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 January 31, 20232024
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. 5,276,7855,346,595 shares of Class A Common Stock and 720,307749,065 shares of Class B Common Stock were outstanding as of March 1, 2023.
February 28, 2024.
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
(In thousands, except per share data)
(Unaudited)
January 31, | October 31, | |||||||
2024 | 2023 | |||||||
ASSETS | ||||||||
Homebuilding: | ||||||||
Cash and cash equivalents | $ | 183,118 | $ | 434,119 | ||||
Restricted cash and cash equivalents | 8,369 | 8,431 | ||||||
Inventories: | ||||||||
Sold and unsold homes and lots under development | 1,092,347 | 998,841 | ||||||
Land and land options held for future development or sale | 173,134 | 125,587 | ||||||
Consolidated inventory not owned | 198,077 | 224,758 | ||||||
Total inventories | 1,463,558 | 1,349,186 | ||||||
Investments in and advances to unconsolidated joint ventures | 110,592 | 97,886 | ||||||
Receivables, deposits and notes, net | 24,208 | 27,982 | ||||||
Property and equipment, net | 37,441 | 33,946 | ||||||
Prepaid expenses and other assets | 68,127 | 69,886 | ||||||
Total homebuilding | 1,895,413 | 2,021,436 | ||||||
Financial services | 149,633 | 168,671 | ||||||
Deferred tax assets, net | 295,332 | 302,833 | ||||||
Total assets | $ | 2,340,378 | $ | 2,492,940 | ||||
LIABILITIES AND EQUITY | ||||||||
Homebuilding: | ||||||||
Nonrecourse mortgages secured by inventory, net of debt issuance costs | $ | 99,553 | $ | 91,539 | ||||
Accounts payable and other liabilities | 360,207 | 415,480 | ||||||
Customers’ deposits | 51,798 | 51,419 | ||||||
Liabilities from inventory not owned, net of debt issuance costs | 114,658 | 124,254 | ||||||
Senior notes and credit facilities (net of discounts, premiums and debt issuance costs) | 934,617 | 1,051,491 | ||||||
Accrued interest | 41,472 | 26,926 | ||||||
Total homebuilding | 1,602,305 | 1,761,109 | ||||||
Financial services | 128,402 | 148,181 | ||||||
Income taxes payable | 2,583 | 1,861 | ||||||
Total liabilities | 1,733,290 | 1,911,151 | ||||||
Equity: | ||||||||
Hovnanian Enterprises, Inc. stockholders' equity: | ||||||||
Preferred stock, $0.01 par value - authorized 100,000 shares; issued and outstanding 5,600 shares with a liquidation preference of $140,000 at January 31, 2024 and October 31, 2023 | 135,299 | 135,299 | ||||||
Common stock, Class A, $0.01 par value - authorized 16,000,000 shares; issued 6,247,939 shares at January 31, 2024 and 6,247,308 shares at October 31, 2023 | 62 | 62 | ||||||
Common stock, Class B, $0.01 par value (convertible to Class A at time of sale) - authorized 2,400,000 shares; issued 776,734 shares at January 31, 2024 and 776,750 shares at October 31, 2023 | 8 | 8 | ||||||
Paid in capital - common stock | 740,063 | 735,946 | ||||||
Accumulated deficit | (135,962 | ) | (157,197 | ) | ||||
Treasury stock - at cost – 901,379 shares of Class A common stock at January 31, 2024 and October 31, 2023; 27,669 shares of Class B common stock at January 31, 2024 and October 31, 2023 | (132,382 | ) | (132,382 | ) | ||||
Total Hovnanian Enterprises, Inc. stockholders’ equity | 607,088 | 581,736 | ||||||
Noncontrolling interest in consolidated joint ventures | - | 53 | ||||||
Total equity | 607,088 | 581,789 | ||||||
Total liabilities and equity | $ | 2,340,378 | $ | 2,492,940 | ||||
See notes to condensed consolidated financial statements (unaudited).
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
(In thousands, except per share data)
(Unaudited)
Three Months Ended January 31, | ||||||||
2024 | 2023 | |||||||
Revenues: | ||||||||
Homebuilding: | ||||||||
Sale of homes | $ | 573,636 | $ | 499,645 | ||||
Land sales and other revenues | 5,292 | 3,557 | ||||||
Total homebuilding | 578,928 | 503,202 | ||||||
Financial services | 15,268 | 12,164 | ||||||
Total revenues | 594,196 | 515,366 | ||||||
Expenses: | ||||||||
Homebuilding: | ||||||||
Cost of sales, excluding interest | 449,213 | 391,040 | ||||||
Cost of sales interest | 19,898 | 15,022 | ||||||
Inventory impairments and land option write-offs | 302 | 477 | ||||||
Total cost of sales | 469,413 | 406,539 | ||||||
Selling, general and administrative | 48,937 | 47,918 | ||||||
Total homebuilding expenses | 518,350 | 454,457 | ||||||
Financial services | 11,471 | 9,053 | ||||||
Corporate general and administrative | 37,133 | 25,490 | ||||||
Other interest | 10,451 | 15,093 | ||||||
Other expenses, net | 551 | 386 | ||||||
Total expenses | 577,956 | 504,479 | ||||||
Gain on extinguishment of debt, net | 1,371 | - | ||||||
Income from unconsolidated joint ventures | 14,952 | 7,160 | ||||||
Income before income taxes | 32,563 | 18,047 | ||||||
State and federal income tax provision (benefit): | ||||||||
State | 2,206 | 2,211 | ||||||
Federal | 6,453 | (2,880 | ) | |||||
Total income taxes | 8,659 | (669 | ) | |||||
Net income | 23,904 | 18,716 | ||||||
Less: preferred stock dividends | 2,669 | 2,669 | ||||||
Net income available to common stockholders | $ | 21,235 | $ | 16,047 | ||||
Per share data: | ||||||||
Basic: | ||||||||
Net income per common share | $ | 3.11 | $ | 2.37 | ||||
Weighted-average number of common shares outstanding | 6,496 | 6,186 | ||||||
Assuming dilution: | ||||||||
Net income per common share | $ | 2.91 | $ | 2.26 | ||||
Weighted-average number of common shares outstanding | 6,937 | 6,468 | ||||||
See notes to condensed consolidated financial statements (unaudited).
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
THREE MONTH PERIOD ENDEDJANUARY 31, 2024
(In thousands, except per share data)
(Unaudited)
January 31, | October 31, | |||||||
2023 | 2022 | |||||||
| ||||||||
ASSETS | ||||||||
Homebuilding: | ||||||||
Cash and cash equivalents | $ | 234,929 | $ | 326,198 | ||||
Restricted cash and cash equivalents | 8,154 | 13,382 | ||||||
Inventories: | ||||||||
Sold and unsold homes and lots under development | 1,066,455 | 1,058,183 | ||||||
Land and land options held for future development or sale | 125,561 | 152,406 | ||||||
Consolidated inventory not owned | 315,022 | 308,595 | ||||||
Total inventories | 1,507,038 | 1,519,184 | ||||||
Investments in and advances to unconsolidated joint ventures | 101,013 | 74,940 | ||||||
Receivables, deposits and notes, net | 37,577 | 37,837 | ||||||
Property and equipment, net | 28,089 | 25,819 | ||||||
Prepaid expenses and other assets | 58,260 | 63,884 | ||||||
Total homebuilding | 1,975,060 | 2,061,244 | ||||||
Financial services | 112,756 | 155,993 | ||||||
Deferred tax assets, net | 347,369 | 344,793 | ||||||
Total assets | $ | 2,435,185 | $ | 2,562,030 | ||||
LIABILITIES AND EQUITY | ||||||||
Homebuilding: | ||||||||
Nonrecourse mortgages secured by inventory, net of debt issuance costs | $ | 133,886 | $ | 144,805 | ||||
Accounts payable and other liabilities | 331,314 | 439,952 | ||||||
Customers’ deposits | 71,243 | 74,020 | ||||||
Liabilities from inventory not owned, net of debt issuance costs | 209,579 | 202,492 | ||||||
Senior notes and credit facilities (net of discounts, premiums and debt issuance costs) | 1,145,261 | 1,146,547 | ||||||
Accrued interest | 52,036 | 32,415 | ||||||
Total homebuilding | 1,943,319 | 2,040,231 | ||||||
Financial services | 91,078 | 135,581 | ||||||
Income taxes payable | 4,991 | 3,167 | ||||||
Total liabilities | 2,039,388 | 2,178,979 | ||||||
Equity: | ||||||||
Hovnanian Enterprises, Inc. stockholders' equity: | ||||||||
Preferred stock, $0.01 par value - authorized 100,000 shares; issued and outstanding 5,600 shares with a liquidation preference of $140,000 at January 31, 2023 and October 31, 2022 | 135,299 | 135,299 | ||||||
Common stock, Class A, $0.01 par value - authorized 16,000,000 shares; issued 6,178,146 shares at January 31, 2023 and 6,159,886 shares at October 31, 2022 | 62 | 62 | ||||||
Common stock, Class B, $0.01 par value (convertible to Class A at time of sale) - authorized 2,400,000 shares; issued 747,994 shares at January 31, 2023 and 733,374 shares at October 31, 2022 | 7 | 7 | ||||||
Paid in capital - common stock | 729,158 | 727,663 | ||||||
Accumulated deficit | (336,366 | ) | (352,413 | ) | ||||
Treasury stock - at cost – 901,379 shares of Class A common stock at January 31, 2023 and 782,901 shares at October 31, 2022; 27,669 shares of Class B common stock at January 31, 2023 and October 31, 2022 | (132,382 | ) | (127,582 | ) | ||||
Total Hovnanian Enterprises, Inc. stockholders’ equity | 395,778 | 383,036 | ||||||
Noncontrolling interest in consolidated joint ventures | 19 | 15 | ||||||
Total equity | 395,797 | 383,051 | ||||||
Total liabilities and equity | $ | 2,435,185 | $ | 2,562,030 | ||||
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, 2023 | 5,345,929 | $ | 62 | 749,081 | $ | 8 | 5,600 | $ | 135,299 | $ | 735,946 | $ | (157,197 | ) | $ | (132,382 | ) | $ | 53 | $ | 581,789 | |||||||||||||||||||||||
Stock options, amortization and issuances | 615 | 46 | 46 | |||||||||||||||||||||||||||||||||||||||||
Preferred dividend declared ($476.56 per share) | (2,669 | ) | (2,669 | ) | ||||||||||||||||||||||||||||||||||||||||
Restricted stock amortization, issuances and forfeitures | 4,071 | 4,071 | ||||||||||||||||||||||||||||||||||||||||||
| Conversion of Class B to Class A common stock | 16 | (16 | ) | - | ||||||||||||||||||||||||||||||||||||||||
Changes in noncontrolling interest in consolidated joint ventures | (53 | ) | (53 | ) | ||||||||||||||||||||||||||||||||||||||||
Net income | 23,904 | 23,904 | ||||||||||||||||||||||||||||||||||||||||||
Balance, January 31, 2024 | 5,346,560 | $ | 62 | 749,065 | $ | 8 | 5,600 | $ | 135,299 | $ | 740,063 | $ | (135,962 | ) | $ | (132,382 | ) | $ | - | $ | 607,088 | |||||||||||||||||||||||
See notes to condensed consolidated financial statements (unaudited).
| 5 |
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
Three Months Ended January 31, | ||||||||
2023 | 2022 | |||||||
Revenues: | ||||||||
Homebuilding: | ||||||||
Sale of homes | $ | 499,645 | $ | 551,366 | ||||
Land sales and other revenues | 3,557 | 638 | ||||||
Total homebuilding | 503,202 | 552,004 | ||||||
Financial services | 12,164 | 13,309 | ||||||
Total revenues | 515,366 | 565,313 | ||||||
Expenses: | ||||||||
Homebuilding: | ||||||||
Cost of sales, excluding interest | 391,040 | 427,917 | ||||||
Cost of sales interest | 15,022 | 13,745 | ||||||
Inventory impairments and land option write-offs | 477 | 99 | ||||||
Total cost of sales | 406,539 | 441,761 | ||||||
Selling, general and administrative | 47,918 | 42,746 | ||||||
Total homebuilding expenses | 454,457 | 484,507 | ||||||
Financial services | 9,053 | 10,400 | ||||||
Corporate general and administrative | 25,490 | 29,435 | ||||||
Other interest | 15,093 | 13,393 | ||||||
Other expenses, net | 386 | 368 | ||||||
Total expenses | 504,479 | 538,103 | ||||||
Income from unconsolidated joint ventures | 7,160 | 8,191 | ||||||
Income before income taxes | 18,047 | 35,401 | ||||||
State and federal income tax provision (benefit): | ||||||||
State | 2,211 | 2,543 | ||||||
Federal | (2,880 | ) | 8,050 | |||||
Total income taxes | (669 | ) | 10,593 | |||||
Net income | 18,716 | 24,808 | ||||||
Less: preferred stock dividends | 2,669 | 2,669 | ||||||
Net income available to common stockholders | $ | 16,047 | $ | 22,139 | ||||
Per share data: | ||||||||
Basic: | ||||||||
Net income per common share | $ | 2.37 | $ | 3.12 | ||||
Weighted-average number of common shares outstanding | 6,186 | 6,389 | ||||||
Assuming dilution: | ||||||||
Net income per common share | $ | 2.26 | $ | 3.07 | ||||
Weighted-average number of common shares outstanding | 6,468 | 6,501 | ||||||
See notes to condensed consolidated financial statements (unaudited).
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
Three MONTH PERIOD ENDED January 31, 2023
(In thousands, except share data)
(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, 2022 | 5,376,985 | $ | 62 | 705,705 | $ | 7 | 5,600 | $ | 135,299 | $ | 727,663 | $ | (352,413 | ) | $ | (127,582 | ) | $ | 15 | $ | 383,051 | |||||||||||||||||||||||
Stock options, amortization and issuances | 209 | 8 | 8 | |||||||||||||||||||||||||||||||||||||||||
Preferred dividend declared ($476.56 per share) | (2,669 | ) | (2,669 | ) | ||||||||||||||||||||||||||||||||||||||||
Restricted stock amortization, issuances and forfeitures | 18,051 | 14,620 | 1,487 | 1,487 | ||||||||||||||||||||||||||||||||||||||||
Changes in noncontrolling interest in consolidated joint ventures | 4 | 4 | ||||||||||||||||||||||||||||||||||||||||||
Share repurchases | (118,478 | ) | (4,800 | ) | (4,800 | ) | ||||||||||||||||||||||||||||||||||||||
Net income | 18,716 | 18,716 | ||||||||||||||||||||||||||||||||||||||||||
Balance, January 31, 2023 | 5,276,767 | $ | 62 | 720,325 | $ | 7 | 5,600 | $ | 135,299 | $ | 729,158 | $ | (336,366 | ) | $ | (132,382 | ) | $ | 19 | $ | 395,797 | |||||||||||||||||||||||
See notes to condensed consolidated financial statements (unaudited).
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
ThreeTHREE MONTH PERIOD ENDEDJanuaryJANUARY 31, 20222023
(In thousands, except share data)
(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, 2021 | 5,595,734 | $ | 61 | 659,207 | $ | 7 | 5,600 | $ | 135,299 | $ | 722,118 | $ | (567,228 | ) | $ | (115,360 | ) | $ | 487 | $ | 175,384 | |||||||||||||||||||||||
Stock options, amortization and issuances | 804 | 4 | 4 | |||||||||||||||||||||||||||||||||||||||||
Preferred dividend declared ($476.56 per share) | (2,669 | ) | (2,669 | ) | ||||||||||||||||||||||||||||||||||||||||
Restricted stock amortization, issuances and forfeitures | 17,654 | 17,445 | (552 | ) | (552 | ) | ||||||||||||||||||||||||||||||||||||||
Conversion of Class B to Class A common stock | 48 | (48 | ) | - | ||||||||||||||||||||||||||||||||||||||||
Changes in noncontrolling interest in consolidated joint ventures | (88 | ) | (88 | ) | ||||||||||||||||||||||||||||||||||||||||
Net income | 24,808 | 24,808 | ||||||||||||||||||||||||||||||||||||||||||
Balance, January 31, 2022 | 5,614,240 | $ | 61 | 676,604 | $ | 7 | 5,600 | $ | 135,299 | $ | 721,570 | $ | (545,089 | ) | $ | (115,360 | ) | $ | 399 | $ | 196,887 | |||||||||||||||||||||||
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, 2022 | 5,376,985 | $ | 62 | 705,705 | $ | 7 | 5,600 | $ | 135,299 | $ | 727,663 | $ | (352,413 | ) | $ | (127,582 | ) | $ | 15 | $ | 383,051 | |||||||||||||||||||||||
Stock options, amortization and issuances | 209 | 8 | 8 | |||||||||||||||||||||||||||||||||||||||||
Preferred dividend declared ($476.56 per share) | (2,669 | ) | (2,669 | ) | ||||||||||||||||||||||||||||||||||||||||
Restricted stock amortization, issuances and forfeitures | 18,051 | 14,620 | 1,487 | 1,487 | ||||||||||||||||||||||||||||||||||||||||
Changes in noncontrolling interest in consolidated joint ventures | 4 | 4 | ||||||||||||||||||||||||||||||||||||||||||
| Share repurchases | (118,478 | ) | (4,800 | ) | (4,800 | ) | ||||||||||||||||||||||||||||||||||||||
Net income | 18,716 | 18,716 | ||||||||||||||||||||||||||||||||||||||||||
Balance, January 31, 2023 | 5,276,767 | $ | 62 | 720,325 | $ | 7 | 5,600 | $ | 135,299 | $ | 729,158 | $ | (336,366 | ) | $ | (132,382 | ) | $ | 19 | $ | 395,797 | |||||||||||||||||||||||
See notes to condensed consolidated financial statements (unaudited).
