 
  

July 31,

  

July 31,

  

Dollar

  

Percentage

 

(Dollars in thousands)

 

2021

  

2020

  

Change

  

Change

 

Homebuilding:

                

Sale of homes

 $663,279  $605,933  $57,346   9.5%

Land sales and other revenues

  7,559   908   6,651   732.5%

Financial services

  19,845   21,295   (1,450)  (6.8)%
                 

Total revenues

 $690,683  $628,136  $62,547   10.0%

 

  

Nine Months Ended

 
                 
  

July 31,

  

July 31,

  

Dollar

  

Percentage

 

(Dollars in thousands)

 

2021

  

2020

  

Change

  

Change

 

Homebuilding:

                

Sale of homes

 $1,894,159  $1,608,513  $285,646   17.8%

Land sales and other revenues

  13,280   2,360   10,920   462.7%

Financial services

  61,070   49,670   11,400   23.0%
                 

Total revenues

 $1,968,509  $1,660,543  $307,966   18.5%

 

Homebuilding

 

For the three and nine months ended July 31, 2021, sale of homes revenues increased $57.3 million, or 9.5%, and $285.6 million, or 17.8%, respectively, as compared to the same periods of the prior year. These increases were primarily due to a 13.5% and 7.6% increase in the average price per home for the three and nine months ended July 31, 2021, respectively, compared with the respective prior year periods. The average price per home increased to $442,776 in the three months ended July 31, 2021 from $390,169 in the three months ended July 31, 2020. The average price per home increased to $420,831 in the nine months ended July 31, 2021 from $390,985 in the nine months ended July 31, 2020. The increase in average price was the result of increases in home prices in virtually all of our markets along with the geographic and community mix of our deliveries. Also, impacting the increase in sale of homes revenues for the nine months ended July 31, 2021 was a 9.4% increase in the number of home deliveries compared to the prior year period. Land sales are ancillary to our homebuilding operations and are expected to continue in the future but may significantly fluctuate up or down. For further details on the decrease in land sales and other revenues, see the section titled “Land Sales and Other Revenues” below.

 

 

Information on homes delivered by segment is set forth below:

 

  

Three Months Ended July 31,

  

Nine Months Ended July 31,

 

(Dollars in thousands)

 

2021

  

2020

  

% Change

  

2021

  

2020

  

% Change

 
                         

Northeast:

                        

Dollars

 $35,255  $41,354   (14.7)% $95,157  $133,409   (28.7)%

Homes

  44   95   (53.7)%  139   270   (48.5)%
                   ��     

Mid-Atlantic:

                        

Dollars

 $106,195  $111,160   (4.5)% $311,230  $288,426   7.9%

Homes

  189   213   (11.3)%  581   536   8.4%
                         

Midwest:

                        

Dollars

 $60,588  $62,901   (3.7)% $181,191  $165,836   9.3%

Homes

  190   197   (3.6)%  576   540   6.7%
                         

Southeast:

                        

Dollars

 $61,978  $65,595   (5.5)% $188,489  $158,592   18.9%

Homes

  139   155   (10.3)%  408   379   7.7%
                         

Southwest:

                        

Dollars

 $212,773  $214,608   (0.9)% $620,120  $548,796   13.0%

Homes

  593   641   (7.5)%  1,808   1,649   9.6%
                         

West:

                        

Dollars

 $186,490  $110,315   69.1% $497,972  $313,454   58.9%

Homes

  343   252   36.1%  989   740   33.6%
                         

Consolidated total:

                        

Dollars

 $663,279  $605,933   9.5% $1,894,159  $1,608,513   17.8%

Homes

  1,498   1,553   (3.5)%  4,501   4,114   9.4%
                         

Unconsolidated joint ventures (1)

                        

Dollars

 $102,262  $132,014   (22.5)% $264,442  $330,559   (20.0)%

Homes

  179   228   (21.5)%  453   565   (19.8)%

 

(1) Represents housing revenues and home deliveries for our unconsolidated homebuilding joint ventures for the period. We provide this data as a supplement to our consolidated results as an indicator of the volume managed in our unconsolidated joint ventures. See Note 18 to the Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q for a further discussion of our unconsolidated joint ventures.

 

As discussed above, the overall increase in consolidated housing revenues during the three and nine months ended July 31, 2021 as compared to the same periods of the prior year was attributed to the increase in average sales price, due to raising prices in virtually all of our markets, and the geographic and community mix of deliveries. 

 

 

 

An important indicator of our future results are recently signed contracts and our home contract backlog for future deliveries. Our sales contracts and homes in contract backlog by segment are set forth below:

 

  

Net Contracts (1) for the

  

Net Contracts (1) for the

         
  

Three Months Ended

  

Nine Months Ended

  

Contract Backlog as of

 
  

July 31,

  

July 31,

  

July 31,

 

(Dollars in thousands)

 

2021

  

2020

  

2021

  

2020

  

2021

  

2020

 
                         

Northeast:

                        

Dollars

 $52,066  $51,586  $135,684  $107,855  $122,638  $61,002 

Homes

  62   102   169   231   160   113 
                         

Mid-Atlantic:

                        

Dollars

 $117,341  $152,511  $414,059  $374,865  $361,329  $269,972 

Homes

  176   307   647   737   572   523 
                         

Midwest:

                        

Dollars

 $56,848  $79,394  $216,775  $192,171  $205,101  $149,016 

Homes

  165   263   628   624   648   534 
                         

Southeast:

                        

Dollars

 $58,522  $79,846  $223,201  $195,512  $211,859  $145,947 

Homes

  124   172   487   436   440   304 
                         

Southwest:

                        

Dollars

 $196,481  $260,891  $783,924  $626,817  $524,029  $308,918 

Homes

  469   814   2,034   1,924   1,292   938 
                         

West:

                        

Dollars

 $127,872  $258,067  $453,557  $488,317  $325,472  $299,564 

Homes

  215   568   795   1,083   561   644 
                         

Consolidated total:

                        

Dollars

 $609,130  $882,295  $2,227,200  $1,985,537  $1,750,428  $1,234,419 

Homes

  1,211   2,226   4,760   5,035   3,673   3,056 
                         

Unconsolidated joint ventures:(2)

                        

Dollars

 $140,913  $135,869  $408,804  $384,910  $502,999  $271,222 

Homes

  380   374   1,112   1,078   2,065   1,030 

 

(1)  Net contracts are defined as new contracts executed during the period for the purchase of homes, less cancellations of contracts in the same period.

