Hovnanian Enterprises, Inc.
Annual Report 2019
Hovnanian Enterprises, Inc.
Communities
Active Selling
Communities
Proposed
Communities
Arizona
California
Delaware
Florida
Georgia
Illinois
Maryland
New Jersey
Ohio
Pennsylvania
South Carolina
Texas
Virginia/DC
West Virginia
Consolidated Total
Unconsolidated
Joint Ventures
Total
8
19
10
13
1
8
6
6
8
-
3
50
8
1
141
22
163
7
19
6
13
-
11
4
32
11
1
11
23
17
2
157
-
157
Financial Highlights
REVENUES AND INCOME
(Dollars in Millions)
Total Revenues
(Loss) Income Before Income Taxes
Income (Loss) Before Income Taxes Excluding Land-Related
Charges, Joint Venture Write-Downs and Loss on
Extinguishment of Debt(1)
Net (Loss) Income
ASSETS, DEBT AND EQUITY
(Dollars in Millions)
Total Assets
Total Recourse Debt(2)
Total Stockholders’ Equity Deficit
INCOME PER COMMON SHARE(3)
(Shares in Thousands)
Assuming Dilution:
Net (Loss) Income Per Common Share
Weighted-Average Number of Common Shares Outstanding
Years Ended October 31,
2019
2018
2017
2016
2015
$2,016.9
$(39.7)
$1,991.2
$8.1
$2,451.7
$(45.2)
$2,752.2
$2.4
$2,148.5
$(21.8)
$9.9
$(42.1)
$20.4
$4.5
$10.2
$(332.2)
$39.0
$(2.8)
$(9.7)
$(16.1)
$1,881.4
$1,480.0
$(489.8)
$1,662.0
$1,439.2
$(453.5)
$1,900.9
$1,637.9
$(460.4)
$2,355.0
$1,625.4
$(128.5)
$2,577.4
$1,874.9
$(128.1)
$(7.06)
5,968
$0.72
6,072
$(56.23)
5,908
$(0.48)
5,898
$(2.74)
5,876
(1) Income (Loss) Before Income Taxes Excluding Land-Related Charges, Joint Venture Write-Downs and Loss on Extinguishment of Debt is not a financial measure
calculated in accordance with generally accepted accounting principles (GAAP). See page 3 of this Annual Report for a reconciliation to Income (Loss) Before Income
Taxes, the most directly comparable GAAP financial measure.
(2) Total Recourse Debt is derived by adding revolving and term loan credit facilities and notes payable, less accrued interest.
(3) All share and per share amounts throughout this report have been retroactively adjusted to reflect the March 2019 reverse stock split.
This summary should be read in conjunction with the related consolidated financial statements and accompanying notes included elsewhere in this Annual Report.
Communities Under Development(1)
(Dollars In Thousands Except Average Price)
(Unaudited)
Years Ended October 31,
As of October 31,
Net Contracts(2)
Deliveries
Contract Backlog
2019
2018 % Change
2019
2018 % Change
2019
2018 % Change
Northeast
(NJ, PA)
Home
Dollars
Avg. Price
Mid-Atlantic
293
$172,950
$590,273
131
$74,730
$570,458
123.7%
131.4%
3.5%
192
$116,889
$608,797
178
$96,012
$539,393
(DE, MD, VA, WV)
Home
Dollars
Avg. Price
728
$385,862
$530,030
640
$340,963
$532,755
Midwest
(IL, OH)
Home
Dollars
Avg. Price
Southeast
(FL, GA, SC)
Home
Dollars
Avg. Price
Southwest
(AZ, TX)
Home
Dollars
Avg. Price
West
(CA)
Home
Dollars
Avg. Price
Consolidated Total
Home
Dollars
Avg. Price
736
$219,266
$297,916
674
$204,487
$303,393
576
$233,645
$405,634
562
$225,703
$401,607
2,006
$677,244
$337,609
1,887
$640,604
$339,483
1,001
$411,577
$411,166
777
$348,726
$448,811
5,340
4,671
$2,100,544
$1,835,213
$393,360
$392,895
13.8%
13.2%
(0.5)%
9.2%
7.2%
(1.8)%
2.5%
3.5%
1.0%
6.3%
5.7%
(0.6)%
28.8%
18.0%
(8.4)%
14.3%
14.5%
0.1%
652
$356,674
$547,046
672
$354,153
$527,013
680
$203,734
$299,609
662
$196,307
$296,536
545
$219,860
$403,413
596
$237,948
$399,242
1,866
$627,201
$336,121
1,873
$637,568
$340,399
1,011
$425,324
$420,696
866
$384,240
$443,695
4,946
4,847
$1,949,682
$1,906,228
$394,194
$393,280
7.9%
21.7%
12.9%
(3.0)%
0.7%
3.8%
2.7%
3.8%
1.0%
(8.6)%
(7.6)%
1.0%
(0.4)%
(1.6)%
(1.3)%
16.7%
10.7%
(5.2)%
2.0%
2.3%
0.2%
Unconsolidated Joint Ventures(3)
Home
Dollars
Avg. Price
Total
Home
Dollars
Avg. Price
840
$431,419
$513,594
915
$556,745
$608,464
6,180
5,586
$2,531,963
$2,391,958
$409,703
$428,206
(8.2)%
(22.5)%
(15.6)%
10.6%
5.9%
(4.3)%
774
$485,324
$627,034
984
$599,979
$609,735
5,720
$2,435,006
$425,700
5,831
$2,506,207
$429,807
(21.3)%
(19.1)%
2.8%
(1.9)%
(2.8)%
(1.0)%
DELIVERIES INCLUDE EXTRAS
152
$86,557
$569,454
51
$30,496
$597,961
198.0%
183.8%
(4.8)%
343
$193,387
$563,810
296
$180,546
$609,953
15.9%
7.1%
(7.6)%
450
$122,681
$272,624
394
$107,149
$271,952
282
$121,921
$432,344
251
$108,137
$430,825
663
$230,898
$348,261
523
$180,854
$345,801
301
$124,700
$414,286
2,191
$880,144
$401,709
461
$194,123
$421,091
2,652
$1,074,267
$405,078
311
$138,448
$445,170
1,826
$745,630
$408,341
366
$231,682
$633,011
2,192
$977,312
$445,854
14.2%
14.5%
0.2%
12.4%
12.7%
0.4%
26.8%
27.7%
0.7%
(3.2)%
(9.9)%
(6.9)%
20.0%
18.0%
(1.6)%
26.0%
(16.2)%
(33.5)%
21.0%
9.9%
(9.1)%
Notes:
(1) Segment data excludes unconsolidated joint ventures.