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
(In thousands)
(Unaudited)
Three Months Ended | ||||||||
January 31, | ||||||||
| 2023 | 2022 | |||||||
Cash flows from operating activities: | ||||||||
Net income | $ | 18,716 | $ | 24,808 | ||||
Adjustments to reconcile net income to net cash used in operating activities: | ||||||||
Depreciation | 1,410 | 1,175 | ||||||
Stock-based compensation | 2,070 | 1,635 | ||||||
Amortization of debt discounts, premiums and deferred financing costs | 330 | (280 | ) | |||||
Gain on sale of property and assets | (14 | ) | (5 | ) | ||||
Income from unconsolidated joint ventures | (7,160 | ) | (8,191 | ) | ||||
Distributions of earnings from unconsolidated joint ventures | 692 | 2,100 | ||||||
Noncontrolling interest in consolidated joint ventures | - | 62 | ||||||
Inventory impairments and land option write-offs | 477 | 99 | ||||||
Decrease (Increase) in assets: | ||||||||
Inventories | 11,669 | (159,227 | ) | |||||
Receivables, deposits and notes | 5,772 | (2,139 | ) | |||||
Origination of mortgage loans | (215,477 | ) | (272,877 | ) | ||||
Sale of mortgage loans | 251,923 | 342,090 | ||||||
Deferred tax assets | (2,576 | ) | 9,465 | |||||
(Decrease) increase in liabilities: | ||||||||
Accounts payable, accrued interest and other liabilities | (98,125 | ) | (70,490 | ) | ||||
Customers’ deposits | (2,777 | ) | 14,924 | |||||
State income tax payable | 1,824 | 1,122 | ||||||
Net cash used in operating activities | (31,246 | ) | (115,729 | ) | ||||
Cash flows from investing activities: | ||||||||
Proceeds from sale of property and assets | 69 | 5 | ||||||
Purchase of property, equipment, and other fixed assets | (3,740 | ) | (2,453 | ) | ||||
Investment in and advances to unconsolidated joint ventures, net of reimbursements | (22,238 | ) | (1,033 | ) | ||||
Distributions of capital from unconsolidated joint ventures | 2,633 | 554 | ||||||
Net cash used in investing activities | (23,276 | ) | (2,927 | ) | ||||
Cash flows from financing activities: | ||||||||
Proceeds from mortgages and notes | 57,704 | 136,021 | ||||||
Payments related to mortgages and notes | (68,958 | ) | (63,892 | ) | ||||
Proceeds from model sale leaseback financing programs | 1,310 | 8,737 | ||||||
Payments related to model sale leaseback financing programs | (3,303 | ) | (3,553 | ) | ||||
Proceeds from land bank financing programs | 21,317 | 21,425 | ||||||
Payments related to land bank financing programs | (12,553 | ) | (13,642 | ) | ||||
Payments for partner distributions to consolidated joint venture | - | (150 | ) | |||||
Net payments related to mortgage warehouse lines of credit | (35,971 | ) | (63,311 | ) | ||||
Preferred dividends paid | (2,669 | ) | (2,669 | ) | ||||
Repurchases of common stock | (4,800 | ) | - | |||||
Deferred financing costs from land banking financing programs and note issuances | (464 | ) | (1,848 | ) | ||||
Net cash (used in) provided by financing activities | (48,387 | ) | 17,118 | |||||
Net decrease in cash and cash equivalents, and restricted cash and cash equivalents | (102,909 | ) | (101,538 | ) | ||||
Cash and cash equivalents, and restricted cash and cash equivalents balance, beginning of period | 382,190 | 311,396 | ||||||
Cash and cash equivalents, and restricted cash and cash equivalents balance, end of period | $ | 279,281 | $ | 209,858 | ||||
Supplemental disclosures of cash flows: | ||||||||
Cash (received) paid during the period for: | ||||||||
Interest, net of capitalized interest (see Note 3 to the Condensed Consolidated Financial Statements) | $ | (3,904 | ) | $ | (5,254 | ) | ||
Income taxes | $ | 84 | $ | 7 | ||||
Reconciliation of Cash, cash equivalents and restricted cash | ||||||||
Homebuilding: Cash and cash equivalents | $ | 234,929 | $ | 137,898 | ||||
Homebuilding: Restricted cash and cash equivalents | 8,154 | 14,260 | ||||||
Financial Services: Cash and cash equivalents, included in financial services assets | 4,682 | 6,846 | ||||||
Financial Services: Restricted cash and cash equivalents, included in financial services assets | 31,516 | 50,854 | ||||||
Total cash, cash equivalents and restricted cash shown in the statements of cash flows | $ | 279,281 | $ | 209,858 | ||||
Three Months Ended | ||||||||
January 31, | ||||||||
2024 | 2023 | |||||||
Cash flows from operating activities: | ||||||||
Net income | $ | 23,904 | $ | 18,716 | ||||
Adjustments to reconcile net income to net cash used in operating activities: | ||||||||
Depreciation | 1,598 | 1,410 | ||||||
Stock-based compensation | 4,073 | 2,070 | ||||||
Amortization of debt discounts, premiums and deferred financing costs | 214 | 330 | ||||||
Gain on sale of property and assets | (41 | ) | (14 | ) | ||||
Income from unconsolidated joint ventures | (14,952 | ) | (7,160 | ) | ||||
Distributions of earnings from unconsolidated joint ventures | 1,010 | 692 | ||||||
Gain on extinguishment of debt | (1,371 | ) | - | |||||
Inventory impairments and land option write-offs | 302 | 477 | ||||||
(Increase) decrease in assets: | ||||||||
Inventories | (114,674 | ) | 11,669 | |||||
Receivables, deposits and notes | 4,694 | 5,772 | ||||||
Origination of mortgage loans | (306,156 | ) | (215,477 | ) | ||||
Sale of mortgage loans | 337,346 | 251,923 | ||||||
Deferred tax assets | 7,501 | (2,576 | ) | |||||
(Decrease) increase in liabilities: | ||||||||
Accounts payable, accrued interest and other liabilities | (33,553 | ) | (98,125 | ) | ||||
Customers’ deposits | 379 | (2,777 | ) | |||||
State income tax payable | 722 | 1,824 | ||||||
Net cash used in operating activities | (89,004 | ) | (31,246 | ) | ||||
Cash flows from investing activities: | ||||||||
Proceeds from sale of property and assets | 43 | 69 | ||||||
Purchase of property, equipment, and other fixed assets | (5,442 | ) | (3,740 | ) | ||||
Investment in and advances to unconsolidated joint ventures, net of reimbursements | - | (22,238 | ) | |||||
Distributions of capital from unconsolidated joint ventures | 1,278 | 2,633 | ||||||
Net cash used in investing activities | (4,121 | ) | (23,276 | ) | ||||
Cash flows from financing activities: | ||||||||
Proceeds from mortgages and notes | 78,867 | 57,704 | ||||||
Payments related to mortgages and notes | (71,257 | ) | (68,958 | ) | ||||
Proceeds from model sale leaseback financing programs | - | 1,310 | ||||||
Payments related to model sale leaseback financing programs | (5,907 | ) | (3,303 | ) | ||||
Proceeds from land bank financing programs | 18,407 | 21,317 | ||||||
Payments related to land bank financing programs | (22,296 | ) | (12,553 | ) | ||||
Net payments related to mortgage warehouse lines of credit | (27,004 | ) | (35,971 | ) | ||||
Payments related to senior secured notes | (113,502 | ) | - | |||||
Preferred dividends paid | (2,669 | ) | (2,669 | ) | ||||
| Treasury stock purchases | - | (4,800 | ) | |||||
Deferred financing costs from land banking financing programs and note issuances | (910 | ) | (464 | ) | ||||
Net cash used in financing activities | (146,271 | ) | (48,387 | ) | ||||
Net decrease in cash and cash equivalents, and restricted cash and cash equivalents | (239,396 | ) | (102,909 | ) | ||||
Cash and cash equivalents, and restricted cash and cash equivalents balance, beginning of period | 477,519 | 382,190 | ||||||
Cash and cash equivalents, and restricted cash and cash equivalents balance, end of period | $ | 238,123 | $ | 279,281 | ||||
Supplemental disclosures of cash flows: | ||||||||
Cash (received) paid during the period for: | ||||||||
Interest, net of capitalized interest | $ | (2,965 | ) | $ | (3,904 | ) | ||
Income taxes | $ | 435 | $ | 84 | ||||
Reconciliation of Cash, cash equivalents and restricted cash | ||||||||
Homebuilding: Cash and cash equivalents | $ | 183,118 | $ | 234,929 | ||||
Homebuilding: Restricted cash and cash equivalents | 8,369 | 8,154 | ||||||
Financial Services: Cash and cash equivalents, included in financial services assets | 4,522 | 4,682 | ||||||
Financial Services: Restricted cash and cash equivalents, included in financial services assets | 42,114 | 31,516 | ||||||
Total cash, cash equivalents and restricted cash shown in the statements of cash flows | $ | 238,123 | $ | 279,281 | ||||
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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). Historically, the Company had seven reportable segments consisting of six homebuilding segments (Northeast, Mid-Atlantic, Midwest, Southeast, Southwest and West) and its financial services segment. During the fourth quarter of fiscal 2022, we realigned our homebuilding operating segments and determined that, in addition to our financial services segment, we now had three reportable homebuilding segments comprised of (1) Northeast, (2) Southeast and (3) West (see Note 17). All prior period amounts related to the segment change have been retrospectively reclassified to conform to the new presentation.
The accompanying unaudited Condensed Consolidated Financial Statements include HEI's accounts and those of all of its consolidated subsidiaries after elimination of all intercompany balances and transactions. Noncontrolling interest represents the proportionate equity interest in a consolidated joint venture that is not100% owned by the Company directly or indirectly.indirectly, which we sold our membership interest in during the first quarter of fiscal 2024.
The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. 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 U.S. 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, 2022.2023. 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 financial statements in conformity with U.S. 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 |
During the first quarter of fiscal 2023,2024, the Board of Directors ("the Board") approved certain grants under a new Long-Term Incentive Program (the “20232024 LTIP”) that contain performance-based vesting conditions. The performance period for the 20232024 LTIP commenced on November 1, 20222023 and will end on October 31, 2025.2026. At the end of the performance period, 50% of the awards, if any, are payable in cash-settled phantom shares and the remaining 50% of the awards, if any, are payable in shares of Company stock, subject to a mandatory two-year post-vesting hold period.
For the three months ended January 31, 2023 2024and 2022,2023, stock-based compensation expense was $4.1 million ($3.0 million net of tax) and $2.1 million (pre and post tax) and $1.6 million ($1.1 million, net of tax)post-tax), respectively. Included in stock-based compensation expense was $8 thousand and $45 thousand of stock option expense for the three months ended January 31, 2023 and 2022, respectively.respectively.
| 8 |
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3.Interest
Interest costs incurred, expensed and capitalized were as follows:
Three Months Ended | ||||||||
January 31, | ||||||||
(In thousands) | 2023 | 2022 | ||||||
Interest capitalized at beginning of period | $ | 59,600 | $ | 58,159 | ||||
Plus interest incurred(1) | 34,326 | 32,783 | ||||||
Less cost of sales interest expensed | (15,022 | ) | (13,745 | ) | ||||
Less other interest expensed(2)(3) | (15,093 | ) | (13,393 | ) | ||||
Less interest contributed to unconsolidated joint venture(4) | (3,016 | ) | - | |||||
Interest capitalized at end of period(5) | $ | 60,795 | $ | 63,804 | ||||
Three Months Ended | ||||||||
January 31, | ||||||||
(In thousands) | 2024 | 2023 | ||||||
Interest capitalized at beginning of period | $ | 52,060 | $ | 59,600 | ||||
Plus interest incurred(1) | 31,961 | 34,326 | ||||||
Less cost of sales interest expensed | (19,898 | ) | (15,022 | ) | ||||
Less other interest expensed(2) | (10,451 | ) | (15,093 | ) | ||||
Less interest contributed to unconsolidated joint venture(3) | - | (3,016 | ) | |||||
Interest capitalized at end of period(4) | $ | 53,672 | $ | 60,795 | ||||
(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 |
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Three Months Ended | ||||||||
January 31, | ||||||||
(In thousands) | 2023 | 2022 | ||||||
Other interest expensed | $ | 15,093 | $ | 13,393 | ||||
Interest paid by our mortgage and finance subsidiaries | 624 | 468 | ||||||
Increase in accrued interest | (19,621 | ) | (19,115 | ) | ||||
Cash paid for interest, net of capitalized interest | $ | (3,904 | ) | $ | (5,254 | ) | ||
| 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. |
| Capitalized interest amounts are shown gross before allocating |
4.Reduction of Inventory to Fair Value
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During the three months ended January 31, 2023 We had 403 and 2022, respectively, we had 361 and 382 communities under development and held for future development or sale at January 31, 2024 and 2023, respectively, which we evaluated for indicators of impairment.impairment indicators. We did not identify impairment indicators (i.e., those with a projected operating loss) for any community during the three months ended January 31, 2023 or 2022.2024 and 2023.
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. During the first quarter of fiscal 2023, we did not mothball any communities, nor did we sell or re-activate any previously mothballed communities. As of both January 31, 2023 and October 31, 2022, the net aggregate book value of our two mothballed communities was $1.4 million, which was net of impairments in prior periods of $20.3 million.
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 thirdthird-party at the end of the respective lease. As a result of our continued involvement these sale and leaseback transactions are considered a financing rather than a sale. Our Condensed Consolidated Balance Sheets at January 31, 20232024 and October 31, 20222023, included inventory of $47.4$36.6 million and $48.5$41.7 million, respectively, recorded to “Consolidated inventory not owned,”owned” with a corresponding amount of $49.3$36.3 million and $51.2$42.0 million, 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 thea land bankersbanker and they provide us an option to purchase back finished lots on a predetermined schedule. Because of our options to repurchase these parcels, these transactions are considered a financing rather than a sale. Our Condensed Consolidated Balance Sheets at January 31, 20232024 and October 31, 20222023, included inventory of $267.6$161.5 million and $260.1$183.1 million, respectively, recorded to “Consolidated inventory not owned,”owned” with a corresponding amount of $160.3$78.4 million (net of debt issuance costs) and $151.3$82.3 million, respectively, recorded to “Liabilities from inventory not owned” for the amount of net cash received from the transactions.
5.Variable Interest Entities |
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The Company entersWe enter into land and lot option purchase contracts to procure land or lots for the construction of homes. Under these contracts, wethe 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 ourthe Company's discretion. CertainUnder the requirements of ASC 810, certain option purchase contracts may result in the creation of a variable interest in the entity (“VIE”Variable Interest Entity ("VIE") that owns the land parcel under option.
WeAlthough the Company does not have legal title to the underlying land, we analyze our option purchase contracts to determine whether the corresponding land and lot sellers are VIEs and, if so, whether the Company iswe are the primary beneficiary. Although the Company does not have legal title to the underlying land,The significant factors we are required to consolidate a VIEconsider in determining if we are 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 thea VIE that most significantly impact the VIE’sVIE's economic performance and whether we haveare shared include, among other things, our ability in determining or limiting the obligation to absorb lossesscope or purpose of the VIE, selling or transferring property owned or controlled by the right to receive benefits fromVIE, changing the terms of the contract or arranging financing for the VIE. As a result of our analyses, we have concluded, the Company is there are no VIEs that required consolidation at eitherJanuary 31, 2024or October 31, 2023because we are not the primary beneficiary of any VIEs from which it is purchasingthe land or lots under option purchase contracts.
We will continue to secure land and lots using options, some of which are with VIEs where we have determined power is shared among the partners and we do not have a controlling financial interest. Including deposits on our unconsolidated VIEs, at January 31, 2024 and October 31, 2023,, we had total cash deposits amounting to $187.7$206.5 million and $192.3 million, respectively, to purchase land and lots with a total purchase price of $1.8 billion.$2.3 billion and $2.2 billion, respectively. 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.property, although some deposits are refundable at our request or refundable if certain conditions are met.
6. | Warranty Costs |
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 months ended January 31, 2023 and 2022, we received $1.0 million and $1.2 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. For homes to be delivered in fiscal 2023 and previously delivered in 2022,2024, our deductible under our general liability insurance is or was $25.0$30.0 million, aggregateaggregated for construction defect and warranty claims, and for homes previously delivered in 2023, our deductible under our general liability insurance was $25.0 million, aggregated for construction defect, warranty, and bodily injury claims. As of November 1, 2023, we no longer have an aggregate deductible for bodily injury claims. For bodily injury claims, our deductible per occurrence in fiscal 2023 and 20222024 is or was$0.25 million and $0.5 million up tofor action over claims, both with a $30.0 million limit, and for fiscal 2023 it was $0.25 million for all other states and $0.5 million for California, both with a $5.0 million limit in California and $0.25 million, up to a $5.0 million limit in all other states. Our aggregate retention for construction defect, warranty and bodily injury claims is or was $25.0 million for fiscal 2023 and 2022.limit. 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 at the time each home is closed and control is transferred to the homebuyer. Additions, charges and chargeschanges in the warranty reserve and general liability reserve for the three months ended January 31, 20232024 and 20222023 were as follows:
Three Months Ended | Three Months Ended | |||||||||||||||
January 31, | January 31, | |||||||||||||||
(In thousands) | 2023 | 2022 | 2024 | 2023 | ||||||||||||
Balance, beginning of period | $ | 97,718 | $ | 94,916 | $ | 98,919 | $ | 97,718 | ||||||||
Additions – Selling, general and administrative | 1,577 | 2,216 | 2,547 | 1,577 | ||||||||||||
Additions – Cost of sales | 1,303 | 1,424 | 2,868 | 1,303 | ||||||||||||
Charges incurred during the period | (8,802 | ) | (4,154 | ) | (6,644 | ) | (8,802 | ) | ||||||||
Changes to pre-existing reserves | (729 | ) | (1,049 | ) | 2,146 | (729 | ) | |||||||||
Balance, end of period | $ | 91,067 | $ | 93,353 | $ | 99,836 | $ | 91,067 | ||||||||
The majority of the charges incurred during the first quarter of fiscal 2023 represented payments for construction defects related to the settlement of two litigation matters. Insurance claims paid by our insurance carriers, excluding insurance deductibles paid, were less than $0.1 million for both the three months ended January 31, 2023 and 2022 for prior year deliveries.
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 or take corrective action, 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 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 Special Masters appointed by the Court to decide non-dispositive motions issued an opinion that (a) granted the Great Notch Plaintiff’s motion to permit it to assert 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, and (b) further stated that the Great Notch Plaintiff is not permitted to pursue that claim until after any trial on the underlying liability claims. To date,In 2018, 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 itsthe remaining claims against the Hovnanian-affiliated defendants, the Great Notch Plaintiff hashad asserted damages of approximately $119.5 million, which amount iswas potentially subject to treble damages pursuant to the Great Notch Plaintiff’s claim under the New Jersey Consumer Fraud Act. In December 2023, the parties reached a settlement on the remaining claims through mediation, and in February 2024 executed a final confidential settlement agreement. The trialsettlement amount is not materially different from what we had been scheduledreserved for April 17, 2023; however, the Court has adjourned the trial and has not yet set a new date. The Hovnanian-affiliated defendants intend to defend these claims vigorously.this case.