 

(2) Represents net contract dollars, net contract homes and contract backlog dollars and homes for our unconsolidated homebuilding joint ventures for the period. We provide this data as a supplement to our consolidated results as an indicator of the volume managed in our unconsolidated joint ventures. See Note 18 to the Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q for a further discussion of our unconsolidated joint ventures.

 

In the first three quarters of 2021, our open for sale community count decreased to 104 from 116 at October 31, 2020, which was the net result of opening 48 new communities, closing 60 communities, contributing three active selling communities to an unconsolidated joint venture and transitioning three joint venture communities to wholly owned since the beginning of fiscal 2021. High demand accelerated the close out of our communities, which contributed to the decrease in community count. While our open for sale community count decreased from October 31, 2020, it increased sequentially from 97 at April 30, 2021 as a result of opening 17 new communities, closing 13 communities and adding three communities through the acquisition of one of our unconsolidated joint ventures during the third quarter of fiscal 2021. Our reported level of sales contracts (net of cancellations) was impacted by an increase in sales pace per community for the nine months ended July 31, 2021 as compared to the same period of the prior year. Net contracts per average active selling community for the nine months ended July 31, 2021 increased to 44.9 compared to 38.1 for the same period in the prior year, while net contracts per average active selling community for the three months ended July 31, 2021 decreased to 12.0 compared to 17.8 for the same period in the prior year. The decrease in the third quarter of fiscal 2021 as compared to the same period of the prior year was due to consciously restricting sales in many of our communities in the current period, along with the unprecedented COVID-19 surge in home demand in the third quarter of fiscal 2020.

 

 

 

Cancellation rates represent the number of cancelled contracts in the quarter divided by the number of gross sales contracts executed in the quarter. For comparison, the following are historical cancellation rates, excluding unconsolidated joint ventures:

 

Quarter

 

2021

  

2020

  

2019

  

2018

  

2017

 
                     

First

  17%  19%  24%  18%  19%

Second

  16%  23%  19%  17%  18%

Third

  16%  18%  19%  19%  19%

Fourth

      18%  21%  23%  22%

 

Another common and meaningful way to analyze our cancellation trends is to compare the number of contract cancellations as a percentage of the beginning backlog. The following table provides this historical comparison, excluding unconsolidated joint ventures:

 

Quarter

 

2021

  

2020

  

2019

  

2018

  

2017

 
                     

First

  11%  14%  16%  12%  12%

Second

  9%  20%  20%  15%  16%

Third

  6%  21%  16%  14%  13%

Fourth

      14%  14%  13%  12%

 

Most cancellations occur within the legal rescission period, which varies by state but is generally less than two weeks after the signing of the contract. Cancellations also occur as a result of a buyer’s failure to qualify for a mortgage, which generally occurs during the first few weeks after signing. As shown in the tables above, contract cancellations over the past several years have been within what we believe to be a normal range, with fiscal 2021 cancellation rates, in particular, being below historical norms as a result of the strong market conditions. However, it is difficult to predict what cancellation rates will be in the future.

 

Total cost of sales on our Condensed Consolidated Statements of Operations includes expenses for consolidated housing and land and lot sales, including inventory impairment loss and land option write-offs (defined as “land charges” in the tables below). A breakout of such expenses for housing sales and homebuilding gross margin is set forth below.

 

Homebuilding gross margin before cost of sales interest expense and land charges is a non-GAAP financial measure. This measure should not be considered as an alternative to homebuilding gross margin determined in accordance with GAAP as an indicator of operating performance.

 

Management believes this non-GAAP measure enables investors to better understand our operating performance. This measure is also useful internally, helping management evaluate our operating results on a consolidated basis and relative to other companies in our industry. In particular, the magnitude and volatility of land charges for the Company, and for other homebuilders, have been significant and, as such, have made financial analysis of our industry more difficult. Homebuilding metrics excluding land charges, as well as interest amortized to cost of sales, and other similar presentations prepared by analysts and other companies are frequently used to assist investors in understanding and comparing the operating characteristics of homebuilding activities by eliminating many of the differences in companies’ respective level of impairments and levels of debt.

 

 

 

  

Three Months Ended

  

Nine Months Ended

 
  

July 31,

  

July 31,

 

(Dollars in thousands)

 

2021

  

2020

  

2021

  

2020

 
                 

Sale of homes

 $663,279  $605,933  $1,894,159  $1,608,513 

Cost of sales, excluding interest expense and land charges

  516,530   499,654   1,488,919   1,323,916 

Homebuilding gross margin, before cost of sales interest expense and land charges

  146,749   106,279   405,240   284,597 

Cost of sales interest expense, excluding land sales interest expense

  17,821   21,794   56,242   58,467 

Homebuilding gross margin, after cost of sales interest expense, before land charges

  128,928   84,485   348,998   226,130 

Land charges

  1,309   2,364   3,267   6,202 

Homebuilding gross margin

 $127,619  $82,121  $345,731  $219,928 

Homebuilding gross margin percentage

  19.2%  13.6%  18.3%  13.7%

Homebuilding gross margin percentage, before cost of sales interest expense and land charges

  22.1%  17.5%  21.4%  17.7%

Homebuilding gross margin percentage, after cost of sales interest expense, before land charges

  19.4%  13.9%  18.4%  14.1%

 

Cost of sales expenses as a percentage of consolidated home sales revenues are presented below:

 

  

Three Months Ended

  

Nine Months Ended

 
  

July 31,

  

July 31,

 
  

2021

  

2020

  

2021

  

2020

 
                 

Sale of homes

  100.0%  100.0%  100.0%  100.0%
                 

Cost of sales, excluding interest expense and land charges:

                

Housing, land and development costs

  69.6%  72.8%  70.1%  72.6%

Commissions

  3.7%  3.9%  3.6%  3.7%

Financing concessions

  1.0%  1.5%  1.2%  1.4%

Overheads

  3.6%  4.3%  3.7%  4.6%

Total cost of sales, before interest expense and land charges

  77.9%  82.5%  78.6%  82.3%

Cost of sales interest

  2.7%  3.6%  3.0%  3.6%

Land charges

  0.2%  0.3%  0.1%  0.4%
                 

Homebuilding gross margin percentage

  19.2%  13.6%  18.3%  13.7%

Homebuilding gross margin percentage, before cost of sales interest expense and land charges

