Hovnanian Enterprises Inc.
Hovnanian Enterprises Inc.
30/08/2024 | Press release | Distributed by Public on 30/08/2024 20:18
Quarterly Report for Quarter Ending July 31, 2024 (Form 10-Q)
hov-20240731.htm
See notes to condensed consolidated financial statements (unaudited).
In connection with the Exchanges, K. Hovnanian, the Notes Guarantors and the Investors entered into the First Amendment to the Secured Term Loan Facility (the "First Amendment" and the Secured Term Loan Facility as amended, the "Amended Secured Term Loan Facility"), providing for, among other things, (i) the issuance of the $93.5million aggregate principal amount of additional Secured Term Loans described above and (ii) certain other modifications and amendments, primarily related to indebtedness permitted to be incurred by K. Hovnanian and the Notes Guarantors thereunder, including providing that the interest rate on all the then outstanding Secured Term Loans shall be increased in certain circumstances when certain priority secured debt is issued, to a weighted-average rate that results from applying (x) an 11.75% per annum rate to the principal amount of the Secured Terms Loans equal to a specified aggregate principal amount of such priority secured debt and (y) a 10.0% per annum rate on the remaining principal amount of Secured Term Loans (the "Interest Rate Increase"). Additionally, the First Amendment provides for an uncommitted incremental term loan facility (term loans thereunder, "Incremental Term Loans") in a maximum amount equal to the Remaining Unsecured Notes Amount. Incremental Term Loans, to the extent requested by K. Hovnanian and incurred in accordance with the Amended Secured Term Loan Facility, would be secured on an equal priority basis with the Secured Term Loans and would generally have the same terms as the Secured Term Loans. K. Hovnanian may request Incremental Term Loans for the sole purpose of exchanging the remaining outstanding principal amount of 13.5% 2026Notes and 5.0% 2040Notes into Incremental Term Loans, which Incremental Term Loans and exchange shall be subject to certain conditions as set forth in the Amended Secured Term Loan Facility. The Secured Term Loans bear interest at a rate equal to 10.0% per annum (subject to the Interest Rate Increase) and will mature on January 31, 2028, with interest payable in arrears on the last business day of each fiscal quarter. Following consummation of the Exchanges, the total outstanding principal amount of Secured Term Loans under the Secured Term Loan Facility is $175.0million.
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 1/1000thof a share of Series A preferred stock. We paid dividends of $2.7 million and $8.0 million on the Series A preferred stock for the threeand ninemonths ended July 31, 2024 and 2023, respectively.
● Income before taxes increasedto $97.3million for the three months ended July 31, 2024from $70.4million for the three months ended July 31, 2023, and increasedto $199.2million for the nine months ended July 31, 2024from $134.6million for the nine months ended July 31, 2023.Income before taxes include gains from the consolidation of joint ventures of $45.7 million and $19.1 million for the three and nine months ended July 31, 2024 and 2023, respectively. Net income increasedto $72.9million for the three months ended July 31, 2024from $55.8million for the three months ended July 31, 2023, and increasedto $147.7million for the nine months ended July 31, 2024from $108.6million for the nine months ended July 31, 2023. Earnings per share, basic and diluted, increased to $10.61 and $9.75, respectively, for the three months ended July 31, 2024compared to $7.92and $7.38, respectively, for the three months ended July 31, 2023. Earnings per share, basic and diluted, increased to $20.85 and $19.15, respectively, for the nine months ended July 31, 2024compared to $14.97and $13.97, respectively, for the nine months ended July 31, 2023.
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 decreased to 19.1% and increased to 18.9% for the three and ninemonths ended July 31, 2024, respectively, compared to 20.1% and 18.8% for the prior year periods, respectively. Total homebuilding gross margin percentage, before cost of sales interest expense and land charges decreased to 22.1% and increased to 22.2% for the three and ninemonths ended July 31, 2024, respectively, compared to 23.2% and 21.9% for the three and ninemonths ended July 31, 2023, respectively. The decrease in gross margin percentage for the three months ended July 31, 2024was primarily due to increased use of incentives and concessions, including additional mortgage interest rate buydowns, to make our homes more affordable. The increase in gross margin percentage for the nine months ended July 31, 2024 was primarily due to decreases in base construction costs per square foot across each of our segments.
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
|
☒ |
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended July 31, 2024
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, NJ07747 (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 representing1/1,000th 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. 5,325,330 shares of Class A Common Stock and 729,403 shares of Class B Common Stock were outstanding as of August 27, 2024.
| 1 |
Table of Contents
HOVNANIAN ENTERPRISES, INC.
FORM 10-Q
|
INDEX |
PAGE |
|
|
|
| PART I. Financial Information |
|
| Item l. Financial Statements: |
|
|
|
|
| Condensed Consolidated Balance Sheets (unaudited) as of July 31, 2024 and October 31, 2023 | 3 |
|
|
|
| Condensed Consolidated Statements of Operations (unaudited) for the three and nine months ended July 31, 2024 and 2023 | 4 |
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|
|
| Condensed Consolidated Statements of Changes in Equity (unaudited) for the three and nine months ended July 31, 2024 and 2023 | 5 |
|
|
|
| Condensed Consolidated Statements of Cash Flows (unaudited) for the nine months ended July 31, 2024 and 2023 | 7 |
|
|
|
| Notes to Condensed Consolidated Financial Statements (unaudited) | 9 |
|
|
|
| Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations | 30 |
|
|
|
| Item 3. Quantitative and Qualitative Disclosures About Market Risk | 49 |
|
|
|
| Item 4. Controls and Procedures | 49 |
|
|
|
| PART II. Other Information | 50 |
| Item 1. Legal Proceedings | 50 |
|
|
|
| Item 2. Unregistered Sales of Equity Securities and Use of Proceeds | 50 |
|
|
|
| Item 5. Other Information | 50 |
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|
|
| Item 6. Exhibits | 51 |
|
|
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| Signatures | 53 |
| 2 |
Table of Contents
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
(Unaudited)
|
July 31, |
October 31, |
|||||||
|
2024 |
2023 |
|||||||
|
ASSETS |
||||||||
|
Homebuilding: |
||||||||
|
Cash and cash equivalents |
$ | 122,036 | $ | 434,119 | ||||
|
Restricted cash and cash equivalents |
9,615 | 8,431 | ||||||
|
Inventories: |
||||||||
|
Sold and unsold homes and lots under development |
1,267,477 | 998,841 | ||||||
|
Land and land options held for future development or sale |
166,552 | 125,587 | ||||||
|
Consolidated inventory not owned |
216,441 | 224,758 | ||||||
|
Total inventories |
1,650,470 | 1,349,186 | ||||||
|
Investments in and advances to unconsolidated joint ventures |
126,318 | 97,886 | ||||||
|
Receivables, deposits and notes, net |
48,067 | 27,982 | ||||||
|
Property and equipment, net |
41,219 | 33,946 | ||||||
|
Prepaid expenses and other assets |
78,506 | 69,886 | ||||||
|
Total homebuilding |
2,076,231 | 2,021,436 | ||||||
|
Financial services |
206,365 | 168,671 | ||||||
|
Deferred tax assets, net |
257,909 | 302,833 | ||||||
|
Total assets |
$ | 2,540,505 | $ | 2,492,940 | ||||
|
LIABILITIES AND EQUITY |
||||||||
|
Homebuilding: |
||||||||
|
Nonrecourse mortgages secured by inventory, net of debt issuance costs |
$ | 115,357 | $ | 91,539 | ||||
|
Accounts payable and other liabilities |
419,836 | 415,480 | ||||||
|
Customers' deposits |
48,791 | 51,419 | ||||||
|
Liabilities from inventory not owned, net of debt issuance costs |
135,559 | 124,254 | ||||||
|
Senior notes and credit facilities (net of discounts, premiums and debt issuance costs) |
898,749 | 1,051,491 | ||||||
|
Accrued interest |
32,799 | 26,926 | ||||||
|
Total homebuilding |
1,651,091 | 1,761,109 | ||||||
|
Financial services |
186,030 | 148,181 | ||||||
|
Income taxes payable |
- | 1,861 | ||||||
|
Total liabilities |
1,837,121 | 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 July 31, 2024and October 31, 2023 | 135,299 | 135,299 | ||||||
| Common stock, Class A, $0.01 par value - authorized 16,000,000 shares; issued 6,410,759 shares at July 31, 2024and 6,247,308 shares at October 31, 2023 | 64 | 62 | ||||||
| Common stock, Class B, $0.01 par value (convertible to Class A at time of sale) - authorized 2,400,000 shares; issued 757,072 shares at July 31, 2024and 776,750 shares at October 31, 2023 | 8 | 8 | ||||||
|
Paid in capital - common stock |
744,479 | 735,946 | ||||||
|
Accumulated deficit |
(17,545 | ) | (157,197 | ) | ||||
| Treasury stock - at cost - 1,090,179 shares of Class A common stock at July 31, 2024and 901,379 shares at October 31, 2023; 27,669 shares of Class B common stock at July 31, 2024and October 31, 2023 | (158,921 | ) | (132,382 | ) | ||||
|
Total Hovnanian Enterprises, Inc. stockholders' equity |
703,384 | 581,736 | ||||||
|
Noncontrolling interest in consolidated joint ventures |
- | 53 | ||||||
|
Total equity |
703,384 | 581,789 | ||||||
|
Total liabilities and equity |
$ | 2,540,505 | $ | 2,492,940 |
See notes to condensed consolidated financial statements (unaudited).
| 3 |
Table of Contents
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
|
Three Months Ended July 31, |
Nine Months Ended July 31, |
|
||||||||||
|
2024 |
2023 |
2024 |
|
|
2023 |
|
||||||
|
Revenues: |
|
|
|
|
|
|
|
|
||||
|
Homebuilding: |
|
|
|
|
|
|
|
|
||||
|
Sale of homes |
$ | 687,424 | $ | 630,371 |
|
$ | 1,947,989 |
|
|
$ | 1,800,724 |
|
|
Land sales and other revenues |
16,392 | 4,937 |
|
|
25,968 |
|
|
|
27,244 |
|
||
|
Total homebuilding |
703,816 | 635,308 |
|
|
1,973,957 |
|
|
|
1,827,968 |
|
||
|
Financial services |
18,888 | 14,649 |
|
|
51,323 |
|
|
|
41,016 |
|
||
|
Total revenues |
722,704 | 649,957 |
|
|
2,025,280 |
|
|
|
1,868,984 |
|
||
|
|
|
|
|
|
|
|
|
|||||
|
Expenses: |
|
|
|
|
|
|
|
|
||||
|
Homebuilding: |
|
|
|
|
|
|
|
|
||||
|
Cost of sales, excluding interest |
547,332 | 483,990 |
|
|
1,528,047 |
|
|
|
1,415,652 |
|
||
|
Cost of sales interest |
22,316 | 19,272 |
|
|
63,757 |
|
|
|
55,719 |
|
||
|
Inventory impairments and land option write-offs |
3,099 | 308 |
|
|
3,638 |
|
|
|
922 |
|
||
|
Total cost of sales |
572,747 | 503,570 |
|
|
1,595,442 |
|
|
|
1,472,293 |
|
||
|
Selling, general and administrative |
50,989 | 47,716 |
|
|
146,415 |
|
|
|
146,090 |
|
||
|
Total homebuilding expenses |
623,736 | 551,286 |
|
|
1,741,857 |
|
|
|
1,618,383 |
|
||
|
|
|
|
|
|
|
|
|
|||||
|
Financial services |
12,362 | 10,345 |
|
|
35,856 |
|
|
|
29,550 |
|
||
|
Corporate general and administrative |
38,480 | 27,365 |
|
|
108,130 |
|
|
|
77,934 |
|
||
|
Other interest |
6,262 | 13,502 |
|
|
25,682 |
|
|
|
43,096 |
|
||
|
Other (income) expense, net (1) |
(44,707 | ) | (18,612 | ) |
|
|
(47,284 | ) |
|
|
(17,652 | ) |
|
Total expenses |
636,133 | 583,886 |
|
|
1,864,241 |
|
|
|
1,751,311 |
|
||
|
(Loss) gain on extinguishment of debt, net |
- | (4,082 | ) |
|
|
1,371 |
|
|
|
(4,082 | ) | |
|
Income from unconsolidated joint ventures |
10,698 | 8,401 |
|
|
36,814 |
|
|
|
20,969 |
|
||
|
Income before income taxes |
97,269 | 70,390 |
|
|
199,224 |
|
|
|
134,560 |
|
||
|
State and federal income tax provision (benefit): |
|
|
|
|
|
|
|
|
||||
|
State |
5,896 | (500 | ) |
|
|
13,333 |
|
|
|
2,794 |
|
|
|
Federal |
18,454 | 15,126 |
|
|
38,232 |
|
|
|
23,140 |
|
||
|
Total income taxes |
24,350 | 14,626 |
|
|
51,565 |
|
|
|
25,934 |
|
||
|
Net income |
72,919 | 55,764 |
|
|
147,659 |
|
|
|
108,626 |
|
||
|
Less: preferred stock dividends |
2,669 | 2,669 |
|
|
8,007 |
|
|
|
8,007 |
|
||
|
Net income available to common stockholders |
$ | 70,250 | $ | 53,095 |
|
$ | 139,652 |
|
|
$ | 100,619 |
|
|
|
|
|
|
|
|
|
|
|||||
|
Per share data: |
|
|
|
|
|
|
|
|
||||
|
Basic: |
|
|
|
|
|
|
|
|
||||
|
Net income per common share |
$ | 10.61 | $ | 7.92 |
|
$ | 20.85 |
|
|
$ | 14.97 |
|
|
Weighted-average number of common shares outstanding |
6,474 | 6,249 |
|
|
6,476 |
|
|
|
6,201 |
|
||
|
Assuming dilution: |
|
|
|
|
|
|
|
|
||||
|
Net income per common share |
$ | 9.75 | $ | 7.38 |
|
$ | 19.15 |
|
|
$ | 13.97 |
|
|
Weighted-average number of common shares outstanding |
7,048 | 6,705 |
|
|
7,048 |
|
|
|
6,642 |
|
(1) Includes gain on consolidation of a joint venture of $45.7 million and $19.1 million for the threeand nine months ended July 31, 2024and 2023, respectively(see Note 18).
