HOVNANIAN ENTERPRISES INC MANAGEMENT REPORT OF FINANCIAL POSITION AND RESULTS OF OPERATIONS (Form 10-Q)
Hovnanian Enterprises, Inc. ("HEI") conducts all of its homebuilding and financial services operations through its subsidiaries (references herein to the "Company," "we," "us" or "our" refer to HEI and its consolidated subsidiaries and should be understood to reflect the consolidated business of HEI's subsidiaries).
Key performance indicators
The following key performance indicators are commonly used in the homebuilding
industry and by management as a means to better understand our operating
performance and trends affecting our business and compare our performance with
the performance of other homebuilders. We believe these key performance
indicators also provide useful information to investors in analyzing our
performance:
? Net contracts is a volume indicator which represents the number of new
contracts executed during the period for the purchase of homes, less
cancellations of contracts in the same period. The dollar value of net
contracts represent the dollars associated with the net contracts executed in
period. These values are an indicator of potential future revenues;
? The order book is a volume indicator that represents the number of dwellings
which are under contract, but not yet delivered on the date indicated. The
the dollar value of the backlog represents the dollar amount of the houses
backlog. These values are an indicator of potential future earnings;
? Active selling communities is a volume indicator that represents the number
communities that are open for sale with ten or more home sites available
at the end of a period. We identify communities based on product type;
there are therefore sometimes several communities on the same land site. These
values are an indicator of potential revenues;
? Net contracts per average active community of sellers are used to indicate the
rate at which homes are sold (put into contract) in active sale
communities and is calculated by dividing the number of net contracts in a
period by the average number of active sales communities during the same period.
Sales pace is an indicator of market strength and demand; and
? The contract termination rate is a volume indicator that represents the number
of sales contracts terminated over the period divided by the number of gross contracts
sales contracts entered into during the period. Contract termination rate as
the percentage of backlog is calculated by dividing the number of cancellations
contracts for the period by the order book at the start of the
period. Cancellation rates compared to previous periods can be an indicator of
market strength or weakness.
Overview
Market Conditions
The demand for new and existing homes is dependent on a variety of demographic
and economic factors, including job and wage growth, household formation,
consumer confidence, mortgage financing, interest rates, inflation and overall
housing affordability. In general, at the start of fiscal year 2020, factors
including rising levels of household formation, a constrained supply of new and
used homes, wage growth, strong employment conditions and mortgage rates that
were low by historical standards were contributing to improving conditions for
new home sales.
In March 2020 , as a result of the initial impact of COVID-19, we experienced
adverse business conditions, including a slowdown in customer traffic and sales
pace and an increase in cancellations. However, beginning in May 2020 , the
homebuilding market rapidly improved, due to what we believe is a combination of
factors including low interest rates, low inventory levels of existing homes and
a general desire for more indoor and outdoor space. During the third quarter and
continuing through the fourth quarter of fiscal 2020, we returned to our normal
activities with respect to land purchases, land development and resuming the
construction of unsold homes. As a result, our operating metrics improved
significantly in fiscal 2020 as compared to fiscal 2019, and improved even
further in fiscal 2021. However, since early January 2022 , 30-year mortgage
rates have increased rapidly from 3.2% to 5.3% at the end of July 2022 . While
these rates are still low by historical standards, the increase in rates, along
with record high inflation levels and consumer fears of an economic recession,
has had a negative impact on our net contracts and net contracts per average
active selling community. Despite the decrease in net contracts, our revenues,
gross margin percentage and pretax profit results have continued to show strong
improvement over the prior year through July 31, 2022 , though it is difficult to
predict the impact of these and other factors on our future results which may be
negatively impacted.
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Table of Contents Operating Results
The table below highlights our overall positive operating results for the three and nine months ended
? For the three and nine months endedJuly 31, 2022 , sale of homes revenues increased 11.1% and 4.2%, respectively, as compared to the same periods of the prior year, primarily resulting from an increase in average prices of 17.8% and 19.1%, respectively, as home prices increased in virtually all of our markets, along with the geographic and community mix of our deliveries, partially offset by respective decreases of 5.7% and 12.5% in the number of home deliveries. The decreases in home deliveries were due in part to the prior year deliveries being unusually high as a result of the unsustainable and extremely strong sales pace in late fiscal 2020 and early fiscal 2021, and also due to supply chain challenges extending construction cycle times and delaying some deliveries. ? Gross margin dollars increased 33.2% and 27.2% for the three and nine months endedJuly 31, 2022 , respectively, as compared to the same period of the prior year, as a result of the increase in gross margin percentage to 23.1% for the three months endedJuly 31, 2022 from 19.2% for the three months endedJuly 31, 2021 , and increased to 22.3% for the nine months endedJuly 31, 2022 from 18.3% for the nine months endedJuly 31, 2021 . Gross margin percentage, before cost of sales interest expense and land charges, increased from 22.1% and 21.4% for the three and nine months endedJuly 31, 2021 to 26.3% and 25.3% for the three and nine months endedJuly 31, 2022 . The increases were primarily due to price increases in virtually all of our markets, along with the mix of communities delivering homes in each period. ? Selling, general and administrative costs (including corporate general and administrative expenses) ("Total SGA") was$74.9 million , or 9.8% of total revenues, in the three months endedJuly 31, 2022 compared with$60.3 million , or 8.7% of total revenues, in the three months endedJuly 31, 2021 . For the nine months endedJuly 31, 2022 , Total SGA was$215.3 million , or 10.6% of total revenues, compared with$206.6 million , or 10.5% of total revenues, in the same period of the prior fiscal year. Such costs increased$14.6 million and$8.7 million for the three and nine months endedJuly 31, 2022 , respectively, as compared to the same periods of the prior year. Excluding the impact in each of the three months endedJuly 31, 2022 and 2021 related to the grants of phantom stock awards under our 2019 Long Term Incentive Plan ("2019 LTIP"), SGA as a percentage of total revenues would have been 9.7% for each period. Had equity shares rather than phantom shares been utilized for the 2019 LTIP, there would not have been any expenses or benefit related to the movement in our stock price. ? Other interest decreased to$9.6 million and$35.4 million for the three and nine months endedJuly 31, 2022 , respectively, from$19.2 million and$65.2 million for the three and nine months endedJuly 31, 2021 , respectively, as we incurred less interest and had less debt in excess of inventory, as a result of the reduction of our debt in fiscal 2021 and fiscal 2022, and an increase in average inventory not owned during the three and nine months endedJuly 31, 2022 compared to the three and nine months endedJuly 31, 2021 . ? Pre-tax income increased to$111.9 million for the three months endedJuly 31, 2022 from pre-tax income of$61.8 million for the three months endedJuly 31, 2021 , and increased to$228.3 million for the nine months endedJuly 31, 2022 from pre-tax income of$112.4 million for the nine months endedJuly 31, 2021 . Net income increased to$82.6 million for the three months endedJuly 31, 2022 from net income of$47.7 million for the three months endedJuly 31, 2021 , and decreased to$169.9 million for the nine months endedJuly 31, 2022 from net income of$555.3 million for the nine months endedJuly 31, 2021 . Earnings per share, basic and diluted, increased to$10.92 and$10.82 , respectively, for the three months endedJuly 31, 2022 compared to$6.85 and$6.72 , respectively, for the three months endedJuly 31, 2021 . Earnings per share, basic and diluted, decreased to$22.05 and$21.77 , respectively, for the nine months endedJuly 31, 2022 compared to$80.02 and$78.51 , respectively, for the nine months endedJuly 31, 2021 . While pretax income increased in fiscal 2022, the significant decrease in net income for the nine months endedJuly 31, 2022 was due to the full reversal of our federal valuation allowance and a portion of the state valuation allowance in respect of our deferred tax assets in the second quarter of fiscal 2021 (see Note 16 to the Condensed Consolidated Financial Statements). ? Net contracts decreased 34.0% and 18.6% for the three and nine months endedJuly 31, 2022 , respectively, compared to the same periods of the prior year, as sales pace slowed to below normal levels during the third quarter of fiscal 2022, due to an overall slow-down in home demand. ? Net contracts per average active selling community decreased to 7.6 for the three months endedJuly 31, 2022 compared to 12.0 in the same period of the prior year, and decreased to 34.9 for the nine months endedJuly 31, 2022 compared to 44.9 in the same period of the prior year. The decreases were due to the decreases in net contracts discussed above. ? Active selling communities atJuly 31, 2022 increased by 3.8% compared toJuly 31, 2021 . We continue to actively pursue new communities, and our total lots controlled increased to 31,913 atJuly 31, 2022 compared to 31,002 atJuly 31, 2021 . ? Contract backlog decreased from 3,673 homes atJuly 31, 2021 to 3,183 homes atJuly 31, 2022 . Despite this decrease, as a result of price increases in virtually all of our markets, the dollar value of contract backlog increased 2.4% to$1.8 billion compared to the prior year. ? Our cash position allowed us to spend$554.1 million on land purchases and land development during the nine months endedJuly 31, 2022 , redeem$100 million principal amount of our senior secured notes, and still have total liquidity of$357.4 million , including$225.1 million of homebuilding cash and cash equivalents as ofJuly 31, 2022 and$125.0 million of borrowing capacity under our senior secured revolving credit facility. 33
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Table of Contents CRITICAL ACCOUNTING POLICIES As disclosed in our annual report on Form 10-K for the fiscal year endedOctober 31, 2021 , our most critical accounting policies relate to income recognition from mortgage loans; inventories; unconsolidated joint ventures; and warranty and construction defect reserves. SinceOctober 31, 2021 , there have been no significant changes to those critical accounting policies.