  22.1%  17.5%  21.4%  17.7%

Homebuilding gross margin percentage, after cost of sales interest expense, before land charges

  19.4%  13.9%  18.4%  14.1%

 

We sell a variety of home types in various communities, each yielding a different gross margin. As a result, depending on the mix of communities delivering homes, consolidated gross margin may fluctuate up or down. Total homebuilding gross margin percentage increased to 19.2% during the three months ended July 31, 2021 compared to 13.6% for the same period last year and increased to 18.3% during the nine months ended July 31, 2021 compared to 13.7% for the same period last year. Homebuilding gross margin percentage, before cost of sales interest expense and land charges, increased from 17.5% for the three months ended July 31, 2020 to 22.1% for the three months ended July 31, 2021, and increased from 17.7% for the nine months ended July 31, 2020 to 21.4% for the nine months ended July 31, 2021. The increases for the three and nine months ended July 31, 2021 for both gross margin percentage and gross margin percentage, before cost of sales interest expense and land charges, were primarily due to increases in home prices across virtually all our operating segments, along with the mix of communities delivering compared to the prior year periods.

 

 

Reflected as inventory impairment loss and land option write-offs in cost of sales, we wrote-off or wrote-down certain inventories totaling $1.3 million and $2.4 million during the three months ended July 31, 2021 and 2020, respectively, and $3.3 million and $6.2 million during the nine months ended July 31, 2021 and 2020, respectively, to their estimated fair value. During the three and nine months ended July 31, 2021, we wrote-off residential land options and approval and engineering costs amounting to $0.1 million and $1.3 million, respectively, compared to $2.4 million and $6.2 million for the three and nine months ended July 31, 2020, respectively, which are included in the total land charges discussed above. Option, approval and engineering costs are written-off when a community’s pro forma profitability is not projected to produce adequate returns on the investment commensurate with the risk and when we believe it is probable we will cancel the option or when a community is redesigned engineering costs related to the initial design are written-off. Such write-offs were located in the Mid-Atlantic, Southeast, Southwest and West segments in the first three quarters of fiscal 2021 and all of our segments in the first three quarters of fiscal 2020. We recorded inventory impairments of $1.2 million and $2.0 million during the three and nine months ended July 31, 2021, respectively, which were related to two communities in the Southeast segment for the three and nine months ended July 31, 2021, and one community in the West segment for the nine months ended July 31, 2021. We did not record any inventory impairments during the three and nine months ended July 31, 2020. It is difficult to predict impairment levels, and should it become necessary or desirable to have additional land sales, lower prices, or should the estimates or expectations used in determining estimated cash flows or fair value decrease or differ from current estimates in the future, we may need to recognize additional impairments.

 

Land Sales and Other Revenues

 

Land sales and other revenues consist primarily of land and lot sales. A breakout of land and lot sales is set forth below:

 

  

Three Months Ended

  

Nine Months Ended

 
  

July 31,

  

July 31,

 

(In thousands)

 

2021

  

2020

  

2021

  

2020

 
                 

Land and lot sales

 $6,819  $25  $11,730  $100 

Cost of sales, excluding interest

  5,338   41   9,121   161 

Land and lot sales gross margin, excluding interest

  1,481   (16)  2,609   (61)

Land and lot sales interest expense

  1,419   20   1,888   72 

Land and lot sales gross margin, including interest

 $62  $(36) $721  $(133)

 

Land sales are ancillary to our residential homebuilding operations and are expected to continue in the future but may significantly fluctuate up or down. Although we budget land sales, they are often dependent upon receiving approvals and entitlements, the timing of which can be uncertain. As a result, projecting the amount and timing of land sales is difficult. Revenue associated with land sales can vary significantly due to the mix of land parcels sold. There were two land sales in the three months ended July 31, 2021 compared to one land sale in the same period of the prior year, resulting in an increase of $6.8 million in land sales revenues. There were eight land sales in the nine months ended July 31, 2021 compared to four land sales in the same period of the prior year, resulting in an increase of $11.6 million in land sales revenues.

 

Land sales and other revenues increased $6.7 million and $10.9 million for the three and nine months ended July 31, 2021, respectively, as compared to the same periods in the prior year. Other revenues include income from contract cancellations where the deposit has been forfeited due to contract terminations, interest income, cash discounts and miscellaneous one-time receipts.  The increase for the three and nine months ended July 31, 2021, compared to the three and nine months ended July 31, 2020, was mainly due to the increase in land sales discussed above. 

 

Homebuilding Selling, General and Administrative

 

Homebuilding selling, general and administrative (“SGA”) expenses increased $2.4 million and $3.5 million for the three and nine months ended July 31, 2021, respectively, compared to the same periods last year. The increase for the three and nine months ended July 31, 2021 was primarily due to a decrease of unconsolidated joint venture management fees received, which offset general and administrative expenses, as a result of fewer unconsolidated joint venture deliveries during the respective periods. The increase for the nine months ended July 31, 2021 was also due to an increase in compensation expense, mostly attributed to our long-term incentive programs now forecasted to achieve above target metrics as a result of the recent improved operating results and our higher stock price. SGA expenses as a percentage of homebuilding revenues decreased to 6.4% and 6.6% for the three and nine months ended July 31, 2021, respectively, compared to 6.7% and 7.6% for the three and nine months ended July 31, 2020, respectively, as a result of the 10.5% and 18.4% increase in homebuilding revenue for the same periods, respectively.