(2) Net contracts are defined as new contracts signed during the period for the purchase of homes, less cancellations of prior contracts.
(3) Represents home deliveries, home revenues and average prices 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 homebuilding joint ventures. Our proportionate share of the income or loss of unconsolidated homebuilding and land
development joint ventures is reflected as a separate line item in our consolidated financial statements under “Income (loss) from unconsolidated joint ventures”.
Note: All statements in this Annual Report 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, (1) changes in general and local economic, industry
and business conditions and impacts of a significant homebuilding downturn; (2) adverse weather and other environmental conditions and natural disasters; (3) high leverage and restrictions on the Company’s
operations and activities imposed by the agreements governing the Company’s outstanding indebtedness; (4) availability and terms of financing to the Company; (5) the Company’s sources of liquidity; (6)
changes in credit ratings; (7) the seasonality of the Company’s business; (8) the availability and cost of suitable land and improved lots and sufficient liquidity to invest in such land and lots; (9) shortages in, and
price fluctuations of, raw materials and labor including due to changes in trade policies, such as the imposition of tariffs and duties on homebuilding materials and products, and related trade disputes with and
retaliatory measures taken by other countries; (10) reliance on, and the performance of, subcontractors; (11) 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; (12) increases in cancellations of agreements of sale; (13) fluctuations in interest rates and the
availability of mortgage financing; (14) changes in tax laws affecting the after-tax costs of owning a home; (15) operations through unconsolidated joint ventures with third parties; (16) government regulation,
including regulations concerning development of land, the home building, sales and customer financing processes, tax laws and the environment; (17) legal claims brought against us and not resolved in our
favor, such as product liability litigation, warranty claims and claims made by mortgage investors; (18) levels of competition; (19) successful identification and integration of acquisitions; (20) significant
influence of the Company’s controlling stockholders; (21) availability of net operating loss carryforwards; (22) utility shortages and outages or rate fluctuations; (23) geopolitical risks, terrorist acts and other acts
of war; (24) loss of key management personnel or failure to attract qualified personnel; (25) information technology failures and data security breaches; (26) negative publicity; and (27) certain risks,
uncertainties and other factors described in detail in the Company’s Annual Report on Form 10-K for the fiscal year ended October 31, 2019 and subsequent filings with the Securities and Exchange
Commission. 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.
1 Five-Year Financial Review
(In Thousands Except Number of Homes and Per-Share Data)
Statement of Operations Data:
Total Revenues
Inventory Impairment Loss and Land Option Write-Offs
Income (Loss) from Unconsolidated Joint Ventures
(Loss) Income Before Income Taxes
Income (Loss) Before Income Taxes Excluding Land-Related Charges,
Joint Venture Write-Downs and Loss on Extinguishment of Debt (1)
Net (Loss) Income
Assuming Dilution:(2)
Net (Loss) Income Per Common Share
Weighted-Average Number of Common Shares Outstanding
Balance Sheet Data:
Cash, Restricted Cash and Cash Equivalents
Total Inventories
Total Assets
Total Recourse Debt (3)
Total Nonrecourse Debt
Total Stockholders’ Equity Deficit
Supplemental Financial Data:
Adjusted EBIT (4)
Adjusted EBITDA (4)
Net Cash (Used in) Provided by Operating Activities (5)
Interest Incurred
Adjusted EBITDA/Interest Incurred
Financial Statistics:
Average Net Debt/Net Capitalization (6)
Inventory Turnover (7)
Homebuilding Gross Margin Percentage, Before Cost of Sales
Interest Expense and Land Charges (8)
Adjusted EBITDA Margin (4) (9)
Operating Statistics:
Net Sales Contracts – Homes
Net Sales Contracts – Dollars
Deliveries – Homes
Deliveries – Dollars
Backlog – Homes
Backlog – Dollars
2019
2018
2017
2016
2015
Years Ended October 31,
$2,016,916
$6,288
$28,932
$(39,668)
$1,991,233
$3,501
$24,033
$8,146
$2,451,665
$17,813
$(7,047)
$(45,244)
$2,752,247
$33,353
$(4,346)
$2,436
$2,148,480
$12,044
$4,169
$(21,765)
$9,910
$20,444
$10,186
$38,989
$(9,721)
$(42,117)
$4,520
$(332,193)
$(2,819)
$(16,100)
$(7.06)
5,968
$0.72
6,072
$(56.23)
5,908
$(0.48)
5,898
$(2.74)
5,876
$182,266
$1,292,485
$1,881,424
$1,479,990
$203,585
$(489,776)
$169,837
$174,009
$(249,127)
$165,906
1.05x
155.5%
1.6x
18.1%
8.6%
$232,992
$1,078,165
$1,662,042
$1,439,235
$95,557
$(453,504)
$493,742
$1,009,827
$1,900,898
$1,637,874
$77,524
$(460,371)
$183,165
$186,321
$(66,822)
$161,048
1.16x
160.8%
1.8x
18.4%
9.4%
$193,263
$199,144
$301,578
$160,203
1.24x
125.4%
2.1x
17.2%
8.1%
$369,713
$1,283,084
$2,354,956
$1,625,358
$96,427
$(128,510)
$222,347
$231,173
$386,996
$166,824
1.39x
110.4%
1.9x
16.9%
8.4%
$280,267