See notes to condensed consolidated financial statements (unaudited).
| 4 |
Table of Contents
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
NINEMONTH PERIOD ENDED JULY 31, 2024
(In thousands, except share data)
(Unaudited)
| A Common Stock |
See notes to condensed consolidated financial statements (unaudited).
|
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 | |||||||||||||||||||||||
| Stock options, amortization and issuances |
|
|
120 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4 | ) |
| Preferred dividend declared ($476.56per share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,669 | ) |
|
|
|
|
|
|
|
|
|
|
(2,669 | ) |
| Restricted stock amortization, issuances and forfeitures |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,942 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,942 |
|
| Conversion of Class B to Class A common stock |
|
|
40,141 |
|
|
|
1 |
|
|
|
(40,141 | ) |
|
|
(1 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- |
|
| Share repurchases |
|
|
(106,047 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(15,147 | ) |
|
|
|
|
|
|
(15,147 | ) |
| Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50,836 |
|
|
|
|
|
|
|
|
|
|
|
50,836 |
|
| Balance, April 30, 2024 |
|
|
5,280,774 |
|
|
$ | 63 |
|
|
|
708,924 |
|
|
$ | 7 |
|
|
|
5,600 |
|
|
$ | 135,299 |
|
|
$ | 747,001 |
|
|
$ | (87,795 | ) |
|
$ | (147,529 | ) |
|
$ | - |
|
|
$ | 647,046 |
|
| Stock options, amortization and issuances |
|
|
4,767 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
268 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
268 |
|
| Preferred dividend declared ($476.56 per share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,669 | ) |
|
|
|
|
|
|
|
|
|
|
(2,669 | ) |
| Restricted stock amortization, issuances and forfeitures |
|
|
85,021 |
|
|
|
1 |
|
|
|
53,250 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
(2,790 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,788 | ) |
| Conversion of Class B to Class A common stock |
|
|
32,771 |
|
|
|
- |
|
|
|
(32,771 | ) |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- |
|
| Share repurchases |
|
|
(82,753 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,392 | ) |
|
|
|
|
|
|
(11,392 | ) |
| Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
72,919 |
|
|
|
|
|
|
|
|
|
|
|
72,919 |
|
| Balance, July 31, 2024 |
|
|
5,320,580 |
|
|
$ | 64 |
|
|
|
729,403 |
|
|
$ | 8 |
|
|
|
5,600 |
|
|
$ | 135,299 |
|
|
$ | 744,479 |
|
|
$ | (17,545 | ) |
|
$ | (158,921 | ) |
|
$ | - |
|
|
$ | 703,384 |
|
| 5 |
Table of Contents
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
NINEMONTH PERIOD ENDEDJULY31, 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 | |||||||||||||||||||||||
| Stock options, amortization and issuances |
|
|
1,720 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
59 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
59 |
|
| Preferred dividend declared ($476.56per share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,669 | ) |
|
|
|
|
|
|
|
|
|
|
(2,669 | ) |
| Restricted stock amortization, issuances and forfeitures |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,157 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,157 |
|
| Conversion of Class B to Class A common stock |
|
|
18 |
|
|
|
|
|
|
|
(18 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- |
|
| Changes in noncontrolling interest in consolidated joint ventures |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7 |
|
|
|
7 |
|
| Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34,146 |
|
|
|
|
|
|
|
|
|
|
|
34,146 |
|
| Balance, April 30, 2023 |
|
|
5,278,505 |
|
|
$ | 62 |
|
|
|
720,307 |
|
|
$ | 7 |
|
|
|
5,600 |
|
|
$ | 135,299 |
|
|
$ | 731,374 |
|
|
$ | (304,889 | ) |
|
$ | (132,382 | ) |
|
$ | 26 |
|
|
$ | 429,497 |
|
| Stock options, amortization and issuances |
|
|
1,610 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23 |
|
||
| Preferred dividend declared ($476.56per share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,669 | ) |
|
|
|
|
|
|
|
|
|
|
(2,669 | ) |
| Restricted stock amortization, issuances and forfeitures |
|
|
65,372 |
|
|
|
|
|
|
|
28,955 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
(112 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(111 | ) |
| Conversion of Class B to Class A common stock |
|
|
181 |
|
|
|
|
|
|
|
(181 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- |
|
| Changes in noncontrolling interest in consolidated joint ventures |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11 |
|
|
|
11 |
|
| Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
55,764 |
|
|
|
|
|
|
|
|
|
|
|
55,764 |
|
| Balance, July 31, 2023 |
|
|
5,345,668 |
|
|
$ | 62 |
|
|
|
749,081 |
|
|
$ | 8 |
|
|
|
5,600 |
|
|
$ | 135,299 |
|
|
$ | 731,285 |
|
|
$ | (251,794 | ) |
|
$ | (132,382 | ) |
|
$ | 37 |
|
|
$ | 482,515 |
|
See notes to condensed consolidated financial statements (unaudited).
| 6 |
Table of Contents
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
|
Nine Months Ended |
||||||||
|
July 31, |
||||||||
|
2024 |
2023 |
|||||||
|
Cash flows from operating activities: |
||||||||
|
Net income |
$ | 147,659 | $ | 108,626 | ||||
|
Adjustments to reconcile net income to net cash (used in) provided by operating activities: |
||||||||
|
Depreciation |
5,679 | 7,223 | ||||||
|
Stock-based compensation |
20,208 | 9,553 | ||||||
|
Amortization of debt discounts, premiums and deferred financing costs |
(366 | ) | 1,561 |
|
||||
|
Gain on sale of property and assets |
(941 | ) | (81 | ) | ||||
| Gain on consolidation of joint venture |
|
|
(45,653 | ) |
|
|
(19,102 | ) |
|
Income from unconsolidated joint ventures |
(36,814 | ) | (20,969 | ) | ||||
|
Distributions of earnings from unconsolidated joint ventures |
3,170 | 13,382 | ||||||
|
(Gain) loss on extinguishment of debt |
(1,371 | ) | 4,082 | |||||
| Noncontrollinginterest in consolidated joint ventures |
|
|
- |
|
|
22 |
|
|
|
Inventory impairments and land option write-offs |
3,638 | 922 | ||||||
|
(Increase) decrease in assets: |
||||||||
|
Inventories |
(181,270 | ) | 217,211 |
|
||||
|
Receivables, deposits and notes |
(25,138 | ) | 12,638 |
|
||||
|
Origination of mortgage loans |
(1,083,465 | ) | (811,015 | ) | ||||
|
Sale of mortgage loans |
1,065,098 | 841,659 | ||||||
|
Deferred tax assets |
44,924 | 20,095 | ||||||
|
Increase (decrease) in liabilities: |
||||||||
|
Accounts payable, accrued interest and other liabilities |
3,819 | (74,050 | ) | |||||
|
Customers' deposits |
(9,146 | ) | (17,425 | ) | ||||
|
State income tax payable |
(2,215 | ) | (2,733 | ) | ||||
|
Net cash (used in) provided by operating activities |
(92,184 | ) | 291,599 | |||||
|
Cash flows from investing activities: |
||||||||
|
Proceeds from sale of property and assets |
951 | 459 | ||||||
|
Purchase of property, equipment, and other fixed assets |
(13,437 | ) | (13,203 | ) | ||||
|
Investment in and advances to unconsolidated joint ventures, net of reimbursements |
(32,162 | ) | (78,560 | ) | ||||
|
Distributions of capital from unconsolidated joint ventures |
4,353 | 12,889 | ||||||
|
Net cash used in investing activities |
(40,295 | ) | (78,415 | ) | ||||
|
Cash flows from financing activities: |
||||||||
|
Proceeds from mortgages and notes |
227,612 | 249,041 | ||||||
|
Payments related to mortgages and notes |
(241,496 | ) | (269,453 | ) | ||||
|
Proceeds from model sale leaseback financing programs |
25,619 | 12,412 | ||||||
|
Payments related to model sale leaseback financing programs |
(17,728 | ) | (14,551 | ) | ||||
|
Proceeds from land bank financing programs |
75,969 | 34,713 | ||||||
|
Payments related to land bank financing programs |
(72,132 | ) | (90,056 | ) | ||||
|
Net proceeds (payments) related to mortgage warehouse lines of credit |
23,688 | (32,468 | ) | |||||
|
Payments related to senior notes, senior secured notes and senior unsecured term loan |
(145,000 | ) | (101,937 | ) | ||||
|
Preferred dividends paid |
(8,007 | ) | (8,007 | ) | ||||
| Treasury stock purchases | (26,539 | ) | (4,800 | ) | ||||
|
Deferred financing costs from land banking financing programs and note issuances |
(3,155 | ) | (2,891 | ) | ||||
|
Net cash used in financing activities |
(161,169 | ) | (227,997 | ) | ||||
|
Net decrease in cash and cash equivalents, and restricted cash and cash equivalents |
(293,648 | ) | (14,813 | ) | ||||
|
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 |
$ | 183,871 | $ | 367,377 | ||||
|
Supplemental disclosures of cash flows: |
||||||||
|
Cash paid during the period for: |
||||||||
|
Interest, net of capitalized interest |
$ | 23,091 | $ | 26,630 | ||||
|
Income taxes |
$ | 8,856 | $ | 8,571 | ||||
|
Reconciliation of Cash, cash equivalents and restricted cash |
||||||||
|
Homebuilding: Cash and cash equivalents |
$ | 122,036 | $ | 325,182 | ||||
|
Homebuilding: Restricted cash and cash equivalents |
9,615 | 8,623 | ||||||
|
Financial Services: Cash and cash equivalents, included in financial services assets |
5,847 | 4,119 | ||||||
|
Financial Services: Restricted cash and cash equivalents, included in financial services assets |
46,373 | 29,453 | ||||||
|
Total cash, cash equivalents and restricted cash shown in the statements of cash flows |
$ | 183,871 | $ | 367,377 |
| 7 |
Table of Contents
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands - Unaudited)
(Continued)
Supplemental disclosure of non-cash operating, investing and financing activities:
In the second quarter of fiscal 2023, we consolidated the remaining assets of oneof our unconsolidated joint ventures, resulting in a $10.8 million reduction in our investment in the joint venture, and increases of $14.9 million and $5.3 million to inventory and accounts payable, respectively.
In the third quarter of fiscal 2023, we consolidated the remaining assets of oneof our unconsolidated joint ventures, resulting in a $53.4 million reduction in our investment in the joint venture, and increases of $95.3 million to inventory, $3.8 million to other assets, $14.5 million to accounts payable, $7.3 million to customer deposits and $4.8 million to nonrecourse mortgages and notes.
In the third quarter of fiscal 2024, we consolidated the remaining assets of oneof our unconsolidated joint ventures, resulting in a $33.1million reduction in our investment in the joint venture, and increases of $123.7million to inventory, $7.0 million to other assets, $8.8million to accounts payable, $6.5 million to customer deposits and $36.6 million to nonrecourse mortgages and notes, net of debt issuance costs.
In the third quarter of fiscal 2024, K. Hovnanian exchanged $64.0 million aggregate principal amount of 13.5% Senior Notes due February 1, 2026 (the "13.5% Notes"), $65.2 million aggregate principal amount of 5.0% Senior Notes due February 1, 2040 and all of its $39.6 million aggregate principal amount of loans under the Senior Unsecured Term Loan Credit Facility due February 1, 2027 (the "Unsecured Term Loan") and an aggregate cash payment of $31.5 million in respect of the 13.5% Notes and Unsecured Term Loan for an additional $93.5 million aggregate principal amount of loans under the Senior Secured 1.75Lien Term Loan Credit Facility due January 31, 2028.
| 8 |
Table of Contents
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
|
1. |
Basis of Presentation |
Hovnanian Enterprises, Inc. ("HEI") conducts all of its homebuilding and financial services operations through its subsidiaries (references herein to the "Company," "we," "us" or "our" refer to HEI and its consolidated subsidiaries and should be understood to reflect the consolidated business of HEI's subsidiaries).
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 not 100% owned by the Company directly or 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, 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 2024, the Board of Directors (the "Board") approved certain grants under a new Long-Term Incentive Program (the "2024 LTIP") that contain performance-based vesting conditions. The performance period for the 2024 LTIP commenced on November 1, 2023 and will end on October 31, 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 and nine months ended July 31, 2024, stock-based compensation expense was $9.2million ($6.1 million net of tax) and $20.2million ($13.2millionnet of tax), respectively. For the three and nine months ended July 31, 2023, stock-based compensation expense was $5.3 million ($4.2 million net of tax) and $9.6 million ($7.7 million net of tax),respectively.| 9 |
Table of Contents
| 3. | Interest |
Interest costs incurred, expensed and capitalized were as follows:
|
|
Three Months Ended |
|
Nine Months Ended |
|||||||||||||
|
|
July 31, |
|
July 31, |
|||||||||||||
|
(In thousands) |
|
2024 |
|
|
2023 |
|
2024 |
2023 |
||||||||
|
Interest capitalized at beginning of period |
|
$ | 52,222 |
|
|
$ | 60,274 |
|
$ | 52,060 | $ | 59,600 | ||||
|
Plus interest incurred(1) |
|
|
28,087 |
|
|
|
34,214 |
|
94,578 | 103,662 | ||||||
|
Less cost of sales interest expensed |
|
|
(22,316 | ) |
|
|
(19,272 | ) | (63,757 | ) | (55,719 | ) | ||||
|
Less other interest expensed(2) |
|
|
(6,262 | ) |
|
|
(13,502 | ) | (25,682 | ) | (43,096 | ) | ||||
|
Less interest contributed to unconsolidated joint venture(3) |
|
|
- |
|
|
(6,440 | ) | (5,468 | ) | (9,456 | ) | |||||
| Plus interest acquired from unconsolidated joint venture(4) |
|
|
2,861 |
|
|
|
- |
|
|
|
2,861 |
|
|
|
283 |
|
|
Interest capitalized at end of period(5) |
|
$ | 54,592 |
|
|
$ | 55,274 |
|
$ | 54,592 | $ | 55,274 |
|
(1) |
Data does notinclude interest incurred by our mortgage and finance subsidiaries. |
|
(2) |
Other interest expensed includes interest that does notqualify for interest capitalization because our assets that qualify for interest capitalization (inventory under development) did notexceed our debt, which amounted to $2.6million and $14.5 million for the three and nine months ended July 31,2023. During the three and nine months ended July 31, 2024, our inventory under development exceeded our debt, therefore, all of the related interest incurred qualified for interest capitalization. Other interest also includes interest on completed homes, land in planning and fully developed lots without homes under construction, which does notqualify for capitalization and therefore is expensed as incurred. This component of other interest was $6.3million and $10.9 million for the three months ended July 31, 2024and 2023, respectively, and $25.7 million and $28.6 million for the nine months ended July 31, 2024and 2023, respectively. |
|
(3) |
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 capitalized interest transactions. |
| (4) | Represents capitalized interest which was included as part of the assets acquired from joint ventures, as discussed in Note 18. There was no impact to the Condensed Consolidated Statement of Operations as a result of these capitalized interest transactions. |
|
(5) |
Capitalized interest amounts are shown gross before allocating a portion of impairments, if any, to capitalized interest. |
| 4. | Reduction of Inventory to Fair Value |
We had 448 and 359 communities under development and held for future development or sale at July 31, 2024and 2023, respectively, which we evaluated for impairment indicators. We identified an impairment indicator related to an offer received on a parcel of land with a carrying value of $15.2 million for one community in our West segment during both the three and nine months ended July 31, 2024. The impairment analysis resulted in an impairment charge of $2.7 million, included with "Inventory impairments and land option write-offs" in the Condensed Consolidated Statement of Operations and deducted from inventory. We did notidentify impairment indicators for any community during the three and nine months ended July 31, 2023.
Write-offsof options, engineering and capitalized interest costs are recorded in "Inventory impairments and land option write-offs" when we redesign communities, abandon certain engineering costs or do not exercise options in various locations because the pro forma profitability is not projected to produce adequate returns on investment commensurate with the risk. Total aggregate write-offs related to these items were $0.4 million and $0.3 million for the three months ended July 31, 2024and 2023, respectively, and $0.9 million for each of the nine months ended July 31, 2024and 2023. The number of lots walked away from during the three months ended July 31, 2024and 2023 were 1,277 and 521, respectively, and2,547 and2,918 during the nine months ended July 31, 2024and 2023, respectively. Walk-aways during the first three quarters of fiscal 2024and 2023occurred across each of our segments.
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 and the ability to repurchase model homes with below market options, these sale and leaseback transactions are considered a financing rather than a sale. Our Condensed Consolidated Balance Sheets at July 31, 2024 and October 31, 2023, included inventory of $48.9 million and $41.7 million, respectively, recorded to "Consolidated inventory not owned" with a corresponding amount of $49.4 million and $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 a land banker 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 July 31, 2024 and October 31, 2023, included inventory of $167.5 million and $183.1 million, respectively, recorded to "Consolidated inventory not owned" with a corresponding amount of $86.2 million (net of debt issuance costs) and $82.3 million, respectively, recorded to "Liabilities from inventory not owned" for the amount of net cash received from the transactions.