CAPITAL AND LIQUIDITY RESOURCES
Our operations consist primarily of residential housing development and sales in the Northeast (New Jersey andPennsylvania ), the Mid-Atlantic (Delaware ,Maryland ,Virginia ,Washington D.C. andWest Virginia ), the Midwest (Illinois andOhio ), the Southeast (Florida ,Georgia andSouth Carolina ), the Southwest (Arizona andTexas ) and the West (California ). In addition, we provide certain financial services to our homebuilding customers. We have historically funded our homebuilding and financial services operations with cash flows from operating activities, borrowings under our credit facilities, the issuance of new debt and equity securities and other financing activities. 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 Activities – Overview
Our total liquidity atJuly 31, 2022 was$357.4 million , including$225.1 million in homebuilding cash and cash equivalents and$125.0 million of borrowing capacity under our senior secured revolving credit facility. Our total liquidity was above our target liquidity range of$170.0 to$245.0 million . The lingering macro economic effects of the COVID-19 pandemic, including inflation and labor and supply market constraints, as well as geopolitical tensions have created significant uncertainty as to general economic and housing market conditions for fiscal 2022 and beyond. We believe that these sources of cash together with available borrowings on our senior secured revolving credit facility will be sufficient through fiscal 2022 to finance our working capital requirements. We spent$554.1 million on land and land development during the first three quarters of fiscal 2022, along with$105.5 million for the$100.0 million partial redemption of our 7.75% Senior Secured 1.125 Lien Notes due 2026. After considering this land and land development, debt payment and all other operating activities, including revenue received from deliveries, cash used for operations was$28.6 million . During the first three quarters of fiscal 2022, cash used for investing activities was$3.3 million , primarily due to the acquisition of certain fixed assets, partially offset by distributions from existing unconsolidated joint ventures. Cash used for financing activities was$0.9 million during the first three quarters of fiscal 2022, which in addition to the$100.0 million debt redemption mentioned above, was due primarily to net payments related to our mortgage warehouse lines of credit, partially offset by net proceeds from nonrecourse mortgage financings and land banking and model sale leaseback financings during the period. We intend to continue to use nonrecourse mortgage financings, model sale leaseback, joint ventures, and, subject to covenant restrictions in our debt instruments, land banking programs as our business needs dictate. Our cash uses during the nine months endedJuly 31, 2022 and 2021 were for operating expenses, land purchases, land deposits, land development, construction spending, debt payments, state income taxes, interest payments, preferred dividend payments, litigation matters and investments in unconsolidated joint ventures. During these periods, we provided for our cash requirements from available cash on hand, housing and land sales, model sale leasebacks, land banking transactions, 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 and other assets, mortgage loans held for sale, interest and other accrued liabilities, deferred income taxes, accounts payable and other liabilities, noncash charges relating to depreciation and stock compensation awards and impairment losses for inventory. When we are expanding our operations, inventory levels, prepaids and other assets increase causing cash flow from operating activities to decrease. Certain liabilities also increase as operations expand and partially offset the negative effect on cash flow from operations caused by the increase in inventory levels, prepaids and other assets. Similarly, as our mortgage operations expand, net income from these operations increases, but for cash flow purposes net income is partially offset by the net change in mortgage assets and liabilities. The opposite is true as our investment in new land purchases and development of new communities decrease, causing us to generate positive cash flow from operations. 34
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Table of Contents Debt Transactions Senior notes and credit facilities balances as ofJuly 31, 2022 andOctober 31, 2021 , were as follows: July 31, October 31, (In thousands) 2022 2021
Senior Secured Notes: 10.0% 1.75% Senior Secured Lien Notes Due
$ 158,502
7.75% Senior Secured 1.125 Lien bonds due
250,000
350,000
10.5% Senior Secured 1.25 Privil Notes due
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 $ 953,093 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 dueFebruary 1, 2040 90,120
90 120
Total Senior Notes$ 180,710
Senior unsecured term credit facility
$ 39,551
1.75 Lien Senior Secured Term Credit Facility
$ 81,498 $ 81,498 Senior Secured Revolving Credit Facility (2) $ - $ - Subtotal notes payable$ 1,154,852 $ 1,254,852 Net (discounts) premiums$ 6,266 $ 10,769 Net debt issuance costs$ (13,246 ) $ (17,248 ) Total notes payable, net of discounts, premiums and debt issuance costs$ 1,147,872 $ 1,248,373 (1)$26.0 million of 8.0% Senior Notes due 2027 (the "8.0% 2027 Notes") are owned by a wholly-owned consolidated subsidiary of HEI. Therefore, in accordance with GAAP, such notes are not reflected on the Condensed Consolidated Balance Sheets of HEI. (2) AtJuly 31, 2022 , provides for up to$125.0 million in aggregate amount of senior secured first lien revolving loans. OnAugust 19, 2022 , the maturity of the Senior Secured Revolving Credit Facility was extended fromDecember 28, 2022 toJune 30, 2024 and the fixed interest rate was replaced with a floating interest rate in each case, effective upon the satisfaction of customary conditions in respect of the collateral securing the borrowings thereunder. See Note 22 to the Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q. Except forK. 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 atJuly 31, 2022 (except for the 8.0% 2027 Notes which are not guaranteed byK. Hovnanian atSunrise Trail III, LLC , a wholly-owned subsidiary of the Company) (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 atJuly 31, 2022 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, includingK. 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 Secured Term Loan Facility (defined below) (the "Secured Term Loans") and loans made under the Secured Credit Agreement (as defined below) (the "Secured Revolving Loans") or notes to be immediately due and payable if not cured within applicable grace periods, including the failure to make timely payments on the Unsecured Term Loans, Secured Term Loans, Secured Revolving Loans or notes or other material indebtedness, cross default to other material indebtedness, the failure to comply with agreements and covenants and specified events of bankruptcy and insolvency, with respect to the Unsecured Term Loans, Secured Term Loans and Secured Revolving Loans, material inaccuracy of representations and warranties and with respect to the Unsecured Term Loans, Secured Term Loans and Secured Revolving Loans, a change of control, and, with respect to the Secured Term Loans, Secured Revolving Loans and senior secured notes, the failure of the documents granting security for the obligations under the secured Debt Instruments to be in full force and effect, and the failure of the liens on any material portion of the collateral securing the obligations under the secured Debt Instruments to be valid and perfected. As ofJuly 31, 2022 , we believe we were in compliance with the covenants of the Debt Instruments. 35
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If our consolidated fixed charge coverage ratio is less than 2.0 to 1.0, as defined in the applicable Debt Instrument, we are restricted from making certain payments, including dividends (in each such case, 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 ofOctober 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 each of the first, second and third quarters of fiscal 2022. 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). We also continue to actively analyze and evaluate our capital structure and explore transactions to simplify our capital structure and to strengthen our balance sheet, including those that reduce leverage, interest rates and/or extend maturities, and will seek to do so with the right opportunity. We may also continue to make debt purchases and/or exchanges for debt or equity from time to time through tender offers, exchange offers, redemptions, open market purchases, private transactions, or otherwise, or seek to raise additional debt or equity capital, depending on market conditions and covenant restrictions. Any liquidity-enhancing or other capital raising or refinancing transaction will depend on identifying counterparties, negotiation of documentation and applicable closing conditions and any required approvals. Due to covenant restrictions in our Debt Instruments, we are currently limited in the amount of debt we can incur, 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 discussion of the Unsecured Term Loans, the Secured Term Loans and Secured Revolving Loans andK. Hovnanian's senior secured notes and senior notes, including information with respect to the collateral securing our secured Debt Instruments. Mortgages and Notes Payable We have nonrecourse mortgage loans for certain communities totaling$187.8 million and$125.1 million (net of debt issuance costs) atJuly 31, 2022 andOctober 31, 2021 , respectively, which are secured by the related real property, including any improvements, with an aggregate book value of$527.6 million and$448.5 million , respectively. The weighted-average interest rate on these obligations was 6.1% and 4.4% atJuly 31, 2022 andOctober 31, 2021 , respectively, and the mortgage loan payments on each community primarily correspond to home deliveries. Our wholly owned mortgage banking subsidiary,K. Hovnanian American Mortgage, LLC ("K. Hovnanian Mortgage"), originates mortgage loans primarily from the sale of our homes. Such mortgage loans and related servicing rights are sold in the secondary mortgage market within a short period of time. In certain instances, we retain the servicing rights for a small amount of loans.K. Hovnanian Mortgage finances the origination of mortgage loans through various master repurchase agreements, which are recorded in "Financial services" liabilities on the Condensed Consolidated Balance Sheets. The loans are secured by the mortgages held for sale and are repaid when we sell the underlying mortgage loans to permanent investors. As ofJuly 31, 2022 andOctober 31, 2021 , we had an aggregate of$70.7 million and$134.9 million , respectively, outstanding under several ofK. 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 arrangements.