$1,644,578
$2,577,398
$1,874,924
$154,797
$(128,084)
$141,727
$150,574
$(318,787)
$166,188
0.91x
109.3%
1.3x
17.6%
7.0%
5,340
$2,100,544
4,946
$1,949,682
2,191
$880,144
4,671
$1,835,213
4,847
$1,906,228
1,826
$745,630
5,196
$2,084,097
5,602
$2,340,033
1,983
$808,033
6,109
$2,519,648
6,464
$2,600,790
2,398
$1,069,102
6,183
$2,448,207
5,507
$2,088,129
2,905
$1,215,925
(1) Income (Loss) Before Income Taxes Excluding Land-Related Charges, Joint Venture Write-Downs and Loss on Extinguishment of Debt is a non-GAAP financial measure. The most directly
comparable GAAP financial measure is (Loss) Income Before Income Taxes. The reconciliation of Income (Loss) Before Income Taxes Excluding Land-Related Charges, Joint Venture Write-
Downs and Loss on Extinguishment of Debt to (Loss) Income Before Income Taxes is presented on page 3 of this Annual Report. Income (Loss) Before Income Taxes Excluding Land-Related
Charges, Joint Venture Write-Downs and Loss on Extinguishment of Debt should be considered in addition to, but not as a substitute for, (Loss) Income Before Income Taxes, Net (Loss) Income and
other measures of financial performance prepared in accordance with GAAP that are presented on the financial statements included in the Company’s reports filed with the Securities and Exchange
Commission (SEC). Additionally, the Company’s calculation of Income (Loss) Before Income Taxes Excluding Land-Related Charges, Joint Venture Write-Downs and Loss on Extinguishment of
Debt may be different than the calculation used by other companies, and, therefore, comparability may be affected.
(2) All share and per share amounts throughout this report have been retroactively adjusted to reflect the March 2019 reverse stock split.
(3) Total Recourse Debt is derived by adding revolving and term loan credit facilities and notes payable, less accrued interest.
(4) Adjusted EBIT and Adjusted EBITDA are non-GAAP financial measures. The most directly comparable GAAP financial measure is Net (Loss) Income. The reconciliation of Adjusted EBIT and
Adjusted EBITDA to Net (Loss) Income is presented on page 3 of this Annual Report. Adjusted EBIT and Adjusted EBITDA should be considered in addition to, but not as a substitute for, (Loss)
Income Before Income Taxes, Net (Loss) Income and other measures of financial performance prepared in accordance with GAAP that are presented on the financial statements included in the
Company’s reports filed with the SEC. Additionally, the Company’s calculation of Adjusted EBIT and Adjusted EBITDA may be different than the calculation used by other companies, and,
therefore, comparability may be affected.
(5) In connection with our adoption of Accounting Standards Update 2016-18 in November 2018, restricted cash amounts are no longer shown within the operating and investing activities as these
balances are now included in the beginning and ending cash balances in our Consolidated Statements of Cash Flows. The adoption also resulted in the reclassification of restricted cash in operating
and investing activities in prior periods.
(6) Net Debt excludes mortgage warehouse debt and nonrecourse debt and is net of accrued interest and homebuilding cash and cash equivalents balances. Net Capitalization includes Net Debt, as
previously defined, and total stockholders’ equity deficit. Calculated based on a five quarter average. The calculation of Average Net Debt/Net Capitalization is presented on page 4 of this Annual
Report. The Company’s calculation of Average Net Debt/Net Capitalization may be different than the calculation used by other companies and, therefore, comparability may be affected.
(7) Derived by dividing cost of sales, excluding cost of sales interest, by the five quarter average inventory, excluding inventory not owned and capitalized interest. The calculation of Inventory
Turnover is presented on page 5 of this Annual Report. The Company’s calculation of Inventory Turnover may be different than the calculation used by other companies and, therefore,
comparability may be affected.
(8) Homebuilding Gross Margin Percentage, Before Cost of Sales Interest Expense and Land Charges is a non-GAAP financial measure. The most directly comparable GAAP financial measure is
Homebuilding Gross Margin Percentage. The reconciliation of Homebuilding Gross Margin Percentage, Before Cost of Sales Interest Expense and Land Charges to Homebuilding Gross Margin
Percentage is presented on page 3 of this Annual Report. Homebuilding Gross Margin, Before Cost of Sales Interest Expense and Land Charges should be considered in addition to, but not as an
alternative to, Homebuilding Gross Margin Percentage determined in accordance with GAAP as an indicator of operating performance. Additionally, the Company’s calculation of Homebuilding
Gross Margin Percentage, Before Cost of Sales Interest Expense and Land Charges may be different than the calculation used by other companies, and, therefore, comparability may be affected.
(9) Adjusted EBITDA Margin is derived by dividing Adjusted EBITDA by Total Revenues.
This summary should be read in conjunction with the related consolidated financial statements and accompanying notes included elsewhere in this Annual Report.