In December 2020, the New Jersey Department of Environmental Protection ("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. Discovery is ongoing.has commenced. Hovnanian Enterprises, Inc. intends to defend these claims vigorously.
8. | Cash Equivalents, Restricted Cash and |
Cash equivalents include certificates of deposit, U.S. 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 high credit quality financial institutions. At January 31, 20232024 and October 31, 20222023, $13.9$12.8 million and $13.4$11.4 million, respectively, of our total cash and cash equivalents was in cash equivalents and restricted cash equivalents.
Homebuilding "Restricted cash and cash equivalents" on the Condensed Consolidated Balance Sheets totaled $8.2$8.4 million and $13.4 million as ofat both January 31, 20232024 and October 31, 20222023, respectively, which primarily consists of cash collateralizing our letter of credit agreements and facilities (see Note 12).
Financial services restricted cash and cash equivalents, which are included in "Financial"Financial services" assets on the Condensed Consolidated Balance Sheets, totaled $31.5$42.1 million and $36.1$30.5 million as of January 31, 20232024 and October 31, 20222023, respectively. Included in these balances were (1) financial services customers’ deposits of $28.4$39.5 million and $28.1 million at January 31, 20232024 and $29.7 million as of October 31, 20222023, respectively, which are subject to restrictions on our use, and (2) restricted cash under the terms of our mortgage warehouse lines of credit of $3.1$2.6 million and $2.4 million at January 31, 20232024 and $6.4 million as of October 31, 20222023, respectively.
Homebuilding "Customers"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 andor surety bonds.
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9. | Leases |
We rent certain office space for use in our operations. Our lease population at January 31, 20232024 is comprised of operating leases where we are the lessee, primarily for our corporate office and division offices.
Lease costs are included in our Condensed Consolidated Statements of Operations, primarily in "Selling, general and administrative" homebuilding 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 January 31, | ||||||||||
| Three Months Ended | ||||||||||
January 31, | ||||||||||
(In thousands) | 2023 | 2022 | ||||||||
Operating lease costs | $ | 2,859 | $ | 2,588 | ||||||
Cash payments on lease liabilities | $ | 2,386 | $ | 2,440 | ||||||
Operating right-of-use lease assets ("ROU assets") are classified within "Prepaidincluded in "Prepaid expenses and other assets"assets" on our Condensed Consolidated Balance Sheets, while lease liabilities are classified within "Accountsincluded in "Accounts payable and other liabilities"liabilities". During the three months ended January 31, 2023,2024, the Company recorded a net increase of $0.4 million to both its ROU assets and lease liabilities of $0.3 million as a result of a new leases and lease renewals that commenced during the period. The following table contains additional information about our leases:
(In thousands) | January 31, 2023 | October 31, 2022 | ||||||||||||||
ROU assets | $ | 17,650 | $ | 17,899 | ||||||||||||
Lease liabilities | $ | 18,498 | $ | 18,862 | ||||||||||||
Weighted-average remaining lease term (in years) | 3.4 | 3.5 | ||||||||||||||
Weighted-average discount rate | 9.5 | % | 9.5 | % | 10.0 | % | 10.0 | % | ||||||||
Maturities of our operating lease liabilities as of January 31, 20232024 are as follows:
Fiscal Year Ended October 31, | (In thousands) | |||||||
2023 (excluding the three months ended January 31, 2023) | $ | 6,321 | ||||||
2024 | 5,779 | |||||||
Fiscal Year Ending October 31, | ||||||||
2024 (excluding the three months ended January 31, 2024) | ||||||||
2025 | 4,653 | |||||||
2026 | 3,111 | |||||||
2027 | 1,863 | |||||||
2028 | ||||||||
2029 and thereafter | ||||||||
Total operating lease payments (1) | 21,727 | |||||||
Less: imputed interest | (3,229 | ) | (6,975 | ) | ||||
Present value of operating lease liabilities | $ | 18,498 | ||||||
(1) Lease payments include options to extend lease terms that are reasonably certain of being executed and exclude $13.7$2.9 million of legally binding minimum lease payments for office leases signed but not yet commenced as of January 31, 20232024. The related ROU assets and operating lease liabilities are not reflected on the Company's Condensed Consolidated Balance Sheets asSheets.
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 are collateralized by the underlying property. Loans held for sale are recorded at fair value with the changes in the value recognized in the Condensed Consolidated Statements of Operations in “Financial services” revenue. We currently use forward sales of mortgage-backed securities (“MBS”), interest rate commitments from borrowers and forward commitments to sell loans to third parties to protect us from interest rate fluctuations. These short-term instruments do not require any payments to be made to the counterparty or purchaser in connection with the execution of the commitments.
At January 31, 20232024 and October 31, 20222023, $58.0$95.1 million and $92.5$127.7 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 the resale value of the home. The reserves for these estimated losses are included in “Financial services” liabilities on the Condensed Consolidated Balance Sheets. As ofAt both January 31, 2023 2024and 2022October 31, 2023, we had specific reserves specifically for 1410 identified mortgage loans, as well as reserves for an estimate of future losses on mortgages sold but not yet identified to us.
The activity in our loan origination reserves during the three months ended January 31, 20232024 and 20222023 was as follows:
Three Months Ended | Three Months Ended | |||||||||||||||
January 31, | January 31, | |||||||||||||||
(In thousands) | 2023 | 2022 | 2024 | 2023 | ||||||||||||
Loan origination reserves, beginning of period | $ | 1,795 | $ | 1,632 | $ | 2,013 | $ | 1,795 | ||||||||
Provisions for losses during the period | 32 | 41 | 46 | 32 | ||||||||||||
Adjustments to pre-existing provisions for losses from changes in estimates | - | - | - | - | ||||||||||||
Loan origination reserves, end of period | $ | 1,827 | $ | 1,673 | $ | 2,059 | $ | 1,827 | ||||||||
11.Mortgages |
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Nonrecourse
We have nonrecourse mortgage loans for certain communities totaling $133.9$99.6 million and $144.8$91.5 million, net of debt issuance costs, at January 31, 20232024 and October 31, 20222023, respectively, which are secured by the related real property, including any improvements, with an aggregate book value of $416.1$313.5 million and $418.9$331.6 million, respectively. The weighted-average interest rate on these obligations was 7.7%8.7% and 6.7%8.5% at January 31, 20232024 and October 31, 20222023, 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 generally sold in the secondary mortgage market within a short period of time. 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 January 31, 2023 to extend the maturity date to January 31, 2024, is a short-term borrowing facility, that provides upwas amended on January 31, 2024 to reduce the borrowing limit from $75.0 million to $50.0 million. million and to extend its maturity to January 31, 2025.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 Secured Overnight Financing Rate ("SOFR"), which was 4.63% at January 31, 2023, plus the applicable margin of 2.25%2.125% to 2.375%. As of January 31, 20232024 and October 31, 20222023, the aggregate principal amount of all borrowings outstanding under the Chase Master Repurchase Agreement was $15.7$36.5 million and $14.1$31.4 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 8, 2023, 6, 2024, which we expect to be renewed for a one year term. term. 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 Bloomberg Short Term Bank Yield Index ("BSBY") rate, plus the applicable margin ranging from 2.125% to 4.5% based on the type of loan and the number of days outstanding on the warehouse line. As of January 31, 20232024 and October 31, 20222023, the aggregate principal amount of all borrowings outstanding under the Customers Master Repurchase Agreement was $20.3$47.3 million and $43.1$41.1 million, respectively.
K. Hovnanian Mortgage also has aanother secured Master Repurchase Agreement with ComericaFlagstar Bank, (“ComericaN.A. ("Flagstar Master Repurchase Agreement”Agreement") which was amended on January 12, 2023 to extend the maturity date to January 10, 2024, and is a short-term borrowing facility through its maturity. The Comerica Master Repurchase Agreementthat 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.through its maturity on January 10, 2025. 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 SOFR, subject to a floor of 1.0%, plus the applicable margin ranging from 1.82% to 5.0% based on the type of loan and the number of days outstanding on the line. As of January 31, 2024 there were no borrowings outstanding under the Flagstar Master Repurchase Agreement.
K.HovnanianMortgage had a secured Master Repurchase Agreement withComericaBank (“ComericaMaster Repurchase Agreement”) which was a short-term borrowing facility that matured onJanuary 10, 2024.TheComericaMaster Repurchase Agreement provided up to $60.0million on the15thday of the last month of the Company's fiscal quarters and reverted back to up to $50.0million30days thereafter. The loan was secured by the mortgages held for sale and was repaid when we sold the underlying mortgage loans to permanent investors. Interest was payable monthly at the daily adjusting BSBY rate, subject to a floor of 0.50%0.50%, plus the applicable margin of 1.75%1.75% or 3.25%3.25% based upon the type of loan. As of AtJanuaryOctober 31, 2023 and October 31, 2022, the aggregate principal amount of all borrowings outstanding under theComericaMaster Repurchase Agreement was $22.4 million and $37.1 million, respectively.$38.3 million. The borrowings outstanding were paid off at maturity.
The Chase Master Repurchase Agreement, Customers Master Repurchase Agreement and ComericaFlagstar 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 January 31, 20232024, we believe we were in compliance with the covenants under the Master Repurchase Agreements.
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12. | Senior Notes and Credit Facilities |
Senior notes and credit facilities balances as of January 31, 20232024 and October 31, 20232022, were as follows:
January 31, | October 31, | |||||||
(In thousands) | 2023 | 2022 | ||||||
Senior Secured Notes: | ||||||||
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 | 250,000 | 250,000 | ||||||
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 | $ | 853,093 | $ | 853,093 | ||||
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 senior notes and credit facilities | $ | 1,154,852 | $ | 1,154,852 | ||||
Net (discounts) premiums | $ | 1,930 | $ | 4,079 | ||||
Unamortized debt issuance costs | $ | (11,521 | ) | $ | (12,384 | ) | ||
Total senior notes and credit facilities, net of discounts, premiums and unamortized debt issuance costs | $ | 1,145,261 | $ | 1,146,547 | ||||
January 31, | October 31, | |||||||
(In thousands) | 2024 | 2023 | ||||||
Senior Secured Notes: | ||||||||
10.0% Senior Secured 1.75 Lien Notes due November 15, 2025 (1) | $ | - | $ | 113,502 | ||||
| 8.0% Senior Secured 1.125 Lien Notes due September 30, 2028 | 225,000 | 225,000 | ||||||
| 11.75% Senior Secured 1.25 Lien Notes due September 30, 2029 | 430,000 | 430,000 | ||||||
Total Senior Secured Notes | $ | 655,000 | $ | 768,502 | ||||
Senior Notes: | ||||||||
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 senior notes and credit facilities | $ | 956,759 | $ | 1,070,261 | ||||
Net (discounts) premiums | $ | (18,230 | ) | $ | (14,563 | ) | ||
Unamortized debt issuance costs | $ | (3,912 | ) | $ | (4,207 | ) | ||
Total senior notes and credit facilities, net of discounts, premiums and unamortized debt issuance costs | $ | 934,617 | $ | 1,051,491 | ||||
(1) $26.0On November 15, 2023, K. Hovnanian redeemed all of its $113.5 million aggregate principal amount of 8.0%10.0% Senior Secured 1.75 Lien Notes due 2027 (the "8.0%2027 Notes") are owned by a wholly-owned consolidated subsidiary of HEI. Therefore, in accordance with U.S. GAAP, such notes are not reflected on the Condensed Consolidated Balance Sheets of HEI.November 15, 2025.
(2) (2) At January 31, 20232024, provides for up to $125.0$125.0 million in aggregate amount of senior secured first lien revolving loans. In the fourth quarter of fiscal 2022, we amended our Secured Credit Facility, which amendments became effective in the first quarter of fiscal 2023. As amended, theThe revolving loans thereunder have a maturity of June 30, 2024 2026 and borrowings bear interest, at K. Hovnanian’s option, at either (i) a term secured overnight financing rate (subject to a floor of 1.00%3.00%) plus an applicable margin of 4.50% or (ii) an alternate base rate (subject to a floor of 4.00%) plus an applicable margin of 3.50%. In addition, K. Hovnanian will pay an unused commitment fee on the undrawn revolving commitments at a rate of 1.00% per annumannum..
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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 and senior notes outstanding at January 31, 2023 (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)2024 (collectively, the “Notes Guarantors”).
The credit agreements governing the Credit Facilitiesterm loans and revolving credit facilities (collectively, the “Credit Facilities”) and the indentures governing the senior secured and senior notes (together, the “Debt Instruments”) outstanding at January 31, 20232024 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, 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 SecuredSenior Unsecured Term Loan Credit Facility (defined below)due February 1, 2027 (the “Unsecured Term Loan Facility”), loans (the “Secured Term Loans”) and loans made under the Senior Secured 1.75 Lien Term Loan Credit Agreement (as defined below)Facility due January 31, 2028 (the “Secured Term Loan Facility”) and loans (the “Secured Revolving Loans”) made under the Senior Secured Revolving Credit Agreement due June 30, 2026 (the “Secured Credit Agreement”) 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 January 31, 2023,2024, 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 includingand dividends (in eachthe case of certain of such case,payments, our secured debt leverage ratio must also be less than 4.0 to 1.0)1.0), and from incurring indebtedness other than certain permitted indebtedness and nonrecourse indebtedness. Beginning as of October 31, 2021, as a result of our improved operating results, our fixed coverage ratio was above 2.0 to 1.0 and our secured debt leverage ratio was below 4.0 to 1.0, therefore we were no longer restricted from paying dividends. As such, we made dividend payments of $2.7 million to preferred shareholders in every quarter since the first quarter of both fiscal 2023 and 2022. Market conditions continue to adversely impact our business, and it is therefore likely that by the end of fiscal 2023 we will be restricted under our Debt Instruments from continuing to pay dividends on our Series A preferred stock. Dividends on the Series A preferred stock are not cumulative and, accordingly, if for any reason we do not declare a dividend on the Series A preferred stock for a quarterly dividend period (regardless of our availability of funds), holders of the Series A Preferred Stock will have no right to receive a dividend for that period, and we will have no obligation to pay a dividend for that period.
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 or equity purchases and/or exchanges 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 2024
On November 15, 2023, K. Hovnanian redeemed in full all of the $113.5 million aggregate principal amount of its 10.0% Senior Secured 1.75 Lien Notes due 2025 for a redemption price of $119.2 million, which included accrued and unpaid interest. This redemption resulted in a gain on extinguishment of debt of $1.4 million for the three months ended January 31, 2024, including the write-off of unamortized premiums, debt issuance costs and fees. The gain from the redemption is included in the Condensed Consolidated Statement of Operations as “Gain on extinguishment of debt, net".
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 “SecuredThe Secured Credit Agreement” and, together with the Unsecured Term Loan Facility (defined below) and the Secured Term Loan Facility, the “Credit Facilities”) providingAgreement provides 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. InThe revolving loans under thefourth quarter of fiscal 2022, we amended our Secured Credit Agreement which amendments became effective in the first quarter of fiscal 2023. As amended, the revolving loans thereunder have a maturity of June 30, 2024 2026 and borrowings bear interest, at K. Hovnanian’s option, at either (i) SOFR (subject to a term secured overnight financingfloor of 3.00%) plus an applicable margin of 4.5% or (ii) an alternate base rate (subject to a floor of 1.00%4.0%) plus an applicable margin of 4.50% or (ii) an alternate base rate plus an applicable margin of 3.50%3.5%. In addition, K. Hovnanian will paypays an unused commitment fee on the undrawn revolving commitments at a rate of 1.00%1.0% per annum.
The7.75% 8.0 % Senior Secured 1.125 Lien Notes due 20262028 (the ""New 1.125 Lien Notes") have a maturity of February 15, 2026 September 30, 2028 and bear interest at a rate of 7.75% 8.0% per annum payable semi-annually on February 15 March 30 and August 15 September 30 of each year to holders of record at the close of business on February 1 March 15 and August 1, September 15, as the case may be, immediately preceding such interest payment dates. The New 1.125 Lien Notes are redeemable in whole or in part at K. Hovnanian’s option at any time prior to September 30, 2025 at a redemption price equal to 100% of their principal amount plus an applicable “Make Whole Amount”. K. Hovnanian may also redeem some or all of the New 1.125 Lien Notes at 103.875%104.0% of their principal amount commencing February 15, 2022, on September 30, 2025, at 101.937%102.0% of their principal amount commencing February 15, 2023 on September 30, 2026 and at 100.0% of their principal amount commencing September 30, 2027. In addition, K. Hovnanian may also redeem up to 35.0% of the aggregate principal amount of New 1.125 Lien Notes prior to September 30, 2025 with the net cash proceeds from certain equity offerings at 108.0% of their principal amountFebruary 15, 2024..
The 10.5%11.75% Senior Secured 1.25 Lien Notes due 20262029 (the "New 1.25 Lien Notes") have a maturity of February 15, 2026 September 30, 2029 and bear interest at a rate of 10.5%11.75% per annum payable semi-annually on February 15 March 30 and August 15 September 30 of each year to holders of record at the close of business on February 1 March 15 and August 1, September 15, as the case may be, immediately preceding such interest payment dates. K. Hovnanian may 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 10.0%1.75 Lien Notes due 2025 (the "1.75 Lien Notes") have a maturity of November 15, 2025 and bear interest at a rate of 10.0% per annum 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. At any time and from time to time 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.
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 1.5New 1.25 Lien Notes are redeemable in whole or in part at ourK. Hovnanian’s option at any time prior to February 15,March 30, 2026 at a redemption price equal to 100% of their principal amount plus an applicable “Make Whole Amount”. K. Hovnanian may also redeem some or all of the New 1.25 Lien Notes at 105.875% of their principal amount commencing on March 30, 2026, at 102.9375% of their principal amount commencing on September 30, 2027 and at 100.0% of their principal amount.
On December 10, 2019, amount commencing on September 30, 2028. In addition, K. Hovnanian entered into a Senior Secured 1.75may also redeem up to 35.0% of the aggregate principal amount of New 1.25 Lien Term Loan Credit Facility due January 31, 2028 (Notes prior to March 30, 2026 with the “Secured Term Loan Facility”)net cash proceeds from certain equity offerings at 111.75% of their principal amount.
The secured term loans under the Secured Term Loan Facility (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. At any time and from time to time 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%102.5% 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.amount.