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Table of Contents Inventory Activities Total inventory, excluding consolidated inventory not owned, increased$148.8 million during the nine months endedJuly 31, 2022 fromOctober 31, 2021 . Total inventory, excluding consolidated inventory not owned, increased in the Northeast by$35.6 million , in the Mid-Atlantic by$51.5 million , in the Southeast by$46.4 million and in the Southwest by$29.6 million . The increase was partially offset by decreases in the Midwest of$10.1 million and in the West of$4.2 million . The net increase was primarily attributable to new land purchases and land development, partially offset by home deliveries during the period. During the nine months endedJuly 31, 2022 , we wrote-off costs in the amount of$1.8 million related to land options that expired or that we terminated, as the communities' forecasted profitability was not projected to produce adequate returns on investment commensurate with the risk. There were no impairment losses during the nine months endedJuly 31, 2022 . 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 atJuly 31, 2022 are expected to be delivered during the next six to nine months. Consolidated inventory not owned increased$182.2 million . Consolidated inventory not owned consists of options related to land banking and model financing transactions that were added to our Condensed Consolidated Balance Sheet in accordance with US GAAP. The increase fromOctober 31, 2021 toJuly 31, 2022 was primarily due to an increase in land banking transactions along with an increase in the sale and leaseback of certain model homes during the period. We have land banking arrangements, whereby we sell land parcels to the land bankers and they provide us an option to purchase back finished lots on a predetermined schedule. Because of our options to repurchase these parcels, for accounting purposes in accordance with ASC 606-10-55-70, these transactions are considered a financing rather than a sale. For purposes of our Condensed Consolidated Balance Sheet, atJuly 31, 2022 , inventory of$237.1 million was recorded to "Consolidated inventory not owned," with a corresponding amount of$131.3 million (net of debt issuance costs) recorded to "Liabilities from inventory not owned" for the amount of net cash received from the transactions. In addition, we sell and lease back certain of our model homes with the right to participate in the potential profit when each home is sold to a third party at the end of the respective lease. As a result of our continued involvement, for accounting purposes in accordance with ASC 606-10-55-68, these sale and leaseback transactions are considered a financing rather than a sale. Therefore, for purposes of our Condensed Consolidated Balance Sheet, atJuly 31, 2022 , inventory of$43.8 million was recorded to "Consolidated inventory not owned," with a corresponding amount of$47.2 million (net of debt issuance costs) recorded to "Liabilities from inventory not owned" for the amount of net cash received from the transactions. When possible, we option property for development prior to acquisition. By optioning property, we are only subject to the loss of the cost of the option and predevelopment costs if we choose not to exercise the option. As a result, our commitment for major land acquisitions is reduced. The costs associated with optioned properties are included in "Land and land options held for future development or sale" on the Condensed Consolidated Balance Sheets. Also included in "Land and land options held for future development or sale" are amounts associated with inventory in mothballed communities. We mothball (or stop development on) certain communities when we determine the current performance does not justify further investment at the time. That is, we believe we will generate higher returns if we decide against spending money to improve land today and save the raw land until such time as the markets improve or we determine to sell the property. As ofJuly 31, 2022 , we had mothballed land in two communities. The book value associated with these communities atJuly 31, 2022 was$1.4 million , which was net of impairment charges recorded in prior periods of$20.3 million . We continually review communities to determine if mothballing is appropriate. During the first three quarters of fiscal 2022, we did not mothball any additional communities, nor did we sell any previously mothballed communities, however, we re-activated four previously mothballed communities. Inventories held for sale, which are land parcels where we have decided not to build homes and we are actively marketing the land for sale, are reported at the lower of carrying amount or fair value less costs to sell. There were no inventories held for sale at bothJuly 31, 2022 andOctober 31, 2021 . 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. 37
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The following tables summarize home sites included in our total residential real estate. The increase in total home sites available atJuly 31, 2022 compared toOctober 31, 2021 is attributable to acquiring new land parcels, partially offset by delivering homes and terminating certain option agreements during the period. Active Proposed Active Communities Developable Total Communities(1) Homes Homes HomesJuly 31, 2022 : Northeast 4 704 3,187 3,891 Mid-Atlantic 19 2,013 6,591 8,604 Midwest 6 975 1,615 2,590 Southeast 19 2,141 1,320 3,461 Southwest 44 5,208 4,714 9,922 West 16 2,330 1,499 3,829 Consolidated total 108 13,371 18,926 32,297 Unconsolidated joint ventures (2) 17 3,535 - 3,535 Owned 7,375 2,708 10,083 Optioned 5,612 16,218 21,830 Controlled lots 12,987 18,926 31,913 Construction to permanent financing lots 384 - 384 Consolidated total 13,371 18,926 32,297
(1) Active communities are communities open for sale with ten or more home sites
available. We identify communities based on product type. Therefore, at
times there are multiple communities at one land site.
(2) Represents active communities and home sites for our unconsolidated
homebuilding joint ventures for the period. We provide this data as a
addition 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.
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Active Proposed
Active Communities Developable Total
Communities(1) Homes Homes Homes
October 31, 2021 :
Northeast 6 821 2,525 3,346
Mid-Atlantic 20 2,160 6,083 8,243
Midwest 8 1,263 1,120 2,383
Southeast 22 1,736 2,043 3,779
Southwest 53 4,728 4,680 9,408
West 15 2,225 1,859 4,084
Consolidated total 124 12,933 18,310 31,243
Unconsolidated joint ventures (2) 17 4,030 - 4,030
Owned 7,257 3,194 10,451
Optioned 5,307 15,116 20,423
Controlled lots 12,564 18,310 30,874
Construction to permanent financing lots 369 - 369
Consolidated total 12,933 18,310 31,243
(1) Active communities are communities open for sale with ten or more home sites
available. We identify communities based on product type. Therefore, to
times there are multiple communities at one land site.
(2) Represents active communities and home sites for our unconsolidated
homebuilding joint ventures for the period. We provide this data as a
addition 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.
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The following table summarizes our started or completed unsold homes and models,
excluding unconsolidated joint ventures, in active and substantially completed
communities. The increase in unsold homes was primarily due to a conscious
effort to increase our number of started unsold homes per community to provide
buyers the opportunity to close quickly, so they may lock in a lower mortgage
rate, thereby making our homes more affordable as mortgage rates continue to
rise.
July 31, 2022 October 31, 2021:
Unsold Unsold
Homes Models Total Homes Models Total
Northeast 14 7 21 8 10 18
Mid-Atlantic 38 20 58 26 22 48
Midwest 14 2 16 8 9 17
Southeast 47 6 53 24 22 46
Southwest 172 13 185 114 29 143
West 65 14 79 7 12 19
Total 350 62 412 187 104 291
Started or completed
unsold homes and
models per active
selling communities
(1) 3.2 0.6 3.8 1.5 0.8 2.3
(1) Active Selling Communities (which are open selling communities with
ten or more home sites available) were 108 and 124 at
completed communities, which are communities with less than ten home sites
available.
Other balance sheet activities
Investments in and advances to unconsolidated joint ventures increased$13.8 million to$74.7 million atJuly 31, 2022 compared toOctober 31, 2021 . The increase was primarily due to income recorded from one of our unconsolidated joint ventures during the period, partially offset by partner distributions. As ofJuly 31, 2022 andOctober 31, 2021 , we had investments in seven and nine 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.