2 Reconciliation of Income (Loss) Before Income Taxes Excluding Land-Related Charges, Joint Venture Write-Downs and Loss on Extinguishment of Debt to (Loss)
Income Before Income Taxes:
(Dollars In Thousands)
(Loss) Income Before Income Taxes
Inventory Impairment Loss and Land Option Write-Offs
Unconsolidated Joint Venture Investment Write-Downs
Loss on Extinguishment of Debt
Income (Loss) Before Income Taxes Excluding Land-Related Charges,
Joint Venture Write-Downs and Loss on
Extinguishment of Debt
Years Ended October 31,
2019
$(39,668)
6,288
854
(42,436)
2018
$8,146
3,501
1,261
(7,536)
2017
$(45,244)
17,813
2,763
(34,854)
2016
$2,436
33,353
–
(3,200)
2015
$(21,765)
12,044
–
–
$9,910
$20,444
$10,186
$38,989
$(9,721)
Reconciliation of Adjusted EBIT and Adjusted EBITDA to Net (Loss) Income:
(Dollars In Thousands)
Net (Loss) Income
Income Tax Provision (Benefit)
Interest Expense
EBIT
Inventory Impairment Loss and Land Option Write-offs
Loss on Extinguishment of Debt
Adjusted EBIT
EBIT
Depreciation
Amortization of Debt Costs
EBITDA
Inventory Impairment Loss and Land Option Write-offs
Loss on Extinguishment of Debt
Adjusted EBITDA
Years Ended October 31,
2019
$(42,117)
2,449
160,781
121,113
6,288
42,436
$169,837
$121,113
4,172
–
125,285
6,288
42,436
$174,009
2018
$4,520
3,626
163,982
172,128
3,501
7,536
$183,165
$172,128
3,156
–
175,284
3,501
7,536
$186,321
2017
$(332,193)
286,949
185,840
140,596
17,813
34,854
$193,263
$140,596
4,249
1,632
146,477
17,813
34,854
$199,144
2016
$(2,819)
5,255
183,358
185,794
33,353
3,200
$222,347
$185,794
3,565
5,261
194,620
33,353
3,200
$231,173
2015
$(16,100)
(5,665)
151,448
129,683
12,044
–
$141,727
$129,683
3,388
5,459
138,530
12,044
–
$150,574
Homebuilding Gross Margin
(Dollars In Thousands)
Sale of Homes
Cost of Sales, Excluding Interest Expense and Land Charges
Homebuilding Gross Margin, Before Cost of Sales Interest Expense and
Land Charges
Cost of Sales Interest Expense, Excluding Land Sales Interest Expense
Homebuilding Gross Margin, After Cost of Sales Interest Expense,
Before Land Charges
Land Charges
Homebuilding Gross Margin
Gross Margin Percentage
Gross Margin Percentage, Before Cost of Sales Interest Expense and
Land Charges
Gross Margin Percentage, After Cost of Sales Interest Expense,
Before Land Charges
Years Ended October 31,
2019
$1,949,682
1,596,237
2018
$1,906,228
1,555,894
2017
$2,340,033
1,937,116
2016
$2,600,790
2,162,284
2015
$2,088,129
1,721,336
353,445
70,520
282,925
350,334
402,917
56,588
76,902
293,746
326,015
6,288
$276,637
3,501
$290,245
17,813
$308,202
14.2%
18.1%
14.5%
15.2%
18.4%
15.4%
13.2%
17.2%
13.9%
438,506
86,593
351,913
33,353
$318,560
12.2%
16.9%
13.5%
366,793
59,574
307,219
12,044
$295,175
14.1%
17.6%
14.7%
3 Calculation of Average Net Debt/Net Capitalization(1)
(Dollars In Thousands)
Notes Payable, Term Loans and Revolving Credit Facility
Less Accrued Interest
Less Homebuilding Cash and Cash Equivalents
Net Debt
Notes Payable, Term Loans and Revolving Credit Facility
Total Stockholders’ Equity Deficit
Total Capitalization
Less Accrued Interest
Less Homebuilding Cash and Cash Equivalents
Net Capitalization
Average Net Debt/Net Capitalization
(Dollars In Thousands)
Notes Payable, Term Loans and Revolving Credit Facility
Less Accrued Interest
Less Homebuilding Cash and Cash Equivalents
Net Debt
Notes Payable, Term Loans and Revolving Credit Facility
Total Stockholders’ Equity Deficit
Total Capitalization
Less Accrued Interest
Less Homebuilding Cash and Cash Equivalents
Net Capitalization
Average Net Debt/Net Capitalization
(Dollars In Thousands)
Notes Payable, Term Loans and Revolving Credit Facility
Less Accrued Interest
Less Homebuilding Cash and Cash Equivalents
Net Debt
Notes Payable, Term Loans and Revolving Credit Facility
Total Stockholders’ Equity Deficit
Total Capitalization
Less Accrued Interest
Less Homebuilding Cash and Cash Equivalents
Net Capitalization
Average Net Debt/Net Capitalization
(Dollars In Thousands)