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Table of Contents
| 5. | Variable Interest Entities |
We enter into land and lot option purchase contracts to procure land or lots for the construction of homes. Under these contracts, the Company will fund a stated deposit in consideration for the right, but not the obligation, to purchase land or lots at a future point in time with predetermined terms. Under the terms of the option purchase contracts, many of the option deposits are not refundable at the Company's discretion. Under the requirements of ASC 810, certain option purchase contracts may result in the creation of a Variable Interest Entity ("VIE") that owns the land parcel under option.
Although 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 we are the primary beneficiary. The significant factors we consider in determining if the power to direct the activities of a VIE that most significantly impact the VIE's economic performance are shared include, among other things, our ability in determining or limiting the scope or purpose of the VIE, selling or transferring property owned or controlled by the VIE, changing the terms of the contract or arranging financing for the VIE. As a result of our analyses, we have concluded, there are no VIEs that required consolidation at either July 31, 2024 or October 31, 2023 because we are not the primary beneficiary of the 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 July 31, 2024 and October 31, 2023, we had total cash deposits amounting to $212.3 million and $192.3 million, respectively, to purchase land and lots with a total purchase price of $2.8 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, although some deposits are refundable at our request or refundable if certain conditions are met.
|
6. |
Warranty Costs |
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 2024, our deductible under our general liability insurance is $30.0 million, aggregated 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 2024 is $0.25 million and $0.5 million for action over claims, both with a $30.0 million limit, and for fiscal 2023it was $0.25 million for all other states and $0.5 million for California, both with a $5.0 million 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 changes in the warranty reserve and general liability reserve for the three and ninemonths ended July 31, 2024and 2023were as follows:
|
Three Months Ended |
|
Nine Months Ended |
|
|||||||||||||
|
July 31, |
|
July 31, |
|
|||||||||||||
|
(In thousands) |
2024 |
2023 |
|
2024 |
|
|
2023 |
|
||||||||
|
Balance, beginning of period |
$ | 85,177 | $ | 90,610 |
|
$ | 98,919 |
|
|
$ | 97,719 |
|
||||
|
Additions - Selling, general and administrative |
2,262 | 1,657 |
|
|
6,850 |
|
|
|
5,451 |
|
||||||
|
Additions - Cost of sales |
2,787 | 1,445 |
|
|
7,637 |
|
|
|
4,685 |
|
||||||
|
Charges incurred during the period |
(2,546 | ) | (3,799 | ) |
|
|
(28,139 | ) |
|
|
(17,186 |
) | ||||
|
Changes to pre-existing reserves |
418 | 437 |
|
|
2,831 |
|
|
|
(319 | ) | ||||||
|
Balance, end of period |
$ | 88,098 | $ | 90,350 |
|
$ | 88,098 |
|
|
$ | 90,350 |
|
The majority of the charges incurred during the firstnine months of fiscal 2024 represented a payment for construction defects related to the settlement of one litigation matter.
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|
7. |
Commitments and Contingent Liabilities |
We are involved in litigation arising in the ordinary course of business, none of which is expected to have a material adverse effect on our financial position, results of operations or cash flows, and we are subject to extensive and complex laws and regulations that affect the development of land and home building, sales and customer financing processes, including zoning, density, building standards and mortgage financing. These laws and regulations often provide broad discretion to the administering governmental authorities. This can delay or increase the cost of development or homebuilding. The significant majority of our litigation matters are related to construction defect claims. Our estimated losses from construction defect litigation matters, if any, are included in our construction defect reserves.
We also are subject to a variety of local, state, federal and foreign laws and regulations concerning protection of health and the environment, including those regulating the emission or discharge of materials into the environment, the management of storm water runoff at construction sites, the handling, use, storage and disposal of hazardous substances, impacts to wetlands and other sensitive environments, and the remediation of contamination at properties that we have owned or developed or currently own or are developing ("environmental laws"). The particular environmental laws that apply to a site may vary greatly according to the community site, for example, due to the community, the environmental conditions at or near the site, and the present and former uses of the site. These environmental laws may result in delays, may cause us to incur substantial compliance, remediation and/or other costs, and can prohibit or severely restrict development and homebuilding activity. In addition, noncompliance with these laws and regulations could result in fines and penalties, obligations to remediate 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 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, oneof 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 2009to 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 has commenced. Hovnanian Enterprises, Inc. intends to defend these claims vigorously.
|
8. |
Cash Equivalents, Restricted Cash and Customers' Deposits |
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 July 31, 2024 and October 31, 2023, $15.5 million and $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 $9.6 million and $8.4 million as of July 31, 2024 and October 31, 2023, respectively, which primarily consists of cash collateralizing our letter of credit agreements and facilities (see Note 12).
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Table of Contents
Financial services restricted cash and cash equivalents, which are included in "Financial services" assetson the Condensed Consolidated Balance Sheets, totaled $46.4 million and$30.5million as of July 31, 2024 and October 31, 2023, respectively. Included in these balances were (1) financial services customers' deposits of $44.1 million and $28.1 million at July 31, 2024and October 31, 2023, respectively, which are subject to restrictions on our use, and (2) restricted cash under the terms of our mortgage warehouse lines of credit of $2.3 million and $2.4 million at July 31, 2024 and October 31, 2023, respectively.
Homebuilding "Customers' deposits" are shown as a liability on the Condensed Consolidated Balance Sheets. These liabilities are significantly more than the applicable periods' restricted cash balances because in some states the deposits are not restricted from use and, in other states, we are able to release the majority of these customer deposits to cash by pledging letters of credit or surety bonds.
|
9. |
Leases |
We rent certain office space for use in our operations. Our lease population at July 31, 2024 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.
| Three Months Ended |
|
Nine Months Ended |
|
|||||||||
|
July 31, |
|
July 31, |
|
|||||||||
|
(In thousands) |
2024 |
2023 |
|
2024 |
|
|
2023 |
|
||||
|
Operating lease costs |
$ | 2,743 | $ | 2,646 |
|
$ | 8,131 |
|
|
$ | 8,510 |
|
|
Cash payments on lease liabilities |
$ | 2,224 | $ | 2,222 |
|
$ | 6,604 |
|
|
$ | 6,959 |
|
Operating right-of-use lease assets ("ROU assets") are included in "Prepaid expenses and other assets"on our Condensed Consolidated Balance Sheets, while lease liabilities are included in "Accounts payable and other liabilities". During the three and ninemonths ended July 31, 2024the Company recorded a net increase to both its ROU assets and lease liabilities of $3.4 million and $6.4 million, respectively, as a result of new leases that commenced during the period. The following table contains additional information about our leases:
|
(In thousands) |
July 31, 2024 |
October 31, 2023 |
||
|
ROU assets |
$ | 24,900 | $ | 25,745 |
|
Lease liabilities |
$ | 26,926 | $ | 26,470 |
|
Weighted-average remaining lease term (in years) |
4.7 | 5.1 | ||
|
Weighted-average discount rate |
10.3 | % | 10.0 | % |
Maturities of our operating lease liabilities as of July 31, 2024 are as follows:
| Fiscal Year Ending October 31, |
(In thousands) |
|
| 2024 (excluding the nine months ended July 31, 2024) | $ | 2,512 |
|
2025 |
9,761 | |
|
2026 |
8,340 | |
|
2027 |
5,803 | |
|
2028 |
2,283 | |
|
2029 and thereafter |
5,167 | |
|
Total operating lease payments |
33,866 | |
|
Less: imputed interest |
(6,940 | ) |
|
Present value of operating lease liabilities |
$ | 26,926 |
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Table of Contents
|
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 changes in the value recognized in the Condensed Consolidated Statements of Operations in "Financial services" revenue. We 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 July 31, 2024 and October 31, 2023, $140.1 million and $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. At both July 31, 2024 and October 31, 2023, we had specific reserves for 10identified 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 and ninemonths ended July 31, 2024and 2023 were as follows:
|
Three Months Ended |
|
|
Nine Months Ended | |||||||||||||
|
July 31, |
|
|
July 31, | |||||||||||||
|
(In thousands) |
2024 |
2023 |
|
|
|
2024 |
|
|
|
2023 | ||||||
|
Loan origination reserves, beginning of period |
$ | 2,034 | $ | 1,906 |
|
|
$ | 2,013 |
|
|
$ | 1,795 | ||||
|
Provisions for losses during the period |
60 | 50 |
|
|
|
162 |
|
|
|
127 | ||||||
|
Adjustments to pre-existing provisions for losses from changes in estimates |
- | - |
|
|
|
(81 | ) |
|
|
34 |
||||||
|
Loan origination reserves, end of period |
$ | 2,094 | $ | 1,956 |
|
|
$ | 2,094 |
|
|
$ | 1,956 |
| 11. | Mortgages |
Nonrecourse
We had nonrecourse mortgage loans for certain communities totaling $115.4 million and $91.5 million, net of debt issuance costs, at July 31, 2024 and October 31, 2023, respectively, which are secured by the related real property, including any improvements, with an aggregate book value of $336.7 million and $331.6 million, respectively. The weighted-average interest rate on these obligations was 9.1% and 8.5% at July 31, 2024 and October 31, 2023, respectively, and the mortgage loan payments primarily correspond to home deliveries.
Mortgage Loans
K. Hovnanian Mortgage finances the origination of mortgage loans through various master repurchase agreements, which are recorded in "Financial services" liabilities on the Condensed Consolidated Balance Sheets.
Our secured Master Repurchase Agreement with JPMorgan Chase Bank, N.A. ("Chase Master Repurchase Agreement"), which was amended on July 31, 2024 to extend the maturity date to July 31, 2025, is a short-term borrowing facility that provides up to $50.0 million through its maturity.The loan is secured by the mortgages held for sale and is repaid when we sell the underlying mortgage loans to permanent investors. Interest is payable monthly on outstanding advances at an adjusted Secured Overnight Financing Rate ("SOFR"), plus an applicable margin of 2.00% to 2.25%. As of July 31, 2024 and October 31, 2023, the aggregate principal amount of all borrowings outstanding under the Chase Master Repurchase Agreement was $42.7 million and $31.4 million, respectively.
| 14 |
Table of Contents
K. Hovnanian Mortgage has another secured Master Repurchase Agreement with Customers Bank ("Customers Master Repurchase Agreement"), which is a short-term borrowing facility that was amended on July 24, 2024 to provide up to $75.0 million through August 30, 2024, and up to $50.0 million from and after August 31, 2024 to maturity on March 5, 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 Bloomberg Short Term Bank Yield Index ("BSBY") rate or SOFR, plus an 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 July 31, 2024 and October 31, 2023, the aggregate principal amount of all borrowings outstanding under the Customers Master Repurchase Agreement was $65.4 million and $41.1 million, respectively.
K. Hovnanian Mortgage has another secured Master Repurchase Agreement with Hinsdale Bank & Trust Company, N.A. ("Hinsdale Master Repurchase Agreement"), which is a short-term borrowing facility that provides up to $50.0 million through its maturity on July 14, 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 the One-Month Term SOFR, plus an applicable margin of 1.75% subject to a floor of 2.75%. As of July 31, 2024, the aggregate principal amount of all borrowings outstanding under the Hinsdale Master Repurchase Agreement was $26.3 million.
K. Hovnanian Mortgage had a Master Repurchase Agreement with Flagstar Bank, N.A. ("Flagstar Master Repurchase Agreement") which was a short-term borrowing facility that provided up to $50.0 million through its maturity on January 10, 2025. 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 daily or as loans were sold to permanent investors on outstanding advances at the current SOFR, subject to a floor of 1.0%, plus an applicable margin ranging from 1.82% to 5.0% based on the type of loan and the number of days outstanding on the line. The borrowings outstanding were paid off and the Flagstar Master Repurchase Agreement was terminated on July 8, 2024.
The Chase Master Repurchase Agreement, Customers Master Repurchase Agreement and Hinsdale 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, the size of the Master Repurchase Agreements, the levels required by these financial covenants, our ability based on our immediately available resources to contribute sufficient capital to cure any default, were such conditions to occur, and our right to cure any conditions of default based on the terms of the applicable agreement, we do not consider any of these covenants to be substantive or material. As of July 31, 2024, we believe we were in compliance with the covenants under the Master Repurchase Agreements.
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Table of Contents
|
12. |
Senior Notes and Credit Facilities |
Senior notes and credit facilitiesbalances as of July 31, 2024 and October 31, 2023, were as follows:
|
July 31, |
October 31, |
|||||||
|
(In thousands) |
2024 |
2023 |
||||||
|
Senior Secured Notes: |
||||||||
| 10.0% Senior Secured 1.75Lien Notes due November 15, 2025(1) | $ | - | $ | 113,502 | ||||
| 8.0% Senior Secured 1.125Lien Notes due September 30, 2028 |
|
|
225,000 |
|
|
|
225,000 |
|
| 11.75% Senior Secured 1.25Lien 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(2) |
$ | 26,588 | $ | 90,590 | ||||
|
5.0% Senior Notes due February 1, 2040(2) |
24,968 | 90,120 | ||||||
|
Total Senior Notes |
$ | 51,556 | $ | 180,710 | ||||
|
Senior Unsecured Term Loan Credit Facility due February 1, 2027(2) |
$ | - | $ | 39,551 | ||||
|
Senior Secured 1.75Lien Term Loan Credit Facility due January 31, 2028(2) |
$ | 175,000 | $ | 81,498 | ||||
|
Senior Secured Revolving Credit Facility (3) |
$ | - | $ | - | ||||
|
Subtotal senior notes and credit facilities |
$ | 881,556 | $ | 1,070,261 | ||||
|
Net premiums (discounts) |
$ | 20,026 | $ | (14,563 | ) | |||
|
Unamortized debt issuance costs |
$ | (2,833 | ) | $ | (4,207 | ) | ||
|
Total senior notes and credit facilities, net of discounts, premiums and unamortized debt issuance costs |
$ | 898,749 | $ | 1,051,491 |
(1) On November 15, 2023, K. Hovnanian redeemed all of its $113.5 million aggregate principal amount of 10.0% Senior Secured 1.75Lien Notes due November 15, 2025.
(2) On May 21, 2024, K. Hovnanian exchanged $64.0 million aggregate principal amount of 13.5% Senior Notes due February 1, 2026 and cash, $65.2 million aggregate principal amount of 5.0% Senior Notes due February 1, 2040 and all of its $39.6 million aggregate principal amount of loans under the Senior Unsecured Term Loan Credit Facility due February 1, 2027 and cash for an additional $93.5 million aggregate principal amount of loans under the Senior Secured 1.75 Lien Term Loan Credit Facility due January 31, 2028.(3) At July 31, 2024, provides for up to $125.0million in aggregate amount of senior secured first lien revolving loans. The revolving loans thereunder have a maturity of June 30, 2026 and borrowings bear interest, at K. Hovnanian's option, at either (i) a term SOFR (subject to a floor of 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 annum.
General
Except for K. Hovnanian, the issuer of the notes and borrower under the 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 July 31, 2024 (collectively, the "NotesGuarantors").
| 16 |
Table of Contents
The credit agreements governing the Credit Facilities and the indentures governing the senior secured and senior notes (together, the "Debt Instruments") outstanding at July 31, 2024, 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 (including through exchange or certain other types of transactions) indebtedness, pay dividends and make distributions on common and preferred stock, repay/repurchase certain indebtedness prior to its respective stated maturity, repurchase 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 due February 1, 2027 (the "Unsecured Term Loan Facility"), loans (the "Secured Term Loans") made under the Senior Secured 1.75Lien Term Loan Credit 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 July 31, 2024, we believe we were in compliance with the covenants of the DebtInstruments.
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 and dividends (in the case of certain of such 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, we were no longer restricted from paying dividends. As such, we have made dividend payments of $2.7 million to preferred shareholders in every quarter since the first quarter of fiscal 2022. 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 thatperiod.
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 covenantrestrictions.