Prepaid expenses and other assets were as follows at:
July 31, October 31, Dollar
(In thousands) 2022 2021 Change
Prepaid insurance $ 4,272 $ 2,577 $ 1,695
Prepaid project costs 29,321 25,880 3,441
Other prepaids 11,349 9,140 2,209
Other assets 506 745 (239 )
Lease right of use asset 18,898 17,844 1,054
Total $ 64,346 $ 56,186 $ 8,160
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Prepaid insurance increased for the nine months endedJuly 31, 2022 , due to the timing of premium payments. These costs are amortized over the life of the associated insurance policy, which can be one to three years. Prepaid project costs consist of community specific expenditures that are used over the life of the community. Such prepaid costs are expensed as homes are delivered. The increase was primarily due to costs incurred for communities not yet open for sale. Other prepaids increased primarily due to new premiums for the renewal of certain software and related services during the period, partially offset by the amortization of these costs. Other prepaids also increased related to a new program for the bulk purchase of mortgage lock commitments to be used for qualifying homebuyers and expensed on future deliveries. Lease right of use asset represents the net present value of our operating leases which, in accordance with ASC 842, are required to be recorded as an asset on our Condensed Consolidated Balance Sheets. See Note 9 to the Condensed Consolidated Financial Statements for further information. The increase in lease right of use assets was primarily due to lease renewals, partially offset by lease payments during the period. Financial services assets consist primarily of residential mortgages receivable held for sale of which$85.1 million and$149.2 million atJuly 31, 2022 andOctober 31, 2021 , respectively, were being temporarily warehoused and are awaiting sale in the secondary mortgage market. The decrease in mortgage loans held for sale fromOctober 31, 2021 was primarily due to a decrease in the volume of loans originated during the third quarter of fiscal 2022 compared to the fourth quarter of fiscal 2021, partially offset by an increase in the average loan value.
Deferred tax assets, net, decreasing
Nonrecourse mortgages secured by inventory increased to$187.8 million atJuly 31, 2022 from$125.1 million atOctober 31, 2021 . The increase was primarily due to new mortgages for communities in all of our segments obtained during the nine months endedJuly 31, 2022 , along with additional loan borrowings on existing mortgages, partially offset by the payment of existing mortgages during the period.
Accounts payable and other liabilities were as follows at:
July 31, October 31, Dollar
(In thousands) 2022 2021 Change
Accounts payable $ 197,673 $ 163,898 $ 33,775
Reserves 98,990 98,831 159
Lease liability 19,940 18,952 988
Accrued expenses 14,836 17,588 (2,752 )
Accrued compensation 74,648 102,862 (28,214 )
Other liabilities 18,421 24,250 (5,829 )
Total $ 424,508 $ 426,381 $ (1,873 )
The increase in accounts payable was primarily due to the increase in backlog
dollars from October 31, 2021 to July 31, 2022 , as homes are under construction
for future delivery. Lease liability represents the net present value of our
minimum lease obligations, which as discussed above, are required to be recorded
on our Condensed Consolidated Balance Sheets in accordance with ASC 842. The
increase corresponds to the increase in the lease right of use asset discussed
above. Accrued expenses decreased primarily due to the timing of certain
accruals for profit and price participation programs, along with a decrease in
accrued property taxes and a decrease in an accrual for a sales reward program.
The decrease in accrued compensation was primarily due to the payment of our
fiscal year 2021 bonuses during the first quarter of fiscal 2022, partially
offset by the accrual of fiscal 2022 bonuses in the first three quarters of
fiscal 2022. Other liabilities decreased primarily due to deferred payroll tax
withholdings which were paid during the period.
Customer deposits increased
Liabilities from inventory not owned increased$115.7 million fromOctober 31, 2021 to$178.5 million atJuly 31, 2022 . The increase was primarily due to an increase in land banking activity during the period and an increase in the sale and leaseback of certain model homes, both accounted for as financing transactions as described above. Financial Services (liabilities) decreased$73.6 million to$108.6 million atJuly 31, 2022 from$182.2 million atOctober 31, 2021 . 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. Accrued interest increased$19.4 million from$28.2 million atOctober 31, 2021 , to$47.6 million atJuly 31, 2022 . The increase was primarily due to timing of new accruals, partially offset by payments, related to our senior secured, senior notes and the term loan during the period. 41
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RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED
Total Revenues
Compared to the same prior period, revenues increased (decreased) as follows:
Three Months Ended
July 31, July 31, Dollar Percentage
(Dollars in thousands) 2022 2021 Change Change
Homebuilding:
Sale of homes $ 736,654 $ 663,279 $ 73,375 11.1 %
Land sales and other revenues 16,406 7,559 8,847 117.0 %
Financial services 14,533 19,845 (5,312 ) (26.8 )%
Total revenues $ 767,593 $ 690,683 $ 76,910 11.1 %
Nine Months Ended
July 31, July 31, Dollar Percentage
(Dollars in thousands) 2022 2021 Change Change
Homebuilding:
Sale of homes $ 1,973,843 $ 1,894,159 $ 79,684 4.2 %
Land sales and other income 18,052 13,280 4,772
35.9 % Financial services 43,548 61,070 (17,522 ) (28.7 )% Total revenues$ 2,035,443 $ 1,968,509 $ 66,934 3.4 % Homebuilding For the three and nine months endedJuly 31, 2022 , sale of homes revenues increased by 11.1% and 4.2%, respectively, compared to the same periods of the prior year due to a 17.8% and 19.1% increase in the average price per home, respectively, partially offset by a 5.7% and 12.5% decrease in homes delivered, respectively, for the three and nine months endedJuly 31, 2022 , compared with the respective prior year period. The average price per home increased to$521,710 in the three months endedJuly 31, 2022 from$442,776 in the three months endedJuly 31, 2021 . The average price per home increased to$501,103 in the nine months endedJuly 31, 2022 from$420,831 in the nine months endedJuly 31, 2021 . The increase in average price was the result of increases in home prices in virtually all of our markets along with the geographic and community mix of our deliveries. Land sales are ancillary to our homebuilding operations and are expected to continue in the future but may significantly fluctuate up or down. For further details on the increase in land sales and other revenues, see the section titled "Land Sales and Other Revenues" below. 42
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The information on the homes delivered by segment is presented below:
Three Months Ended July 31, Nine Months Ended July 31,
(Dollars in
thousands) 2022 2021 % Change 2022 2021 % Change
Northeast:
Dollars $ 60,266 $ 35,255 70.9 % $ 135,671 $ 95,157 42.6 %
Homes 78 44 77.3 % 184 139 32.4 %
Mid-Atlantic:
Dollars $ 168,076 $ 106,195 58.3 % $ 396,180 $ 311,230 27.3 %
Homes 251 189 32.8 % 610 581 5.0 %
Midwest:
Dollars $ 61,375 $ 60,588 1.3 % $ 172,987 $ 181,191 (4.5 )%
Homes 166 190 (12.6 )% 483 576 (16.1 )%
Southeast:
Dollars $ 71,484 $ 61,978 15.3 % $ 200,133 $ 188,489 6.2 %
Homes 148 139 6.5 % 402 408 (1.5 )%
Southwest:
Dollars $ 266,107 $ 212,773 25.1 % $ 692,093 $ 620,120 11.6 %
Homes 590 593 (0.5 )% 1,643 1,808 (9.1 )%
West:
Dollars $ 109,346 $ 186,490 (41.4 )% $ 376,779 $ 497,972 (24.3 )%
Homes 179 343 (47.8 )% 617 989 (37.6 )%
Consolidated total:
Dollars $ 736,654 $ 663,279 11.1 % $ 1,973,843 $ 1,894,159 4.2 %
Homes 1,412 1,498 (5.7 )% 3,939 4,501 (12.5 )%
Unconsolidated joint
ventures (1)
Dollars $ 78,390 $ 102,262 (23.3 )% $ 228,984 $ 264,442 (13.4 )%
Homes 121 179 (32.4 )% 372 453 (17.9 )%
(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.