Total Notes Payable
Less Accrued Interest
Less Homebuilding Cash and Cash Equivalents
Net Debt
Total Notes Payable
Total Stockholders’ Equity Deficit
Total Capitalization
Less Accrued Interest
Less Homebuilding Cash and Cash Equivalents
Net Capitalization
Average Net Debt/Net Capitalization
(Dollars In Thousands)
Total Notes Payable
Less Accrued Interest
Less Homebuilding Cash and Cash Equivalents
Net Debt
Total Notes Payable
Total Stockholders’ Equity Deficit
Total Capitalization
Less Accrued Interest
Less Homebuilding Cash and Cash Equivalents
Net Capitalization
Average Net Debt/Net Capitalization
10/31/2018
$1,474,835
35,600
187,871
$1,251,364
$1,474,835
(453,504)
$1,021,331
35,600
187,871
$797,860
10/31/2017
$1,679,674
41,800
463,697
$1,174,177
$1,679,674
(460,371)
$1,219,303
41,800
463,697
$713,806
As of
10/31/2016
$1,657,758
32,425
339,773
$1,285,560
$1,657,758
(128,510)
$1,529,248
32,425
339,773
$1,157,050
As of
10/31/2015
$1,915,312
40,388
245,398
$1,629,526
$1,915,312
(128,084)
$1,787,228
40,388
245,398
$1,501,442
As of
10/31/2014
$1,668,624
32,222
255,117
$1,381,285
$1,668,624
(117,799)
$1,550,825
32,222
255,117
$1,263,486
1/31/2019
$1,515,488
18,100
113,314
$1,384,074
$1,515,488
(470,364)
$1,045,124
18,100
113,314
$913,710
1/31/2018
$1,597,324
15,100
278,158
$1,304,066
$1,597,324
(491,189)
$1,106,135
15,100
278,158
$812,877
1/31/2017
$1,619,673
31,700
195,830
$1,392,143
$1,619,673
(128,280)
$1,491,393
31,700
195,830
$1,263,863
1/31/2016
$1,731,760
29,172
147,124
$1,555,464
$1,731,760
(143,140)
$1,588,620
29,172
147,124
$1,412,324
1/31/2015
$1,913,831
31,212
269,282
$1,613,337
$1,913,831
(129,984)
$1,783,847
31,212
269,282
$1,483,353
As of
4/30/2019
$1,500,358
37,900
123,998
$1,338,460
$1,500,358
(484,479)
$1,015,879
37,900
123,998
$853,981
As of
4/30/2018
$1,597,375
38,500
248,815
$1,310,060
$1,597,375
(499,976)
$1,097,399
38,500
248,815
$810,084
4/30/2017
$1,621,375
31,100
275,011
$1,315,264
$1,621,375
(133,903)
$1,487,472
31,100
275,011
$1,181,361
4/30/2016
$1,747,260
39,119
120,661
$1,587,480
$1,747,260
(152,322)
$1,594,938
39,119
120,661
$1,435,158
4/30/2015
$1,925,496
39,938
256,866
$1,628,692
$1,925,496
(146,334)
$1,779,162
39,938
256,866
$1,482,358
7/31/2019
$1,486,117
22,500
83,634
$1,379,983
$1,486,117
(493,071)
$993,046
22,500
83,634
$886,912
7/31/2018
$1,556,618
17,900
216,707
$1,322,011
$1,556,618
(500,631)
$1,055,987
17,900
216,707
$821,380
7/31/2017
$1,650,543
13,500
278,486
$1,358,557
$1,650,543
(471,162)
$1,179,381
13,500
278,486
$887,395
7/31/2016
$1,652,087
30,479
181,526
$1,440,082
$1,652,087
(151,943)
$1,500,144
30,479
181,526
$1,288,139
7/31/2015
$1,916,961
30,599
207,302
$1,679,060
$1,916,961
(151,507)
$1,765,454
30,599
207,302
$1,527,553
10/31/2019
$1,499,071
19,100
130,976
$1,348,995
$1,499,071
(489,776)
$1,009,295
19,100
130,976
$859,219
10/31/2018
$1,474,835
35,600
187,871
$1,251,364
$1,474,835
(453,504)
$1,021,331
35,600
187,871
$797,860
10/31/2017
$1,679,674
41,800
463,697
$1,174,177
$1,679,674
(460,371)
$1,219,303
41,800
463,697
$713,806
10/31/2016
$1,657,758
32,425
339,773
$1,285,560
$1,657,758
(128,510)
$1,529,248
32,425
339,773
$1,157,050
10/31/2015
$1,915,312
40,388
245,398
$1,629,526
$1,915,312
(128,084)
$1,787,228
40,388
245,398
$1,501,442
Five
Quarter
Average
$1,340,575
$862,336
155.5%
Five
Quarter
Average
$1,272,336
$791,201
160.8%
Five
Quarter
Average
$1,305,140
$1,040,695
125.4%
Five
Quarter
Average
$1,499,622
$1,358,823
110.4%
Five
Quarter
Average
$1,586,380
$1,451,638
109.3%
(1) Net Debt excludes mortgage warehouse debt and nonrecourse debt and is net of accrued interest and homebuilding cash and cash equivalents balances. Net Capitalization
includes Net Debt, as previously defined, and total stockholders’ equity deficit. Calculated based on a five quarter average. The Company’s calculation of Average Net Debt/Net
Capitalization may be different than the calculation used by other companies and, therefore, comparability may be affected.