Fiscal 2024On November 15, 2023, K. Hovnanian redeemed in full all of the $113.5 million aggregate principal amount of its 10.0% Senior Secured 1.75Lien Notes due 2025for 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 nine months ended July 31, 2024, including the write-off of unamortized premiums, debt issuance costs and fees. The gain from the redemption is included in "(Loss) gain on extinguishment of debt, net" in the Condensed Consolidated Statement of Operations.
On May 21, 2024, K. Hovnanian and the Notes Guarantors entered into certain exchange agreements, pursuant to which K. Hovnanian, the Notes Guarantors and affiliates of certain investment managers named therein (collectively in respect of the Exchange Agreements, the "Investors") completed certain private exchanges (collectively, the "Exchanges") of (i) $64.0million aggregate principal amount of 13.5% 2026Notes (as defined below) and $21.5million in cash for $42.5million aggregate principal amount of additional Secured Term Loans, (ii) $65.2million aggregate principal amount of 5.0% 2040Notes (as defined below) for $31.4million aggregate principal amount of additional Secured Term Loans and (iii) $39.6million aggregate principal amount of Unsecured Term Loans and $10.0million in cash for $19.6million aggregate principal amount of additional Secured Term Loans. Following the consummation of the Exchanges, there are $26.6million aggregate principal amount of 13.5% 2026Notes outstanding, $25.0million aggregate principal amount of 5.0% 2040Notes outstanding and noUnsecured Term Loans outstanding, in total equaling $51.6million aggregate principal amount of indebtedness under these instruments outstanding (such amount, the "Remaining Unsecured Notes Amount"). As a result of the Exchanges, all outstanding obligations in respect of principal, interest and fees under the Unsecured Term Loan Facility and all commitments thereunder were terminated.
| 17 |
Table of Contents
Secured Obligations
The Secured Credit Agreement 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. The revolving loans under the Secured Credit Agreement have a maturity of June 30, 2026 and borrowings bear interest, at K. Hovnanian's option, at either (i) SOFR (subject to a floor of 3.00%) plus an applicable margin of 4.5% or (ii) an alternate base rate (subject to a floor of 4.0%) plus an applicable margin of 3.5%. In addition, K. Hovnanian pays an unused commitment fee on the undrawn revolving commitments at a rate of 1.0% per annum.The8.0% Senior Secured 1.125Lien Notes due 2028(the "New 1.125Lien Notes") have a maturity of September 30, 2028 and bear interest at a rate of 8.0% per annum payable semi-annually on March 30 and September 30 of each year to holders of record at the close of business on March 15 and September 15, as the case may be, immediately preceding such interest payment dates. The New 1.125Lien 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 1.125Lien Notes at 104.0% of their principal amount commencing on September 30, 2025, at 102.0% of their principal amount commencing 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 1.125Lien Notes prior to September 30, 2025 with the net cash proceeds from certain equity offerings at 108.0% of their principal amount.
The 11.75% Senior Secured 1.25Lien Notes due 2029(the "New 1.25Lien Notes") have a maturity of September 30, 2029 and bear interest at a rate of 11.75% per annum payable semi-annually on March 30 and September 30 of each year to holders of record at the close of business on March 15 and September 15, as the case may be, immediately preceding such interest payment dates. The New 1.25Lien Notes are redeemable in whole or in part at K. Hovnanian's option at any time prior to 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 1.25Lien 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 commencing on September 30, 2028. In addition, K. Hovnanian may also redeem up to 35.0% of the aggregate principal amount of New 1.25Lien Notes prior to March 30, 2026, with the net cash proceeds from certain equity offerings at 111.75% of their principal amount.
The Secured Term Loans bear interest at a rate equal to 10.0% per annum (subject to increase as described above under "- Fiscal 2024") 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 102.5% 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.
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 suchdebt): the liens securing the Secured Credit Agreement are senior to the liens securing all of K. Hovnanian's other secured notes and the Secured Term Loan; the liens securing the New 1.125Lien Notes are senior to the liens securing the New 1.25Lien Notes, the Secured Term Loans and any other future secured obligations that are junior in priority with respect to the assets securing the New 1.125Lien Notes; the liens securing the New 1.25Lien Notes are senior to the liens securing the Secured Term Loans and any other future secured obligations that are junior in priority with respect to the assets securing the New 1.25Lien Notes; and the liens securing the Secured Term Loans are senior to any other future secured obligations that are junior in priority with respect to the assets securing the Secured Term Loans.
| 18 |
Table of Contents
As of July 31, 2024, the collateral securing the Secured Credit Agreement, the Secured Term Loan Facility and the senior secured notes included (1) $130.1 million of cash and cash equivalents, which included $4.3 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) $695.7 million aggregate book value of real property, which does not include the impact of inventory investments, home deliveries or impairments thereafter and which may differ from the value if it were appraised; and (3) equity interests in joint venture holding companies with an aggregate book value of $124.2 million.
Unsecured Obligations
The 13.5% Senior Notes due 2026(the "13.5% 2026Notes") bear interest at 13.5% per annum and mature on February 1, 2026. Interest on the 13.5% 2026Notes 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% 2026Notes 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% 2026Notes at a redemption price equal to 100.0% of their principal amount.
The 5.0% Senior Notes due 2040(the "5.0% 2040Notes") bear interest at 5.0% per annum and mature on February 1, 2040. Interest on the 5.0% 2040Notes 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% 2040Notes at a redemption price equal to 100.0% of their principal amount.
The Unsecured Term Loans bore interest at a rate equal to 5.0% per annum and interest was payable in arrears on the last business day of each fiscal quarter. The Unsecured Term Loans were redeemed in full in conjunction with the Exchanges.Other
We have certain stand-alone cash collateralized letter of credit agreements and facilities under which there was a total of $4.1 million and $4.9 million letters of credit outstanding at July 31, 2024and October 31, 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 July 31, 2024and October 31, 2023, the amount of cash collateral in these segregated accounts was $4.3 million and $5.1 million, respectively, which is reflected in "Restricted cash and cash equivalents" on the Condensed Consolidated Balance Sheets.
|
13. |
Per Share Calculation |
Basic and diluted earnings per share for the periods presented below were calculated as follows:
|
|
Three Months Ended |
|
|
Nine Months Ended |
||||||||||||
|
|
July 31, |
|
|
July 31, |
||||||||||||
|
(In thousands, except per share data) |
|
2024 |
|
|
|
2023 |
|
|
2024 |
2023 |
||||||
|
Numerator: |
|
|
|
|
|
|
|
|
|
|||||||
|
Net income |
|
$ | 72,919 |
|
|
$ | 55,764 |
|
|
$ | 147,659 | $ | 108,626 | |||
|
Less: preferred stock dividends |
|
|
(2,669 | ) |
|
|
(2,669 | ) |
|
(8,007 | ) | (8,007 | ) | |||
|
Less: undistributed earnings allocated to participating securities |
|
|
(1,548 | ) |
|
|
(3,578 | ) |
|
(4,660 | ) | (7,780 | ) | |||
|
Numerator for basic earnings per share |
|
$ | 68,702 |
|
|
$ | 49,517 |
|
|
$ | 134,992 | $ | 92,839 | |||
|
Plus: undistributed earnings allocated to participating securities |
|
|
1,548 |
|
|
|
3,578 |
|
|
4,660 | 7,780 | |||||
|
Less: undistributed earnings reallocated to participating securities |
|
|
(1,556 | ) |
|
|
(3,582 | ) |
|
(4,698 | ) | (7,801 | ) | |||
|
Numerator for diluted earnings per share |
|
$ | 68,694 |
|
|
$ | 49,513 |
|
|
$ | 134,954 | $ | 92,818 | |||
|
Denominator: |
|
|
|
|
|
|
|
|||||||||
|
Denominator for basic earnings per share - weighted average shares outstanding |
|
|
6,474 |
|
|
|
6,249 |
|
|
6,476 | 6,201 | |||||
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|||||||||
|
Stock-based payments |
|
|
574 |
|
|
|
456 |
|
|
572 | 441 | |||||
|
Denominator for diluted earnings per share - weighted-average shares outstanding |
|
|
7,048 |
|
|
|
6,705 |
|
|
7,048 | 6,642 | |||||
|
Basic earnings per share |
|
$ | 10.61 |
|
|
$ | 7.92 |
|
|
$ | 20.85 | $ | 14.97 | |||
|
Diluted earnings per share |
|
$ | 9.75 |
|
|
$ |
7.38 |
|
|
$ | 19.15 | $ | 13.97 |
| 19 |
Table of Contents
In addition, 6thousand 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 threeand ninemonths ended July 31, 2023, because to do so would have been anti-dilutive for the period. There were no shares related to out-of-the-money stock options for the threeand ninemonths ended July 31, 2024.
|
14. |
Preferred Stock |
|
15. |
Common Stock |
Each share of Class A common stock entitles its holder to one vote per share, and each share of Class B common stock generally entitles its holder to ten votes per share. The amount of any regular cash dividend payable on a share of Class A common stock will be an amount equal to 110% of the corresponding regular cash dividend payable on a share of Class B common stock. If a shareholder desires to sell shares of Class B common stock, such stock must be converted into shares of Class A common stock at a one-to-one conversion rate.
On August 4,2008, the Board adopted a shareholder rights plan (the "Rights Plan"), which was amended on January 11, 2018,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 14,2027, unless it expires earlier in accordance with its terms. The approval of the Board's decision to initially adopt the Rights Plan and Amendments Nos. 1, 2and 3thereto were approved by shareholders. 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 September 1, 2022, the Board authorized a repurchase program for up to $50.0 million of our Class A common stock. Under the 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.
Duringthe nine months ended July 31, 2024, we repurchased 188,800 shares under the stock repurchase program, with a market value of $26.5 million, or $140.31 per share. During the nine months ended July 31, 2023, we repurchased 118,478 shares under the stock repurchase program, with a market value of $4.8 million, or $40.51 per share. The repurchased shares were added to "Treasury stock" on the Condensed Consolidated Balance Sheets. As of July 31, 2024, $6.5 million of our Class A common stock is available to be purchased under the stock repurchase program.
| 20 |
Table of Contents
|
16. |
Income Taxes |
For the threeand nine months ended July 31, 2024, we recorded income tax expense of $24.4 million and $51.6 million, respectively, and $14.6 million and $25.9 million for the same periods in the prior year, respectively. For both the three and nine months ended July 31, 2024, and both prior year periods, the expense was primarily driven by federal and state tax expense on income before income taxes and permanent differences, partially offset by the generation of energy efficient home tax credits. Income tax expense for the three and nine months ended July 31, 2024 was impacted by discrete net tax expenses related to the gain on consolidation of a joint venture, cancellation of debt income from the Exchanges and stock-based compensation as a result of current period activity. The state tax expense for the three and nine months ended July 31, 2023 included the release of a valuation allowance as a result of a change in tax law. The federal tax expense is not paid in cash as it is offset by the use of our existing NOLcarryforwards.
The Company recognizesdeferred 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. As part of our analysis, we considered both positive and negative factors that impact profitability and whether those factors would lead to a change in estimate of our deferred tax assets ("DTAs") that may be realized in the future. At July 31, 2024, the Company 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.|
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 13 states that are aggregated into reportable segments based primarily upon geographic proximity.
HEI's reportable segments consist of the following three homebuilding segments and a financial services segment.
Homebuilding:
|
(1) |
Northeast (Delaware, Maryland, New Jersey, Ohio, Pennsylvania, Virginia and West Virginia) |
| (2) | Southeast (Florida, Georgia and South Carolina) |
| (3) | West (Arizona, Californiaand Texas) |
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.
| 21 |
Table of Contents
Financial information relating to our reportable segments was as follows:
|
|
Three Months Ended |
|
Nine Months Ended |
|||||||||
|
|
July 31, |
|
July 31, |
|||||||||
|
(In thousands) |
|
2024 |
|
|
2023 |
|
2024 |
2023 |
||||
|
Revenues: |
|
|
|
|
|
|
|
|
||||
|
Northeast |
|
$ | 255,332 |
|
|
$ | 201,814 |
|
$ | 645,859 | $ | 625,323 |
|
Southeast |
|
|
115,964 |
|
|
|
121,240 |
|
350,761 | 296,084 | ||
|
West |
|
|
330,980 |
|
|
|
309,147 |
|
970,671 | 898,882 | ||
|
Total homebuilding |
|
|
702,276 |
|
|
|
632,201 |
|
1,967,291 | 1,820,289 | ||
|
Financial services |
|
|
18,888 |
|
|
|
14,649 |
|
51,323 | 41,016 | ||
|
Corporate and unallocated |
|
|
1,540 |
|
|
|
3,107 |
|
6,666 | 7,679 | ||
|
Total revenues |
|
$ | 722,704 |
|
|
$ | 649,957 |
|
$ | 2,025,280 | $ | 1,868,984 |
|
Income before income taxes: |
|
|
|
|
|
|
|
|
||||
|
Northeast |
|
$ | 40,006 |
|
|
$ | 29,088 |
|
$ | 107,645 | $ | 86,311 |
|
Southeast |
|
|
20,449 |
|
|
|
23,431 |
|
62,391 | 49,902 | ||
|
West |
|
|
21,009 |
|
|
|
27,873 |
|
77,198 | 65,981 | ||
|
Total homebuilding |
|
|
81,464 |
|
|
|
80,392 |
|
247,234 | 202,194 | ||
|
Financial services |
|
|
6,526 |
|
|
|
4,304 |
|
15,467 | 11,466 | ||
|
Corporate and unallocated (1) |
|
|
9,279 |
|
|
(14,306 | ) | (63,477 | ) | (79,100 | ) | |
|
Income before income taxes |
|
$ | 97,269 |
|
|
$ | 70,390 |
|
$ | 199,224 | $ | 134,560 |
|
(1) |
Corporate and unallocated for the three months ended July 31, 2024, included corporate general and administrative expenses of $38.4 million, $42.3 million of other income, and a $5.4 million reduction to interest expense.Corporate and unallocated for the nine months ended July 31, 2024, included corporate general and administrative expenses of $108.1 million, $43.2 million of other income, and $1.4 million of gain on extinguishment of debt. Corporate and unallocated for the three months ended July 31, 2023, included corporate general and administrative expenses of$27.4 million, interest expense of $2.6 million, $19.8million of other income, and loss on extinguishment of debt of $4.1 million. Corporate and unallocated for the nine months ended July 31, 2023, included corporate general and administrative expenses of $78.0 million, interest expense of $14.4 million, $17.4 million of other income, and loss on extinguishment of debt of $4.1 million. |
|
July 31, |
October 31, |
|||
|
(In thousands) |
2024 |
2023 |
||
|
Assets: |
||||
|
Northeast |
$ | 647,257 | $ | 483,784 |
|
Southeast |
295,320 | 286,701 | ||
|
West |
877,310 | 733,318 | ||
|
Total homebuilding |
1,819,887 | 1,503,803 | ||
|
Financial services |
206,365 | 168,671 | ||
|
Corporate and unallocated |
514,253 | 820,466 | ||
|
Total assets |
$ | 2,540,505 | $ | 2,492,940 |
| 22 |
Table of Contents
|
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 a new unconsolidated joint venture for $41.1 million of net cash.
During the second quarter of fiscal 2023, one of the Company's unconsolidated joint ventures was dissolved, and we assumed control of the remaining assets and liabilities.
During the third quarter of fiscal 2023, we contributed 16 communities we owned, including eight active selling communities, to one new unconsolidated joint venture for $75.7 million of net cash.
During the third quarter of fiscal 2023, we assumed control of one of our unconsolidated joint ventures after the partner received their final cash distribution. We consolidated the remaining assets and liabilities that were in the unconsolidated joint venture at fair value on the date of distribution. Upon consolidation, we recorded a gain of $19.1 million in "Other (income) expense, net" for the threeand nine months ended July 31, 2023. Subsequent to consolidation, we contributed the same three active selling communities to an unconsolidated joint venture for $48.0 million of net cash.