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An important indicator of our future results are recently signed contracts and
our home contract backlog for future deliveries. Our sales contracts and homes
in contract backlog by segment are set forth below:
Net Contracts (1) for the Net Contracts (1) for the
Three Months Ended Nine Months Ended Contract Backlog as of
July 31, July 31, July 31,
(Dollars in thousands) 2022 2021 2022
2021 2022 2021 Northeast: Dollars$ 47,109 $ 52,066 $ 181,641 $ 135,684 $ 184,366 $ 122,638 Homes 66 62 249 169 237 160 Mid-Atlantic: Dollars$ 91,100 $ 117,341 $ 384,950 $ 414,059 $ 330,960 $ 361,329 Homes 139 176 608 647 506 572 Midwest: Dollars$ 29,999 $ 56,848 $ 144,833 $ 216,775 $ 166,291 $ 205,101 Homes 60 165 371 628 493 648 Southeast: Dollars$ 67,402 $ 58,522 $ 326,727 $ 223,201 $ 348,019 $ 211,859 Homes 114 124 555 487 574 440 Southwest: Dollars$ 179,005 $ 196,481 $ 742,953 $ 783,924 $ 510,681 $ 524,029 Homes 336 469 1,533 2,034 966 1,292 West: Dollars$ 53,324 $ 127,872 $ 345,642 $ 453,557 $ 251,293 $ 325,472 Homes 84 215 559 795 407 561 Consolidated total: Dollars$ 467,939 $ 609,130 $ 2,126,746 $ 2,227,200 $ 1,791,610 $ 1,750,428 Homes 799 1,211 3,875 4,760 3,183 3,673 Unconsolidated joint ventures:(2) Dollars $ 84,392 $ 140,913 $ 315,015 $ 408,804 $ 628,034 $ 502,999 Homes 133 380 683 1,112 2,599 2,065
(1) Net contracts are defined as new contracts executed during the period for the purchase of housing, less contract terminations during the same period.
(2) Represents net contract dollars, net contract homes and contract backlog dollars and homes for our unconsolidated homebuilding joint ventures for the period. We provide this data as a supplement to our consolidated results as an indicator of the volume managed in our unconsolidated joint ventures. See Note 18 to the Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q for a further discussion of our unconsolidated joint ventures. In the first three quarters of fiscal 2022, our open for sale community count decreased to 108 from 124 atOctober 31, 2021 , which was the net result of opening 35 new communities and closing 51 communities since the beginning of fiscal 2022. The decrease in open for sale communities is a result of delays in land development as a result of supply chain and other issues that initially arose during the pandemic and have persisted. We expect community count to grow during the fourth quarter of 2022. Our reported level of sales contracts (net of cancellations) we have seen through the nine months endedJuly 31, 2022 was impacted by a decrease in sales pace per community for the nine months endedJuly 31, 2022 as compared to the same period of the prior year. Net contracts per average active selling community for the three months endedJuly 31, 2022 decreased to 7.6 compared to 12.0 for the same period in the prior year which was during a peak in sales pace during the pandemic. Net contracts per average active selling community for the nine months endedJuly 31, 2022 decreased to 34.9 compared to 44.9 for the same period in the prior year which was during a peak in sales pace during the pandemic. 44
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Cancellation rates represent the number of contracts canceled during the quarter divided by the number of gross sales contracts executed during the quarter. For comparison, here are the historical termination rates, excluding unconsolidated joint ventures:
Quarter 2022 2021 2020 2019 2018 First 14 % 17 % 19 % 24 % 18 % Second 17 % 16 % 23 % 19 % 17 % Third 27 % 16 % 18 % 19 % 19 % Fourth 15 % 18 % 21 % 23 %
Another common and meaningful way to analyze our cancellation trends is to compare the number of contract cancellations as a percentage of initial order backlog. The following table presents this historical comparison, excluding unconsolidated joint ventures:
Quarter 2022 2021 2020 2019 2018
First 8 % 11 % 14 % 16 % 12 %
Second 9 % 9 % 20 % 20 % 15 %
Third 8 % 6 % 21 % 16 % 14 %
Fourth 6 % 14 % 14 % 13 %
Most cancellations occur within the legal rescission period, which varies by
state but is generally less than two weeks after the signing of the contract.
Cancellations also occur as a result of a buyer's failure to qualify for a
mortgage, which generally occurs during the first few weeks after signing. As
shown in the tables above, contract cancellations over the past several years
have been within what we believe to be a normal range, with fiscal 2021 and the
first half of fiscal 2022 cancellation rates, in particular, being below
historical norms as a result of the strong market conditions. Fiscal 2020 had
varying cancellation rates due to the COVID-19 pandemic and its effects. During
the third quarter of fiscal 2022, due to the sharp decline in gross sales, our
cancellation rate as a percentage of gross sales increased significantly to 27%,
which is higher than our historical normal range. However, due to our strong
backlog position, our cancellation rate as a percentage of beginning backlog
decreased slightly from the prior quarter to 8%, which is below our historical
normal range. Market conditions remain uncertain and it is difficult to predict
what cancellation rates will be in the future.
Total cost of sales on our Condensed Consolidated Statements of Operations
includes expenses for consolidated housing and land and lot sales, including
inventory impairment loss and land option write-offs (defined as "land charges"
in the tables below). A breakout of such expenses for housing sales and
homebuilding gross margin is set forth below.
Homebuilding gross margin before cost of sales interest expense and land charges
is a non-GAAP financial measure. This measure should not be considered as an
alternative to homebuilding gross margin determined in accordance with GAAP as
an indicator of operating performance.
Management believes this non-GAAP measure enables investors to better understand
our operating performance. This measure is also useful internally, helping
management evaluate our operating results on a consolidated basis and relative
to other companies in our industry. In particular, the magnitude and volatility
of land charges for the Company, and for other homebuilders, have been
significant and, as such, have made financial analysis of our industry more
difficult. Homebuilding metrics excluding land charges, as well as interest
amortized to cost of sales, and other similar presentations prepared by analysts
and other companies are frequently used to assist investors in understanding and
comparing the operating characteristics of homebuilding activities by
eliminating many of the differences in companies' respective level of
impairments and levels of debt.
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Three Months Ended Nine Months Ended
July 31, July 31,
(Dollars in thousands) 2022 2021 2022 2021
Sale of homes $ 736,654 $ 663,279 $ 1,973,843 $ 1,894,159
Cost of sales, excluding interest
expense and land charges 543,064 516,530 1,474,403 1,488,919
Homebuilding gross margin, before cost
of sales interest expense and land
charges 193,590 146,749 499,440 405,240
Cost of sales interest expense,
excluding land sales interest expense 22,453 17,821 57,855 56,242
Homebuilding gross margin, after cost of
sales interest expense, before land
charges 171,137 128,928 441,585 348,998
Land charges 1,173 1,309 1,837 3,267
Homebuilding gross margin $ 169,964 $ 127,619 $ 439,748 $ 345,731
Homebuilding gross margin percentage 23.1 % 19.2 % 22.3 % 18.3 %
Homebuilding gross margin percentage,
before cost of sales interest expense
and land charges 26.3 % 22.1 % 25.3 % 21.4 %
Homebuilding gross margin percentage,
after cost of sales interest expense,
before land charges 23.2 % 19.4 % 22.4 % 18.4 %
Cost of sales expenses as a percentage of consolidated home sales revenues are
presented below:
Three Months Ended Nine Months Ended
July 31, July 31,
2022 2021 2022 2021
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 66.3 % 69.6 % 66.8 % 70.1 %
Commissions 3.2 % 3.7 % 3.4 % 3.6 %
Financing concessions 0.8 % 1.0 % 0.9 % 1.2 %
Overheads 3.4 % 3.6 % 3.6 % 3.7 %
Total cost of sales, before interest
expense and land charges 73.7 % 77.9 % 74.7 % 78.6 %
Cost of sales interest 3.1 % 2.7 % 2.9 % 3.0 %
Land charges 0.1 % 0.2 % 0.1 % 0.1 %
Homebuilding gross margin percentage 23.1 % 19.2 % 22.3 % 18.3 %
Homebuilding gross margin percentage,
before cost of sales interest expense
and land charges 26.3 % 22.1 % 25.3 % 21.4 %
Homebuilding gross margin percentage,
after cost of sales interest expense,
before land charges 23.2 % 19.4 % 22.4 % 18.4 %
We sell a variety of home types in various communities, each yielding a
different gross margin. As a result, depending on the mix of communities
delivering homes, consolidated gross margin may fluctuate up or down. Total
homebuilding gross margin percentage increased to 23.1% during the three months
ended July 31, 2022 compared to 19.2% for the same period last year.
Homebuilding gross margin percentage, before cost of sales interest expense and
land charges, increased from 22.1% for the three months ended July 31, 2021 to
26.3% for the three months ended July 31, 2022 . Total homebuilding gross margin
percentage increased to 22.3% during the nine months ended July 31, 2022
compared to 18.3% for the same period last year. Homebuilding gross margin
percentage, before cost of sales interest expense and land charges, increased
from 21.4% for the nine months ended July 31, 2021 to 25.3% for the nine months
ended July 31, 2022 . The increases for the three and nine months ended July 31,
2022 for both gross margin percentage and gross margin percentage, before cost
of sales interest expense and land charges, were primarily due to increases in
home prices across virtually all our operating segments, along with the mix of
communities delivering compared to the prior year periods.