Each series of secured notes 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 (in each case, with respect to the assets securing such 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. TheLoan; the liens securing the New 1.125 Lien Notes are senior to the liens securing the New 1.25 Lien Notes, 1.5 Lien Notes, the 1.75 Lien Notes, the Secured Term Loans and any other future secured obligations that are junior in priority with respect to the assets securing the New 1.125 Lien Notes,Notes; the liens securing the New 1.25 Lien Notes are senior to the liens securing the 1.5 Lien Notes, the 1.75 Lien Notes, the Secured Term Loans and any other future secured obligations that are junior in priority with respect to the assets securing the New 1.25 Lien Notes,Notes; and the liens securing the 1.5 Lien Notes are senior to the liens securing the 1.75 Lien Notes, the Secured Term Loans 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 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 January 31, 20232024, the collateral securing the Secured Credit Agreement, the Secured Term Loan Facility and the senior secured notes included (1) $242.3(1) $190.1 million of cash and cash equivalents, which included $5.8$5.0 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) $470.7(2) $592.5 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)(3) equity interests in joint venture holding companies with an aggregate book value of $96.9 million.$109.2 million.
Unsecured Obligations
The 13.5% Senior Notes due 2026 (the “13.5%“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.amount.
The 5.0% Senior Notes due 2040 (the “5.0%“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, K. Hovnanian may redeem some or all of the 5.0% 2040 Notes at a redemption price equal to 100.0% of their principal amount. 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, 2027.2027.
Other
We have certain stand-alone cash collateralized letter of credit agreements and facilities under which there was a total of $5.7$4.8 million and $6.0$4.9 million letters of credit outstanding at January 31, 20232024 and October 31, 2022, 2023, 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 January 31, 20232024 and October 31, 2022, 2023, the amount of cash collateral in these segregated accounts was $5.8$5.0 million and $6.1$5.1 million, respectively, which is reflected in “Restricted cash and cash equivalents” on the Condensed Consolidated Balance Sheets.Sheets.
Basic and diluted earnings per share for the periods presented below were calculated as follows:
Three Months Ended | Three Months Ended | |||||||||||||||
January 31, | January 31, | |||||||||||||||
(In thousands, except per share data) | 2023 | 2022 | 2024 | 2023 | ||||||||||||
Numerator: | ||||||||||||||||
Net income | $ | 18,716 | $ | 24,808 | $ | 23,904 | $ | 18,716 | ||||||||
Less: preferred stock dividends | (2,669 | ) | (2,669 | ) | (2,669 | ) | (2,669 | ) | ||||||||
Less: undistributed earnings allocated to participating securities | (1,403 | ) | (2,189 | ) | (1,025 | ) | (1,403 | ) | ||||||||
Numerator for basic earnings per share | $ | 14,644 | $ | 19,950 | $ | 20,210 | $ | 14,644 | ||||||||
Plus: undistributed earnings allocated to participating securities | 1,403 | 2,189 | 1,025 | 1,403 | ||||||||||||
Less: undistributed earnings reallocated to participating securities | (1,403 | ) | (2,189 | ) | (1,025 | ) | (1,403 | ) | ||||||||
Numerator for diluted earnings per share | $ | 14,644 | $ | 19,950 | $ | 20,210 | $ | 14,644 | ||||||||
Denominator: | ||||||||||||||||
Denominator for basic earnings per share – weighted average shares outstanding | 6,186 | 6,389 | 6,496 | 6,186 | ||||||||||||
Effect of dilutive securities: | ||||||||||||||||
Stock-based payments | 282 | 112 | 441 | 282 | ||||||||||||
Denominator for diluted earnings per share – weighted-average shares outstanding | 6,468 | 6,501 | 6,937 | 6,468 | ||||||||||||
Basic earnings per share | $ | 2.37 | $ | 3.12 | $ | 3.11 | $ | 2.37 | ||||||||
Diluted earnings per share | $ | 2.26 | $ | 3.07 | $ | 2.91 | $ | 2.26 | ||||||||
In addition, 80 thousand and 24 thousand shares related to out-of-the money stock options, which could potentially dilute basic earnings per share in the future, were not included in the computation of diluted earnings per share for both the three months ended January 31,2023,and 2022, respectively, because to do so would have been anti-dilutive for eachthe period.
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 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. During both the three months ended January 31, 2023 and 2022 weWe paid dividends of $2.7 million on the Series A preferred stock.stock for each of the three months ended January 31, 2024and 2023.
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-to-one conversion rate.
On August 4, 2008, ourthe Board of Directors (the “Board”) adopted a shareholder rights plan (the “Rights Plan”), which was amended on January 11, 2018,and January 18, 2021, and January 11, 2024, 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, there would be a triggering event causing significant dilution in the voting power of such person or group. However, existing shareholders 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’s decision to adopt the Rights Plan may be terminated by the Board at any time prior to the Rights being triggered. The Rights Plan will continue in effect until August 14, 2024,2027, unless it expires earlier in accordance with its terms. The approval of the Board’s decision to initially adopt the Rights Plan and the amendmentsAmendments Nos. 1 and 2 thereto were approved by shareholders.shareholders (Amendment No. 3 will be voted upon by shareholders at HEI's Annual Meeting to be held on March 21, 2024). Our shareholders 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% shareholders and holders of Class B common stock, 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 U.S. 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, the Board authorized a stock repurchase program to purchase up to 0.2 million shares of Class A common stock. On September 1, 2022, the Board terminated our priorauthorized a repurchase program and authorized a new program for the repurchase of up to $50.0 million of our Class A common stock. Under the new repurchase program, repurchases may be made from time to time in open market transactions, in privately negotiated transactions or otherwise. The timing and the actual dollar amount repurchased will depend on a variety of factors, including legal requirements, price, future tax implications and economic and market conditions. The repurchase program may be changed, suspended or discontinued at any time and does not have a specified expiration date.
There were no shares repurchased during the three months ended January 31, 2024. During the three months ended January 31, 2023, we repurchased 118,478 shares under the new stock repurchase program, with a market value of $4.8 million, or $40.51 per share, which were added to "Treasury stock" on our Condensed Consolidated Balance Sheets as of SheetJanuary 31, 2023.. There were no shares repurchased during the three months ended January 31, 2022.As of January 31, 2023,2024, $33.0 million of our Class A common stock is available to be purchased under the stock repurchase program.
16. | Income Taxes |
For the three months ended January 31, 2024, we recorded income tax expense of $8.7 million. The totalexpense was primarily driven by federal and state tax expense on income before income taxes and permanent differences, partially offset by the generation of energy home credits. The federal tax expense is not paid in cash as it is offset by the use of our existing NOL carryforwards.
For the three months ended January 31, 2023, we recorded income tax benefit for the three months ended January 31, 2023 wasof $0.7 million. The benefit was primarily due to $6.2 million benefit of energy efficient tax credits on homes closed in the prior fiscal year, which was offset by federal and state tax expense as a result of pretax income.income before income taxes.
The total income tax expense for the three months ended January 31, 2022 was $10.6 million. The expense was primarily due to federal and state tax expense recorded as a result of our pretax income. The federal tax expense is not paid in cash as it is offset by the use of our existing NOL carryforwards.
Our federal net operating losses of $909.5 million expire between 2029 and 2038, and $21.1 million have an indefinite carryforward period. Of our $2.3 billion of state NOLs, $411.4 million expire between 2023 through 2027; $1.4 billion expire between 2028 through 2032; $369.7 million expire between 2033 through 2037; $73.7 million expire between 2038 through 2042; and $51.5 million have an indefinite carryforward period.
The Company recognizes deferred income taxes for 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. A valuation allowance is providedAs part of our analysis, we considered both positive and negative factors that impact profitability and whether those factors would lead to offseta change in estimate of our deferred tax assets ("DTAs"(“DTAs”) if, based uponthat may be realized in the available evidence, it is more likely than future. At notJanuary 31, 2024 that some or all of, the DTAs will not be realized. Future realization of DTAs depends on the existence of sufficient taxable income of the appropriate character. Sources of taxable income include future reversals of existing taxable temporary differences, expected future taxable income, taxable income in prior carryback years if permitted under the tax law and tax planning strategies. ManagementCompany has determined that it is more likely than not that sufficient taxable income will be generated in the future to realize its DTAs, net of any valuation allowance. The Company’s DTAs as of January 31, 2023 were $347.4 million.
As of January 31, 2023, 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. Overall, the positive evidence, both objective and subjective, outweighed the negative evidence. The significant positive improvement in our operations in the last three years, coupled with our contract backlog of $1.2 billion as of January 31, 2023 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. Based on this analysis, we determined that the current valuation allowance for our DTAs of $95.7 million as of January 31, 2023 is appropriate.
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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 resource allocations.
We currently have homebuilding operations in 1413 states that are aggregated into reportable segments based primarily upon geographic proximity.
Historically, the Company had seven reportable segments consisting of six homebuilding segments (Northeast, Mid-Atlantic, Midwest, Southeast, Southwest and West) and its financial services segment. During the fourth quarter of fiscal 2022, we reevaluated our reportable segments as a result of changes in the business and our management thereof. In particular, we considered the fact that, since our segments were last established, the Company had exited the Minnesota, North Carolina and Tampa markets and is currently in the process of exiting the Chicago market. Applying the principles set forth under Accounting Standards Codification ("ASC") 280, including that our business trends are reflective of economic conditions in markets with general geographic proximity, we realigned our homebuilding operating segments.
HEI’s reportable segments now consist of the following three homebuilding segments and a financial services segment.
Homebuilding:
(1) | Northeast (Delaware, | |
| (2) | Southeast (Florida, Georgia and South Carolina) | |
| (3) | West (Arizona, California and Texas) |
All prior period amounts related to the segment change have been retrospectively reclassified throughout to conform to the new presentation.
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 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, 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 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 corporate general and administrative expenses.
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.
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Financial information relating to our reportable segments was as follows:
Three Months Ended | ||||||||||||||||
January 31, | ||||||||||||||||
Three Months Ended | ||||||||||||||||
January 31, | ||||||||||||||||
(In thousands) | 2023 | 2022 | ||||||||||||||
Revenues: | ||||||||||||||||
Northeast | $ | 211,462 | $ | 174,945 | ||||||||||||
Southeast | 73,794 | 55,582 | ||||||||||||||
West | 215,734 | 321,470 | ||||||||||||||
Total homebuilding | 500,990 | 551,997 | ||||||||||||||
Financial services | 12,164 | 13,309 | ||||||||||||||
Corporate and unallocated | 2,212 | 7 | ||||||||||||||
Total revenues | $ | 515,366 | $ | 565,313 | ||||||||||||
Income before income taxes: | ||||||||||||||||
Northeast | $ | 28,512 | $ | 19,838 | ||||||||||||
Southeast | 11,623 | 10,162 | ||||||||||||||
West | 9,889 | 43,935 | ||||||||||||||
Total homebuilding | 50,024 | 73,935 | ||||||||||||||
Financial services | 3,111 | 2,909 | ||||||||||||||
Corporate and unallocated (1) | (35,088 | ) | (41,443 | ) | (42,610 | ) | (35,088 | ) | ||||||||
Income before income taxes | $ | 18,047 | $ | 35,401 | ||||||||||||
(1) | Corporate and unallocated for the three months ended January 31, |
January 31, | October 31, | |||||||
(In thousands) | 2023 | 2022 | ||||||
Assets: | ||||||||
Northeast | $ | 494,830 | $ | 530,884 | ||||
Southeast | 357,831 | 330,894 | ||||||
West | 824,696 | 802,704 | ||||||
Total homebuilding | 1,677,357 | 1,664,482 | ||||||
Financial services | 112,756 | 155,993 | ||||||
Corporate and unallocated | 645,072 | 741,555 | ||||||
Total assets | $ | 2,435,185 | $ | 2,562,030 | ||||
January 31, | October 31, | |||||||
(In thousands) | 2024 | 2023 | ||||||
Assets: | ||||||||
Northeast | $ | 524,029 | $ | 483,784 | ||||
Southeast | 333,582 | 286,701 | ||||||
West | 773,215 | 733,318 | ||||||
Total homebuilding | 1,630,826 | 1,503,803 | ||||||
Financial services | 149,633 | 168,671 | ||||||
Corporate and unallocated | 559,919 | 820,466 | ||||||
Total assets | $ | 2,340,378 | $ | 2,492,940 | ||||
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.
During the first quarter of fiscal 2023, we contributed four communities we owned, including one active selling community to onea new unconsolidated joint venture for $41.1 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.
(In thousands) | January 31, 2023 | |||||||||||
Land | ||||||||||||
Homebuilding | Development | Total | ||||||||||
Assets: | ||||||||||||
Cash and cash equivalents | $ | 132,931 | $ | 859 | $ | 133,790 | ||||||
Inventories | 501,596 | - | 501,596 | |||||||||
Other assets | 25,388 | - | 25,388 | |||||||||
Total assets | $ | 659,915 | $ | 859 | $ | 660,774 | ||||||
Liabilities and equity: | ||||||||||||
Accounts payable and accrued liabilities | $ | 479,122 | $ | 642 | $ | 479,764 | ||||||
Notes payable | 58,767 | - | 58,767 | |||||||||
Total liabilities | 537,889 | 642 | 538,531 | |||||||||
Equity of: | ||||||||||||
Hovnanian Enterprises, Inc. | 97,047 | 209 | 97,256 | |||||||||
Others | 24,979 | 8 | 24,987 | |||||||||
Total equity | 122,026 | 217 | 122,243 | |||||||||
Total liabilities and equity | $ | 659,915 | $ | 859 | $ | 660,774 | ||||||
Debt to capitalization ratio | 33 | % | 0 | % | 32 | % | ||||||
(In thousands) | October 31, 2022 | |||||||||||
Land | ||||||||||||
Homebuilding | Development | Total | ||||||||||
Assets: | ||||||||||||
Cash and cash equivalents | $ | 153,176 | $ | 868 | $ | 154,044 | ||||||
Inventories | 441,140 | - | 441,140 | |||||||||
Other assets | 20,037 | - | 20,037 | |||||||||
Total assets | $ | 614,353 | $ | 868 | $ | 615,221 | ||||||
Liabilities and equity: | ||||||||||||
Accounts payable and accrued liabilities | $ | 471,813 | $ | 651 | $ | 472,464 | ||||||
Notes payable | 34,880 | - | 34,880 | |||||||||
Total liabilities | 506,693 | 651 | 507,344 | |||||||||
Equity of: | ||||||||||||
Hovnanian Enterprises, Inc. | 73,142 | 209 | 73,351 | |||||||||
Others | 34,518 | 8 | 34,526 | |||||||||
Total equity | 107,660 | 217 | 107,877 | |||||||||
Total liabilities and equity | $ | 614,353 | $ | 868 | $ | 615,221 | ||||||
Debt to capitalization ratio | 24 | % | 0 | % | 24 | % | ||||||
January 31, 2024 | ||||||||||||
Land | ||||||||||||
| (In thousands) | Homebuilding | Development | Total | |||||||||
Assets: | ||||||||||||
Cash and cash equivalents | $ | 116,347 | $ | 768 | $ | 117,115 | ||||||
Inventories | 372,833 | - | 372,833 | |||||||||
Other assets | 380,995 | - | 380,995 | |||||||||
Total assets | $ | 870,175 | $ | 768 | $ | 870,943 | ||||||
Liabilities and equity: | ||||||||||||
Accounts payable and accrued liabilities | $ | 509,879 | $ | 551 | $ | 510,430 | ||||||
Notes payable | 107,782 | - | 107,782 | |||||||||
Total liabilities | 617,661 | 551 | 618,212 | |||||||||
Equity of: | ||||||||||||
Hovnanian Enterprises, Inc. | 109,210 | 210 | 109,420 | |||||||||
Others | 143,304 | 7 | 143,311 | |||||||||
Total equity | 252,514 | 217 | 252,731 | |||||||||
Total liabilities and equity | $ | 870,175 | $ | 768 | $ | 870,943 | ||||||
Debt to capitalization ratio | 30 | % | 0 | % | 30 | % | ||||||
October 31, 2023 | ||||||||||||
Land | ||||||||||||
| (In thousands) | Homebuilding | Development | Total | |||||||||
Assets: | ||||||||||||
Cash and cash equivalents | $ | 127,547 | $ | 822 | $ | 128,369 | ||||||
Inventories | 375,022 | - | 375,022 | |||||||||
Other assets | 380,989 | - | 380,989 | |||||||||
Total assets | $ | 883,558 | $ | 822 | $ | 884,380 | ||||||
Liabilities and equity: | ||||||||||||
Accounts payable and accrued liabilities | $ | 524,586 | $ | 605 | $ | 525,191 | ||||||
Notes payable | 101,126 | - | 101,126 | |||||||||
Total liabilities | 625,712 | 605 | 626,317 | |||||||||
Equity of: | ||||||||||||
Hovnanian Enterprises, Inc. | 96,281 | 210 | 96,491 | |||||||||
Others | 161,565 | 7 | 161,572 | |||||||||
Total equity | 257,846 | 217 | 258,063 | |||||||||
Total liabilities and equity | $ | 883,558 | $ | 822 | $ | 884,380 | ||||||
Debt to capitalization ratio | 28 | % | 0 | % | 28 | % | ||||||
As of January 31, 20232024 and October 31, 2022,2023, we had outstanding advances outstandingto unconsolidated joint ventures of $3.8$1.2 million and $1.6$1.4 million, respectively, to these unconsolidated joint ventures.respectively. These amounts were included in “Accounts payable and accrued liabilities” in the tables above. In some cases, our net investment in these unconsolidated joint ventures is less than our proportionate share of the equity reflected in the tabletables 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. During the three months ended January 31, 20232024 and 20222023, we did not write-down any of our unconsolidated joint venture investments.