During thesecond quarter of fiscal 2024,we contributed11communities we owned, includingthreeactive selling communities to a new unconsolidated joint venture for $53.8million 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.
|
July 31, 2024 |
||||||||||||
|
Land |
||||||||||||
| (In thousands) |
Homebuilding |
Development |
Total |
|||||||||
|
Assets: |
||||||||||||
|
Cash and cash equivalents |
$ | 129,396 | $ | 331 | $ | 129,727 | ||||||
|
Inventories |
410,777 | - | 410,777 | |||||||||
|
Other assets |
350,532 | - | 350,532 | |||||||||
|
Total assets |
$ | 890,705 | $ | 331 | $ | 891,036 | ||||||
|
Liabilities and equity: |
||||||||||||
|
Accounts payable and accrued liabilities |
$ | 514,266 | $ | 31 | $ | 514,297 | ||||||
|
Notes payable |
94,478 | - | 94,478 | |||||||||
|
Total liabilities |
608,744 | 31 | 608,775 | |||||||||
|
Equity of: |
||||||||||||
|
Hovnanian Enterprises, Inc. |
124,213 | 1 | 124,214 | |||||||||
|
Others |
157,748 | 299 | 158,047 | |||||||||
|
Total equity |
281,961 | 300 | 282,261 | |||||||||
|
Total liabilities and equity |
$ | 890,705 | $ | 331 | $ | 891,036 | ||||||
|
Debt to capitalization ratio |
25 | % | 0 | % | 25 | % |
| 23 |
Table of Contents
|
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 July 31, 2024and October 31, 2023, we had outstanding advances to unconsolidated joint ventures of $2.1 million and $1.4 million, respectively. These amounts were included in "Accounts payable and accrued liabilities" in the tables above. In some cases, our net investment in unconsolidated joint ventures is less than our proportionate share of equity reflected in the tables above because of differences between asset impairments recorded against our unconsolidated joint venture investments and any impairments recorded in the applicable unconsolidated joint venture. During the nine months ended July 31, 2024and 2023, we did notwrite-down any of our unconsolidated joint venture investments.
|
Three Months Ended July 31, 2024 |
||||||||||||
|
Land |
||||||||||||
| (In thousands) |
Homebuilding |
Development |
Total |
|||||||||
|
Revenues |
$ | 155,930 | $ | - | $ | 155,930 | ||||||
|
Cost of sales and expenses |
(134,612 | ) | 414 |
|
(134,198 | ) | ||||||
|
Joint venture net income |
$ | 21,318 | $ | 414 |
|
$ | 21,732 | |||||
|
Our share of net income |
$ | 10,698 | $ | - | $ | 10,698 |
|
Three Months Ended July 31, 2023 |
||||||||||||
|
Land |
||||||||||||
| (In thousands) |
Homebuilding |
Development |
Total |
|||||||||
|
Revenues |
$ | 122,579 | $ | - | $ | 122,579 | ||||||
|
Cost of sales and expenses |
(106,873 | ) | (1 | ) | (106,874 | ) | ||||||
|
Joint venture net income(loss) |
$ | 15,706 | $ | (1 | ) | $ | 15,705 | |||||
|
Our share of net income (loss) |
$ | 8,401 | $ | - |
|
$ | 8,401 |
|
Nine Months Ended July 31, 2024 |
||||||||||||
|
Land |
||||||||||||
| (In thousands) |
Homebuilding |
Development |
Total |
|||||||||
|
Revenues |
$ | 406,399 | $ | - | $ | 406,399 | ||||||
|
Cost of sales and expenses |
(354,388 | ) | 414 |
|
(353,974 | ) | ||||||
|
Joint venture net income |
$ | 52,011 | $ | 414 |
|
$ | 52,425 | |||||
|
Our share of net income |
$ | 36,814 | $ | - | $ | 36,814 |
| 24 |
Table of Contents
|
Nine Months Ended July 31, 2023 |
||||||||||||
|
Land |
||||||||||||
| (In thousands) |
Homebuilding |
Development |
Total |
|||||||||
|
Revenues |
$ | 283,710 | $ | - | $ | 283,710 | ||||||
|
Cost of sales and expenses |
(260,110 | ) | (4 | ) | (260,114 | ) | ||||||
|
Joint venture net income(loss) |
$ | 23,600 | $ | (4 | ) | $ | 23,596 | |||||
|
Our share of net income (loss) |
$ | 20,969 | $ | - |
|
$ | 20,969 |
The reason "Our share of net income" in homebuilding joint ventures is higher or lower than the "Joint venture net income" in the tables above is a result of our varying ownership percentages in each investment. For the threeand ninemonths ended July 31, 2024and 2023, respectively, we had investments in sevenand eightunconsolidated 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 and nine months ended July 31, 2024, "Our share of net income" was less than the "Joint venture net income" due to four unconsolidated joint ventures with increased income during the period for which we currently recognize a lower profit-sharing percentage based on the joint venture agreements, partially offset by one unconsolidated joint venture with increased income during the period for which we currently recognize a higher profit-sharing percentage based on the joint venture agreements. In addition, "Joint venture net income" for the three and nine months ended July 31, 2024, was positively impacted by an unconsolidated joint venture that was generating income but such income did not impact "Our share of net income" because we had previously written off our investment in such joint venture.
| 25 |
Table of Contents
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 ventures' revenues. These management fees, which totaled $5.5 million and $4.5 million for the three months ended July 31, 2024and 2023, respectively, and $14.0 million and $11.2 million for the nine months ended July 31, 2024and 2023, respectively, are recorded in "Selling, general and administrative" homebuilding expenses in the Condensed Consolidated Statements of Operations.
Our unconsolidated joint ventures may obtain separate project specific mortgage financing. 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 August 2023, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2023-05, "Business Combinations - Joint Venture Formations" ("ASU 2023-05"), which addresses the accounting for contributions made to a joint venture. ASU 2023-05requires 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 2023-07requires 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 2023-09requires 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. |
| 26 |
Table of Contents
Our financial instruments measured at fair value on a recurring basis are summarized below:
|
Fair Value at |
Fair Value at |
||||
|
Fair Value |
July 31, |
October 31, |
|||
|
(In thousands) |
Hierarchy |
2024 |
2023 |
||
|
Mortgage loans held for sale (1) |
Level 2 |
$ | 148,602 | $ | 130,235 |
(1) The aggregate unpaid principal balance was $147.1 million and $130.4 million at July 31, 2024 and October 31, 2023, respectively.
Fair value of mortgage loans held for sale is based on independent quoted market prices, where available, or the prices for other mortgage loans with similar characteristics.
The financial services segment had a pipeline of loan applications in process of $616.5 million at July 31, 2024. Loans in process for which interest rates were committed to the borrowers totaled $68.5 million as of July 31, 2024. 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.
In 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 managed by entering into MBS forward commitments, option contracts with investment banks, federally regulated bank affiliates and loan sales transactions with permanent investors meeting the segment's credit standards. 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 and option contracts. At July 31, 2024, we had no open mandatory investor commitments to sell MBS.
Changes in fair value that are included in income are shown, by financial instrument and financial statement line item, below:
|
Three Months Ended July 31, 2024 |
|||||||
|
Mortgage |
Interest Rate |
||||||
|
Loans Held |
Lock |
Forward |
|||||
|
(In thousands) |
For Sale |
Commitments |
Contracts |
||||
|
Change in fair value included in financial services revenue |
$ | 598 |
|
$ | - | $ | - |
|
Three Months Ended July 31, 2023 |
|||||||
|
Mortgage |
Interest Rate |
||||||
|
Loans Held |
Lock |
Forward |
|||||
|
(In thousands) |
For Sale |
Commitments |
Contracts |
||||
|
Change in fair value included in financial services revenue |
$ | (64 | ) | $ | 8 | $ | 2 |
|
Nine Months Ended July 31, 2024 |
|||||||
|
Mortgage |
Interest Rate |
||||||
|
Loans Held |
Lock |
Forward |
|||||
|
(In thousands) |
For Sale |
Commitments |
Contracts |
||||
|
Change in fair value included in financial services revenue |
$ | 1,482 |
|
$ | - | $ | - |
|
Nine Months Ended July 31, 2023 |
||||||
|
Mortgage |
Interest Rate |
|||||
|
Loans Held |
Lock |
Forward |
||||
|
(In thousands) |
For Sale |
Commitments |
Contracts |
|||
|
Change in fair value included in financial services revenue |
$ | 662 | $ | - | $ | - |
| 27 |
Table of Contents
Assets measured at fair value on a nonrecurring basis are those assets for which we have recorded valuation adjustments and write-offs during the three and nine months ended July 31, 2024, respectively. The assets measured at fair value on a nonrecurring basis are all within our homebuilding operations and are summarized below:
|
Three Months Ended July 31, 2024 |
|
|||||||||||
|
Fair |
|
|
|
|
||||||||
|
Value |
Pre-Impairment |
Total |
|
Fair |
|
|||||||
|
(In thousands) |
Hierarchy |
Amount |
Losses |
|
Value |
|
||||||
|
|
|
|
|
|||||||||
|
Land and land options held for future development or sale |
|
Level 3 |
|
$ | 15,245 | $ | (2,653 | ) |
|
$ | 12,592 |
|
|
Nine Months Ended July 31, 2024 |
|
||||||||||
|
Fair |
|
|
|
|
|||||||
|
Value |
Pre-Impairment |
Total |
|
Fair |
|
||||||
|
(In thousands) |
Hierarchy |
Amount |
Losses |
|
Value |
|
|||||
|
|
|
|
|
||||||||
|
Land and land options held for future development or sale |
|
Level 3 | $ | 15,245 | $ | (2,653 | ) |
|
$ | 12,592 |
|
| 28 |
Table of Contents
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 2measurements 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 3measurements are estimated based on third-party broker quotes or management's estimate of the fair value based on available trades for similar debt instruments. As shown in the table below, our 8.0% Senior Secured 1.125Lien Notes due 2028, 11.75% Senior Secured 1.25Lien Notes due 2029and 5.0% Senior Notes due 2040were a Level 2measurement at July 31, 2024due to recent trades for the same notes.
| Fair Value as of July 31, 2024 |
|
(In thousands) |
Level 1 |
Level 2 |
Level 3 |
Total |
||||
|
Senior Secured Notes: |
||||||||
|
8.0% Senior Secured 1.125Lien Notes due September 30, 2028 |
$ | - | $ | 229,358 | $ | - | $ | 229,358 |
|
11.75% Senior Secured 1.25Lien Notes due September 30, 2029 |
- | 481,243 | - | 481,243 | ||||
|
Senior Notes: |
||||||||
|
13.5% Senior Notes due February 1, 2026 |
- | - | 27,216 | 27,216 | ||||
|
5.0% Senior Notes due February 1, 2040 |
- | 9,987 | - | 9,987 | ||||
|
Senior Credit Facilities: |
||||||||
|
Senior Secured 1.75Lien Term Loan Credit Facility due January 31, 2028 |
- | - | 189,180 | 189,180 | ||||
|
Total fair value |
$ | - | $ | 720,588 | $ | 216,396 | $ | 936,984 |
| Fair Value as of October 31, 2023 |
|
(In thousands) |
Level 1 |
Level 2 |
Level 3 |
Total |
||||
|
Senior Secured Notes: |
||||||||
|
10.0% Senior Secured 1.75Lien Notes due November 15, 2025 |
$ | - | $ | 113,843 | $ | - | $ | 113,843 |
|
8.0% Senior Secured 1.125Lien Notes due September 30, 2028 |
- | - | 230,690 | 230,690 | ||||
|
11.75% Senior Secured 1.25Lien 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 1.75Lien Term Loan Credit Facility due January 31, 2028 | - | - | 81,742 | 81,742 | ||||
|
Total fair value |
$ | - | $ | 590,498 | $ | 487,371 | $ | 1,077,869 |
The Senior Secured Revolving Credit Facility is not included in the above tables because there were no borrowings outstanding thereunder at July 31, 2024 and October 31, 2023.
|
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 each of the three months ended July 31, 2024and 2023, the services provided by such engineering firm to the Company totaled $0.3 million. During the nine months ended July 31, 2024and 2023, the services provided by such engineering firm to the Company totaled $0.9million and $1.1 million, respectively. Neither the Company nor Mr. Hovnanian has a financial interest in the relative's company from whom the services were provided.
| 29 |
Table of Contents
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Hovnanian Enterprises, Inc. ("HEI") conducts all of its homebuilding and financial services operations through its subsidiaries (references herein to the "Company," "we," "us" or "our" refer to HEI and its consolidated subsidiaries and should be understood to reflect the consolidated business of HEI's subsidiaries).
Key Performance Indicators
The following key performance indicators are commonly used in the homebuilding industry and by management as a means to better understand our operating performance and trends affecting our business and compare our performance with the performance of other homebuilders. We believe these key performance indicators also provide useful information to investors in analyzing our performance:
|
● |
Net contracts is a volume indicator which represents the number of new contracts executed during the period for the purchase of homes, less cancellations of contracts in the same period. The dollar value of net contracts represents the dollars associated with net contracts executed in the period. These values are an indicator of potential future revenues; |
|
● |
Contract backlog is a volume indicator which represents the number of homes that are under contract, but not yet delivered as of the stated date. The dollar value of contract backlog represents the dollar amount of the homes in contract backlog. These values are an indicator of potential future revenues; |
|
● |
Active selling communities is a volume indicator which represents the number of communities which are open for sale with tenor 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 oneland 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 January 2022 to October 2023, 30-year mortgage rates more than doubled. The sharp increase in interest rates, persistently high levels of inflation and doubt about the stability of the economy, negatively impacted housing demand beginning in the second half of fiscal 2022and into fiscal 2023. During the first quarter of fiscal 2024, mortgage rates declined, which had a positive effect on our sales pace. Rates fluctuated in the second and third quarters of fiscal 2024 and affordability generally remains challenging for homebuyers. We have been aggressive in our pricing, incentives and concessions in order to align with the current market.
| 30 |
Table of Contents
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 provides 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 tool 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 oneof several available options we use to drive sales and close homes.
The number of existing home sales listings remain at all-time low levels, which limits the supply of homes available for purchase, leading to increased demand for new homes. There was strong demand for our homes in the first and second quarters of fiscal 2024as compared to the same periods of the prior year, which led to a significant increase in net contracts and net contracts per average active selling community, as compared to the first half of fiscal 2023.However, demand declined during the third quarter of fiscal 2024, partially due to volatility in interest rates impacting homebuyers' decisions. In addition, we had extended construction disruptions from Hurricane Beryl across our Texas operations, which is our largest state by deliveries. Overall, wewere able to increase net prices in approximately 33% of our communities during the third quarter of fiscal 2024.
There still remains a great degree of uncertainty due to inflation, the continued possibility of an economic recession, employment risk and the potential for further mortgage rate increases. While we continue to experience some lingering supply chain issues, we remain focused on continuing to shorten our construction cycle times and building on our national initiatives to drive down costs with our material providers and trade partners. The changing conditions in the housing market, and in the general economy, makes it difficult to predict how strongly our business will be impacted by these external factors over fiscal 2024and beyond.