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Reflected as inventory impairment loss and land option write-offs in cost of sales, we wrote-off or wrote-down certain inventories totaling$1.1 million and$1.3 million during the three months endedJuly 31, 2022 and 2021, respectively, and$1.8 million and$3.3 million during the nine months endedJuly 31, 2022 and 2021, respectively, to their estimated fair value. During the three and nine months endedJuly 31, 2022 , we wrote-off residential land options and approval and engineering costs amounting to$1.1 million and$1.8 million , respectively, compared to$0.1 million and$1.3 million for the three and nine months endedJuly 31, 2021 , respectively, which are included in the total land charges discussed above. Option, approval and engineering costs are written-off when a community's pro forma profitability is not projected to produce adequate returns on the investment commensurate with the risk and when we believe it is probable we will cancel the option or when a community is redesigned engineering costs related to the initial design are written-off. Such write-offs were located in all the segments in the first three quarters of fiscal 2022 and in the Mid-Atlantic, Southeast, Southwest and West segments in the first three quarters of fiscal 2021. There were no inventory impairments during the three and nine months endedJuly 31, 2022 . We recorded inventory impairments of$1.2 million and$2.0 million during the three and nine months endedJuly 31, 2021 , respectively, which were related to two communities in the Southeast segment for the three and nine months endedJuly 31, 2021 , and one community in the West segment for the nine months endedJuly 31, 2021 . It is difficult to predict impairment levels, and should it become necessary or desirable to have additional land sales, lower prices, or should the estimates or expectations used in determining estimated cash flows or fair value decrease or differ from current estimates in the future, we may need to recognize additional impairments.
Land sales and other income
Land sales and other income consist mainly of land and lot sales. A breakdown of land and lot sales is presented below:
Three Months Ended Nine Months Ended
July 31, July 31,
(In thousands) 2022 2021 2022 2021
Land and lot sales $ 15,788 $ 6,819 $ 16,187 $ 11,730
Cost of sales, excluding interest 5,512 5,338 5,772 9,121
Land and lot sales gross margin,
excluding interest 10,276 1,481 10,415 2,609
Land and lot sales interest expense - 1,419 21 1,888
Land and lot sales gross margin,
including interest $ 10,276 $ 62 $ 10,394 $ 721
Land sales are ancillary to our residential homebuilding operations and are
expected to continue in the future but may significantly fluctuate up or down.
Although we budget land sales, they are often dependent upon receiving approvals
and entitlements, the timing of which can be uncertain. As a result, projecting
the amount and timing of land sales is difficult. Revenue associated with land
sales can vary significantly due to the mix of land parcels sold. There were one
and two land sales in the three months ended July 31, 2022 and 2021,
respectively, resulting in an increase of $9.0 million in land sales revenues.
There were four and eight land sales in the nine months ended July 31, 2022 and
2021, respectively, resulting in an increase of $4.5 million in land sales
revenues. During the third quarter of fiscal 2022, we had a more significant
land sale in the Northeast segment causing the increase in land sales revenue
for both the three and nine months ended July 31, 2022 .
Land sales and other revenues increased $8.8 million and $4.8 million for the
three and nine months ended July 31, 2022 compared to the same period in the
prior year. Other revenues include income from contract cancellations where the
deposit has been forfeited due to contract terminations, interest income, cash
discounts and miscellaneous one-time receipts. The increase for the three and
nine months ended July 31, 2022 , compared to the three and nine months ended
July 31, 2021 , was mainly due to the increase in land sales discussed above.
Sale of residential, general and administrative construction
Homebuilding selling, general and administrative ("SGA") expenses increased $7.2
million and $14.0 million for the three and nine months ended July 31, 2022 ,
respectively, compared to the same period last year. The increase for the three
and nine months ended July 31, 2022 was due to an increase in total compensation
expense as a result of an increase in headcount and bonuses related to market
conditions and company performance and an increase in insurance costs as a
result of an increase in premiums to obtain insurance during fiscal 2022. Also
impacting the increase in the three months ended July 31, 2022 was a decrease of
unconsolidated joint venture management fees received, which offset general and
administrative expenses, as a result of fewer unconsolidated joint venture
deliveries during the respective periods, while the same remained flat for the
nine months ended July 31, 2022 compared to same period in the prior year. SGA
expenses as a percentage of homebuilding revenues increased to 6.7% and 7.0% for
the three and nine months ended July 31, 2022 compared to 6.4% and 6.6% for the
three and nine months ended July 31, 2021 , respectively, as a result of the
increase in expense for the current periods compared to the prior year periods.
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RESIDENTIAL CONSTRUCTION ACTIVITIES BY SEGMENT
Segment Analysis
Three Months Ended July 31,
(Dollars in thousands, except average
sales price) 2022 2021 Variance Variance %
Northeast
Homebuilding revenue $ 76,032 $ 35,255 $ 40,777 115.7 %
Income before income taxes $ 20,179 $ 6,765 $ 13,414 198.3 %
Homes delivered 78 44 34 77.3 %
Average sales price $ 772,641 $ 801,250 $ (28,609 ) (3.6 )%
Mid-Atlantic
Homebuilding revenue $ 168,135 $ 106,419 $ 61,716 58.0 %
Income before income taxes $ 37,756 $ 15,907 $ 21,849 137.4 %
Homes delivered 251 189 62 32.8 %
Average sales price $ 669,625 $ 561,878 $ 107,747 19.2 %
Midwest
Homebuilding revenue $ 61,410 $ 60,659 $ 751 1.2 %
Income before income taxes $ 2,023 $ 3,358 $ (1,335 ) (39.8 )%
Homes delivered 166 190 (24 ) (12.6 )%
Average sales price $ 369,729 $ 318,884 $ 50,845 15.9 %
Southeast
Homebuilding revenue $ 71,542 $ 68,854 $ 2,688 3.9 %
Income before income taxes $ 15,263 $ 2,682 $ 12,581 469.1 %
Homes delivered 148 139 9 6.5 %
Average sales price $ 483,000 $ 445,885 $ 37,115 8.3 %
Southwest
Homebuilding revenue $ 266,374 $ 213,127 $ 53,247 25.0 %
Income before income taxes $ 42,725 $ 28,523 $ 14,202 49.8 %
Homes delivered 590 593 (3 ) (0.5 )%
Average sales price $ 451,029 $ 358,808 $ 92,221 25.7 %
West
Homebuilding revenue $ 109,410 $ 186,519 $ (77,109 ) (41.3 )%
Income before income taxes $ 19,223 $ 27,189 $ (7,966 ) (29.3 )%
Homes delivered 179 343 (164 ) (47.8 )%
Average sales price $ 610,872 $ 543,703 $ 67,169 12.4 %
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Nine Months Ended July 31,
(Dollars in thousands, except average
sales price) 2022 2021
Deviation Deviation %
Northeast
Homebuilding revenue$ 151,517 $ 97,488 $ 54,029 55.4 % Income before income taxes$ 31,052 $ 16,427 $ 14,625 89.0 % Homes delivered 184 139 45 32.4 % Average sales price$ 737,342 $ 684,583 $ 52,759 7.7 %
Environment-
Homebuilding revenue$ 396,750 $ 311,564 $ 85,186 27.3 % Income before income taxes$ 82,441 $ 38,618 $ 43,823 113.5 % Homes delivered 610 581 29 5.0 % Average sales price$ 649,475 $ 535,680 $ 113,795 21.2 %
Midwest
Homebuilding revenue$ 173,175 $ 183,895 $ (10,720 ) (5.8 )% Income before income taxes$ 4,303 $ 11,070 $ (6,767 ) (61.1 )% Homes delivered 483 576 (93 ) (16.1 )% Average sales price$ 358,151 $ 314,568 $ 43,583 13.9 %
South East
Homebuilding revenue$ 200,359 $ 195,545 $ 4,814 2.5 % Income before income taxes$ 36,185 $ 9,540 $ 26,645 279.3 % Homes delivered 402 408 (6 ) (1.5 )% Average sales price$ 497,843 $ 461,983 $ 35,860 7.8 %
South West
Homebuilding revenue$ 692,766 $ 620,848 $ 71,918 11.6 % Income before income taxes$ 99,370 $ 78,848 $ 20,522 26.0 % Homes delivered 1,643 1,808 (165 ) (9.1 )% Average sales price$ 421,237 $ 342,987 $ 78,250 22.8 %
West
Homebuilding revenue$ 377,151 $ 498,084 $ (120,933 ) (24.3 )% Income before income taxes$ 70,002 $ 58,729 $ 11,273 19.2 % Homes delivered 617 989 (372 ) (37.6 )% Average sales price$ 610,663 $ 503,511 $ 107,152 21.3 % 49
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Residential construction results by segment
Northeast - Homebuilding revenues increased 115.7% for the three months endedJuly 31, 2022 compared to the same period of the prior year. The increase for the three months endedJuly 31, 2022 was attributed to a$15.8 million increase in land sales and other revenue and a 77.3% increase in homes delivered, partially offset by a 3.6% decrease in average sales price. The decrease in average sales price was the result of new communities delivering higher priced, larger single family homes and townhomes in higher-end submarkets of the segment in the three months endedJuly 31, 2022 compared to some communities delivering in the three months endedJuly 31, 2021 that had smaller single family homes in mid to higher-end submarkets of the segment with higher location premiums that are no longer delivering. Income before income taxes increased$13.4 million to$20.2 million for the three months endedJuly 31, 2022 as compared to the prior year period. This was primarily due to the increase in homebuilding revenue discussed above, partially offset by a decrease in gross margin percentage before interest expense for the period compared to the same period of the prior year. Homebuilding revenues increased 55.4% for the nine months endedJuly 31, 2022 compared to the same period of the prior year. The increase for the nine months endedJuly 31, 2022 was attributed to a$13.5 million increase in land sales and other revenue, a 32.4% increase in homes delivered and a 7.7% increase in average sales price. The increase in average sales price was the result of new communities delivering higher priced, larger single family homes and townhomes in higher-end submarkets of the segment in the nine months endedJuly 31, 2022 compared to some communities delivering in the nine months endedJuly 31, 2021 that had smaller single family homes, townhomes and affordable-housing homes in mid to higher-end submarkets of the segment that are no longer delivering. Also impacting the increase in average sales price was price increases in certain communities. Income before income taxes increased$14.6 million to$31.1 million for the nine months endedJuly 31, 2022 as compared to the prior year period. This was primarily due to the increase in homebuilding revenue discussed above, partially offset by a decrease in gross margin percentage before interest expense for the period compared to the same period of the prior year. Mid-Atlantic - Homebuilding revenues increased 58.0% for the three months endedJuly 31, 2022 compared to the same period in the prior year period. The increase was