 

 

HOMEBUILDING OPERATIONS BY SEGMENT

 

Segment Analysis

 

  

Three Months Ended July 31,

 
                 

(Dollars in thousands, except average sales price)

 

2021

  

2020

  

Variance

  

Variance %

 
                 

Northeast

                

Homebuilding revenue

 $35,255  $41,370  $(6,115)  (14.8)%

Income before income taxes

 $6,765  $5,240  $1,525   29.1%

Homes delivered

  44   95   (51)  (53.7)%

Average sales price

 $801,250  $435,305  $365,945   84.1%
                 

Mid-Atlantic

                

Homebuilding revenue

 $106,419  $111,402  $(4,983)  (4.5)%

Income before income taxes

 $15,907  $11,024  $4,883   44.3%

Homes delivered

  189   213   (24)  (11.3)%

Average sales price

 $561,878  $521,878  $40,000   7.7%
                 

Midwest

                

Homebuilding revenue

 $60,659  $63,003  $(2,344)  (3.7)%

Income before income taxes

 $3,358  $765  $2,593   339.0%

Homes delivered

  190   197   (7)  (3.6)%

Average sales price

 $318,884  $319,294  $(410)  (0.1)%
                 

Southeast

                

Homebuilding revenue

 $68,854  $65,790  $3,064   4.7%

Income (loss) before income taxes

 $2,682  $(253) $2,935   1,160.1%

Homes delivered

  139   155   (16)  (10.3)%

Average sales price

 $445,885  $423,194  $22,691   5.4%
                 

Southwest

                

Homebuilding revenue

 $213,127  $214,918  $(1,791)  (0.8)%

Income before income taxes

 $28,523  $20,072  $8,451   42.1%

Homes delivered

  593   641   (48)  (7.5)%

Average sales price

 $358,808  $334,802  $24,006   7.2%
                 

West

                

Homebuilding revenue

 $186,519  $110,323  $76,196   69.1%

Income before income taxes

 $27,189  $226  $26,963   11,930.5%

Homes delivered

  343   252   91   36.1%

Average sales price

 $543,703  $437,758  $105,945   24.2%

 

 

  

Nine Months Ended July 31,

 
                 

(Dollars in thousands, except average sales price)

 

2021

  

2020

  

Variance

  

Variance %

 
                 

Northeast

                

Homebuilding revenue

 $97,488  $133,444  $(35,956)  (26.9)%

Income before income taxes

 $16,427  $17,703  $(1,276)  (7.2)%

Homes delivered

  139   270   (131)  (48.5)%

Average sales price

 $684,583  $494,107  $190,476   38.5%
                 

Mid-Atlantic

                

Homebuilding revenue

 $311,564  $288,899  $22,665   7.8%

Income before income taxes

 $38,618  $20,548  $18,070   87.9%

Homes delivered

  581   536   45   8.4%

Average sales price

 $535,680  $538,108  $(2,428)  (0.5)%
                 

Midwest

                

Homebuilding revenue

 $183,895  $166,120  $17,775   10.7%

Income (loss) before income taxes

 $11,070  $(3,063) $14,133   461.4%

Homes delivered

  576   540   36   6.7%

Average sales price

 $314,568  $307,104  $7,464   2.4%
                 

Southeast

                

Homebuilding revenue

 $195,545  $158,933  $36,612   23.0%

Income (loss) before income taxes

 $9,540  $(4,514) $14,054   311.3%

Homes delivered

  408   379   29   7.7%

Average sales price

 $461,983  $418,449  $43,534   10.4%
                 

Southwest

                

Homebuilding revenue

 $620,848  $549,471  $71,377   13.0%

Income before income taxes

 $78,848  $41,744  $37,104   88.9%

Homes delivered

  1,808   1,649   159   9.6%

Average sales price

 $342,987  $332,805  $10,182   3.1%
                 

West

                

Homebuilding revenue

 $498,084  $313,547  $184,537   58.9%

Income before income taxes

 $58,729  $4,560  $54,169   1,187.9%

Homes delivered

  989   740   249   33.6%

Average sales price

 $503,511  $423,586  $79,925   18.9%

 

 

Homebuilding Results by Segment

 

Northeast - Homebuilding revenues decreased 14.8% for the three months ended July 31, 2021 compared to the same period of the prior year. The decrease for the three months ended July 31, 2021 was attributed to a 53.7% decrease in homes delivered, partially offset by a 84.1% increase in average sales price. The increase in average sales price was mainly the result of price increases in certain communities.

 

Income before income taxes increased $1.5 million to $6.8 million for the three months ended July 31, 2021 as compared to the prior year period. This was primarily due to a $1.2 million decrease in inventory impairment loss and land option write-offs and an increase in gross margin percentage before interest expense for the period compared to the same period of the prior year.

 

Homebuilding revenues decreased 26.9% for the nine months ended July 31, 2021 compared to the same period of the prior year. The decrease was attributed to a 48.5% decrease in homes delivered, partially offset by a 38.5% increase in average sales price. The increase in average sales price was mainly the result of price increases in certain communities.

 

Income before income taxes decreased $1.3 million to $16.4 million for the nine months ended July 31, 2021 as compared to the prior year period. This was primarily due to the decrease in homebuilding revenues discussed above and a $7.7 million decrease in income from unconsolidated joint ventures and a $0.7 million increase in selling, general and administrative costs, partially offset by an increase in gross margin percentage before interest expense for the period compared to the same period of the prior year.

 

Mid-Atlantic - Homebuilding revenues decreased 4.5% for the three months ended July 31, 2021 compared to the same period in the prior year period. The decrease was primarily due to an 11.3% decrease in homes delivered, partially offset by a 7.7% increase in average sales price for the three months ended July 31, 2021 compared to the same period in the prior year. The increase in average sales price was mainly the result of price increases in certain communities.

 

Income before income taxes increased $4.9 million to $15.9 million for the three months ended July 31, 2021 compared to the same period in the prior year. This was primarily due to an increase in gross margin percentage before interest expense for the three months ended July 31, 2021 compared to the same period of the prior year.

 

Homebuilding revenues increased 7.8% for the nine months ended July 31, 2021 compared to the same period in the prior year. The increase was primarily due to an 8.4% increase in homes delivered, while average sales price was essentially flat with a 0.5% decrease for the nine months ended July 31, 2021.

 

Income before income taxes increased $18.1 million to $38.6 million for the nine months ended July 31, 2021 as compared to the prior year period, which was primarily due to the increase in homebuilding revenues discussed above, a $0.2 million decrease in selling, general and administrative costs and an increase in gross margin percentage before interest expense. 

 

Midwest - Homebuilding revenues decreased 3.7% for the three months ended July 31, 2021 compared to the same period in the prior year. The decrease was due to a 3.6% decrease in homes delivered while average sales price was essentially flat with a 0.1% decrease for the nine months ended July 31, 2021.