Our cash position allowed us to spend $677.0million on land purchases and land development for long-term growth during the nine months ended July 31, 2024,and still have total liquidity of $251.3million, including $122.0million of homebuilding cash and cash equivalents and $125.0million of borrowing capacity under our senior secured revolving credit facility as ofJuly 31, 2024.Information on our operating results for the three and ninemonths ended July 31, 2024are as follows:
● Sale of homes revenues increasedto $687.4million for the three months ended July 31, 2024from $630.4million for the three months ended July 31, 2023, and increasedto$1.9billion for the nine months ended July 31, 2024from $1.8billion for the nine months ended July 31, 2023.There was a 4.8% and 7.1% increase in the number of home deliveries for the three and ninemonthsended July 31, 2024, respectively,compared to the prior year periods, as well as an increase in average prices of 4.1% and 1.0% for the three and ninemonths ended July 31, 2024,respectively, compared to the prior year periods. The increase in average price was the result of the geographic and community mix of our deliveries. ● Gross margin dollars increased3.5% and 9.0% for the three and ninemonths ended July 31, 2024, respectively, as compared to the same periods of the prior year, while gross margin percentage decreased from 20.1% for thethree monthsended July 31, 2023 to 19.1% for thethree monthsended July 31, 2024, and increased slightly from 18.8% for the nine months ended July 31, 2023to 18.9% for the nine months ended July 31, 2024.Gross margin percentage, before cost of sales interest expense and land charges, decreased from 23.2% for the three months ended July 31, 2023to 22.1% for the three months ended July 31, 2024, and increased from 21.9% for the nine months ended July 31, 2023to 22.2% for the nine months ended July 31, 2024.The decrease in gross margin percentage for the threemonths ended July 31, 2024was primarily due to increased use of incentives and concessions, including additional mortgage interest rate buydowns, to make our homes more affordable. The increase in gross margin percentage for the nine months ended July 31, 2024 was primarily due to decreases in base construction costs per square foot across each of our segments. ● Selling, general and administrative costs (including corporate general and administrative expenses) ("Total SGA") was $89.5million, or 12.4%of total revenues, in the three months ended July 31, 2024compared with $75.1million, or 11.6% of total revenues, in the three months ended July 31, 2023. For the nine months ended July 31, 2024, Total SGA was $254.5million, or 12.6% of total revenues, compared with $224.0million, or 12.0% of total revenues, in the same period of the prior fiscal year. The increase in Total SGA dollars is primarily due an increase in advertising expenses and compensation expense,mainly related to increased headcount and annual merit increases, along withgrants of phantom stock awards under our 2019and 2023long-term incentive plans, for which expense is impacted by the change in our stock price each period. ● Other interest decreasedto $6.3million and $25.7million for the three and ninemonths ended July 31, 2024, respectively, from $13.5million and $43.1million for the three and ninemonths ended July 31, 2023, respectively, primarily due to a reduction in principal of our senior notes as a result of redemptions during fiscal 2023and the first quarter of fiscal 2024, and the debt exchange executed in the third quarter of fiscal 2024.| 31 |
Table of Contents
● Net contracts decreased17.5% and increased 3.3% for the three and ninemonths ended July 31, 2024, respectively, compared to the same periods of the prior year. The decrease for the three months ended July 31, 2024 is primarily due to a historically strong third quarter of fiscal 2023, which included a high number of build for rent contracts. The increase in the nine months is primarily driven by demand for new homes resulting from the low supply of existing homes for sale, slightly lower mortgage rates than the prior year, job creation in the employment market and overall growth in the broader economy.
● Net contracts per average active selling community decreased to 10.1from 13.4 for the three months ended July 31, 2024, and increased to 32.7 from 32.3for the nine months ended July 31, 2024 compared to the same periods of the prior year. The fluctuations for the three and ninemonths ended July 31, 2024were primarily due to the fluctuations in net contracts discussed above. Also, our active selling communities increased from102at July 31, 2023 to 126at July 31, 2024, however, a significant amount of the community openings occurred during July 2024. Therefore, while the community count used in the calculation increased, the timing of the newly opened communities did not provide the benefit of a full quarter to sell homes therefrom.● Contract backlog decreasedfrom 2,403homes at July 31, 2023to 2,041homes at July 31, 2024, and the dollar value of contract backlog decreasedto $1.2billion, a 12.6% decrease in dollar value compared to the prior year, as ourbacklog conversion ratio has increased from the prior year period due to our focus on having more QMI homes available to sell and deliver.Results of Operations
Total Revenues
Compared to the same period in the prior year, revenues increased (decreased) as follows:
|
Three Months Ended |
||||||||||||||||
|
July 31, |
July 31, |
Dollar |
Percentage |
|||||||||||||
|
(Dollars in thousands) |
2024 |
2023 |
Change |
Change |
||||||||||||
|
Homebuilding: |
||||||||||||||||
|
Sale of homes |
$ | 687,424 | $ | 630,371 | $ | 57,053 | 9.1 | % | ||||||||
|
Land sales and other revenues |
16,392 |
4,937 |
11,455 | 232.0 | % | |||||||||||
|
Financial services |
18,888 | 14,649 | 4,239 | 28.9 | % | |||||||||||
|
Total revenues |
$ | 722,704 | $ | 649,957 | $ | 72,747 | 11.2 |
% |
| 32 |
Table of Contents
|
Nine Months Ended |
||||||||||||||||
|
July 31, |
July 31, |
Dollar |
Percentage |
|||||||||||||
|
(Dollars in thousands) |
2024 |
2023 |
Change |
Change |
||||||||||||
|
Homebuilding: |
||||||||||||||||
|
Sale of homes |
$ | 1,947,989 | $ | 1,800,724 | $ | 147,265 | 8.2 | % | ||||||||
|
Land sales and other revenues |
25,968 |
27,244 |
(1,276 | ) | (4.7 | )% | ||||||||||
|
Financial services |
51,323 | 41,016 | 10,307 | 25.1 | % | |||||||||||
|
Total revenues |
$ | 2,025,280 | $ | 1,868,984 | $ | 156,296 | 8.4 |
% |
Homebuilding: Sale of Homes
For the three and ninemonths ended July 31, 2024, sale of homes revenues increased9.1% and 8.2%, respectively, compared to the same periods in the prior year. The sale of homes revenue increaseddue to a 4.8% and 7.1% increase in homes delivered, respectively, as well as a 4.1% and 1.0% increase in the average price per home for the three and ninemonths ended July 31, 2024, respectively, compared with the prior year periods. The average price per home increased to $547,748in the three months ended July 31, 2024from $526,186in the three months ended July 31, 2023. The average price per home increased to $540,958in the nine months ended July 31, 2024from $535,770in the nine months ended July 31, 2023.The increase in average price was the result of the geographic and community mix of our deliveries. 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 July 31, |
|
Nine Months Ended July 31, |
|
|||||||||||||||||||||
|
(Dollars in thousands, except average sales price) |
2024 |
2023 |
% Change |
|
2024 |
|
|
2023 |
|
|
% Change |
|
||||||||||||
|
Consolidated total: |
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
|
Housing revenues |
$ | 687,424 | $ | 630,371 | 9.1 | % |
|
$ | 1,947,989 |
|
|
$ | 1,800,724 |
|
|
8.2 | % | |||||||
|
Homes delivered |
1,255 | 1,198 | 4.8 | % |
|
|
3,601 |
|
|
|
3,361 |
|
|
|
7.1 | % | ||||||||
|
Average sales price |
$ | 547,748 | $ | 526,186 | 4.1 | % |
|
$ | 540,958 |
|
|
$ | 535,770 |
|
|
1.0 | % | |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
|
Unconsolidated joint ventures: (1) |
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
|
Housing revenues |
$ | 151,443 | $ | 120,984 | 25.2 | % |
|
$ | 396,901 |
|
|
$ | 280,331 |
|
|
41.6 | % | |||||||
|
Homes delivered |
227 | 171 | 32.7 | % |
|
|
615 |
|
|
|
399 |
|
|
|
54.1 | % | ||||||||
|
Average sales price |
$ | 667,150 | $ | 707,509 | (5.7 | )% |
|
$ | 645,367 |
|
|
$ | 702,584 |
|
|
(8.1 | )% |
(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 18to the Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q for a further discussion of our unconsolidated joint ventures.
| 33 |
Table of Contents
Homebuilding: Land Sales and Other Revenues
Land sales and other revenues increased$11.5million and decreased $1.3million for the three and ninemonths ended July 31, 2024, respectively, compared to the same periods in the prior year. Revenue associated with land sales can vary significantly due to the mix of land parcels sold. There were oneand twoland sales in the three and ninemonths ended July 31, 2024, respectively, and zeroand twoland sales in the three and ninemonths ended July 31, 2023, respectively. Land sales revenues increased $13.8million and decreased $0.3million during the three and ninemonths ended July 31, 2024, respectively, compared to the same periods in the prior year.Homebuilding: Cost of Sales
Cost of sales includes expenses for homebuilding 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 |
|
Nine Months Ended |
|
|||||||||||||
|
July 31, |
|
July 31, |
|
|||||||||||||
|
(Dollars in thousands) |
2024 |
2023 |
|
2024 |
|
|
2023 |
|
||||||||
|
Sale of homes |
$ | 687,424 | $ | 630,371 |
|
$ | 1,947,989 |
|
|
$ | 1,800,724 |
|
||||
|
Cost of sales, excluding interest expense and land charges |
535,425 |
483,990 |
|
|
1,515,258 |
|
|
|
1,405,712 |
|
||||||
|
Homebuilding gross margin, before cost of sales interest expense and land charges |
151,999 | 146,381 |
|
|
432,731 |
|
|
|
395,012 |
|
||||||
|
Cost of sales interest expense, excluding land sales interest expense |
20,351 | 19,271 |
|
|
61,792 |
|
|
|
54,793 |
|
||||||
|
Homebuilding gross margin, after cost of sales interest expense, before land charges |
131,648 | 127,110 |
|
|
370,939 |
|
|
|
340,219 |
|
||||||
|
Land charges |
446 | 308 |
|
|
985 |
|
|
|
922 |
|
||||||
|
Homebuilding gross margin |
$ | 131,202 | $ | 126,802 |
|
$ | 369,954 |
|
|
$ | 339,297 |
|
||||
|
Homebuilding gross margin percentage |
19.1 | % | 20.1 | % |
|
|
18.9 | % |
|
|
18.8 | % | ||||
|
Homebuilding gross margin percentage, before cost of sales interest expense and land charges |
22.1 | % | 23.2 | % |
|
|
22.2 | % |
|
|
21.9 | % | ||||
|
Homebuilding gross margin percentage, after cost of sales interest expense, before land charges |
19.2 | % | 20.2 | % |
|
|
19.0 | % |
|
|
18.9 | % |
| 34 |
Table of Contents
Cost of sales as a percentage of consolidated home sales revenues are presented below:
|
Three Months Ended |
Nine Months Ended |
|
|||||||||||||
|
July 31, |
July 31, |
|
|||||||||||||
|
2024 |
2023 |
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 |
69.1 | % | 68.1 | % |
|
68.3 | % |
|
|
68.5 | % | ||||
|
Commissions |
3.0 | % | 3.4 | % |
|
3.3 | % |
|
|
3.4 | % | ||||
|
Financing concessions |
2.2 | % | 1.8 | % |
|
2.3 | % |
|
|
2.1 | % | ||||
|
Overheads |
3.6 | % | 3.5 | % |
|
3.9 | % |
|
|
4.1 | % | ||||
|
Total cost of sales, excluding interest expense and land charges |
77.9 | % | 76.8 | % |
|
77.8 | % |
|
|
78.1 | % | ||||
|
Cost of sales interest |
2.9 | % | 3.0 | % |
|
3.2 | % |
|
|
3.0 | % | ||||
|
Land charges |
0.1 | % | 0.1 | % |
|
0.1 | % |
|
|
0.1 | % | ||||
|
|
|
|
|
|
|
|
|||||||||
|
Homebuilding gross margin percentage |
19.1 | % | 20.1 | % |
|
18.9 | % |
|
|
18.8 | % | ||||
|
Homebuilding gross margin percentage, before cost of sales interest expense and land charges |
22.1 | % | 23.2 | % |
|
22.2 | % |
|
|
21.9 | % | ||||
|
Homebuilding gross margin percentage, after cost of sales interest expense, before land charges |
19.2 | % | 20.2 | % |
|
19.0 | % |
|
|
18.9 | % |
Land and lot sale expenses and gross margins are set forth below:
|
Three Months Ended |
|
Nine Months Ended |
|
|||||||||||||
|
July 31, |
|
July 31, |
|
|||||||||||||
|
(In thousands) |
2024 |
2023 |
|
2024 |
|
|
2023 |
|
||||||||
|
Land and lot sales |
$ | 14,230 | $ | 429 |
|
$ | 15,783 |
|
|
$ | 16,042 |
|
||||
|
Cost of sales, excluding interest |
11,907 | - |
|
|
12,789 |
|
|
|
9,940 |
|
||||||
|
Land and lot sales gross margin, excluding interest |
2,323 | 429 |
|
|
2,994 |
|
|
|
6,102 |
|
||||||
|
Land and lot sales interest expense |
1,965 | 1 |
|
|
1,965 |
|
|
|
926 |
|
||||||
|
Land and lot sales gross margin, including interest |
$ | 358 | $ | 428 |
|
$ | 1,029 |
|
|
$ | 5,176 |
|
| 35 |
Table of Contents
Land sales are ancillary to our 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 $3.1million and $0.3million in expense for the three months ended July 31, 2024and 2023, respectively, and $3.6million and $0.9million in expense for the nine months ended July 31, 2024and 2023, respectively. Inventory impairments amounted to $2.7 million and zero during the three and nine months ended July 31, 2024and 2023, respectively. The impairment recorded for fiscal 2024 was for one community in the West segment. We wrote-off residential land option, approval and engineering costs across each of our segments during the first nine months of fiscal 2024and 2023.