4 Calculation of Inventory Turnover(1)
(Dollars In Thousands)
Cost of Sales, Excluding Interest
Total Inventories
Consolidated Inventory Not Owned
Capitalized Interest
Inventories less Consolidated Inventory Not
Owned and Capitalized Interest
Inventory Turnover
(Dollars In Thousands)
Cost of Sales, Excluding Interest
Total Inventories
Consolidated Inventory Not Owned
Capitalized Interest
Inventories less Consolidated Inventory Not
Owned and Capitalized Interest
Inventory Turnover
1/31/2019
$304,927
For the Quarter Ended
4/30/2019
$355,477
7/31/2019
$381,939
Year
Ended
10/31/2019 10/31/2019
$1,604,777
$562,434
10/31/2018
$1,078,165
87,921
68,117
1/31/2019
$1,178,373
112,618
74,455
As of
4/30/2019
$1,268,058
154,435
79,277
7/31/2019
$1,354,918
179,642
77,997
10/31/2019
$1,292,485
190,273
71,264
Five
Quarter
Average
$922,127
$991,300
$1,034,346
$1,097,279
$1,030,948
$1,015,200
1/31/2018
$329,527
For the Quarter Ended
4/30/2018
$393,012
7/31/2018
$361,303
1.6x
Year
Ended
10/31/2018 10/31/2018
$1,566,555
$482,713
10/31/2017
$1,009,827
124,784
71,051
1/31/2018
$1,053,514
93,875
70,793
As of
4/30/2018
$1,040,045
78,907
65,355
7/31/2018
$1,109,043
96,989
67,510
10/31/2018
$1,078,165
87,921
68,117
$813,992
$888,846
$895,783
$944,544
$922,127
For the Quarter Ended
Five
Quarter
Average
$893,058
1.8x
Year
Ended
(Dollars In Thousands)
Cost of Sales, Excluding Interest
1/31/2017
$445,027
4/30/2017
$475,440
7/31/2017
$478,886
10/31/2017 10/31/2017
$1,961,804
$562,451
Total Inventories
Consolidated Inventory Not Owned
Capitalized Interest
Inventories less Consolidated Inventory Not
Owned and Capitalized Interest
Inventory Turnover
As of
10/31/2016
$1,283,084
208,701
96,688
1/31/2017
$1,293,426
171,572
94,438
4/30/2017
$1,209,212
154,620
90,960
7/31/2017
$1,188,849
138,529
87,119
10/31/2017
$1,009,827
124,784
71,051
$977,695
$1,027,416
$963,632
$963,201
$813,992
For the Quarter Ended
Five
Quarter
Average
$949,187
2.1x
Year
Ended
(Dollars In Thousands)
Cost of Sales, Excluding Interest
1/31/2016
$464,146
4/30/2016
$536,050
7/31/2016
$583,783
10/31/2016 10/31/2016
$2,230,457
$646,478
Total Inventories
Consolidated Inventory Not Owned
Capitalized Interest
Inventories less Consolidated Inventory Not
Owned and Capitalized Interest
Inventory Turnover
As of
10/31/2015
$1,644,578
122,225
123,898
1/31/2016
$1,651,986
338,067
117,113
4/30/2016
$1,676,136
312,841
115,809
7/31/2016
$1,466,754
280,728
104,544
10/31/2016
$1,283,084
208,701
96,688
Five
Quarter
Average
$1,398,455
$1,196,806
$1,247,486
$1,081,482
$977,695
$1,180,385
For the Quarter Ended
1.9x
Year
Ended
(Dollars In Thousands)
Cost of Sales, Excluding Interest
1/31/2015
$354,812
4/30/2015
$382,139
7/31/2015
$432,625
10/31/2015 10/31/2015
$1,722,038
$552,462
Total Inventories
Consolidated Inventory Not Owned
Capitalized Interest
Inventories less Consolidated Inventory Not
Owned and Capitalized Interest
Inventory Turnover
As of
10/31/2014
$1,344,310
108,853
109,158
1/31/2015
$1,481,976
90,098
114,241
4/30/2015
$1,538,757
100,806
119,901
7/31/2015
$1,612,489
109,355
122,941
10/31/2015
$1,644,578
122,225
123,898
Five
Quarter
Average
$1,126,299
$1,277,637
$1,318,050
$1,380,193
$1,398,455
$1,300,127
1.3x
(1) Derived by dividing cost of sales, excluding cost of sales interest, by the five quarter average inventory, excluding inventory not owned and capitalized interest. The
Company’s calculation of Inventory Turnover may be different than the calculation used by other companies and, therefore, comparability may be affected.
5 (This page has been left blank intentionally.)
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended OCTOBER 31, 2019
☐ 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, Fifth Floor, Matawan, NJ
(Address of Principal Executive Offices)
07747
(Zip Code)
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
732-747-7800
Title of each class
Class A Common Stock $0.01 par value per share
Preferred Stock Purchase Rights(1)
Depositary Shares each representing
1/1,000th of a share of 7.625% Series A
Preferred Stock
Trading symbol(s)
HOV
N/A
HOVNP
Name of each exchange on which registered
New York Stock Exchange
New York Stock Exchange
Nasdaq Global Market
(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 if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act of 1933.
Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes ☐ No ☒
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will
not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. ☒
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 ☐
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
Nonaccelerated Filer ☐
Accelerated Filer ☒
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 ☒
The aggregate market value of the voting and nonvoting common equity held by non-affiliates computed by reference to the price
at which the common equity was last sold, or the average bid and asked price of such common equity as of April 30, 2019 (the last business
day of the registrant’s most recently completed second fiscal quarter) was $73,971,400.
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. 5,503,301
shares of Class A Common Stock and 622,690 shares of Class B Common Stock were outstanding as of December 13, 2019.
HOVNANIAN ENTERPRISES, INC.
DOCUMENTS INCORPORATED BY REFERENCE:
Part III — Those portions of the registrant’s definitive proxy statement to be filed pursuant to Regulation 14A in connection with
registrant’s annual meeting of stockholders to be held on March 24, 2020, which are responsive to those parts of Part III, Items 10, 11, 12,
13 and 14 as identified herein.