Three Months Ended January 31, 2023 | ||||||||||||
(In thousands) | Land | |||||||||||
Homebuilding | Development | Total | ||||||||||
Revenues | $ | 79,601 | $ | - | $ | 79,601 | ||||||
Cost of sales and expenses | (76,885 | ) | - | (76,885 | ) | |||||||
Joint venture net income | $ | 2,716 | $ | - | $ | 2,716 | ||||||
Our share of net income | $ | 7,160 | $ | - | $ | 7,160 | ||||||
Three Months Ended January 31, 2024 | ||||||||||||
Land | ||||||||||||
| (In thousands) | Homebuilding | Development | Total | |||||||||
Revenues | $ | 126,425 | $ | - | $ | 126,425 | ||||||
Cost of sales and expenses | (108,659 | ) | - | (108,659 | ) | |||||||
Joint venture net income | $ | 17,766 | $ | - | $ | 17,766 | ||||||
Our share of net income | $ | 14,952 | $ | - | $ | 14,952 | ||||||
Three Months Ended January 31, 2022 | ||||||||||||
(In thousands) | Land | |||||||||||
Homebuilding | Development | Total | ||||||||||
Revenues | $ | 69,591 | $ | 113 | $ | 69,704 | ||||||
Cost of sales and expenses | (65,582 | ) | (26 | ) | (65,608 | ) | ||||||
Joint venture net income | $ | 4,009 | $ | 87 | $ | 4,096 | ||||||
Our share of net income | $ | 8,147 | $ | 45 | $ | 8,192 | ||||||
Three Months Ended January 31, 2023 | ||||||||||||
Land | ||||||||||||
| (In thousands) | Homebuilding | Development | Total | |||||||||
Revenues | $ | 79,601 | $ | - | $ | 79,601 | ||||||
Cost of sales and expenses | (76,885 | ) | - | (76,885 | ) | |||||||
Joint venture net income | $ | 2,716 | $ | - | $ | 2,716 | ||||||
Our share of net income | $ | 7,160 | $ | - | $ | 7,160 | ||||||
The reason “Our share of net income” in our homebuilding joint ventures is higher or lower than the “Joint venture net income” shown in the tables above is a result of our varying ownership percentages in each investment. For both the three months ended January 31, 20232024 and 2022,2023, respectively, we had investments in eightseven and teneight unconsolidated joint ventures, respectively, and our ownership in these joint ventures ranged from 20% to over 50% 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 January 31, 2023,2024, "Our share of net income" was higherless than the "Joint venture net income" due to the recognition of income in excess of our current sharing percentage for onethree of our unconsolidated joint ventures in accordance with the joint venture agreement, which provides a higher earning percentage than ownership percentage when the joint venture partner exceeds defined rate of return thresholds. This was slightly offset by a second unconsolidated joint venture that experienced increased income during the period for which we currently recognize a lower profit-sharing percentage based on the joint venture's agreements. In addition, we had previously written off our investment in venture agreements, partially offset by one of our unconsolidated joint ventures that was generating losses and therefore for the three months ended January 31, 2023 we did not recognize any losses on this investment. Had we not fully written off our investment, our share of the net loss in this unconsolidated joint venture would have been approximately 50%,with increased income during the period for which would have reduced our overall share of net income across all of our unconsolidated joint ventures. Aswe currently recognize a result, this unconsolidatedhigher profit-sharing percentage based on the joint venture loss significantly reduced the profit when looking at all of our eight unconsolidated joint ventures, in the aggregate, without having any impact on our share of net income or loss recorded in the applicable period.agreement.
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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’sventures' revenues. These management fees, which totaled $3.6$4.3 million and $2.4$3.6 million for the three months ended January 31, 20232024 and 20222023, respectively, are recorded in “Selling, general and administrative” homebuilding expenses in the Condensed Consolidated Statements of Operations.
Typically, ourOur unconsolidated joint ventures may 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. 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 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 Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2020-04,2020-04, “Reference Rate Reform (Topic 848)848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting” (“ASU 2020-04”2020-04”). ASU 2020-042020-04 provides companies with optional expedients to ease the potential accounting burden on contracts affected by the discontinuation of the London Interbank Offered Rate or another reference rate expected to be discontinued. This guidance was effective for the Company beginning on March 12, 2020 and we may elect to apply the amendments prospectively. In December 2022, the FASB issued ASU 2022-06,2022-06, “Reference Rate Reform (Topic 848)848): Deferral of the Sunset Date of Topic 848”, to extend the temporary accounting rules under ASC 848 from December 31, 2022 to December 31, 2024. We are currently evaluating the potential impact, but we do not expect the adoption of this guidance to have a material impact on our Condensed Consolidated Financial Statements.
In August 2023, the FASB issued ASU 2023-05, “Business Combinations - Joint Venture Formations” (“ASU 2023-05”), which addresses the accounting for contributions made to a joint venture. ASU 2023-05 requires joint ventures to measure all assets and liabilities upon formation at fair value. This guidance will be applied prospectively to all joint venture formations with a formation date on or after January 1, 2025. We are currently evaluating the potential impact, but we do not expect the adoption of this guidance to have a material impact on our Condensed Consolidated Financial Statements.
In November 2023, the FASB issued ASU 2023-07, “Improvements to Reportable Segment Disclosures” (“ASU 2023-07”). ASU 2023-07 requires disclosure of significant segment expenses that are regularly provided to the chief operating decision maker and included within the segment measure of profit or loss. This guidance will be applied retrospectively and is effective for annual reporting periods in fiscal years beginning after December 15, 2023, and interim reporting periods in fiscal years beginning after December 31, 2024. We are currently evaluating the potential impact, but we do not expect the adoption of this guidance to have a material impact on our Condensed Consolidated Financial Statements.
In December 2023, the FASB issued ASU 2023-09, “Improvements to Income Tax Disclosures” (“ASU 2023-09”). ASU 2023-09 requires enhanced disclosures related to the rate reconciliation and information on income taxes paid. This guidance will be applied prospectively and is effective for annual reporting periods in fiscal years beginning after December 15, 2024. We are currently evaluating the potential impact the adoption of this guidance will have on our Condensed Consolidated Financial Statements.
20. | Fair Value of Financial Instruments |
We use a fair-value hierarchy which prioritizes the inputs used in measuring fair value 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 | January 31, | October 31, | |||||||
(In thousands) | Hierarchy | 2023 | 2022 | ||||||
Mortgage loans held for sale (1) | Level 2 | $ | 74,891 | $ | 110,548 | ||||
Forward contracts | Level 2 | (37 | ) | 752 | |||||
Total | $ | 74,854 | $ | 111,300 | |||||
Interest rate lock commitments | Level 3 | - | - | ||||||
Total | $ | 74,854 | $ | 111,300 | |||||
Fair Value at | Fair Value at | ||||||||
Fair Value | January 31, | October 31, | |||||||
(In thousands) | Hierarchy | 2024 | 2023 | ||||||
Mortgage loans held for sale (1) | Level 2 | $ | 99,046 | $ | 130,235 | ||||
(1) The aggregate unpaid principal balance was $74.5$98.2 million and $110.2$130.4 million at January 31, 20232024 and October 31, 2022,2023, respectively.
We elected the fair value option for our loans held for sale. Management believes the fair value option improves financial reporting by mitigating volatility in reported earnings caused by measuring the fairFair value of the loans and derivative instruments used to economically hedge them without having to apply complex hedge accounting. Fair value ofmortgage loans held for sale is based on independent quoted market prices, where available, or the prices for other mortgage loans with similar characteristics.characteristics.
The financial services segment had a pipeline of loan applications in process of $555.7$569.2 million at January 31, 20232024. Loans in process for which interest rates were committed to the borrowers totaled $85.9$71.8 million as of January 31, 20232024. Substantially all of these commitments were for periods of 60 days or less. Since a portion of these commitments are expected to expire without being exercised by the borrowers, the total commitments do not necessarily represent future cash requirements.
TheIn addition, 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 primarily managed by entering into MBS forward commitments, option contracts with investment banks, federally regulated bank affiliates and option contracts. Inloan sales transactions with permanent investors meeting the segment’s credit standards. Our risk, in the event of default by the purchaser, our risk is the difference between the contract price and fair value of the MBS forward commitments and option contracts. At January 31, 2023,2024, we had no open mandatory investor commitments to sell mandatory MBS.
Changes in fair value option that are included in income are shown, by financial instrument and financial statement line item, below:
Three Months Ended January 31, 2024 | ||||||||||||
Mortgage | Interest Rate | |||||||||||
Loans Held | Lock | Forward | ||||||||||
(In thousands) | For Sale | Commitments | Contracts | |||||||||
Change in fair value included in financial services revenue | $ | 802 | $ | - | $ | - | ||||||
Three Months Ended January 31, 2023 | ||||||||||||
Mortgage | Interest Rate | |||||||||||
Loans Held | Lock | Forward | ||||||||||
(In thousands) | For Sale | Commitments | Contracts | |||||||||
Change in fair value included in financial services revenue | $ | 421 | $ | - | $ | (37 | ) | |||||
Three Months Ended January 31, 2022 | ||||||||||||
Mortgage | Interest Rate | |||||||||||
Loans Held | Lock | Forward | ||||||||||
(In thousands) | For Sale | Commitments | Contracts | |||||||||
Change in fair value included in financial services revenue | $ | 1,982 | $ | (645 | ) | $ | 135 | |||||
We did not have any assets measured at fair value on a nonrecurring basis during the three months endedJanuary 31, 20232024 and 2022,2023, respectively.
| 26 |
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 Level 3 measurements are estimated based on third-partythird-party broker quotes or management'smanagement’s estimate of the fair value based on available trades for similar debtdebt instruments. As shown in the table below, our 1.7511.75% Senior Secured 1.25 Lien Notes 1.125 Lien Notes and 1.25 Lien Notesdue 2029 were a Level 2 measurement at January 31, 20232024 due to recent trades on such notes (whereas such notes were a Level 3 measurement at October 31, 2022).for the same notes.
| Fair Value as of January 31, |
(In thousands) | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Senior Secured Notes: | ||||||||||||||||
8.0% Senior Secured 1.125 Lien Notes due September 30, 2028 | - | - | 231,750 | 231,750 | ||||||||||||
11.75% Senior Secured 1.25 Lien Notes due September 30, 2029 | - | 477,300 | - | 477,300 | ||||||||||||
Senior Notes: | ||||||||||||||||
13.5% Senior Notes due February 1, 2026 | - | - | 95,745 | 95,745 | ||||||||||||
5.0% Senior Notes due February 1, 2040 | - | - | 45,484 | 45,484 | ||||||||||||
Senior Credit Facilities: | ||||||||||||||||
Senior Unsecured Term Loan Credit Facility due February 1, 2027 | - | - | 37,490 | 37,490 | ||||||||||||
Senior Secured 1.75 Lien Term Loan Credit Facility due January 31, 2028 | - | - | 90,552 | 90,552 | ||||||||||||
Total fair value | $ | - | $ | 477,300 | $ | 501,021 | $ | 978,321 | ||||||||
(In thousands) | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Senior Secured Notes: | ||||||||||||||||
10.0% Senior Secured 1.75 Lien Notes due November 15, 2025 | - | 164,842 | - | 164,842 | ||||||||||||
7.75% Senior Secured 1.125 Lien Notes due February 15, 2026 | - | 243,308 | - | 243,308 | ||||||||||||
10.5% Senior Secured 1.25 Lien Notes due February 15, 2026 | - | 284,665 | - | 284,665 | ||||||||||||
11.25% Senior Secured 1.5 Lien Notes due February 15, 2026 | - | - | 158,955 | 158,955 | ||||||||||||
Senior Notes: | ||||||||||||||||
13.5% Senior Notes due February 1, 2026 | - | - | 96,523 | 96,523 | ||||||||||||
5.0% Senior Notes due February 1, 2040 | - | - | 45,881 | 45,881 | ||||||||||||
Senior Credit Facilities: | ||||||||||||||||
Senior Unsecured Term Loan Credit Facility due February 1, 2027 | - | - | 33,436 | 33,436 | ||||||||||||
Senior Secured 1.75 Lien Term Loan Credit Facility due January 31, 2028 | - | - | 84,106 | 84,106 | ||||||||||||
Total fair value | $ | - | $ | 692,815 | $ | 418,901 | $ | 1,111,716 | ||||||||
| Fair Value as of October 31, 2023 |
(In thousands) | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Senior Secured Notes: | ||||||||||||||||
10.0% Senior Secured 1.75 Lien Notes due November 15, 2025 | - | 113,843 | - | 113,843 | ||||||||||||
8.0% Senior Secured 1.125 Lien Notes due September 30, 2028 | - | - | 230,690 | 230,690 | ||||||||||||
11.75% Senior Secured 1.25 Lien Notes due September 30, 2029 | - | 476,655 | - | 476,655 | ||||||||||||
Senior Notes: | ||||||||||||||||
13.5% Senior Notes due February 1, 2026 | - | - | 95,062 | 95,062 | ||||||||||||
5.0% Senior Notes due February 1, 2040 | - | - | 44,843 | 44,843 | ||||||||||||
Senior Credit Facilities: | ||||||||||||||||
Senior Unsecured Term Loan Credit Facility due February 1, 2027 | - | - | 35,034 | 35,034 | ||||||||||||
Senior Secured 1.75 Lien Term Loan Credit Facility due January 31, 2028 | - | - | 81,742 | 81,742 | ||||||||||||
Total fair value | $ | - | $ | 590,498 | $ | 487,371 | $ | 1,077,869 | ||||||||
(In thousands) | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Senior Secured Notes: | ||||||||||||||||
10.0% Senior Secured 1.75 Lien Notes due November 15, 2025 | - | - | 165,844 | 165,844 | ||||||||||||
7.75% Senior Secured 1.125 Lien Notes due February 15, 2026 | - | - | 240,393 | 240,393 | ||||||||||||
10.5% Senior Secured 1.25 Lien Notes due February 15, 2026 | - | - | 272,966 | 272,966 | ||||||||||||
11.25% Senior Secured 1.5 Lien Notes due February 15, 2026 | - | - | 162,566 | 162,566 | ||||||||||||
Senior Notes: | ||||||||||||||||
13.5% Senior Notes due February 1, 2026 | - | - | 94,282 | 94,282 | ||||||||||||
5.0% Senior Notes due February 1, 2040 | - | - | 55,654 | 55,654 | ||||||||||||
Senior Credit Facilities: | ||||||||||||||||
Senior Unsecured Term Loan Credit Facility due February 1, 2027 | - | - | 31,301 | 31,301 | ||||||||||||
Senior Secured 1.75 Lien Term Loan Credit Facility due January 31, 2028 | - | - | 85,247 | 85,247 | ||||||||||||
Total fair value | $ | - | $ | - | $ | 1,108,253 | $ | 1,108,253 | ||||||||
The Senior Secured Revolving Credit Facility is not included in the above tables because there were no borrowings outstanding thereunder as ofat January 31, 20232024 and October 31, 20232022.
21. | Transactions with Related Parties |
From time to time, an engineering firm owned by Tavit Najarian, a relative of Ara K. Hovnanian, our Chairman and Chief Executive Officer, provides services to the Company. During the three months ended January 31, 20232024 and 20222023, the services provided by such engineering firm to the Company totaled $0.4$0.3 million and $0.2$0.4 million, respectively. Neither the Company nor Mr. Hovnanian has a financial interest in the relative’s company from whom the services were provided.
ITEM 2.2. 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).
Segments
Historically, the Company had seven reportable segments consisting of six homebuilding segments (Northeast, Mid-Atlantic, Midwest, Southeast, Southwest and West) and a financial services segment. During the fourth quarter of fiscal 2022, we reevaluated our reportable segments as a result of changes in the business and our management thereof. In particular, we considered the fact that, since our segments were last established, the Company had exited the Minnesota, North Carolina and Tampa markets and is currently in the process of exiting the Chicago market. Applying the principles set forth under Accounting Standards Codification 280, Segment Reporting, including that our business trends are reflective of economic conditions in markets with general geographic proximity, we realigned our homebuilding operating segments and determined that, in addition to our financial services segment, we now have three reportable homebuilding segments comprised of (1) Northeast, (2) Southeast and (3) West, as noted below. All prior period amounts related to the segment change have been retrospectively reclassified to conform to the new presentation.
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 and Operating Results
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, inflation and overall housing affordability.
From early January 2022 to October 2023, 30-year mortgage rates increased rapidly from 3.2% to a high of 7.1% at the end of October 2022, and then back down slightly to 6.1% at the end of January 2023.more than doubled. The quick and sharp increase in interest rates, from 2021 to 2022, persistently high levels of inflation and doubt about the stability of the economy, continues to negatively impactimpacted housing demand.demand beginning in the second half of fiscal 2022 and into fiscal 2023. During the first quarter of fiscal 2023, we were2024, mortgage rates declined, which had a positive effect on our sales pace, but affordability generally remains challenging for homebuyers. We have been aggressive in our pricing, incentives and concessions in order to increase affordability,align with the current market.
We continue to use our increased inventory of quick move-in homes ("QMI homes") to help meet buyers’ needs for more affordable housing in the recent uncertain interest rate environment. The time between contract signing and closing is shorter with a QMI home as compared to a to be built home, which hadprovides customers with more certainty on their mortgage pricing. The availability of QMI homes also allows us to offer mortgage interest rate buydown assistance, which is a positive effect ontool we offer through our wholly-owned mortgage banking subsidiary ("K. Hovnanian Mortgage"), to help ease the impact of higher monthly payments from rising interest rates. We pay the cost of interest rate buydowns for customers that qualify through K. Hovnanian Mortgage and decide to use the program. The level of interest rate based incentives utilized differs across our markets and is one of several available options we use to drive sales pace, but dueand close homes.
The number of existing home sales listings are at all-time low levels, which limits the supply of homes available for purchase, leading to increased demand for new homes, which leads to improved pricing power. There was strong demand for our homes in the first quarter of fiscal 2024 as compared to the general uncertainty potential buyers still remain cautious about their decisionsame period of the prior year, which led to purchase a home. As a result, oursignificant increase in net contracts and net contracts per average active selling community, remained adversely impactedas compared to the first quarter of fiscal 2022, although we did see positive improvement throughout2023. We were able to increase net prices in approximately 37% of our communities during the quarter. Our gross contract cancellation rate for the three months ended January 31, 2023 was higher than the three months ended January 31, 2022 but decreased compared to the fourthfirst quarter of fiscal 2022. For2024.
There still remains a great degree of uncertainty due to inflation, the monthcontinued possibility of January 2023 our gross contract cancellationan economic recession, employment risk and the potential for further mortgage rate was 27%, which remained above our historical average. Weincreases. While we continue to experience extended build times due tosome lingering supply chain issues, but given the lower volume of homes inwe remain focused on continuing to shorten our construction we expect to see improvements resulting from an increase in available labor going forward. In addition, we have renegotiated the timing or pricing of certain land contractscycle times and continue to buildbuilding on our national initiatives to drive down costs with our vendorsmaterial providers and trade partners who are also being affected by the difficult macro-economic environment. Although recent sales per community in January and February have begun to improve, given the slower sales pace in the second half of fiscal 2022 and the first quarter of fiscal 2023 compared to the prior year and uncertainty in the homebuilding market, the Company will be taking measures in the second quarter of fiscal 2023 to reduce its overhead expenses through a combination of workforce reductions and certain other cost reduction measures.
We expect continued pressure on our results from higher wages due to inflation, as well as increased advertising spending, and less favorable margins on the mortgage rates we offer customers in order to attract buyers.partners. The changing conditions in the housing market, caused by increased mortgage rates and other factorsin the general economy, make it difficult to predict how strongly our business will be adversely impacted by these external factors over fiscal 2024 and beyond.