Homebuilding: Selling, General and Administrative
Homebuilding selling, general and administrative ("SGA") expenses increased$3.3million to $51.0million for the three months ended July 31, 2024and increased $0.3million to $146.4million for the nine months ended July 31, 2024compared to the same periods in the prior year. The increase for the three and nine months ended July 31, 2024compared to the same periods in the prior year was primarily due to an increase in selling overhead from higher advertising costs and an increase in total compensation expense as a result of an increase in headcount and bonuses related to positive overall market conditions and specific company performance, slightly offset by an increase in unconsolidated joint venture deliveries, where we receive a management fee on each delivery, which offsets our SGA expenses incurred.Homebuilding: Key Performance Indicators
Net Contracts Per Average Active Selling Community
Net contracts per average active selling community for the three and ninemonths ended July 31, 2024were 10.1and 32.7, respectively, compared to 13.4and 32.3for the same periods in the prior year, respectively. The calculation for the three months ended July 31, 2024 was impacted by the increase in our active selling communities from102at July 31, 2023 to 126at July 31, 2024, however, a significant amount of the community openings occurred during July 2024. Therefore, while the community count used in the calculation increased, the timing of the newly opened communities did not provide the benefit of a full quarter to sell homes therefrom.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 |
2024 |
|
2023 |
2022 |
2021 |
2020 |
||||||||||||||||||
|
First |
|
|
14 |
% | 30 | % | 14 | % | 17 | % | 19 | % | |||||||||
|
Second |
|
|
14 | % | 18 | % | 17 | % | 16 | % | 23 | % | |||||||||
|
Third |
|
|
17 | % | 16 | % | 27 | % | 16 | % | 18 | % | |||||||||
|
Fourth |
|
|
|
|
|
25 | % | 41 | % | 15 | % | 18 | % | ||||||||
| 36 |
Table of Contents
The following table provides quarterly contract cancellations as a percentage of the beginning backlog, excluding unconsolidated joint ventures:
|
Quarter |
2024 |
2023 |
2022 |
2021 |
2020 |
||||||||||||||||
|
First |
|
|
10 | % | 16 | % | 8 | % | 11 | % | 14 | % | |||||||||
|
Second |
|
|
13 | % | 16 | % | 9 | % | 9 | % | 20 | % | |||||||||
|
Third |
|
|
12 | % | 12 | % | 8 | % | 6 | % | 21 | % | |||||||||
|
Fourth |
|
|
|
|
|
13 | % | 13 | % | 6 | % | 14 | % |
Most cancellations occur within the legal rescission period, which varies by state but is generally less than twoweeks 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. Due to our solid backlog position, our cancellation rate as a percentage of beginning backlog for the third quarter of fiscal 2024was 12%, which approximates our historical normal rate. 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 |
|
|
Nine Months Ended |
|
Contract Backlog as of |
||||||||||||||||||
|
|
July 31, |
|
|
July 31, |
|
July 31, |
||||||||||||||||||
|
(Dollars in thousands) |
|
2024 |
|
|
2023 |
|
|
2024 |
2023 |
|
2024 |
2023 |
||||||||||||
|
Northeast: |
|
|
|
|
|
|
|
|
|
|||||||||||||||
|
Dollars |
|
$ | 260,081 |
|
|
$ | 239,425 |
|
|
$ | 835,809 | $ | 685,595 |
|
$ | 617,520 | $ | 478,477 | ||||||
|
Number of homes |
|
|
414 |
|
|
|
366 |
|
|
1,346 | 1,090 |
|
898 | 794 | ||||||||||
|
|
|
|
|
|
|
|
|
|
||||||||||||||||
|
Southeast: |
|
|
|
|
|
|
|
|
|
|||||||||||||||
|
Dollars |
|
$ | 63,990 |
|
|
$ | 155,655 |
|
|
$ | 206,722 | $ | 370,800 |
|
$ | 147,268 | $ | 353,023 | ||||||
|
Number of homes |
|
|
114 |
|
|
|
373 |
|
|
388 | 812 |
|
316 | 710 | ||||||||||
|
|
|
|
|
|
|
|
|
|
||||||||||||||||
|
West: |
|
|
|
|
|
|
|
|
|
|||||||||||||||
|
Dollars |
|
$ | 321,722 |
|
|
$ | 349,145 |
|
|
$ | 1,013,424 | $ | 888,650 |
|
$ | 393,980 | $ | 494,758 | ||||||
|
Number of homes |
|
|
664 |
|
|
|
705 |
|
|
2,097 | 1,807 |
|
827 | 899 | ||||||||||
|
|
|
|
|
|
|
|
|
|
||||||||||||||||
|
Total: |
|
|
|
|
|
|
|
|
|
|||||||||||||||
|
Dollars |
|
$ | 645,793 |
|
|
$ | 744,225 |
|
|
$ | 2,055,955 | $ | 1,945,045 |
|
$ | 1,158,768 | $ | 1,326,258 | ||||||
|
Number of homes |
|
|
1,192 |
|
|
|
1,444 |
|
|
3,831 | 3,709 |
|
2,041 | 2,403 |
| 37 |
Table of Contents
Contract backlog dollars decreased12.6% as of July 31, 2024compared to July 31, 2023, and the number of homes in backlog decreased15.1% as of July 31, 2024 compared to July 31, 2023. The decrease in contract backlog dollars and number of homes as of July 31, 2024compared to July 31, 2023was primarily driven by an increase in sales of QMI homes and improved contract backlog conversion.
Homebuilding: Operations by Segment
Financial information relating to our homebuilding operations by segment was as follows:
|
Three Months Ended July 31, |
||||||||||||||||
|
(Dollars in thousands, except average sales price) |
2024 |
2023 |
Variance |
Variance % |
||||||||||||
|
Northeast |
||||||||||||||||
|
Homebuilding revenue |
$ | 255,332 | $ | 201,814 | $ | 53,518 | 26.5 | % | ||||||||
|
Income before income taxes |
$ | 40,006 | $ | 29,088 | $ | 10,918 | 37.5 | % | ||||||||
|
Homes delivered |
404 | 357 | 47 | 13.2 | % | |||||||||||
|
Average sales price |
$ | 630,653 | $ | 562,499 | $ | 68,154 | 12.1 | % | ||||||||
|
Southeast |
||||||||||||||||
|
Homebuilding revenue |
$ | 115,964 | $ | 121,240 | $ | (5,276 | ) | (4.4 | )% | |||||||
|
Income before income taxes |
$ | 20,449 | $ | 23,431 | $ | (2,982 | ) | (12.7 | )% | |||||||
|
Homes delivered |
231 | 230 | 1 | 0.4 | % | |||||||||||
|
Average sales price |
$ | 501,316 | $ | 526,404 | $ | (25,088 | ) | (4.8 | )% | |||||||
|
West |
||||||||||||||||
|
Homebuilding revenue |
$ | 330,980 | $ | 309,147 | $ | 21,833 | 7.1 | % | ||||||||
|
Income before income taxes |
$ | 21,009 | $ | 27,873 | $ | (6,864 | ) | (24.6 | )% | |||||||
|
Homes delivered |
620 | 611 | 9 | 1.5 | % | |||||||||||
|
Average sales price |
$ | 511,026 | $ | 504,887 | $ | 6,139 | 1.2 | % |
|
Nine Months Ended July 31, |
||||||||||||||||
|
(Dollars in thousands, except average sales price) |
2024 |
2023 |
Variance |
Variance % |
||||||||||||
|
Northeast |
||||||||||||||||
|
Homebuilding revenue |
$ | 645,859 | $ | 625,323 | $ | 20,536 | 3.3 | % | ||||||||
|
Income before income taxes |
$ | 107,645 | $ | 86,311 | $ | 21,334 | 24.7 | % | ||||||||
|
Homes delivered |
1,067 | 1,086 | (19 | ) | (1.7 | )% | ||||||||||
|
Average sales price |
$ | 602,138 | $ | 573,868 | $ | 28,270 | 4.9 | % | ||||||||
|
|
||||||||||||||||
|
Southeast |
||||||||||||||||
|
Homebuilding revenue |
$ | 350,761 | $ | 296,084 | $ | 54,677 | 18.5 | % | ||||||||
|
Income before income taxes |
$ | 62,391 | $ | 49,902 | $ | 12,489 | 25.0 | % | ||||||||
|
Homes delivered |
672 | 545 | 127 | 23.3 | % | |||||||||||
|
Average sales price |
$ | 520,537 | $ | 542,594 | $ | (22,057 | ) | (4.1 | )% | |||||||
|
|
||||||||||||||||
|
West |
||||||||||||||||
|
Homebuilding revenue |
$ | 970,671 | $ | 898,882 | $ | 71,789 | 8.0 | % | ||||||||
|
Income before income taxes |
$ | 77,198 | $ | 65,981 | $ | 11,217 | 17.0 | % | ||||||||
|
Homes delivered |
1,862 | 1,730 | 132 | 7.6 | % | |||||||||||
|
Average sales price |
$ | 513,269 | $ | 509,705 | $ | 3,564 | 0.7 | % |
| 38 |
Table of Contents
Homebuilding Results by Segment
Northeast - Homebuilding revenue increased26.5% for the three months ended July 31, 2024compared to the same period in the prior year. The increase for the three months ended July 31, 2024was attributed to a 13.2% increase in homes delivered and a 12.1% 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 townhomesin higher-end submarketsof the segment for the three months ended July 31, 2024 compared to some communities delivering lower priced, smaller single family homes and townhomesin lower-end submarketsof the segment in the three months ended July 31, 2023, which were no longer delivering in the current year.Income before income taxes increased$10.9million to $40.0million for the three months ended July 31, 2024as compared to the same period in the prior year. This was primarily due the increase in homebuilding revenue discussed above and a $2.9million increase in income from unconsolidated joint ventures, slightly offset by a decrease in gross margin percentage.
Homebuilding revenue increased3.3% for the nine months ended July 31, 2024compared to the same period in the prior year. The increase for the nine months ended July 31, 2024was attributed to a 4.9% increase in average sales price, slightly offset by a 1.7% decrease in homes delivered. The increase in average sales price was the result of new communities delivering higher priced, larger single family homes and townhomesin higher-end submarketsof the segment for the nine months ended July 31, 2024 compared to some communities delivering lower priced, smaller single family homes in lower-end submarketsof the segment in the nine months ended July 31, 2023, which were no longer delivering in the current year.
Income before income taxes increased$21.3million to $107.6million for the nine months ended July 31, 2024as compared to the same period in the prior year. This was primarily due to the increase in homebuilding revenue discussed above, a $12.3million increase in income from unconsolidated joint ventures and a $3.6million decrease in SGA, while gross margin percentage was relatively flat.
Southeast - Homebuilding revenue decreased4.4% for the three months ended July 31, 2024compared to the same period in the prior year. The decrease was due to a 4.8% decrease in average sales price, partially offset by a 0.4% increase in homes delivered. The decrease 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 July 31, 2024 compared to some communities delivering higher priced, larger single family homes and townhomes in mid to higher-end submarketsof the segment in the three months ended July 31, 2023, which were no longer delivering in the current year.
Income before income taxes decreased$3.0million to $20.4million for the three months ended July 31, 2024compared to the same period in the prior year. This was primarily due to the decrease in homebuilding revenue discussed above, a $1.5 million increase in SGA and a $1.1million decrease in income from unconsolidated joint ventures, while gross margin percentage was relatively flat.
Homebuilding revenue increased18.5% for the nine months ended July 31, 2024compared to the same period in the prior year. The increase was due to a 23.3% increase in homes delivered, partially offset by a 4.1% decrease in average sales price. The decrease 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 in the nine months ended July 31,2024 compared to some communities for the nine months ended July 31, 2023 that had higher priced, larger single family homes and townhomes in mid to higher-end submarkets, which were no longer delivering in the current year.
Income before income taxes decreased$6.9million to $21.0million for the three months ended July 31, 2024compared to the same period in the prior year. This was primarily due to a $2.8 million increase in inventory impairments and land option write offs and a decrease in gross margin percentage.
Homebuilding revenue increased8.0% for the nine months ended July 31, 2024compared to the same period in the prior year. The increase was due to an 7.6% increase in homes delivered, while average sales price increased by 0.7%.
Income before income taxes increased$11.2million to $77.2million for the nine months ended July 31, 2024compared to the same period in the prior year. The increase is primarily due to the increase in homebuilding revenue discussed above, along with a $1.3 million increase in income from unconsolidated joint ventures and a slight increase in gross margin percentage.
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Financial Services
Financial services consists 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 nine months ended July 31, 2024and 2023, Federal Housing Administration and Veterans Administration ("FHA/VA") loans represented 34.1% and 30.4%, respectively, of our total loans. For the nine months ended July 31, 2024compared to the same period in the prior year, our conforming conventional loan originations as a percentage of our total loans decreased from 68.8% to 65.3%. The origination of loans which exceed conforming conventions decreased from 0.8% to 0.6% for the nine months ended July 31, 2024compared to the same period in the prior year.
During the three and ninemonths ended July 31, 2024and 2023, financial services provided $6.5million and $15.5million of income before income taxes, respectively, compared to $4.3million and $11.5million for the same periods in the prior year, respectively.The increase in financial services income before income taxes for the three and ninemonths ended July 31, 2024compared to the same periods in the prior year was primarily due to an increase in the volume of loans closed and an increase in the average size of the loans settled. In the markets served by our wholly owned mortgage banking subsidiaries, 81.4% and 70.1% of our non-cash homebuyers obtained mortgages originated by these subsidiaries during the three months ended July 31, 2024and 2023, respectively, and 79.7% and 67.8% of our non-cash homebuyers obtained mortgages originated by these subsidiaries during the nine months ended July 31, 2024and 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 increased to $38.5million for the three months ended July 31, 2024compared to $27.4million for the three months ended July 31, 2023and increased to $108.1million for the nine months ended July 31, 2024compared to $77.9million for the nine months ended July 31, 2023.The increase for the three months ended July 31, 2024was primarily due to an increase in compensation expense, mainly related to increased headcount and annual merit increases and by increased expense related to grants of phantom stock awards under our 2019and 2023long-term incentive plans, for which expense is impacted by the change in our stock price each period. During the nine months of fiscal 2024, equity awards including phantom stock werealso granted under a new long-term incentive program, which increased stock compensation expense compared to the same period in the prior year.
Other Interest
Other interest decreased$7.2million to $6.3million for the three months ended July 31, 2024and decreased$17.4million to $25.7million for the nine months ended July 31, 2024compared to the same periods in the prior year, respectively. Our assets that qualify for interest capitalization (inventory under development) exceeded our debt during the third quarter of fiscal 2024, therefore, all of the related interest incurred during fiscal 2024 qualified for interest capitalization instead of being directly expensed. Also, contributing to the decrease in Other interest for the three and ninemonths ended July 31, 2024, was the reduction in principal of our senior notes as a result of redemptions during fiscal 2023and the first quarter of fiscal 2024, and the debt exchange executed in the third quarter of fiscal 2024.
Gain on Extinguishment of Debt, Net
On November 15, 2023, K. Hovnanian redeemed in full all of the $113.5million aggregate principal amount of its 10.0% Senior Secured 1.75Lien Notes due 2025for a redemption price of $119.2million, which included accrued and unpaid interest. This redemption resulted in a gain on extinguishment of debt of $1.4million for the nine months ended July 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 increased$2.3million to $10.7million for the three months ended July 31, 2024and increased$15.8million to $36.8million for the nine months ended July 31, 2024compared to the same periods in the prior year, respectively. The increase for thethree and nine months ended July 31, 2024compared to the same periods of the prior year was primarily due to the recognition of additional income from three 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.
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Income Taxes
Income tax expense for the three and ninemonths ended July 31, 2024was $24.4million and $51.6million, respectively, and$14.6million and $25.9million for the same periods in the prior year, respectively. For both the three and nine months ended July 31, 2024, and both prior year periods, the expense was primarily driven by federal and state tax expense on income before income taxes and permanent differences, partially offset by the generation of energy efficient home tax credits. Income tax expense for the three and nine months ended July 31, 2024 was impacted by discrete net tax expenses related to the gain on consolidation of a joint venture, cancellation of debt income from the debt exchanges executed in the third quarter of fiscal 2024 and stock-based compensation as a result of current period activity. The state tax expense for the three and nine months ended July 31, 2023 included the release of a valuation allowance as a result of a change in tax law. The federal tax expense is not paid in cash as it is offset by the use of our existing NOLcarryforwards.Capital Resources and Liquidity
Overview
Our total liquidity at July 31, 2024was $251.3million, including $122.0million in homebuilding cash and cash equivalents and $125.0million 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 12months 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 impact our ability to grow our business.
Operating, Investing and Financing Cash Flow Activities
We spent $677.0 million on land and land development during the first three quarters of fiscal 2024, along with $113.5million for the redemption of our 10.0% Senior Secured 1.75Lien Notes due 2025. After land and land development spending and all other operating activities, including revenue received from deliveries, cash used in operations was $92.2million. During the first three quarters of fiscal 2024, cash used in investing activities was $40.3million, primarily due to a new joint venture entered into during the second quarter of fiscal 2024, along with spending on capitalized software, partially offset by distributions of capital from existing unconsolidated joint ventures. Cash used in financing activities was $161.2million during the first three quarters of fiscal 2024, which in addition to the $113.5million debt redemption mentioned above, was primarily due to cash payments of $31.5 million related to the May 2024 debt exchange, net payments for nonrecourse mortgage financings, treasury stock purchases and payments of preferred dividends, partially offset by net proceeds related to our mortgage warehouse lines of credit, and net proceeds for land banking financingsand model sale leaseback 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 nine months ended July 31, 2024and 2023were for operating expenses, land purchases, land deposits, land development, construction spending, investments in unconsolidated joint ventures, land banking transactions, state income taxes, debt reductions, interest payments, preferred dividends, treasury stock purchases and litigation matters. During these periods, we provided for our cash requirements from available cash on hand, housing and land sales, nonrecourse mortgage transactions, income from unconsolidated joint ventures, financial service revenues and other revenues.