 

Income before income taxes increased $2.6 million to $3.4 million for the three months ended July 31, 2021 compared to the same period in the prior year. The increase was primarily due to a $0.8 million decrease in selling, general and administrative costs and a $0.7 million decrease in inventory impairment loss and land option write-offs, while gross margin percentage before interest expense was flat compared with the same period of the prior year.

 

 

Homebuilding revenues increased 10.7% for the nine months ended July 31, 2021 compared to the same period in the prior year. The increase was primarily due to a 6.7% increase in homes delivered and a 2.4% increase in the average sales price. The increase in average sales price was the result of new communities delivering higher priced, larger single family homes and townhomes in higher-end submarkets of the segment in the nine months ended July 31, 2021 compared to some communities delivering in the nine months ended July 31, 2020 that had lower priced, single family homes in lower-end submarkets of the segment that are no longer delivering. Also impacting the increase in the average sales price was price increases in certain communities.

 

Loss before income taxes improved $14.1 million to income of $11.1 million for the nine months ended July 31, 2021 as compared to the prior year period, primarily due to the increase in homebuilding revenue discussed above, a $3.3 million decrease in selling, general and administrative costs, a $3.5 million decrease in inventory impairment loss and land option write-offs and a slight increase in gross margin percentage before interest expense.

 

Southeast – Homebuilding revenues increased 4.7% for the three months ended July 31, 2021 compared to the same period in the prior year. The increase was due to a 5.4% increase in average sales price and a $6.7 million increase in land sales and other revenue, partially offset by a 10.3% decrease in homes delivered. The increase in average sales price was the result of new communities delivering higher priced, larger single family homes in higher-end submarkets of the segment in the three months ended July 31, 2021 compared to some communities delivering in the three months ended July 31, 2020 that had lower priced, smaller single family homes and townhomes in lower-end submarkets of the segment that are no longer delivering. Also impacting the increase in the average sales price was price increases in certain communities. 

 

Loss before income taxes improved $2.9 million to income of $2.7 million for the three months ended July 31, 2021 compared to the prior year period, primarily due to the increase in homebuilding revenue discussed above and an increase in gross margin percentage before interest expense for the period compared to the same period of the prior year.

 

Homebuilding revenues increased 23.0% for the nine months ended July 31, 2021 compared to the same period in the prior year. The increase for the nine months ended July 31, 2021 was due to a 7.7% increase in homes delivered, a 10.4% increase in average sales price and a $6.7 million increase in land sales and other revenue. The increase in average sales price was the result of new communities delivering higher priced, larger single family homes in higher-end submarkets of the segment in the nine months ended July 31, 2021 compared to some communities delivering in the nine months ended July 31, 2020 that had lower priced, smaller single family homes and townhomes in lower-end submarkets of the segment that are no longer delivering. Also impacting the increase in the average sales price was price increases in certain communities. 

 

Loss before income taxes improved $14.1 million to income of $9.5 million for the nine months ended July 31, 2021 compared to the prior year period, primarily due to the increase in homebuilding revenue discussed above, a $1.9 million increase in income from unconsolidated joint ventures and an increase in gross margin percentage before interest expense.

 

Southwest - Homebuilding revenues decreased 0.8% for the three months ended July 31, 2021 compared to the same period in the prior year. The slight decrease in homebuilding revenues was primarily due to a 7.5% decrease in homes delivered, partially offset by a 7.2% increase in average sales price. The increase in the average sales price was due to price increases in certain communities. 

 

Income before income taxes increased $8.5 million to $28.5 million for the three months ended July 31, 2021 compared to the same period in the prior year. The increase was primarily due to a $0.5 million increase in income from unconsolidated joint ventures and an increase in gross margin percentage before interest expense for the three months ended July 31, 2021 compared to the same period of the prior year.

 

Homebuilding revenues increased 13.0% for the nine months ended July 31, 2021 compared to the same period in the prior year. The increase was primarily due to a 9.6% increase in homes delivered and a 3.1% increase in average sales price. The increase in the average sales price was due to price increases in certain communities. 

 

Income before income taxes increased $37.1 million to $78.8 million for the nine months ended July 31, 2021 compared to the same period in the prior year. The increase was due to the increase in homebuilding revenues discussed above, a $0.4 million increase in income from unconsolidated joint ventures and an increase in gross margin percentage before interest expense for the nine months ended July 31, 2021 compared to the same period of the prior year.

 

 

 

West – Homebuilding revenues increased 69.1% for the three months ended July 31, 2021 compared to the same period in the prior year. The increase was due to a 36.1% increase in homes delivered and a 24.2% increase in average sales price. The increase in average sales price was the result of new communities delivering higher priced, larger single family homes in higher-end submarkets of the segment in the three months ended July 31, 2021 compared to some communities delivering in the three months ended July 31, 2020 that had lower priced, smaller single family homes in lower-end submarkets of the segment that are no longer delivering. Also impacting the increase in the average sales price was price increases in certain communities.

 

Income before income taxes increased $27.0 million to $27.2 million for the three months ended July 31, 2021 compared to the prior year period, primarily due to the increase in homebuilding revenue discussed above and an increase in gross margin percentage before interest expense for the period compared to the same period of the prior year.

 

Homebuilding revenues increased 58.9% for the nine months ended July 31, 2021 compared to the same period in the prior year. The increase was due to a 33.6% increase in homes delivered and a 18.9% increase in average sales price. The increase in average sales price was the result of new communities delivering higher priced, larger single family homes in higher-end submarkets of the segment in the nine months ended July 31, 2021 compared to some communities delivering in the nine months ended July 31, 2020 that had lower priced, smaller single family homes in lower-end submarkets of the segment that are no longer delivering. Also impacting the increase in the average sales price was price increases in certain communities.

 

Income before income taxes increased $54.2 million to $58.7 million for the nine months ended July 31, 2021 compared to the prior year period, primarily due to the increase in homebuilding revenue discussed above and an increase in gross margin percentage before interest expense for the period compared to the same period of the prior year, partially offset by a $1.3 million increase in inventory impairment loss and land option write-offs.