FORM 10-K
TABLE OF CONTENTS
Item
Page
PART I ..................................................................................................................................................................................... 1
Business .................................................................................................................................................................................... 1
1
1A Risk Factors............................................................................................................................................................................... 9
1B Unresolved Staff Comments ..................................................................................................................................................... 19
Properties .................................................................................................................................................................................. 19
2
Legal Proceedings ..................................................................................................................................................................... 19
3
Mine Safety Disclosures ............................................................................................................................................................ 20
4
Information About Our Executive Officers ............................................................................................................................... 20
PART II .................................................................................................................................................................................... 21
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities ................. 21
5
Selected Financial Data ............................................................................................................................................................. 22
6
7
Management’s Discussion and Analysis of Financial Condition and Results of Operations .................................................... 22
7A Quantitative and Qualitative Disclosures About Market Risk ................................................................................................... 45
8
Financial Statements and Supplementary Data ......................................................................................................................... 46
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure .................................................... 46
9
9A Controls and Procedures ............................................................................................................................................................ 46
9B Other Information ...................................................................................................................................................................... 46
PART III .................................................................................................................................................................................. 47
Directors, Executive Officers and Corporate Governance ........................................................................................................ 47
Executive Compensation ........................................................................................................................................................... 48
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters .................................. 48
Certain Relationships and Related Transactions, and Director Independence ........................................................................... 48
Principal Accountant Fees and Services .................................................................................................................................... 48
PART IV .................................................................................................................................................................................. 49
Exhibits and Financial Statement Schedules ............................................................................................................................. 49
Form 10-K Summary ................................................................................................................................................................ 50
Signatures .................................................................................................................................................................................. 56
10
11
12
13
14
15
16
i
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PART I
ITEM 1
BUSINESS
Business Overview
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). Through its subsidiaries, HEI designs, constructs, markets, and sells single-family
detached homes, attached townhomes and condominiums, urban infill, and active lifestyle homes in planned residential developments and
is one of the nation’s largest builders of residential homes. Founded in 1959 by Kevork Hovnanian, HEI was incorporated in New Jersey
in 1967 and reincorporated in Delaware in 1983. Since the incorporation of HEI’s predecessor company, the Company combined with its
unconsolidated joint ventures have delivered in excess of 342,000 homes, including 5,720 homes in fiscal 2019. The Company has two
distinct operations: homebuilding and financial services. Our homebuilding operations consist of six segments: Northeast, Mid-Atlantic,
Midwest, Southeast, Southwest and West. Our financial services operations provide mortgage loans and title services to the customers of
our homebuilding operations.
We are currently, excluding unconsolidated joint ventures, offering homes for sale in 141 communities in 24 markets in 14
states throughout the United States. We market and build homes for first-time buyers, first-time and second-time move-up buyers, luxury
buyers, active lifestyle buyers and empty nesters. We offer a variety of home styles at base prices ranging from $153,000 to $2,252,000 with
an average sales price, including options, of $394,000 nationwide in fiscal 2019.
Our operations span all significant aspects of the home-buying process – from design, construction, and sale, to mortgage
origination and title services.
The following is a summary of our growth history:
1959 - Founded by Kevork Hovnanian as a New Jersey homebuilder.
1983 - Completed initial public offering.
1986 - Entered the North Carolina market through the investment in New Fortis Homes.
1992 - Entered the greater Washington, D.C. market.
1994 - Entered the Coastal Southern California market.
1998 - Expanded in the greater Washington, D.C. market through the acquisition of P.C. Homes.
1999 - Entered the Dallas, Texas market through our acquisition of Goodman Homes. Further diversified and strengthened
our position as New Jersey’s largest homebuilder through the acquisition of Matzel & Mumford.
2001 - Continued expansion in the greater Washington D.C. and North Carolina markets through the acquisition of
Washington Homes. This acquisition further strengthened our operations in each of these markets.
2002 - Entered the Central Valley market in Northern California and Inland Empire region of Southern California through the
acquisition of Forecast Homes.
2003 - Expanded operations in Texas and entered the Houston market through the acquisition of Parkside Homes and Brighton
Homes. Entered the greater Ohio market through our acquisition of Summit Homes and entered the greater metro Phoenix
market through our acquisition of Great Western Homes.
2004 - Entered the greater Tampa, Florida market through the acquisition of Windward Homes and started operations in the
Minneapolis/St. Paul, Minnesota market.
2005 - Entered the Orlando, Florida market through our acquisition of Cambridge Homes and entered the greater Chicago,
Illinois market and expanded our position in Florida and Minnesota through the acquisition of the operations of Town &
Country Homes, which occurred concurrently with our entering into a joint venture with affiliates of Blackstone Real Estate
Advisors to own and develop Town & Country Homes’ existing residential communities. We also entered the Cleveland, Ohio
market through the acquisition of Oster Homes.
1
2006 - Entered the coastal markets of South Carolina and Georgia through the acquisition of Craftbuilt Homes.
During fiscal 2016, we exited the Minneapolis, Minnesota and Raleigh, North Carolina markets and sold land portfolios in
those markets. During fiscal 2018, we completed a wind down of our operations in the San Francisco Bay area in Northern California and
in Tampa, Florida.
Geographic Breakdown of Markets by Segment
The Company markets and builds homes that are constructed in 16 of the nation’s top 50 housing markets. We segregate our
homebuilding operations geographically into the following six segments:
Northeast: New Jersey and Pennsylvania
Mid-Atlantic: Delaware, Maryland, Virginia, Washington, D.C. and West Virginia
Midwest: Illinois and Ohio
Southeast: Florida, Georgia and South Carolina
Southwest: Arizona and Texas
West: California
For financial information about our segments, see Item 7 “Management’s Discussion and Analysis of Financial Condition and
Results of Operations.”
Employees
We employed 1,868 full-time employees (whom we refer to as associates) as of October 31, 2019.