Our cash position allowed us to spend $230.4million on land purchases and land development for long-term growth during thethree months ended January 31, 2024and still have total liquidity of $313.1million, including $183.1million of homebuilding cash and cash equivalents and $125.0million of borrowing capacity under our senior secured revolving credit facility as we head into the spring selling season.ofJanuary 31, 2024.
Information on our operating results for the three months ended January 31, 20232024 are as follows:
● Sale of homes revenues decreasedincreased to $573.6 million for the three months ended January 31, 2024 from $499.6 million for the three months ended January 31, 2023 from $551.4 million2023. There was a 13.3% increase in the number of home deliveries for the three months ended January 31, 2022. There was a 20.1% decrease in the number of home deliveries, due in part2024, compared to the prior year deliveries being unusually high as a result of an extremely strong sales pace in late fiscal 2021 and early fiscal 2022. Partially offsetting the decrease in home deliveries wasperiod, along with an increase in average prices of 13.4%1.3% for the three months ended January 31, 2023,2024, compared to the prior year period, as home pricesperiod. The increase in average price was the result of increased rapidly in virtually all of our markets through the first half of fiscal 2022,demand due to improved market conditions, along with the geographic and community mix of our deliveries.
● GrossWhile gross margin dollars decreased 15.0%increased 12.6% for the three months ended January 31, 2023,2024 as compared to the same period of the prior year, as a result of the decrease in gross margin percentage decreased to 18.7%18.3% for the three months ended January 31, 20232024 from 19.9%18.7% for the three months ended January 31, 2022.2023 Gross margin percentage, before cost of sales interest expense and land charges, decreased from 22.4%was 21.8% for both the three months ended January 31, 2022 to 21.8% for the three months ended January 31,2024 and 2023. The decreases weredecrease in gross margin percentage was primarily due to our increased use of incentives and concessions when necessary to make our homes more affordable for buyers in thecertain markets in which we operate, partially offset by a reduction in construction costs.operate.
● Selling, general and administrative costs (including corporate general and administrative expenses) ("Total SGA") was $73.4$86.1 million, or 14.2%14.5% of total revenues, in the three months ended January 31, 20232024 compared with $72.2$73.4 million, or 12.8%14.2% of total revenues, in the three months ended January 31, 2022.2023. The increase in Total SGA as a percentage of total revenuesdollars is primarily due an increase in compensation expense, mainly related to the decreasegrants of phantom stock awards under our2019 and 2023 long-term incentive plans, for which expense is impacted by the change in revenuesour stock price each period.
● Other interest decreased to $10.5 million for the three months ended January 31, 2023, as compared to the same period of the prior year, as discussed above.
● Other interest increased to2024 from $15.1 million for the three months ended January 31, 2023, from $13.4primarily due to a reduction in principal of our senior notes as a result of redemptions during fiscal 2023 and the first quarter of fiscal 2024.
● Income before taxes increased to $32.6 million for the three months ended January 31, 2022, primarily due to additional inventory financing resulting2024 from an increase in average inventory not owned.
● Pre-tax income decreased to $18.0$18.0 million for the three months ended January 31, 2023 from pre-tax2023. Net income of $35.4increased to $23.9 million for the three months ended January 31, 2022. Net income decreased to2024 from $18.7 million for the three months ended January 31, 2023 from net income of $24.8 million for the three months ended January 31, 2022.2023. Net income for the first quarter of fiscal 2023 included a $6.2 million tax benefit from energy efficient home credits. Earnings per share, basic and diluted, decreasedincreased to $3.11 and $2.91, respectively, for the three months ended January 31, 2024 compared to $2.37 and $2.26, respectively, for the three months ended January 31, 2023 compared to $3.12 and $3.07, respectively,2023.
● Net contracts increased 43.0% for the three months ended January 31, 2022.
● Net contracts decreased 49.2% for the three months ended January 31, 2023,2024, compared to the same period of the prior year asprimarily due to increased demand for new homes resulting from a downward trend in mortgage rates, the slow sales pace acrosslow supply of existing homes for sale, favorable signs from the industry duringemployment market and overall growth in the second half of fiscal 2022 continued into the first quarter of fiscal 2023, primarily as a result of fluctuating interest rates and a continuing uncertain economic outlook. However, sales pace per community did improve in each consecutive month of the first quarter of fiscal 2023.broader economy.
● Net contracts per average active selling community decreasedincreased to 6.59.7 for the three months ended January 31, 20232024 compared to 13.1 in6.5 for the same period of the prior year. The declineincrease for the three months ended January 31, 2024 was due to the decreaseincrease in net contracts discussed above.
● Contract backlog decreased from 3,624 homes at January 31, 2022 to 2,028 homes at January 31, 2023 to 1,888 homes at January 31, 2024, and the dollar value of contract backlog decreased to $1.2$1.1 billion, a 37.6%5.6% decrease in dollar value compared to the prior year. The decreases were primarily attributed to lower sales and an increase in cancellations as buyers continue to try and navigate a difficult environment. Our gross contract cancellation rate of 30%the decrease in the first quarternumber of fiscal 2023 was an improvement sequentially from the fourth quarteractive selling communities of fiscal 2022 when it was 41%.
● Our cash position allowed us to spend $134.4 million on land purchases and land development during the three months ended118 at January 31, 2023 and still have total liquidity2024 as compared to 121 for the same period of $365.7 million, including $234.9 million of homebuilding cash and cash equivalents as of January 31, 2023 and $125.0 million of borrowing capacity under our senior secured revolving credit facility. the prior year.
Results of Operations
Total Revenues
Compared to the same period in the prior year, revenues increased (decreased) as follows:
Three Months Ended | Three Months Ended | |||||||||||||||||||||||||||||||
January 31, | January 31, | Dollar | Percentage | January 31, | January 31, | Dollar | Percentage | |||||||||||||||||||||||||
(Dollars in thousands) | 2023 | 2022 | Change | Change | 2024 | 2023 | Change | Change | ||||||||||||||||||||||||
Homebuilding: | ||||||||||||||||||||||||||||||||
Sale of homes | $ | 499,645 | $ | 551,366 | $ | (51,721 | ) | (9.4 | )% | $ | 573,636 | $ | 499,645 | $ | 73,991 | 14.8 | % | |||||||||||||||
Land sales and other revenues | 3,557 | 638 | 2,919 | 457.5 | % | 5,292 | 3,557 | 1,735 | 48.8 | % | ||||||||||||||||||||||
Financial services | 12,164 | 13,309 | (1,145 | ) | (8.6 | )% | 15,268 | 12,164 | 3,104 | 25.5 | % | |||||||||||||||||||||
Total revenues | $ | 515,366 | $ | 565,313 | $ | (49,947 | ) | (8.8 | )% | $ | 594,196 | $ | 515,366 | $ | 78,830 | 15.3 | % | |||||||||||||||
Homebuilding: Sale of Homes
For the three months ended January 31, 2023,2024, sale of homes revenues decreased 9.4%increased 14.8%, compared to the same period in the prior year. The sale of homes revenue decrease isincreased due to a 20.1% decrease13.3% increase in homes delivered, partially offset byas well as a 13.4%1.3% increase in the average price per home for the three months ended January 31, 2023,2024, compared with the prior year period. The average price per home increased to $532,671$539,639 in the three months ended January 31, 20232024 from $469,647$532,671 in the three months ended January 31, 2022.2023. The increase in average price was the result of increases in home prices in virtually all of our markets, primarily during the first half of fiscal 2022,increased demand due to improved market conditions, along with the geographic and community mix of our deliveries. Land sales are ancillary to our homebuilding operations and are expected to continue in the future. For further detail on changes in segment revenues see “Homebuilding: Operations by Segment” below. For further detail on land sales and other revenues, see “Homebuilding: Land Sales and Other Revenues” below.
Information on the sale of homes is set forth in the table below:
Three Months Ended January 31, | Three Months Ended January 31, | |||||||||||||||||||||||
(Dollars in thousands, except average sales price) | 2023 | 2022 | % Change | 2024 | 2023 | % Change | ||||||||||||||||||
Consolidated total: | ||||||||||||||||||||||||
Housing revenues | $ | 499,645 | $ | 551,366 | (9.4 | )% | $ | 573,636 | $ | 499,645 | 14.8 | % | ||||||||||||
Homes delivered | 938 | 1,174 | (20.1 | )% | 1,063 | 938 | 13.3 | % | ||||||||||||||||
Average sales price | $ | 532,671 | $ | 469,647 | 13.4 | % | $ | 539,639 | $ | 532,671 | 1.3 | % | ||||||||||||
Unconsolidated joint ventures (1) | ||||||||||||||||||||||||
Housing revenues | $ | 78,670 | $ | 63,620 | 23.7 | % | $ | 125,209 | $ | 78,670 | 59.2 | % | ||||||||||||
Homes delivered | 107 | 109 | (1.8 | )% | 206 | 107 | 92.5 | % | ||||||||||||||||
Average sales price | $ | 735,234 | $ | 583,670 | 26.0 | % | $ | 607,811 | $ | 735,234 | (17.3 | )% | ||||||||||||
(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.
Homebuilding: Land Sales and Other Revenues
Land sales and other revenues increased $2.9$1.7 million for the three months ended January 31, 20232024, compared to the same period in the prior year. Other revenues include interest income, which increased as a result of an increase inhigher rates on cash and cash equivalent accounts in the first quarter of fiscal 20232024 compared to the same period in the prior year. In addition, other revenues include income from contract cancellations where deposits have been forfeited due to contract terminations, which increased due to higher cancellations in the first quarter of fiscal 2023 compared to the first quarter of fiscal 2022. Revenue associated with land sales can vary significantly due to the mix of land parcels sold. There was one land sale in botheach of the three months ended January 31, 2024, and 2023, and 2022, and a $0.3 million increase in land sales revenue.revenues increased $1.0 million, during the three months ended January 31, 2024 compared to the same period in the prior year.
Homebuilding: Cost of Sales
Cost of sales includes expenses for consolidated housing and land and lot sales, including inventory impairments and land option write-offs (defined as “land charges” in the tables below). A breakout of such expenses for homebuilding and land and lot sales and the gross margins for each 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 U.S. 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 comparable 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 levels of impairments and debt.
Three Months Ended | Three Months Ended | |||||||||||||||
January 31, | January 31, | |||||||||||||||
(Dollars in thousands) | 2023 | 2022 | 2024 | 2023 | ||||||||||||
Sale of homes | $ | 499,645 | $ | 551,366 | $ | 573,636 | $ | 499,645 | ||||||||
Cost of sales, excluding interest expense and land charges | 390,963 | 427,873 | 448,448 | 390,963 | ||||||||||||
Homebuilding gross margin, before cost of sales interest expense and land charges | 108,682 | 123,493 | 125,188 | 108,682 | ||||||||||||
Cost of sales interest expense, excluding land sales interest expense | 15,001 | 13,724 | 19,898 | 15,001 | ||||||||||||
Homebuilding gross margin, after cost of sales interest expense, before land charges | 93,681 | 109,769 | 105,290 | 93,681 | ||||||||||||
Land charges | 477 | 99 | 302 | 477 | ||||||||||||
Homebuilding gross margin | $ | 93,204 | $ | 109,670 | $ | 104,988 | $ | 93,204 | ||||||||
Homebuilding gross margin percentage | 18.7 | % | 19.9 | % | 18.3 | % | 18.7 | % | ||||||||
Homebuilding gross margin percentage, before cost of sales interest expense and land charges | 21.8 | % | 22.4 | % | 21.8 | % | 21.8 | % | ||||||||
Homebuilding gross margin percentage, after cost of sales interest expense, before land charges | 18.8 | % | 19.9 | % | 18.4 | % | 18.8 | % | ||||||||
Cost of sales as a percentage of consolidated home sales revenues are presented below:
Three Months Ended | ||||||||||||||||
January 31, | Three Months Ended | |||||||||||||||
2023 | 2022 | January 31, | ||||||||||||||
2024 | 2023 | |||||||||||||||
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 | 68.0 | % | 69.0 | % | 67.9 | % | 68.0 | % | ||||||||
Commissions | 3.3 | % | 3.6 | % | 3.4 | % | 3.3 | % | ||||||||
Financing concessions | 2.3 | % | 0.8 | % | 2.5 | % | 2.3 | % | ||||||||
Overheads | 4.6 | % | 4.2 | % | 4.4 | % | 4.6 | % | ||||||||
Total cost of sales, before interest expense and land charges | 78.2 | % | 77.6 | % | ||||||||||||
Total cost of sales, excluding interest expense and land charges | 78.2 | % | 78.2 | % | ||||||||||||
Cost of sales interest | 3.0 | % | 2.5 | % | 3.4 | % | 3.0 | % | ||||||||
Land charges | 0.1 | % | 0.0 | % | 0.1 | % | 0.1 | % | ||||||||
Homebuilding gross margin percentage | 18.7 | % | 19.9 | % | 18.3 | % | 18.7 | % | ||||||||
Homebuilding gross margin percentage, before cost of sales interest expense and land charges | 21.8 | % | 22.4 | % | 21.8 | % | 21.8 | % | ||||||||
Homebuilding gross margin percentage, after cost of sales interest expense, before land charges | 18.8 | % | 19.9 | % | 18.4 | % | 18.8 | % | ||||||||
We sell a variety of home types in various communities, each yielding a different gross margin. The decrease inAs a result, depending on the mix of communities delivering homes, consolidated gross marginsmargin may fluctuate up or down. Total homebuilding gross margin percentage decreased to 18.3% for the three months ended January 31, 2023,2024 compared to 18.7% for the prior year. Total homebuilding gross margin percentage, before cost of sales interest expense and land charges was flat at 21.8% for the three months ended January 31, 2024 and 2023. The decrease in gross margin percentage for the three months ended January 31, 2024 was primarily due to the increase in ourincreased use of incentives and concessions, including additional mortgage interest rate buydowns, to make our homes more affordable.
Land and lot sale expenses and gross margins are set forth below:
Three Months Ended | Three Months Ended | |||||||||||||||
January 31, | January 31, | |||||||||||||||
(In thousands) | 2023 | 2022 | 2024 | 2023 | ||||||||||||
Land and lot sales | $ | 329 | $ | 34 | $ | 1,340 | $ | 329 | ||||||||
Cost of sales, excluding interest | 77 | 44 | 765 | 77 | ||||||||||||
Land and lot sales gross margin, excluding interest | 252 | (10 | ) | 575 | 252 | |||||||||||
Land and lot sales interest expense | 21 | 21 | - | 21 | ||||||||||||
Land and lot sales gross margin, including interest | $ | 231 | $ | (31 | ) | $ | 575 | $ | 231 | |||||||
Land sales are ancillary to our residential homebuilding operations and are expected to continue in the future but may fluctuate significantly.
Homebuilding: Inventory Impairments and Land Option Write-Offs
Inventory impairments and land option write-offs reflects certain inventories we have either written off or written down to their estimated fair value totaling $0.5$0.3 million and $0.1$0.5 million in expense for the three months ended January 31, 20232024 and 2022,2023, respectively. There were no inventory impairments during the three months ended January 31, 20232024 and 2022.2023. During the three months ended January 31, 20232024 and 2022,2023, we wrote-off residential land option, approval and engineering costs. Such write-offs occurred across our Northeast and Southeast segments in the first quarter of fiscal 2024, and across each of our segments in the first quarter of fiscal 2023 and 2022..
Homebuilding: Selling, General and Administrative
Homebuilding selling, general and administrative (“SGA”) expenses increased $5.2$1.0 million to $47.9$48.9 million for the three months ended January 31, 20232024 compared to the same period in the prior year. The increase for the three months ended January 31, 2024 compared to the same period in the prior year was primarily due to fees incurred on unused builder forward commitments we are offering to lower mortgage rates for our customers, which began in the second half of fiscal 2022. Also contributing to the increase in SGA was an increase in compensation expense relatedselling overhead from higher advertising and sales costs as we prepare to merit-based salary increases.open new communities.
Homebuilding: Key Performance Indicators
Net Contracts Per Average Active Selling Community
Net contracts per average active selling community for the three months ended January 31, 20232024 were 6.5 9.7 compared to 13.16.5 for the same period in the prior year. Our reported level of sales contracts (net of cancellations) were impacted by a decreasean increase in the pace of sales in all of our segments. As noted above, the current level ofcustomer demand for new homes is significantly lowerpartially due to high levelsthe availability of inflation, a sharp increase in mortgage rates from the prior year and continued concern about an economic recession. During the quarter, net contracts per average active selling community did increase from 1.5 in November to 3.0 in January as mortgage rates started to stabilize slightly during the period for potential home buyers. QMI homes.
Contract Cancellation Rates
The following table provides historical quarterly cancellation rates, which represents the number of cancelled contracts in the quarter divided by the number of gross sales contracts executed in the quarter, excluding unconsolidated joint ventures:
Quarter | 2023 | 2022 | 2021 | 2020 | 2019 | 2024 | 2023 | 2022 | 2021 | 2020 | |||||||||||||||||||||||||||||||||
First | 30 | % | 14 | % | 17 | % | 19 | % | 24 | % | 14 | % | 30 | % | 14 | % | 17 | % | 19 | % | |||||||||||||||||||||||
Second | 17 | % | 16 | % | 23 | % | 19 | % | 18 | % | 17 | % | 16 | % | 23 | % | |||||||||||||||||||||||||||
Third | 27 | % | 16 | % | 18 | % | 19 | % | 16 | % | 27 | % | 16 | % | 18 | % | |||||||||||||||||||||||||||
Fourth | 41 | % | 15 | % | 18 | % | 21 | % | 25 | % | 41 | % | 15 | % | 18 | % | |||||||||||||||||||||||||||
Quarter | 2024 | 2023 | 2022 | 2021 | 2020 | ||||||||||||||||
First | 10 | % | 16 | % | 8 | % | 11 | % | 14 | % | |||||||||||
Second | 16 | % | 9 | % | 9 | % | 20 | % | |||||||||||||
Third | 12 | % | 8 | % | 6 | % | 21 | % | |||||||||||||
Fourth | 13 | % | 13 | % | 6 | % | 14 | % | |||||||||||||
Quarter | 2023 | 2022 | 2021 | 2020 | 2019 | |||||||||||||||
First | 16 | % | 8 | % | 11 | % | 14 | % | 16 | % | ||||||||||
Second | 9 | % | 9 | % | 20 | % | 20 | % | ||||||||||||
Third | 8 | % | 6 | % | 21 | % | 16 | % | ||||||||||||
Fourth | 13 | % | 6 | % | 14 | % | 14 | % | ||||||||||||
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 generally been within what we believeDue to be a normal range, with fiscal 2021 and first half of fiscal 2022 cancellation rates, in particular, being below historical norms as a result of the strong market conditions. However, during the last three quarters, due to the sharp decline in gross sales and an increase in cancellations, our cancellation rate as a percentage of gross sales increased significantly to 27%, 41% and 30%, respectively, which is higher than our historical normal range. Additionally,solid backlog position, our cancellation rate as a percentage of beginning backlog for the first quarter of fiscal 20232024 was 16%10%, which is also abovebelow our historical normal range of 13%. When sales pace is increasing, the cancellation rate as a percentage of beginning backlog tends to lag the changes seen in our cancellation rate as a percentage of gross sales. Market conditions, although improving, still remain uncertain and it is difficult to predict what cancellation rates will be in the future.