 

Financial Services

 

Financial services consist primarily of originating mortgages from our home buyers, selling such mortgages in the secondary market, and title insurance activities. We use mandatory investor commitments and forward sales of mortgage-backed securities (“MBS”) to hedge our mortgage-related interest rate exposure on agency and government loans. These instruments involve, to varying degrees, elements of credit and interest rate risk. Credit risk associated with MBS forward commitments and loan sales transactions is managed by limiting our counterparties to investment banks, federally regulated bank affiliates and other investors meeting our credit standards. Our risk, in the event of default by the purchaser, is the difference between the contract price and fair value of the MBS forward commitments. For the first three quarters of fiscal 2021 and 2020, Federal Housing Administration and Veterans Administration (“FHA/VA”) loans represented 29.6% and 30.2%, respectively, of our total loans. The origination of FHA/VA loans decreased slightly from the first three quarters of fiscal 2020 to the first three quarters of fiscal 2021, and our conforming conventional loan originations as a percentage of our total loans increased from 68.4% to 69.7% for these periods, respectively. The origination of loans which exceed conforming conventions decreased from 1.4% for the first three quarters of fiscal 2020 to 0.7% for the first three quarters of fiscal 2021. Profits and losses relating to the sale of mortgage loans are recognized when legal control passes to the buyer of the mortgage and the sales price is collected.

 

During the three and nine months ended July 31, 2021, financial services provided a $8.6 million and $28.1 million pretax profit, respectively, compared to $10.8 million and $20.0 million, respectively, of pretax profit for the same periods of fiscal 2020. The decrease in pretax profit for the three months ended July 31, 2021 was attributed to the decrease in the homebuilding deliveries and a decrease in the basis point spread between the loans originated and the implied rate from the sale of the loans. The increase in pretax profit for the nine months ended July 31, 2021 was attributed to the increase in the homebuilding deliveries and an increase in the average price of the loans settled. Also impacting the increase for the nine months ended July 31, 2021, was the increase in the basis point spread between the loans originated and the implied rate from the sale of the loans. In the market areas served by our wholly owned mortgage banking subsidiaries, 65.6% and 68.2% of our noncash homebuyers obtained mortgages originated by these subsidiaries during the three months ended July 31, 2021 and 2020, respectively, and 68.6% of our noncash homebuyers obtained mortgages originated by these subsidiaries for both the nine months ended July 31, 2021 and 2020, respectively. 

 

Corporate General and Administrative

 

Corporate general and administrative expenses include the operations at our headquarters in New Jersey. These expenses include payroll, stock compensation, facility costs and rent and other costs associated with our executive offices, legal expenses, information services, human resources, corporate accounting, training, treasury, process redesign, internal audit, national and digital marketing, construction services and administration of insurance, quality and safety. Corporate general and administrative expenses decreased to $17.3 million for the three months ended July 31, 2021 compared to $19.3 million for the three months ended July 31, 2020 and increased to $81.1 million for the nine months ended July 31, 2021 compared to $54.3 million for the nine months ended July 31, 2020. The decrease for the three months ended July 31, 2021 was due to a reduction in reserves for self-insured medical claims, which were reduced based on actual claims, as well a decrease in compensation expense related to the grants of phantom stock awards under our 2019 Long Term Incentive Plan (“2019 LTIP”), which expense decreased due to the decrease in our stock price during the period. The increase for the nine months ended July 31, 2021 was primarily due to an increase in compensation expense, mainly related to the grants of phantom stock awards under our 2019 LTIP which expense increased due to the significant increase in our stock price from $51.16 at January 31, 2021 to $104.39 at July 31, 2021. Had equity shares rather than phantom shares been utilized for the 2019 LTIP, there would not have been expenses related to the movement in our stock price. 

  

 

Other Interest

 

Other interest decreased $7.9 million for the three months ended July 31, 2021 compared to the three months ended July 31, 2020 and decreased $13.8 million for the nine months ended July 31, 2021 compared to the nine months ended July 31, 2020 primarily due to the decrease in nonrecourse mortgages and inventory financing arrangements at July 31, 2021 compared to July 31, 2020. Our assets that qualify for interest capitalization (inventory under development) are less than our debt, and therefore the portion of interest not covered by qualifying assets is directly expensed. 

 

(Loss) Gain on Extinguishment of Debt

 

On July 30, 2021, the Company redeemed in full all of the $111.2 million aggregate principal amount of 10.0% 2022 Notes. The aggregate purchase price for this redemption was $111.7 million, which included accrued and unpaid interest. This redemption resulted in a loss on extinguishment of debt of $0.3 million for the three months ended July 31,2021, net of the write-off of unamortized financing costs and fees. The loss from the redemption is included in the Condensed Consolidated Statement of Operations as "Loss on extinguishment of debt".

 

On December 10, 2019, the Company entered into a credit agreement providing for $81.5 million of senior secured 1.75 lien term loans in exchange for $163.0 million of senior unsecured term loans. On December 10, 2019, the Company also issued $158.5 million of 10.0% Senior Secured 1.75 Lien Notes due 2025 in exchange for $23.2 million of 10.0% Senior Secured Notes due 2022 and $141.7 million 10.5% Senior Secured Notes due 2024. These transactions were accounted for in accordance with ASC 470-60, resulting in a gain on extinguishment of debt of $9.5 million. Additional costs incurred pertaining to this transaction resulted in a $0.2 million and less than $0.1 million loss on extinguishment of debt during the three months ended April 30, 2020 and July 31, 2020, respectively. During the three months ended July 31, 2020, the Company repurchased in open market transactions $25.5 million aggregate principal amount of 10.0% 2022 Notes. The aggregate repurchase price for these repurchases was $21.4 million, which included accrued and unpaid interest. These repurchases resulted in a gain on extinguishment of debt of $4.1 million for the three months ended July 31, 2020, net of the write-off of unamortized financing costs and fees. The gains from the repurchases are included in the Condensed Consolidated Statement of Operations as "Gain of extinguishment of debt".

 

Income from Unconsolidated Joint Ventures

 

Income from unconsolidated joint ventures consists of our share of the earnings or losses of our unconsolidated joint ventures. Income from unconsolidated joint ventures decreased $0.6 million to $5.0 million for the three months ended July 31, 2021 and decreased $3.9 million to $9.6 million for the nine months ended July 31, 2021 compared to the same respective periods of the prior year. The decrease was primarily due to the recognition of our share of income from certain of our joint ventures delivering fewer homes in the current fiscal year as compared to the prior fiscal year.