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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 July 31, 2024and October 31, 2023, were as follows:
|
July 31, |
October 31, |
|||||||
|
(In thousands) |
2024 |
2023 |
||||||
|
Senior Secured Notes |
$ | 655,000 | $ | 768,502 | ||||
|
Senior Notes (1) |
51,556 | 180,710 | ||||||
|
Senior Unsecured Term Loan Credit Facility due February 1, 2027 (1) |
- | 39,551 | ||||||
|
Senior Secured 1.75Lien Term Loan Credit Facility due January 31, 2028 (1) |
175,000 | 81,498 | ||||||
|
Senior Secured Revolving Credit Facility (2) |
- | - | ||||||
|
Less: Net (discounts), premiums and unamortized debt issuance costs |
17,193 | (18,770 | ) | |||||
|
Total senior notes and credit facilities, net of discounts, premiums and unamortized debt issuance costs |
$ | 898,749 | $ | 1,051,491 |
(1) On May 21, 2024, K. Hovnanian exchanged $64.0million aggregate principal amount of 13.5% Senior Notes due February 1, 2026 and cash, $65.2million aggregate principal amount of 5.0% Senior Notes due February 1, 2040 and all of its $39.6million aggregate principal amount of loans under the Senior Unsecured Term Loan Credit Facility due February 1, 2027 and cash for an additional $93.5million aggregate principal amount of loans under the Senior Secured 1.75Lien Term Loan Credit Facility due January 31, 2028.
Except for K. Hovnanian, the issuer of the notes and borrower under the 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 July 31, 2024 (collectively, the "Notes Guarantors").
The credit agreements governing the Credit Facilities and the indentures governing the senior secured and senior notes (together with the Credit Facilities, the "Debt Instruments") outstanding at July 31, 2024 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 (including through exchange or certain other types of transactions) indebtedness, pay dividends and make distributions on common and preferred stock, repay/repurchase certain indebtedness prior to its respective stated maturity, repurchase 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 due February 1, 2027, loans (the "Secured Term Loans") made under the Senior Secured 1.75Lien Term Loan Credit Facility due January 31, 2028, and loans (the "Secured Revolving Loans") made under the Senior Secured Revolving Credit Agreement 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 July 31, 2024, we believe we were in compliance with the covenants of the Debt Instruments.
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If our consolidated fixed charge coverage ratio is less than 2.0to 1.0, as defined in the applicable Debt Instrument, we are restricted from making certain payments and dividends (in the case of certain of such payments, our secured debt leverage ratio must also be less than 4.0to 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, we were no longer restricted from paying dividends. As such, we have made dividend payments of $2.7million to preferred shareholders in every quarter since the first quarter of fiscal 2022. 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 and the effects on our business and if and when we may 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.
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 12to 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 $115.4million and $91.5million, net of debt issuance costs, at July 31, 2024and October 31, 2023, respectively, which are secured by the related real property, including any improvements, with an aggregate book value of $336.7 million and $331.6million, respectively. The weighted-average interest rate on these obligations was 9.1% and 8.5% at July 31, 2024and October 31, 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 July 31, 2024and October 31, 2023, we had an aggregate of $134.4 million and $110.8million, respectively, outstanding under several of K. Hovnanian Mortgage's short-term borrowing facilities.
See Note 11to the Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q for a further discussion of these agreements
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Equity
On September 1, 2022, our Board of Directors authorized a repurchase program for up to $50.0million of our Class A common stock. Under the 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.
During the nine months ended July 31, 2024, we repurchased 188,800shares under the stock repurchase program, with a market value of $26.5million, or $140.31per share, and during the nine months ended July 31, 2023, we repurchased 118,478shares, with a market value of $4.8million, or $40.51per share. As of July 31, 2024, $6.5million of our Class A common stock is available to be purchased under the stock repurchase program.
On July 12, 2005, we issued 5,600shares of 7.625% Series A preferred stock, with a liquidation preference of $25,000per 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. We paid dividends of $2.7million and $8.0million on the Series A preferred stock for the three and ninemonths ended July 31, 2024and 2023, respectively.
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 $28.4million to $126.3million at July 31, 2024compared to October 31, 2023. The increase was primarily due a new joint venture entered into during the second quarter of fiscal 2024, along with increases in our share of income recognized for threeof our existing unconsolidated joint ventures during the period, partially offset by the consolidation of a previously unconsolidated joint venture in the third quarter of fiscal 2024, and partner distributions. As of July 31, 2024and October 31, 2023, we had investments in sixand sevenunconsolidated homebuilding joint ventures and oneunconsolidated land development joint venture, respectively. 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, increased$309.6million to $1.4billion at July 31, 2024compared to October 31, 2023. Total inventory, excluding consolidated inventory not owned, increased by $114.2million in the West, $5.3million in the Southeast and $190.1million in the Northeast. The increases were primarily attributable to new land purchases and land development during the 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 July 31, 2024are expected to be delivered during the next sixto ninemonths.
Consolidated inventory not owned, which consists of options related to land banking and model financing, decreased $8.3million from October 31, 2023to July 31, 2024. The decrease was primarily due to a decrease in land banking transactions, partially offset by 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 land bankers and they provide us with an option to purchase finished lots on a predetermined schedule. On our Condensed Consolidated Balance Sheet, at July 31, 2024, inventory of $167.5million was recorded to "Consolidated inventory not owned," with a corresponding amount of $86.2million (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 July 31, 2024, inventory of $48.9million was recorded to "Consolidated inventory not owned," with a corresponding amount of $49.4million (net of debt issuance costs) recorded to "Liabilities from inventory not owned" for the amount of net cash received from sale and leaseback transactions.
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The following tables summarize home sites included in our total residential real estate. The increase in total home sites available at July 31, 2024compared to October 31, 2023is attributable to increased community count and acquiring new land parcels during the period, partially offset by delivering homes and terminating certain option agreements.
|
Active Selling |
Proposed |
|||||||||||||||
|
Active Selling |
Communities |
Developable |
Total |
|||||||||||||
|
Communities(1) |
Homes |
Homes |
Homes |
|||||||||||||
|
July 31, 2024: |
||||||||||||||||
|
Northeast |
42 | 4,687 | 13,740 | 18,427 | ||||||||||||
|
Southeast |
10 | 1,635 | 5,239 | 6,874 | ||||||||||||
|
West |
74 | 6,590 | 7,637 | 14,227 | ||||||||||||
|
Consolidated total |
126 | 12,912 | 26,616 | 39,528 | ||||||||||||
|
Unconsolidated joint ventures (2) |
22 | 2,654 | 1,933 | 4,587 | ||||||||||||
|
Owned |
5,736 | 1,444 | 7,180 | |||||||||||||
|
Optioned |
7,164 | 25,172 | 32,336 | |||||||||||||
|
Construction to permanent financing lots |
12 | - | 12 | |||||||||||||
|
Consolidated total |
12,912 | 26,616 | 39,528 |
|
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 |
|
(1) |
Active selling communities are open for sale communities with tenor more home sites available. We identify communities based on product type. Therefore, at times there are multiple communities at oneland 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 18to 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 selling communities and substantially completed communities.
|
July 31, 2024 |
October 31, 2023 |
|||||||||||||||||||||||
|
Unsold |
Unsold |
|||||||||||||||||||||||
|
Homes |
Models |
Total |
Homes |
Models |
Total |
|||||||||||||||||||
|
Northeast |
242 | 34 | 276 | 159 | 41 | 200 | ||||||||||||||||||
|
Southeast |
96 | 19 | 115 | 99 | 16 | 115 | ||||||||||||||||||
|
West |
667 | 20 | 687 | 570 | 24 | 594 | ||||||||||||||||||
|
Total |
1,005 | 73 | 1,078 | 828 | 81 | 909 | ||||||||||||||||||
|
Started or completed unsold homes and models per active selling communities (1) |
8.0 | 0.6 | 8.6 | 7.3 | 0.7 | 8.0 |
|
(1) |
Active selling communities (which are communities that are open for sale with tenor more home sites available) were 126at July 31, 2024and 113atOctober 31, 2023. This ratio does not include substantially completed communities, which are communities with less than tenhome sites available. |
Financial Services Assets and Liabilities
Financial services assets increased $37.7million to $206.4million atJuly 31, 2024, compared to October 31, 2023. Financial services assets consist primarily of residential mortgage receivables held for sale of which $145.9million and $127.6million at July 31, 2024and October 31, 2023, respectively, were being temporarily warehoused and are awaiting sale in the secondary mortgage market. The increase in mortgage loans held for sale from October 31, 2023was primarily related to an increase in the volume of loans originated during the third quarter of fiscal 2024compared to the fourth quarter of fiscal 2023, along with an increase in the average loan value.Financial services liabilities increased $37.8million to $186.0million at July 31, 2024compared to October 31, 2023. The increase was primarily due to an increase in amounts outstanding under our mortgage warehouse lines of credit and directly correlates to the increase in the volume of mortgage loans held for sale during the period.
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Inflation
The annual rate of inflation in the United States was 2.9% in July 2024, as measured by the Consumer Price 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 threeto 12months. Construction costs for residential buildings represented approximately 53.0% of our homebuilding cost of sales for the nine months ended July 31, 2024.
Critical Accounting Policies
As disclosed in our Annual Report on Form 10-K for the fiscal year ended October 31, 2023, our most critical accounting policies relate to inventories, unconsolidated joint ventures, warranty and construction defect reserves and income taxes. Since October 31, 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:
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● |
Changes in general and local economic, industry and business conditions and impacts of a significant homebuilding downturn; |
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● |
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; |
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● |
Fluctuations in interest rates and the availability of mortgage financing, including as a result of instability in the banking sector; |
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● |
Adverse weather and other environmental conditions and natural disasters; |
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● |
The seasonality of the Company's business; |
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● |
The availability and cost of suitable land and improved lots and sufficient liquidity to invest in such land and lots; |
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● |
Reliance on, and the performance of, subcontractors; |
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● |
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; |
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● |
Increases in cancellations of agreements of sale; |
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● |
Increases in inflation; |
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● |
Changes in tax laws affecting the after-tax costs of owning a home; |
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● |
Legal claims brought against us and not resolved in our favor, such as product liability litigation, warranty claims and claims made by mortgage investors; |
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● |
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; | |
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● |
Significant influence of the Company's controlling stockholders; |
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● |
Availability of net operating loss carryforwards; |
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● | Loss of key management personnel or failure to attract qualified personnel; and |
| ● | Public health issues such as a major epidemic or pandemic. |
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, 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.
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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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 July 31, 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 July 31, 2024by Fiscal Year of Maturity Date |
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|
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|
FV at |
||||||||||||||||||||||||||||
|
(Dollars in thousands) |
2024 |
2025 |
2026 |
2027 |
2028 |
|
|
Thereafter |
Total |
7/31/2024 |
||||||||||||||||||||||
|
Long term debt(1): |
|
|
|
|
||||||||||||||||||||||||||||
|
Fixed rate |
$ | - | $ | - | $ | 26,588 | $ | - | $ |
400,000 |
|
|
$ | 454,968 | $ | 881,556 | $ | 936,984 | ||||||||||||||
|
Weighted average interest rate |
- | % | - | % | 13.50 | % | - | % |
|
8.88 | % |
|
11.38 | % | 10.31 | % |
| (1) |
Does not include: |
|
| ● | the mortgage warehouse lines of credit made under ourMaster Repurchase Agreements; | |
| ● | $115.4million of nonrecourse mortgages secured by inventory, which have various maturities spread over the next twoto threeyears and are paid off as homes are delivered; and | |
| ● | our $125.0million Secured Credit Facility under which there were no borrowings outstanding as of July 31, 2024. |
Item 4. CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company's reports under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to the Company's management, including its chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosures. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. The Company's management, with the participation of the Company's chief executive officer and chief financial officer, has evaluated the effectiveness of the design and operation of the Company's disclosure controls and procedures as of July 31, 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 July 31, 2024, that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.
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Table of Contents
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
For information with respect to our legal proceedings, see Note 7to the Condensed Consolidated Financial Statements in Part I, Item 1of this Quarterly Report on Form 10-Q.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
Recent Sales of Unregistered Equity Securities
None.
Issuer Purchases of Equity Securities
On September 1, 2022, our Board of Directors authorized a repurchase program for up to $50.0 million of our Class A common stock. Under the 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. As of July 31, 2024, $6.5 million of our Class A common stock is available to be purchased under the stock repurchase program.
The following table provides information relating to the company's repurchase of common stock for the third quarter of fiscal 2024.
|
|
|
Total Number of Shares Purchased |
Average Price Paid Per Share |
Total Number of Shares Purchased of Part of Publicly Announced Plans or Program |
Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Program |
|||
| May 1, 2024 through May 31, 2024 |
|
- |
|
- |
|
- |
|
$17,977,646 |
| June 1, 2024 through June 30, 2024 |
|
9,705 |
|
$141.77 |
|
9,705 |
|
$16,601,795 |
| July 1, 2024 through July 31, 2024 |
|
73,048 |
|
$138.46 |
|
73,048 |
|
$6,487,677 |
Item 5. OTHER INFORMATION
During the three months ended July 31, 2024, no director or officer (as defined in Rule 16a-1(f) of the Exchange Act) of the Company adoptedor terminateda "Rule 10b5-1trading arrangement" or "non-Rule 10b5-1trading arrangement," as each term is defined in Item 408(a) of Regulation S-K.
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Table of Content
| 10(b)* | Form of 2024 Performance Share Unit Agreement EBIT Class A. |
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|
| 10(c)* | Form of 2024 Performance Share Unit Agreement EBIT Class B. |
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|
|
| 10(d)* | Form of 2024 Performance Share Unit Agreement EBIT ROI Class A. |
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|
|
| 10(e)* |
Form of 2024 Performance Share Unit Agreement EBIT ROI Class A. |
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|
|
| 10(f)* | Form of 2024 Associate Restricted Share Unit Agreement Class A. |
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|
|
| 10(g)* | Form of 2024 Director Restricted Share Unit Agreement Class A. |
|
|
|
| 31(a) | Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer. |
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|
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| 31(b) | Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer. |
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|
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| 32(a) | Section 1350 Certification of Chief Executive Officer. |
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|
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| 32(b) | Section 1350 Certification of Chief Financial Officer. |
|
|
|
| 101 | The following financial information from our Quarterly Report on Form 10-Q for the quarter ended July 31, 2024, formatted in inline Extensible Business Reporting Language (Inline XBRL): (i) the Condensed Consolidated Balance Sheets at July 31, 2024 and October 31, 2023, (ii) the Condensed Consolidated Statements of Operations for the three and nine months ended July 31, 2024 and 2023, (iii) the Condensed Consolidated Statements of Changes in Equity for the three and nine months ended July 31, 2024 and 2023, (iv) the Condensed Consolidated Statements of Cash Flows for the nine months ended July 31, 2024 and 2023, and (v) the Notes to Condensed Consolidated Financial Statements. |
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| 104 | Cover Page from our Quarterly Report on Form 10-Q for the three months ended July 31, 2024, formatted in Inline XBRL (and contained in Exhibit 101). |
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|
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* Management contracts or compensatory plans or arrangements. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
HOVNANIAN ENTERPRISES, INC.
(Registrant)
|
DATE: |
August 30, 2024 | |
|
/s/ ARA K. HOVNANIAN |
||
|
Ara K. Hovnanian |
||
|
Chairman of the Board, Chief Executive Officer and President |
||
|
(Principal Executive Officer) |
||
|
DATE: |
August 30, 2024 | |
|
/s/ BRAD O'CONNOR |
||
|
Brad O'Connor |
||
|
Chief Financial Officer and Treasurer |
||
|
|
|
(Principal Financial Officer and Principal Accounting Officer) |
| 53 |