Contract Backlog
Our consolidated sales contracts and homes in contract backlog, excluding unconsolidated joint ventures, by segment is set forth below:
Net Contracts for the | Net Contracts for the | |||||||||||||||||||||||||||||||
Three Months Ended | Contract Backlog as of | Three Months Ended | Contract Backlog as of | |||||||||||||||||||||||||||||
January 31, | January 31, | January 31, | January 31, | |||||||||||||||||||||||||||||
(Dollars in thousands) | 2023 | 2022 | 2023 | 2022 | 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||||||
Northeast: | ||||||||||||||||||||||||||||||||
Dollars | $ | 185,850 | $ | 261,577 | $ | 432,508 | $ | 761,929 | $ | 248,753 | $ | 185,850 | $ | 478,864 | $ | 432,508 | ||||||||||||||||
Number of homes | 311 | 468 | 782 | 1,395 | 383 | 311 | 668 | 782 | ||||||||||||||||||||||||
Southeast: | ||||||||||||||||||||||||||||||||
Dollars | $ | 82,191 | $ | 126,454 | $ | 319,344 | $ | 292,384 | $ | 68,671 | $ | 82,191 | $ | 267,294 | $ | 319,344 | ||||||||||||||||
Number of homes | 164 | $ | 228 | 525 | 545 | 110 | 164 | 530 | 525 | |||||||||||||||||||||||
West: | ||||||||||||||||||||||||||||||||
Dollars | $ | 147,087 | $ | 410,231 | $ | 425,669 | $ | 831,289 | $ | 306,928 | $ | 147,087 | $ | 365,172 | $ | 425,669 | ||||||||||||||||
Number of homes | 313 | 855 | 721 | 1,684 | 634 | 313 | 690 | 721 | ||||||||||||||||||||||||
Total: | ||||||||||||||||||||||||||||||||
Dollars | $ | 415,128 | $ | 798,262 | $ | 1,177,521 | $ | 1,885,602 | $ | 624,352 | $ | 415,128 | $ | 1,111,330 | $ | 1,177,521 | ||||||||||||||||
Number of homes | 788 | 1,551 | 2,028 | 3,624 | 1,127 | 788 | 1,888 | 2,028 | ||||||||||||||||||||||||
Contract backlog dollars decreased 37.6%5.6% as of January 31, 20232024 compared to January 31, 2022,2023, and the number of homes in backlog decreased 44.0%6.9% for the same period. The decrease in contract backlog dollars and number of homes for the three months endedas of January 31, 2024 compared to January 31, 2023 was primarily driven by our lower community count in the first quarter of fiscal 2024 as compared to the same period in the prior year was driven by the slower sales environment in the second half of fiscal 2022 and first quarter of fiscal 2023. year.
Homebuilding: Operations by Segment
Financial information relating to our homebuilding operations by segment was as follows:
Three Months Ended January 31, | Three Months Ended January 31, | |||||||||||||||||||||||||||||||
(Dollars in thousands, except average sales price) | 2023 | 2022 | Variance | Variance % | 2024 | 2023 | Variance | Variance % | ||||||||||||||||||||||||
Northeast | ||||||||||||||||||||||||||||||||
Homebuilding revenue | $ | 211,462 | $ | 174,945 | $ | 36,517 | 20.9 | % | $ | 191,440 | $ | 211,462 | $ | (20,022 | ) | (9.5 | )% | |||||||||||||||
Income before income taxes | $ | 28,512 | $ | 19,838 | $ | 8,674 | 43.7 | % | $ | 35,909 | $ | 28,512 | $ | 7,397 | 25.9 | % | ||||||||||||||||
Homes delivered | 371 | 358 | 13 | 3.6 | % | 332 | 371 | (39 | ) | (10.5 | )% | |||||||||||||||||||||
Average sales price | $ | 568,394 | $ | 487,930 | $ | 80,464 | 16.5 | % | $ | 572,256 | $ | 568,394 | $ | 3,862 | 0.7 | % | ||||||||||||||||
Southeast | ||||||||||||||||||||||||||||||||
Homebuilding revenue | $ | 73,794 | $ | 55,582 | $ | 18,212 | 32.8 | % | $ | 106,010 | $ | 73,794 | $ | 32,216 | 43.7 | % | ||||||||||||||||
Income before income taxes | $ | 11,623 | $ | 10,162 | $ | 1,461 | 14.4 | % | $ | 14,875 | $ | 11,623 | $ | 3,252 | 28.0 | % | ||||||||||||||||
Homes delivered | 141 | 104 | 37 | 35.6 | % | 195 | 141 | 54 | 38.3 | % | ||||||||||||||||||||||
Average sales price | $ | 522,950 | $ | 533,606 | $ | (10,656 | ) | (2.0 | )% | $ | 541,682 | $ | 522,950 | $ | 18,732 | 3.6 | % | |||||||||||||||
West | ||||||||||||||||||||||||||||||||
Homebuilding revenue | $ | 215,734 | $ | 321,470 | $ | (105,736 | ) | (32.9 | )% | $ | 278,457 | $ | 215,734 | $ | 62,723 | 29.1 | % | |||||||||||||||
Income before income taxes | $ | 9,889 | $ | 43,935 | $ | (34,046 | ) | (77.5 | )% | $ | 20,592 | $ | 9,889 | $ | 10,703 | 108.2 | % | |||||||||||||||
Homes delivered | 426 | 712 | (286 | ) | (40.2 | )% | 536 | 426 | 110 | 25.8 | % | |||||||||||||||||||||
Average sales price | $ | 504,777 | $ | 451,112 | $ | 53,665 | 11.9 | % | $ | 518,692 | $ | 504,777 | $ | 13,915 | 2.8 | % | ||||||||||||||||
Homebuilding Results by Segment
Northeast - Homebuilding revenue increased 20.9%decreased 9.5% for the three months ended January 31, 20232024 compared to the same period in the prior year. The decrease for the three months ended January 31, 2024 was attributed to a 10.5% decrease in homes delivered, while average sales price had a slight increase of 0.7%.
Income before income taxes increased $7.4 million to $35.9 million for the three months ended January 31, 2024 as compared to the same period in the prior year. This was primarily due to an $8.7 million increase in income from unconsolidated joint ventures and a slight increase in gross margin percentage.
Southeast – Homebuilding revenue increased 43.7% for the three months ended January 31, 2024 compared to the same period in the prior year. The increase for the three months ended January 31, 2023 was attributeddue to a 3.6%38.3% increase in homes delivered as well asand a 16.5%3.6% increase in average sales price. The increase in average sales price was the result of price increases in certain communities.
Income before income taxes increased $8.7$3.3 million to $28.5$14.9 million for the three months ended January 31, 2023 as2024 compared to the same period in the prior year. This was primarily due to the increase in homebuilding revenue discussed above, a $1.8 million decrease in SGA, andpartially offset by a slight increasedecrease in gross margin percentage.
SoutheastWest – Homebuilding revenue increased 32.8%29.1% for the three months ended January 31, 20232024 compared to the same period in the prior year. The increase was due to a 35.6%25.8% increase in homes delivered partially offset byand a 2.0% decrease2.8% increase in average sales price. The decreaseincrease in average sales price was the result of new communities delivering lower priced, smaller single-family homes and townhomes in lower-end submarkets of the segment for the three months ended January 31, 2023 compared to a mix of more deliveries in higher-end submarkets for the three months ended January 31, 2022. This decrease is partially offset by price increases in certain communities.
Income before income taxes increased $1.5$10.7 million to $11.6$20.6 million for the three months ended January 31, 20232024 compared to the same period in the prior year. This was primarily due to the increase in homebuilding revenue discussed above and ana slight increase in gross margin percentage.
West – Homebuilding revenue decreased 32.9% for the three months ended January 31, 2023 compared to the same period in the prior year. The decrease was due to a 40.2% decrease in homes delivered, partially offset by an 11.9% increase in average sales price. The increase in average sales price was the result of price increases in certain communities.
Income before income taxes decreased $34.0 million to $9.9 million for the three months ended January 31, 2023 compared to the same period in the prior year. The decrease is primarily due to the decrease in homebuilding revenue discussed above and a decrease in gross margin percentage.
Financial Services
Financial services consistconsists 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. For the three months ended January 31, 20232024 and 2022,2023, Federal Housing Administration and Veterans Administration (“FHA/VA”) loans represented 29.1%32.5% and 24.3%29.1%, respectively, of our total loans. For the three months ended January 31, 20232024 compared to the same period in the prior year, our conforming conventional loan originations as a percentage of our total loans decreased from 74.6%70.1% to 70.1%, respectively.67.4%. The origination of loans which exceed conforming conventions decreased from 0.8% to 0.8%0.1% for the three months ended January 31, 20232024 compared to 1.1% for the same period in the prior year.
During the three months ended January 31, 20232024 and 2022,2023, financial services provided $3.1$3.8 million and $2.9$3.1 million of income before income taxes, respectively. The slight increase in financial services income before income taxes was primarily due tofor the decrease in total financial services costs from closing less loans in the first quarter of fiscal 2023three months ended January 31, 2024 compared to the same period in the prior year andwas primarily due to an increase in the basis point spread between theamount of loans originated and the implied rate from our sale of the loans.closed. In the market areasmarkets served by our wholly owned mortgage banking subsidiaries, 63.3%78.8% and 64.1%63.3% of our noncashnon-cash homebuyers obtained mortgages originated by these subsidiaries during the three months ended January 31, 20232024 and 2022,2023, respectively.
Corporate General and Administrative
Corporate general and administrative expenses include 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 decreasedincreased to $25.5$37.1 million for the three months ended January 31, 2024 compared to $25.5 million for the three months ended January 31, 2023 compared to $29.4 millionThe increase for the three months ended January 31, 2022,2024 was primarily due to a decreasean increase in compensation expense, mainly related to the grants of phantom stock awards under our 2019 and 2023 long-term incentive plan, for which expense is impacted by the change in our stock price each period. During the first quarter of fiscal 2023,2024, equity awards including phantom stock awards were granted under a new Long-Term Incentive Program (the “2023 LTIP”) that consistslong-term incentive program, which added additional expense compared to the first quarter of 50% cash-settled phantom shares and 50% equity-settled shares. The 2023 LTIP included phantom shares based on analysis that demonstrated a higher likelihood of dilution to our book value per share if the entire award was settled in shares rather than cash via phantom shares.fiscal 2023.
Other Interest
Other interest increased $1.7decreased $4.6 million to $10.5 million for the three months ended January 31, 20232024 compared to the same period in the prior year. 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. Other interest increaseddecreased for the three months ended January 31, 2024 primarily due to additional inventory financing resulting from an increasea reduction in average inventory not owned.principal of our senior notes as a result of redemptions during fiscal 2023 and the first quarter of fiscal 2024.
Gain on Extinguishment of Debt, Net
On November 15, 2023, K. Hovnanian redeemed in full all of the $113.5 million aggregate principal amount of its 10.0% Senior Secured 1.75 Lien Notes due 2025 for a redemption price of $119.2 million, which included accrued and unpaid interest. This redemption resulted in a gain on extinguishment of debt of $1.4 million for the three months ended January 31, 2024, including the write-off of unamortized premium, debt issuance costs and fees.
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 $1.0increased $7.8 million to $7.2$15.0 million for the three months ended January 31, 20232024. The increase for three months ended January 31, 2024 compared to the same period of the prior year was primarily due to the recognition of additional income from two of our unconsolidated joint ventures; because the joint venture partner achieved certain return hurdles, the Company was able to recognize a higher share of the unconsolidated joint ventures' income than it had in the prior year.
Income Taxes
Income tax expense for the three months ended January 31, 2024 was $8.7 million, compared to a benefit of $0.7 million, for the same period in the prior year. The decreaseexpense was primarily due to receivingdriven by federal and state tax expense on income before income taxes and permanent differences, partially offset by the final distribution from onegeneration of energy efficient home tax credits. The federal tax expense is not paid in cash as it is offset by the use of our unconsolidated joint ventures in the first quarter of fiscal 2022.
Income Taxes
existing net operating loss carryforwards. The total income tax benefit for the three months ended January 31, 2023 was $0.7 million. The benefit was primarily due to $6.2 million in energy efficient home tax credits offset by federal and state tax expense as a result of pretax income. The total income tax expense for the three months ended January 31, 2022 was $10.6 million. The expense was primarily due to federal and state tax expense recorded as a result of our pretax income. The federal tax expense is not paid in cash as it is offset by the use of our existing NOL carryforwards.before income taxes.
Capital Resources and Liquidity
Overview
Our total liquidity at January 31, 20232024 was $365.7$313.1 million, including $234.9$183.1 million in homebuilding cash and cash equivalents and $125.0$125.0 million of borrowing capacity under our senior secured revolving credit facility. We believe that our cash on hand together with available borrowings on our senior secured revolving credit facility will be sufficient for at least the next 12 months to finance our working capital requirements.
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. We may not be able to obtain desired financing 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 Cash Flow Activities
We spent $134.4$230.4 million on land and land development during the first quarter of fiscal 2023.2024, along with $113.5 million for the redemption of our 10.0% Senior Secured 1.75 Lien Notes due 2025. After land and land development spending and all other operating activities, including revenue received from deliveries, we used cash used infor operations was $31.2of $89.0 million. During the first quarter of fiscal 2023,2024, cash used in investing activities was $23.3$4.1 million, primarily due to a new unconsolidated joint venture entered into during the period, along with the acquisition of certain fixed assets,spending on capitalized software, partially offset by distributions from existing unconsolidated joint ventures. Cash used in financing activities was $48.4$146.3 million during the first quarter of fiscal 2023,2024, which in addition to the $113.5 million debt redemption mentioned above, was primarily due to net payments related to our mortgage warehouse lines of credit, net payments for nonrecourse mortgageland banking financings and model sale leaseback financings, repurchases of common stock and the payment of preferred dividends, partially offset by net proceeds from land banking financings during the period.for nonrecourse mortgage financings. We intend to continue to use nonrecourse mortgages, model sale leasebacks, joint ventures, and, subject to covenant restrictions in our debt instruments, land banking programs as our business needs dictate.
Our cash uses during the three months ended January 31, 20232024 and 20222023 were for operating expenses, land purchases, land deposits, land development, construction spending, model sale leasebacks,land banking transactions, state income taxes, debt reductions, interest payments, preferred dividends equity repurchases,and litigation matters and investments in unconsolidated joint ventures.matters. During these periods, we provided for our cash requirements from available cash on hand, housing and land sales, land bankingnonrecourse mortgage transactions, income from unconsolidated joint ventures, financial service revenues and other revenues.
Our net income historically does not approximate cash flow from operating activities. The difference between net income and cash flow from operating activities is primarily caused by changes in inventory levels together with changes in receivables, prepaid expenses and other assets, mortgage loans held for sale, accrued interest, deferred income taxes, accounts payable and other liabilities, and noncash charges relating to depreciation, stock compensation and impairments. When we are expanding our operations, inventory levels, prepaid expenses 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, prepaid expenses 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 January 31, 20232024 and October 31, 2022,2023, were as follows:
January 31, | October 31, | January 31, | October 31, | |||||||||||||
(In thousands) | 2023 | 2022 | 2024 | 2023 | ||||||||||||
Senior Secured Notes | $ | 853,093 | $ | 853,093 | $ | 655,000 | $ | 768,502 | ||||||||
Senior Notes | $ | 180,710 | $ | 180,710 | 180,710 | 180,710 | ||||||||||
Senior Unsecured Term Loan Credit Facility due February 1, 2027 | $ | 39,551 | $ | 39,551 | 39,551 | 39,551 | ||||||||||
Senior Secured 1.75 Lien Term Loan Credit Facility due January 31, 2028 | $ | 81,498 | $ | 81,498 | 81,498 | 81,498 | ||||||||||
Senior Secured Revolving Credit Facility (1) | $ | - | $ | - | - | - | ||||||||||
Less: Net (discounts), premiums and unamortized debt issuance costs | $ | (9,591 | ) | $ | (8,305 | ) | (22,142 | ) | (18,770 | ) | ||||||
Total senior notes and credit facilities, net of discounts, premiums and unamortized debt issuance costs | $ | 1,145,261 | $ | 1,146,547 | $ | 934,617 | $ | 1,051,491 | ||||||||
(1) At January 31, 2023,2024, provides for up to $125.0$125.0 million in aggregate amount of senior secured first lien revolving loans. In the fourth quarter of fiscal 2022, we amended our Secured Credit Facility, which amendments became effective in the first quarter of fiscal 2023.As amended, theThe revolving loans thereunder have a maturity of June 30, 20242026 and borrowings bear interest, at K. Hovnanian’s option, at either (i) a term secured overnight financing rate (subject to a floor of 1.00%3.00%) plus an applicable margin of 4.50%4.50% or (ii) an alternate base rate (subject to a floor of 4.00%) plus an applicable margin of 3.50%3.50%. In addition, K. Hovnanian will pay an unused commitment fee on the undrawn revolving commitments at a rate of 1.00%1.00% per annum.