 

Total Taxes 

 

The total income tax expense for the three months ended July 31, 2021 was $14.1 million, primarily related to federal tax expense from pretax income generated during the third quarter of fiscal 2021 and state tax expense from income generated in states where we do not have net operating loss carryforwards to offset the current year income. The total income tax benefit for the nine months ended July 31, 2021 was $442.9 million, primarily due to the reversal of a substantial portion of our valuation allowance previously recorded against our deferred tax assets, as discussed in Note 16 to the Condensed Consolidated Financial Statements. 

 

Inflation

 

Inflation has a long-term effect, because increasing costs of land, materials and labor result in increasing sale prices of our homes. In general, these price increases have been commensurate with the general rate of inflation in our housing markets and have not had a significant adverse effect on the sale of our homes. A significant risk faced by the housing industry generally is that rising house construction costs, including land and interest costs, will substantially outpace increases in the income of potential purchasers and therefore limit our ability to raise home sale prices, which may result in lower gross margins.

 

Inflation has a lesser short-term effect, because we generally negotiate fixed-price contracts with many, but not all, of our subcontractors and material suppliers for the construction of our homes. These prices usually are applicable for a specified number of residential buildings or for a time period of between three to twelve months. Construction costs for residential buildings represented approximately 52.9% of our homebuilding cost of sales for the nine months ended July 31, 2021.

 

 

 

Safe Harbor Statement

 

All statements in this Quarterly Report on Form 10-Q that are not historical facts should be considered as “Forward-Looking Statements” within the meaning of the “Safe Harbor” provisions of the Private Securities Litigation Reform Act of 1995. Such statements involve known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Such forward-looking statements include but are not limited to statements related to the Company's goals and expectations with respect to its financial results for future financial periods. Although we believe that our plans, intentions and expectations reflected in, or suggested by, such forward-looking statements are reasonable, we can give no assurance that such plans, intentions or expectations will be achieved. By their nature, forward-looking statements: (i) speak only as of the date they are made, (ii) are not guarantees of future performance or results and (iii) are subject to risks, uncertainties and assumptions that are difficult to predict or quantify. Therefore, actual results could differ materially and adversely from those forward-looking statements as result of a variety of factors. Such risks, uncertainties and other factors include, but are not limited to:

  

 

The outbreak and spread of COVID-19 and the measures that governments, agencies, law enforcement and/or health authorities implement to address it;

 

Changes in general and local economic, industry and business conditions and impacts of a significant homebuilding downturn;

 

Adverse weather and other environmental conditions and natural disasters;

 

The seasonality of the Company’s business;

 

● 

The availability and cost of suitable land and improved lots and sufficient liquidity to invest in such land and lots;

 

Shortages in, and price fluctuations of, raw materials and labor, including due to changes in trade policies, including the imposition of tariffs and duties on homebuilding materials and products and related trade disputes with and retaliatory measures taken by other countries;

 

Reliance on, and the performance of, subcontractors;

 

● 

Regional and local economic factors, including dependency on certain sectors of the economy, and employment levels affecting home prices and sales activity in the markets where the Company builds homes;

 

Increases in cancellations of agreements of sale;

 

Fluctuations in interest rates and the availability of mortgage financing;

 

Changes in tax laws affecting the after-tax costs of owning a home;

 

Legal claims brought against us and not resolved in our favor, such as product liability litigation, warranty claims and claims made by mortgage investors;

 

Levels of competition;

 Utility shortages and outages or rate fluctuations;
 Information technology failures and data security breaches;
 Negative publicity;
 High leverage and restrictions on the Company's operations and activities imposed by the agreements governing the Company's outstanding indebtedness; 
 Availability and terms of financing to the Company;
 The Company's sources of liquidity;
 Changes in credit ratings;
 Government regulations, including regulations concerning development of land, the home building, sales and customer financing processes, tax laws and the environment;
 Operations through unconsolidated joint ventures with third parties;
 

Significant influence of the Company’s controlling stockholders;

 

Availability of net operating loss carryforwards; and

 

Loss of key management personnel or failure to attract qualified personnel.

    

Certain risks, uncertainties and other factors are described in detail in Part I, Item 1 “Business” and Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended October 31, 2020. Except as otherwise required by applicable securities laws, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, changed circumstances or any other reason after the date of this Quarterly Report on Form 10-Q.

 

 

 

Item 3.     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

A primary market risk facing us is interest rate risk on our long-term debt, including debt instruments at variable interest rates. In connection with our mortgage operations, mortgage loans held for sale and the associated mortgage warehouse lines of credit under our Master Repurchase Agreements are subject to interest rate risk; however, such obligations reprice frequently and are short-term in duration. In addition, we hedge the interest rate risk on mortgage loans by obtaining forward commitments from private investors. Accordingly, the interest rate risk from mortgage loans is not material. We do not use financial instruments to hedge interest rate risk except with respect to mortgage loans. We are also subject to foreign currency risk but we do not believe this risk is material. The following table sets forth as of July 31, 2021, our long-term debt obligations, principal cash flows by scheduled maturity, weighted-average interest rates and estimated fair value (“FV”).

  

  

Long Term Debt as of July 31, 2021 by Fiscal Year of Expected Maturity Date

 
                              

FV at

 

(Dollars in thousands)

 

2021

  

2022

  

2023

  

2024

  

2025

  

Thereafter

  

Total

  

7/31/21

 
                                 

Long term debt(1)(2):

                                

Fixed rate

 $-  $-  $-  $69,683  $-  $1,254,852  $1,324,535  $1,336,652 

Weighted average interest rate

  -%  -%  -%  10.50%  -%  9.38%  9.48%    

 

(1)Does not include the mortgage warehouse lines of credit made under our Master Repurchase Agreements. Also, does not include our $125.0 million Secured Credit Facility under which there were no borrowings outstanding as of July 31, 2021.

(2)

Does not include $118.0 million of nonrecourse mortgages secured by inventory. These mortgages have various maturities spread over the next two to three years and are paid off as homes are delivered.

 

Item 4.     CONTROLS AND PROCEDURES

 

The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company’s reports under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosures. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. The Company’s management, with the participation of the Company’s chief executive officer and chief financial officer, has evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of July 31, 2021. Based upon that evaluation and subject to the foregoing, the Company’s chief executive officer and chief financial officer concluded that the design and operation of the Company’s disclosure controls and procedures are effective to accomplish their objectives.