primarily due to a 19.2% increase in average sales price and a 32.8% increase in homes delivered for the three months endedJuly 31, 2022 compared to the same period in the prior year. The increase in average sales price was mainly the result of price increases in certain communities. Income before income taxes increased$21.8 million to$37.8 million for the three months endedJuly 31, 2022 compared to the same period in the prior year. This was primarily due to the increase in homebuilding revenue discussed above, a$4.1 million increase in income from unconsolidated joint ventures and an increase in gross margin percentage before interest expense for the three months endedJuly 31, 2022 compared to the same period of the prior year. Homebuilding revenues increased 27.3% for the nine months endedJuly 31, 2022 compared to the same period in the prior year period. The increase was primarily due to a 21.2% increase in average sales price and a 5.0% increase in homes delivered for the nine months endedJuly 31, 2022 compared to the same period in the prior year. The increase in average sales price was mainly the result of price increases in certain communities. Income before income taxes increased$43.8 million to$82.4 million for the nine months endedJuly 31, 2022 compared to the same period in the prior year. This was primarily due to the increase in homebuilding revenue discussed above, a$7.7 million increase in income from unconsolidated joint ventures and an increase in gross margin percentage before interest expense for the nine months endedJuly 31, 2022 compared to the same period of the prior year. Midwest - Homebuilding revenues increased 1.2% for the three months endedJuly 31, 2022 compared to the same period in the prior year. The increase was due to a 15.9% increase in average sales price, partially offset by a 12.6% decrease in homes delivered for the three months endedJuly 31, 2022 . The increase in average sales price was mainly the result of price increases in certain communities. Income before income taxes decreased$1.3 million to$2.0 million for the three months endedJuly 31, 2022 compared to the same period in the prior year. The decrease was primarily due to a$0.4 million increase in selling, general and administrative costs and a decrease in gross margin percentage before interest expense for the period compared to the same period of the prior year. Homebuilding revenues decreased 5.8% for the nine months endedJuly 31, 2022 compared to the same period in the prior year. The decrease was due to a$2.5 million decrease in land sales and other revenue, a 16.1% decrease in homes delivered, partially offset by a 13.9% increase in average sales price for the nine months endedJuly 31, 2022 . The increase in average sales price was mainly the result of price increases in certain communities. Income before income taxes decreased$6.8 million to$4.3 million for the nine months endedJuly 31, 2022 compared to the same period in the prior year. The decrease was primarily due to the decrease in homebuilding revenue discussed above, a$2.0 million increase in selling, general and administrative costs and a decrease in gross margin percentage before interest expense for the period compared to the same period of the prior year. 50
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Southeast - Homebuilding revenues increased 3.9% for the three months endedJuly 31, 2022 compared to the same period in the prior year. The increase was due to a 6.5% increase in homes delivered and an 8.3% increase in average sales price, partially offset by a$6.8 million decrease in land sales and other revenue for the three months endedJuly 31, 2022 compared to the same period of the prior year. The increase in average price was mainly the result of price increases in certain communities. Income before income taxes increased$12.6 million to$15.3 million for the three months endedJuly 31, 2022 compared to the prior year period, primarily due to the increase in homebuilding revenue discussed above, a$6.1 million increase in income from unconsolidated joint ventures and an increase in gross margin percentage before interest expense for the period compared to the same period of the prior year. Homebuilding revenues increased 2.5% for the nine months endedJuly 31, 2022 compared to the same period in the prior year. The increase was due to a 7.8% increase in average sales price, partially offset by a 1.5% decrease in homes delivered and a$6.8 million decrease in land sales and other revenue. The increase in average sales price was the result of new communities delivering higher priced, larger single family homes in higher-end submarkets of the segment in the nine months endedJuly 31, 2022 compared to some communities delivering in the nine months endedJuly 31, 2021 that had lower priced, smaller single family homes in higher-end submarkets of the segment that are no longer delivering. Also impacting the increase in the average sales price was price increases in certain communities. Income before income taxes increased$26.6 million to$36.2 million for the nine months endedJuly 31, 2022 compared to the prior year period, primarily due to the increase in homebuilding revenue discussed above, a$10.7 million increase in income from unconsolidated joint ventures and an increase in gross margin percentage before interest expense for the period compared to the same period of the prior year. Southwest - Homebuilding revenues increased 25.0% for the three months endedJuly 31, 2022 compared to the same period in the prior year. The increase was primarily due to a 25.7% increase in average sales price, partially offset by a 0.5% decrease in homes delivered for the three months endedJuly 31, 2022 compared to the same period in the prior year. The increase in average sales price was mainly the result of price increases in certain communities. Income before income taxes increased$14.2 million to$42.7 million for the three months endedJuly 31, 2022 compared to the same period in the prior year. The increase was primarily due to the increase in homebuilding revenues discussed above and an increase in gross margin percentage before interest expense for the three months endedJuly 31, 2022 compared to the same period of the prior year. Homebuilding revenues increased 11.6% for the nine months endedJuly 31, 2022 compared to the same period in the prior year. The increase was primarily due to a 22.8% increase in average sales price, partially offset by a 9.1% decrease in homes delivered for the nine months endedJuly 31, 2022 compared to the same period in the prior year. The increase in average sales price was mainly the result of price increases in certain communities. Income before income taxes increased$20.5 million to$99.4 million for the nine months endedJuly 31, 2022 compared to the same period in the prior year. The increase was primarily due to the increase in homebuilding revenues discussed above and an increase in gross margin percentage before interest expense for the nine months endedJuly 31, 2022 compared to the same period of the prior year. 51
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West - Homebuilding revenues decreased 41.3% for the three months endedJuly 31, 2022 compared to the same period in the prior year. The decrease was due to a 47.8% decrease in homes delivered, partially offset by a 12.4% increase in average sales price. The increase in average sales price was mainly the result of price increases in certain communities. Income before income taxes decreased$8.0 million to$19.2 million for the three months endedJuly 31, 2022 compared to the prior year period. The decrease is primarily due to the decrease in homebuilding revenues discussed above and a$2.2 million increase in selling, general and administrative costs, partially offset by an increase in gross margin percentage before interest expense for the period compared to the same period of the prior year. Homebuilding revenues decreased 24.3% for the nine months endedJuly 31, 2022 compared to the same period in the prior year. The decrease was due to a 37.6% decrease in homes delivered, partially offset by a 21.3% increase in average sales price. The increase in average sales price was mainly the result of price increases in certain communities. Income before income taxes increased$11.3 million to$70.0 million for the nine months endedJuly 31, 2022 compared to the prior year period. The increase is primarily due to a$1.3 million decrease in inventory impairment loss and land option write-offs and an increase in gross margin percentage before interest expense for the period compared to the same period of the prior year. Financial Services Financial services consist primarily of originating mortgages from our home buyers, selling such mortgages in the secondary market, and title insurance activities. We use mandatory investor commitments and forward sales of mortgage-backed securities ("MBS") to hedge our mortgage-related interest rate exposure on agency and government loans. These instruments involve, to varying degrees, elements of credit and interest rate risk. Credit risk associated with MBS forward commitments and loan sales transactions is managed by limiting our counterparties to investment banks, federally regulated bank affiliates and other investors meeting our credit standards. Our risk, in the event of default by the purchaser, is the difference between the contract price and fair value of the MBS forward commitments. For the first three quarters of fiscal 2022 and 2021,Federal Housing Administration andVeterans Administration ("FHA/VA ") loans represented 24.0% and 29.6%, respectively, of our total loans. The origination of FHA/VA loans decreased from the first three quarters of fiscal 2021 to the first three quarters of fiscal 2022, and our conforming conventional loan originations as a percentage of our total loans increased from 69.7% to 75.2% for this period, respectively. The origination of loans which exceed conforming conventions was relatively flat at 0.8% for the first three quarters of fiscal 2021 compared to fiscal 2022. Profits and losses relating to the sale of mortgage loans are recognized when legal control passes to the buyer of the mortgage and the sales price is collected. During the three and nine months endedJuly 31, 2022 , financial services provided a$3.7 million and$11.6 million pretax profit, respectively, compared to$8.6 million and$28.1 million , respectively, of pretax profit for the same periods of fiscal 2021. The decrease in pretax profit was attributed to the decrease in the homebuilding deliveries and a decrease in the basis point spread between the loans originated and the implied rate from the sale of the loans. In the market areas served by our wholly owned mortgage banking subsidiaries, 52.5% and 65.6% of our noncash homebuyers obtained mortgages originated by these subsidiaries during the three months endedJuly 31, 2022 and 2021, respectively, and 59.0% and 68.6% of our noncash homebuyers obtained mortgages originated by these subsidiaries during the nine months endedJuly 31, 2022 and 2021, respectively.