Except for K. Hovnanian, the issuer of the notes and borrower under the Credit Facilities (as defined below)credit agreements governing our term loans and revolving credit facilities (collectively, the "Credit Facilities"), 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 and senior notes outstanding at January 31, 2023 (except for the 8.0% Senior Notes due 2027 which are not guaranteed by K. Hovnanian at Sunrise Trail III, LLC, a wholly-owned subsidiary of the Company)2024 (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 January 31, 20232024 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, 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 (the "Unsecured Term Loans") made under the Senior Unsecured Term Loan Credit Facility (defined below)due February 1, 2027, loans (the “Unsecured"Secured Term Loans”Loans"), loans made under the Senior Secured 1.75 Lien Term Loan Credit Facility (defined below) (the “Secured Term Loans”)due January 31, 2028, and loans (the "Secured Revolving Loans") made under the Senior Secured Revolving Credit Agreement (as defined below) (the “Secured Revolving Loans”)due June 30, 2026, 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 January 31, 2023,2024, 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 includingand dividends (in eachthe case of certain of such case,payments, our secured debt leverage ratio must also be less than 4.0 to 1.0), and from incurring indebtedness other than certain permitted indebtedness and nonrecourse indebtedness. Beginning as of October 31, 2021, as a result of our improved operating results, our fixed coverage ratio was above 2.0 to 1.0 and our secured debt leverage ratio was below 4.0 to 1.0, therefore we were no longer restricted from paying dividends. As such, we made dividend payments of $2.7 million to preferred shareholders in every quarter since the first quarter of both fiscal 2023 and 2022. As discussed above,We currently believe our ratios will permit us to continue to make dividend payments on our preferred stock. However, with general economic uncertainty, it is difficult to predict long-term market conditions continue to adversely impactand the effects on our business and it is therefore likely that by the end of fiscal 2023if and when we willmay be restricted under our Debt Instruments from continuing to pay dividends on our Series A preferred stock. Dividends on the Series A preferred stock are not cumulative and, accordingly, if for any reason we do not declare a dividend on the Series A preferred stock for a quarterly dividend period (regardless of our availability of funds), holders of the Series A Preferred Stock will have no right to receive a dividend for that period, and we will have no obligation to pay a dividend for that period.
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 (for example, we redeemed $100 million aggregate principal amount of our senior secured notes during the second quarter of fiscal 2022).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 or equity purchases and/or exchanges 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, 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.
See Note 12 to the Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q for a further discussion of K. Hovnanian’s Credit Facilities, 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 $133.9$99.6 million and $144.8$91.5 million, (netnet of debt issuance costs)costs, at January 31, 20232024 and October 31, 2022,2023, respectively, which are secured by the related real property, including any improvements, with an aggregate book value of $416.1$313.5 million and $418.9$331.6 million, respectively. The weighted-average interest rate on these obligations was 7.7%8.7% and 6.7%8.5% at January 31, 20232024 and October 31, 2022,2023, 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. 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 January 31, 20232024 and October 31, 2022,2023, we had an aggregate of $58.4$83.8 million and $94.3$110.8 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.
Equity
On September 1, 2022, our Board of Directors terminated our priorauthorized a repurchase program and authorized a new program for the repurchase of up to $50.0 million of our Class A common stock. Under the new repurchase program, repurchases may be made from time to time in open market transactions, in privately negotiated transactions or otherwise. The timing and the actual dollar amount repurchased will depend on a variety of factors, including legal requirements, price, future tax implications and economic and market conditions. The repurchase program may be changed, suspended or discontinued at any time and does not have a specified expiration date.
There were no shares repurchased during the three months ended January 31, 2024. During the three months ended January 31, 2023, we repurchased 118,478 shares under the new stock repurchase program, with a market value of $4.8$4.8 million, or $40.51$40.51 per share, which were added to "Treasury stock" on our Condensed Consolidated Balance SheetsSheet as of January 31, 2023. There were no shares repurchased during the three months ended As of January 31, 2022. As of January 31, 2023, $33.02024, $33.0 million of our Class A common stock is available to be purchased under the stock repurchase program.
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. During both the three months ended January 31, 2023 and 2022 weWe paid dividends of $2.7 million on the Series A preferred stock.stock for each of the three months ended January 31, 2024 and 2023.
Unconsolidated Joint Ventures
We have investments in unconsolidated joint ventures in various markets where our homebuilding operations are located. Investments in and advances to unconsolidated joint ventures increased $26.1$12.7 million to $101.0$110.6 million at January 31, 20232024 compared to October 31, 2022.2023. The increasechange was primarily due to a new joint venture formedour share of income recognized in the first quarter of fiscal 2023, along with income recorded from onetwo of our existing unconsolidated joint ventures increasing during the period.period, partially offset by partner distributions. As of January 31, 20232024 and October 31, 2022,2023, we had investments in sevensix and sixseven 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.
Inventories
Total inventory, excluding consolidated inventory not owned, decreased $18.6increased $141.1 million to $1.2$1.3 billion at January 31, 20232024 compared to October 31, 2022.2023. Total inventory, excluding consolidated inventory not owned, decreasedincreased by $67.2 million in the Northeast by $54.5 million, partially offset by increases of $17.2West, $40.4 million in the Southeast and $18.7$33.5 million in the West.Northeast. The net decrease wasincreases were primarily attributable to home deliveries, along with inventory contributed to a new joint venture, partially offset by new land purchases and land development during the period.period, partially offset by home deliveries. 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 January 31, 20232024 are expected to be delivered during the next six to nine months.
Consolidated inventory not owned, which consists of options related to land banking and model financing, increased $6.4decreased $26.7 million from October 31, 20222023 to January 31, 2023.2024. The increasedecrease was primarily due to an increasea decrease in land banking transactions partially offset by a decreaseand in the sale and leaseback of certain model homes during the period. We have land banking arrangements, whereby we sell land parcels to land bankers and they provide us with an option to purchase finished lots on a predetermined schedule. On our Condensed Consolidated Balance Sheet, at January 31, 2023,2024, inventory of $267.6$161.5 million was recorded to “Consolidated inventory not owned,” with a corresponding amount of $160.3$78.4 million (net of debt issuance costs) recorded to “Liabilities from inventory not owned” for the amount of net cash received from land banking transactions. We also 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. On our Condensed Consolidated Balance Sheet, at January 31, 2023,2024, inventory of $47.4$36.6 million was recorded to “Consolidated inventory not owned,” with a corresponding amount of $49.3$36.3 million (net of debt issuance costs) recorded to “Liabilities from inventory not owned” for the amount of net cash received from sale and leaseback transactions.
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 January 31, 2023, we had mothballed land in two communities. The book value associated with these communities included on our Condensed Consolidated Balance Sheet in “Land and land options held for future development or sale” at January 31, 2023 was $1.4 million, which was net of impairment charges recorded in prior periods of $20.3 million. During the first quarter of fiscal 2023, we did not mothball any additional communities, nor did we sell or re-activate any 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 $10.2 million of our total inventories held for sale at January 31, 2023, and are reported at the lower of carrying amount or fair value less costs to sell. There were no inventories held for sale at October 31, 2022. 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 decreaseincrease in total home sites available at January 31, 20232024 compared to October 31, 20222023 is attributable to acquiring new land parcels during the period, partially offset by delivering homes and terminating certain option agreements during the period, partially offset by acquiring new land parcels..
Active | Proposed | Active Selling | Proposed | |||||||||||||||||||||||||||||
Active | Communities | Developable | Total | Active Selling | Communities | Developable | Total | |||||||||||||||||||||||||
Communities(1) | Homes | Homes | Homes | Communities(1) | Homes | Homes | Homes | |||||||||||||||||||||||||
January 31, 2023: | ||||||||||||||||||||||||||||||||
January 31, 2024: | ||||||||||||||||||||||||||||||||
Northeast | 33 | 3,928 | 10,269 | 14,197 | 43 | 4,069 | 10,913 | 14,982 | ||||||||||||||||||||||||
Southeast | 21 | 1,776 | 1,873 | 3,649 | 12 | 1,100 | 5,561 | 6,661 | ||||||||||||||||||||||||
West | 67 | 6,570 | 4,956 | 11,526 | 63 | 6,731 | 5,216 | 11,947 | ||||||||||||||||||||||||
Consolidated total | 121 | 12,274 | 17,098 | 29,372 | 118 | 11,900 | 21,690 | 33,590 | ||||||||||||||||||||||||
Unconsolidated joint ventures (2) | 12 | 3,680 | 236 | 3,916 | 19 | 2,591 | 2,609 | 5,200 | ||||||||||||||||||||||||
Owned | 6,153 | 2,181 | 8,334 | 5,963 | 1,746 | 7,709 | ||||||||||||||||||||||||||
Optioned | 5,872 | 14,917 | 20,789 | 5,923 | 19,944 | 25,867 | ||||||||||||||||||||||||||
Construction to permanent financing lots | 249 | - | 249 | 14 | - | 14 | ||||||||||||||||||||||||||
Consolidated total | 12,274 | 17,098 | 29,372 | 11,900 | 21,690 | 33,590 | ||||||||||||||||||||||||||
Active Selling | Proposed | |||||||||||||||
Active Selling | Communities | Developable | Total | |||||||||||||
Communities(1) | Homes | Homes | Homes | |||||||||||||
October 31, 2023: | ||||||||||||||||
Northeast | 41 | 4,096 | 10,065 | 14,161 | ||||||||||||
Southeast | 12 | 1,247 | 4,688 | 5,935 | ||||||||||||
West | 60 | 6,550 | 5,108 | 11,658 | ||||||||||||
Consolidated total | 113 | 11,893 | 19,861 | 31,754 | ||||||||||||
Unconsolidated joint ventures (2) | 18 | 2,797 | 2,609 | 5,406 | ||||||||||||
Owned | 6,114 | 1,223 | 7,337 | |||||||||||||
Optioned | 5,751 | 18,638 | 24,389 | |||||||||||||
Construction to permanent financing lots | 28 | - | 28 | |||||||||||||
Consolidated total | 11,893 | 19,861 | 31,754 | |||||||||||||
Active | Proposed | |||||||||||||||
Active | Communities | Developable | Total | |||||||||||||
Communities(1) | Homes | Homes | Homes | |||||||||||||
October 31, 2022: | ||||||||||||||||
Northeast | 32 | 4,296 | 10,726 | 15,022 | ||||||||||||
Southeast | 21 | 1,898 | 2,823 | 4,721 | ||||||||||||
West | 68 | 6,909 | 5,148 | 12,057 | ||||||||||||
Consolidated total | 121 | 13,103 | 18,697 | 31,800 | ||||||||||||
Unconsolidated joint ventures (2) | 13 | 3,355 | - | 3,355 | ||||||||||||
Owned | 6,634 | 2,388 | 9,022 | |||||||||||||
Optioned | 6,187 | 16,309 | 22,496 | |||||||||||||
Construction to permanent financing lots | 282 | - | 282 | |||||||||||||
Consolidated total | 13,103 | 18,697 | 31,800 | |||||||||||||
(1) | Active selling 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 selling 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 selling communities and substantially completed communities.
January 31, 2023 | October 31, 2022: | |||||||||||||||||||||||||||||||||||||||||||||||
January 31, 2024 | October 31, 2023 | |||||||||||||||||||||||||||||||||||||||||||||||
Unsold | Unsold | |||||||||||||||||||||||||||||||||||||||||||||||
Homes | Models | Total | Homes | Models | Total | Unsold | Unsold | |||||||||||||||||||||||||||||||||||||||||
Homes | Models | Total | Homes | Models | Total | |||||||||||||||||||||||||||||||||||||||||||
Northeast | 76 | 36 | 112 | 92 | 32 | 124 | 148 | 42 | 190 | 159 | 41 | 200 | ||||||||||||||||||||||||||||||||||||
Southeast | 71 | 5 | 76 | 72 | 5 | 77 | 113 | 18 | 131 | 99 | 16 | 115 | ||||||||||||||||||||||||||||||||||||
West | 521 | 22 | 543 | 516 | 22 | 538 | 479 | 30 | 509 | 570 | 24 | 594 | ||||||||||||||||||||||||||||||||||||
Total | 668 | 63 | 731 | 680 | 59 | 739 | 740 | 90 | 830 | 828 | 81 | 909 | ||||||||||||||||||||||||||||||||||||
Started or completed unsold homes and models per active selling communities (1) | 5.5 | 0.5 | 6.0 | 5.6 | 0.5 | 6.1 | 6.3 | 0.7 | 7.0 | 7.3 | 0.7 | 8.0 | ||||||||||||||||||||||||||||||||||||
(1) | Active selling communities (which are communities that are open for sale with ten or more home sites available) were |
Financial Services Assets and Liabilities
Financial services assets decreased $43.2$19.0 million to $112.8$149.6 million at January 31, 2023,2024, compared to October 31, 2022.2023. Financial services assets consist primarily of residential mortgage receivables held for sale of which $70.9$96.5 million and $108.6$127.6 million at January 31, 20232024 and October 31, 2022,2023, respectively, were being temporarily warehoused and are awaiting sale in the secondary mortgage market. The decrease in mortgage loans held for sale from October 31, 20222023 was primarily related to a decrease in the volume of loans originated during the first quarter of fiscal 20232024 compared to the fourth quarter of fiscal 2022,2023, partially offset by a slightan increase in the average loan value.
Financial services liabilities decreased $44.5$19.8 million to $91.1$128.4 million at January 31, 20232024 compared to October 31, 2022.2023. The decrease was primarily due to a decrease in amounts outstanding under our mortgage warehouse lines of credit and directly correlates to the decrease in the volume of mortgage loans held for sale during the period.
Inflation
Inflation
The annual rate of inflation in the United States hit 6.4%was 3.1% in January 2023, nearly the highest in more than three decades,31, 2024, as measured by the Consumer Price Index.Index, which is much improved from its peak of 9.1% in June 2022. Inflation has a long-term effect, because higher costs for land, materials and labor results in increasing sales prices of our homes. Historically, 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, could 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 12 months. Construction costs for residential buildings represented approximately 57.7%53.2% of our homebuilding cost of sales for the three months ended January 31, 2023.2024.
For the first quarter of fiscal 2023, elevated inflation continues to create economic uncertainty and have an impact on interest rates, which in turn adversely impacted our home sales.
Critical Accounting Policies
As disclosed in our Annual Report on Form 10-K for the fiscal year ended October 31, 2022,2023, our most critical accounting policies relate to inventories, unconsolidated joint ventures, warranty and construction defect reserves and income taxes. Since October 31, 2022,2023, there have been no significant changes to those critical accounting policies.
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 a result of a variety of factors. Such risks, uncertainties and other factors include, but are not limited to:
● | Changes in general and local economic, industry and business conditions and impacts of a significant homebuilding downturn; | |
● | Shortages in, and price fluctuations of, raw materials and labor, including due to geopolitical events, 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; | |
● | Fluctuations in interest rates and the availability of mortgage | |
● | 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; | |
● | 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; | |
● | Increases in inflation; | |
● | 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 regulation, 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; | |
| ● | Loss of key management personnel or failure to attract qualified personnel; and | |
● |
|
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, 2022.2023. 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.
Substantially all of our long-term debt requires fixed interest payments and we have limited exposure to variable 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 are able to 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 significant. We do not use financial instruments to hedge interest rate risk except with respect to mortgage loans. The following table sets forth as of January 31, 2023,2024, 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 January 31, 2023 by Fiscal Year of Maturity Date | Long-Term Debt as of January 31, 2024 by Fiscal Year of Maturity Date | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
FV at | FV at | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | 2023 | 2024 | 2025 | 2026 | 2027 | Thereafter | Total | 1/31/23 | 2024 | 2025 | 2026 | 2027 | 2028 | Thereafter | Total | 1/31/2024 | ||||||||||||||||||||||||||||||||||||||||||||||||
Long term debt(1): | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Fixed rate | $ | - | $ | - | $ | - | $ | 943,683 | $ | 39,551 | $ | 171,618 | $ | 1,154,852 | $ | 1,111,716 | $ | - | $ | - | $ | 90,590 | $ | 39,551 | $ | 306,498 | $ | 520,120 | $ | 956,759 | $ | 978,321 | ||||||||||||||||||||||||||||||||
Weighted average interest rate | - | % | - | % | - | % | 10.10 | % | 5.00 | % | 7.37 | % | 9.52 | % | - | % | - | % | 13.5 | % | 5.00 | % | 8.53 | % | 10.58 | % | 9.97 | % | ||||||||||||||||||||||||||||||||||||
| (1) | Does not include: |
| ● the mortgage warehouse lines of credit made under our Master Repurchase Agreements; | |
| ● |
| ● our |
.
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 January 31, 2023.2024. 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 January 31, 20232024 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
| 46 |
For information with respect to our legal proceedings, see 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.PROCEEDS, AND ISSUER PURCHASES OF EQUITY SECURITIES.
Recent Sales of Unregistered Equity Securities
None.
Issuer Purchases of Equity Securities
The table below sets forth information regardingNo repurchases byof our common stock were made during the three months ended January 31, 2024. For a description of the Company's stock repurchase program, see "Part I. Financial Information - Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations – Capital Resources and Liquidity – Equity".
During the three months ended January 31, 2024, no director or officer (as defined in Rule 16a-1(f) of the Exchange Act) of the Company adopted or terminated a "Rule 10b5-1 trading arrangement" or "non-Rule 10b5-1 trading arrangement," as each term is defined in Item 408(a) of its common stock during the periods indicated:
Total Number of Shares Purchased | Average Price Paid Per Share | Total Number of Shares Purchased of Part of Publicly Announced Plans or Program (1) | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Program (1) | |||||
November 1, 2022 through November 30, 2022 | 118,475 | $ 40.51 | 118,475 | $ 32,977,920 | ||||
December 1, 2022 through December 31, 2022 | - | $ - | - | $ 32,977,920 | ||||
January 1, 2023 through January 31, 2023 | - | $ - | - | $ 32,977,920 |
(1) On September 1, 2022, the Board terminated our prior repurchase program and authorized a new program for the repurchase of up to $50.0 million of our Class A common stock. Under the new repurchase program, repurchases may be made from time to time in open market transactions, in privately negotiated transactions or otherwise. The timing and the actual dollar amount repurchased will depend on a variety of factors, including legal requirements, price, future tax implications and economic and market conditions. The repurchase program may be changed, suspended or discontinued at any time and does not have a specified expiration date.Regulation S-K.
EXHIBITS | |
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3(a) | |
3(b) | |
4(a) | |
4(b) | |
4(c) | |
4(d) | |
4(e) | |
4(f) | |
4(g) | |
| 4(h) | |
| 10(a)* | Form of |
| 10(b)* | Form of |
| 10(c)* | |
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) | |
32(b) | |
101
| The following financial information from our Quarterly Report on Form 10-Q for the quarter ended January 31, |
| 104 | Cover Page from our Quarterly Report on Form 10-Q for the three months ended January 31, |
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| * Management contracts or compensatory plans or arrangements. |
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: | March | |
/s/ | ||
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Chairman of the Board, Chief Executive | ||
(Principal Executive Officer) | ||
DATE: | March 1, 2024 | |
/s/ BRAD O’CONNOR | ||
Brad O’Connor | ||
Chief Financial Officer and | ||
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