 

There was no change in the Company’s internal control over financial reporting that occurred during the quarter ended July 31, 2021 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

 

PART II.  OTHER INFORMATION

 

Item 1.  LEGAL PROCEEDINGS

 

Information with respect to legal proceedings is incorporated into this Part II, Item 1 from Note 7 to the Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.

  

Item 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

 

Recent Sales of Unregistered Equity Securities

 

None.

 

Issuer Purchases of Equity Securities

 

No shares of our Class A Common Stock or Class B Common Stock were purchased by or on behalf of the Company or any affiliated purchaser during the fiscal third quarter of 2021. The maximum number of shares that may be purchased under the Company’s repurchase plans or programs is 22 thousand.

 

Dividends

 

Certain debt agreements to which we are a party contain restrictions on the payment of cash dividends. As a result of the most restrictive of these provisions, we are not currently able to pay any cash dividends. We have never paid a cash dividend to our common stockholders.

 

Item 5.  OTHER INFORMATION

 

On September 7, 2021, the Board of Directors of HEI approved an amendment and restatement of HEI’s Amended and Restated By-laws (as so amended and restated, the “Bylaws”), which changes were effective immediately upon approval. The Bylaws were amended and restated to include a provision designating the Delaware Court of Chancery as the exclusive forum for stockholder claims and the U.S. federal district courts as the exclusive forum for claims under the Securities Act of 1933, as amended, unless HEI agrees otherwise, and to make certain technical and non-substantive amendments.

 

The foregoing summary of the amendment and restatement is qualified in its entirety by reference to the Bylaws, a copy of which is attached to this Quarterly Report on Form 10-Q as Exhibit 3(b) and is incorporated herein by reference.

 

 

Item 6.

EXHIBITS 

 

 

3(a)

Restated Certificate of Incorporation of the Registrant (Incorporated by reference to Exhibits to Current Report on Form 8-K of the Registrant filed on March 29, 2019).

  

3(b)

Amended and Restated Bylaws of the Registrant.

  

4(a)

Specimen Class A Common Stock Certificate. (Incorporated by reference to Exhibits to Current Report on Form 8-K of the Registrant filed on March 29, 2019).

  

4(b)

Specimen Class B Common Stock Certificate (Incorporated by reference to Exhibits to Current Report on Form 8-K of the Registrant filed on March 29, 2019).

  

4(c)

Certificate of Designations, Powers, Preferences and Rights of the 7.625% Series A Preferred Stock of Hovnanian Enterprises, Inc., dated July 12, 2005.(Incorporated by reference to Exhibits to Current Report on Form 8-K of the Registrant filed on July 13, 2005).

  

4(d)

Certificate of Designations of the Series B Junior Preferred Stock of Hovnanian Enterprises, Inc., dated August 14, 2008 (Incorporated by reference to Exhibits to Quarterly Report on Form 10-Q of the Registrant for the quarter ended July 31, 2008).

  

4(e)

Rights Agreement, dated as of August 14, 2008, between Hovnanian Enterprises, Inc. and National City Bank, as Rights Agent, which includes the Form of Certificate of Designation as Exhibit A, Form of Right Certificate as Exhibit B and the Summary of Rights as Exhibit C (Incorporated by reference to Exhibits to the Registration Statement on Form 8-A of the Registrant filed on August 14, 2008).

  

4(f)

Amendment No. 1 to Rights Agreement, dated as of January 11, 2018, between Hovnanian Enterprises, Inc. and Computershare Trust Company, N.A. (as successor to National City Bank), as Rights Agent, which includes the amended and restated Form of Rights Certificate as Exhibit 1 and the amended and restated Summary of Rights as Exhibit 2 (Incorporated by reference to Exhibits to Current Report on Form 8-K of the Registrant filed on January 11, 2018).

  

4(g)

Amendment No. 2 to Rights Agreement, dated as of January 18, 2021, between the Company and Computershare Trust Company, N.A. (as successor to National City Bank), as Rights Agent, which includes the amended and restated Form of Rights Certificate as Exhibit 1 and the amended and restated Summary of Rights as Exhibit 2 (Incorporated by reference to Exhibits to Current Report on Form 8-K of the Registrant filed January 19, 2021).

  
10(a)*Form of 2021 Performance Share Unit Agreement - EBIT (Class A)
  
10(b)*Form of 2021 Performance Share Unit Agreement - EBIT (Class B)
  
10(c)*Form of 2021 Performance Share Unit Agreement - Relative EBIT ROI (Class A)
  
10(d)*Form of 2021 Performance Share Unit Agreement - Relative EBIT ROI (Class B)
  
10(e)*Form of Director Restricted Share Unit Agreement (Class A)
  
10(f)*Form of 2021 Long-Term Incentive Program Award Agreement (Class A)
  
10(g)*Form of 2021 Long-Term Incentive Program Award Agreement (Class B)
  

 

 

31(a)

Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.

  

31(b)

Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.

  

32(a)

Section 1350 Certification of Chief Executive Officer.

  

32(b)

Section 1350 Certification of Chief Financial Officer.

  

101

 

The following financial information from our Quarterly Report on Form 10-Q for the quarter ended July 31, 2021, formatted in inline Extensible Business Reporting Language (Inline XBRL): (i) the Condensed Consolidated Balance Sheets at July 31, 2021 and October 31, 2020, (ii) the Condensed Consolidated Statements of Operations for the three and nine months ended July 31, 2021 and 2020, (iii) the Condensed Consolidated Statements of Changes in Equity Deficit for the nine months ended July 31, 2021 and 2020, (iv) the Condensed Consolidated Statements of Cash Flows for the nine months ended July 31, 2021 and 2020, and (v) the Notes to Condensed Consolidated Financial Statements.

  
104Cover Page from our Quarterly Report on Form 10-Q for the nine months ended July 31, 2021, formatted in Inline XBRL (and contained in Exhibit 101).

 

 

 * Management compensatory plan or agreement

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

HOVNANIAN ENTERPRISES, INC.

(Registrant)

 

 

DATE:

September 9, 2021

 

  

/s/J. LARRY SORSBY

 

  

J. Larry Sorsby

 

  

Executive Vice President,

 

  

Chief Financial Officer and Director

 

  

  

 

DATE:

September 9, 2021

 

  

/s/BRAD G. O’CONNOR

 

  

Brad G. O’Connor

 

  

Senior Vice President, Treasurer and Chief Accounting Officer

 

60