Corporate General and Administrative
Corporate general and administrative expenses include the operations at our headquarters inNew 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 increased to$24.8 million for the three months endedJuly 31, 2022 compared to$17.3 million for the three months endedJuly 31, 2021 and decreased to$75.9 million for the nine months endedJuly 31, 2022 compared to$81.1 million for the nine months endedJuly 31, 2021 . The increase for the three months endedJuly 31, 2022 compared to the same period in the prior fiscal year was primarily due to increased compensation and bonuses related to market conditions and company performance. The decrease for the nine months endedJuly 31, 2022 compared to the same period in the prior fiscal year was primarily due to decreases in compensation expense, mainly related to the grants of phantom stock awards under our 2019 LTIP, for which expense is impacted by the change in our stock price each period. The expense decreased as a result of the significant decrease in our stock price during the third quarter of fiscal 2022, versus a significant increase in stock price during the same period of the prior year. 52
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Table of Contents Other Interest Other interest decreased$9.5 million for the three months endedJuly 31, 2022 compared to the three months endedJuly 31, 2021 and decreased$29.7 million for the nine months endedJuly 31, 2022 compared to the nine months endedJuly 31, 2021 . 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 decreased because we incurred less interest and had less debt in excess of inventory as a result of the reduction of our debt and increase in our qualifying assets during fiscal 2021 and 2022.
Income from
Income from unconsolidated joint ventures consists of our share of the earnings or losses of our unconsolidated joint ventures. Income from unconsolidated joint ventures increased$7.5 million to$12.6 million for the three months endedJuly 31, 2022 and increased$14.4 million to$23.9 million for the nine months endedJuly 31, 2022 compared to the same respective periods of the prior year. The increase was primarily due to the recognition of our share of income from two of our unconsolidated joint ventures during the three and nine months endedJuly 31, 2022 based on the joint venture partner achieving certain return hurdles, in compliance with the joint venture agreement, and as a result, the Company was able to recognize a higher share of the unconsolidated joint venture's profit.
Loss on extinguishment of debt
OnApril 29, 2022 ,K. Hovnanian redeemed$100.0 million aggregate principal amount of its 7.75% Senior Secured 1.125 Lien Notes due 2026. The aggregate purchase price for this redemption was$105.5 million , which included accrued and unpaid interest and which was funded with cash on hand. This redemption resulted in a loss on extinguishment of debt of$6.8 million for the nine months endedJuly 31, 2022 , net of the write-off of unamortized financing costs and fees. The loss from the redemption is included in the Condensed Consolidated Statement of Operations as "Loss on extinguishment of debt". Total Taxes The total income tax expense for the three and nine months endedJuly 31, 2022 was$29.3 million and$58.4 million , respectively. 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. The total income tax expense for the three months endedJuly 31, 2021 was$14.1 million . The federal tax expense was primarily related to pretax income generated during the quarter and state tax expense from income generated in states where we do not have net operating loss carryforwards to offset the current year income. The total benefit for the nine months endedJuly 31, 2021 was$442.9 million . The benefit was primarily due to the reversal of a substantial portion of our valuation allowance previously recorded against our deferred tax assets. Inflation The annual rate of inflation inthe United States hit 8.5% inJuly 2022 , nearly the highest in more than three decades, as measured by the Consumer Price Index (CPI). Inflation has a long-term effect, because increasing costs of land, materials and labor result in increasing sale 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, will substantially outpace increases in the income of potential purchasers and therefore limit our ability to raise home sale prices, which may result in lower gross margins. Inflation has a lesser short-term effect, because we generally negotiate fixed-price contracts with many, but not all, of our subcontractors and material suppliers for the construction of our homes. These prices usually are applicable for a specified number of residential buildings or for a time period of between three to twelve months. Construction costs for residential buildings represented approximately 56.9% of our homebuilding cost of sales for the nine months endedJuly 31, 2022 . 53
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Table of Contents Safe Harbor Statement All statements in this Quarterly Report on Form 10-Q that are not historical facts should be considered as "Forward-Looking Statements" within the meaning of the "Safe Harbor" provisions of the Private Securities Litigation Reform Act of 1995. Such statements involve known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Such forward-looking statements include but are not limited to statements related to the Company's goals and expectations with respect to its financial results for future financial periods. Although we believe that our plans, intentions and expectations reflected in, or suggested by, such forward-looking statements are reasonable, we can give no assurance that such plans, intentions or expectations will be achieved. By their nature, forward-looking statements: (i) speak only as of the date they are made, (ii) are not guarantees of future performance or results and (iii) are subject to risks, uncertainties and assumptions that are difficult to predict or quantify. Therefore, actual results could differ materially and adversely from those forward-looking statements as result of a variety of factors. Such risks, uncertainties and other factors include, but are not limited to:
? Changes in general and local economic, industrial and business conditions and
the impacts of a significant slowdown in residential construction;
? Shortages and price fluctuations of raw materials and labor, including
due to geopolitical events, changes in trade policies, including the
the imposition of tariffs and duties on residential building materials and products, and
related trade disputes and retaliatory actions taken by others
countries;
? The outbreak and spread of COVID-19 and the measures that governments,
the agencies, law enforcement and/or health authorities take action to remedy it,
as well as the lingering macroeconomic effects of the pandemic;
? Adverse weather and other environmental conditions and natural disasters;
? The seasonality of the Company’s activities;
? The availability and cost of suitable land and improved lots and
cash to invest in such land and lots;
? Dependence on subcontractors and their performance;
? Regional and local economic factors, including dependence on certain sectors
of the economy and employment levels affecting home prices and sales
activity in markets where the Company builds homes;
? Increase in terminations of promises to sell;
? Interest rate fluctuations and the availability of mortgage financing;
? Changes in tax laws affecting the after-tax costs of owning a home;
? Legal claims brought against us and not resolved in our favour, such as
product liability disputes, warranty claims and mortgage claims
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 operations and activities of the Company
imposed by the agreements governing the Company’s outstanding debt;
? Availability and terms of financing of the Company;
? The Company’s sources of liquidity;
? Changes in credit ratings;
? Government regulations, including regulations regarding land development,
customer home building, sales and financing processes, tax laws and
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 inability to attract qualified personnel;
and ? Increases in inflation. 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 endedOctober 31, 2021 . 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. 54
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