Corporate Offices and Available Information
Our corporate offices are located at 90 Matawan Road, Fifth Floor, Matawan, New Jersey 07747 (See Item 2-Properties). Our
telephone number is 732-747-7800, and our Internet web site address is www.khov.com. Information available on or through our web site
is not a part of this Form 10-K. We make available free of charge through our web site our Annual Report on Form 10-K, quarterly reports
on Form 10-Q, current reports on Form 8-K, and amendments to these reports filed or furnished pursuant to Section 13(d) or 15(d) of the
Securities Exchange Act of 1934, as amended (“Exchange Act”), as soon as reasonably practicable after they are filed with, or furnished
to, the Securities and Exchange Commission (SEC). Copies of the Company’s Form 10-K, quarterly reports on Form 10-Q, current reports
on Form 8-K, and amendments to these reports are available free of charge upon request. The SEC maintains an Internet site
(http://www.sec.gov) that contains reports, proxy and information statements and other information regarding issuers that file electronically
with the SEC.
2
Business Strategies
Given the relatively low levels of total U.S. housing starts, and our belief in the long-term recovery of the homebuilding
market, we remain focused on identifying new land parcels, which are critical to improving our financial performance. As discussed
previously, we were limited in our ability to invest in land purchases in fiscal 2016 and 2017 due to significant debt maturities that we
were unable to refinance and therefore had to pay at maturity. This reduction of investment led to a decrease in community count and
revenues, which impacted our overall profitability. In the fourth quarter of fiscal 2016 and in July 2017, we were able to refinance certain
of our debt maturities and again in fiscal 2018 and fiscal 2019 the Company entered into certain financing transactions which extended
our debt maturities. These transactions provided us with the long term capital needed to implement our strategy to invest in land to grow
the business to more significant profitability. However, there is typically a significant time lag from when we first control lots until the
time that we open a community for sale. This timeline can vary significantly from a few months (in a market such as Houston) to three to
five plus years (in a market such as New Jersey). For seven consecutive quarters through the third quarter of fiscal 2019, our total number
of lots controlled increased as compared to the same period of the prior year. Although there was a slight decrease in total lots controlled
of 3.2% as of October 31, 2019 as compared to October 31, 2018, the growth in lots controlled in previous quarters has led to the year-
over-year community count growth. Our strategy has been to grow through increased open for sale communities. As our recently opened
communities begin delivering homes, we believe it should lead to additional delivery and revenue growth, and in turn profitability, in
future periods absent adverse market factors. We continue to see opportunities to purchase land at prices that make economic sense in light
of our current sales prices and sales paces and plan to continue actively pursuing such land acquisitions. New land purchases at pricing
that we believe will generate appropriate investment returns and drive greater operating efficiencies are needed to return to sustained
profitability.
In addition to our current focus on maintaining adequate liquidity and evaluating new investment opportunities, we intend to
continue to focus on our historic key business strategies, as enumerated below. We believe that these strategies separate us from our
competitors in the residential homebuilding industry and the adoption, implementation and adherence to these principles will continue to
benefit our business.
Our goal is to become a significant builder in each of the selected markets in which we operate, which will enable us to achieve
powers and economies of scale and differentiate ourselves from most of our competitors.
As noted above, we offer a broad product array to provide housing to a wide range of customers. Our customers consist of
first-time buyers, first-time and second-time move-up buyers, luxury buyers, active lifestyle buyers and empty nesters. Our diverse product
array includes single-family detached homes, attached townhomes and condominiums, urban infill and active lifestyle homes.
We are committed to customer satisfaction and quality in the homes that we build. We recognize that our future success rests
in the ability to deliver quality homes to satisfied customers. We seek to expand our commitment to customer service through a variety of
quality initiatives. In addition, our focus remains on attracting and developing quality associates. We use several leadership development
and mentoring programs to identify key individuals and prepare them for positions of greater responsibility within our Company.
We focus on achieving high return on invested capital. Each new community is evaluated based on its ability to meet or exceed
internal rate of return requirements. Our belief is that the best way to create lasting value for our shareholders is through a strong focus on
return on invested capital.
We prefer to use a risk-averse land acquisition strategy. We attempt to acquire land with a minimum cash investment and
negotiate takedown options, thereby limiting the financial exposure to the amounts invested in property and predevelopment costs. This
approach significantly reduces our risk and generally allows us to obtain necessary development approvals before acquisition of the land.
Our strategy includes homebuilding and land development joint ventures as a means of controlling lot positions, expanding
our market opportunities, establishing strategic alliances, reducing our risk profile, leveraging our capital base and enhancing our returns
on capital. Our homebuilding joint ventures are generally entered into with third-party investors to develop land and construct homes that
are sold directly to home buyers. Our land development joint ventures include those with developers and other homebuilders, as well as
financial investors to develop finished lots for sale to the joint venture’s members or other third parties.
We manage our financial services operations to better serve all of our home buyers. Our current mortgage financing and title
service operations enhance our contact with customers and allow us to coordinate the home-buying experience from beginning to end.
3
Operating Policies and Procedures
We attempt to reduce the effect of certain risks inherent in the housing industry through the following policies and procedures:
Training - Our training is designed to provide our associates with the knowledge, attitudes, skills and habits necessary to
succeed in their jobs. Our training department regularly conducts online or webinar training in sales, construction, administration and
managerial skills.
Land Acquisition, Planning, and Development - Before entering into a contract to acquire land, we complete extensive
comparative studies and analyses which assist us in evaluating the economic feasibility of such land acquisition. We generally follow a
policy of acquiring options to purchase land for future community developments.
● Where possible, we acquire land for future development through the use of land options, which need not be exercised before
the completion of the regulatory approval process. We attempt to structure these options with flexible takedown schedules
rather than with an obligation to take down the entire parcel upon receiving regulatory approval. If we are unable to negotiate
flexible takedown schedules, we will buy parcels in a single bulk purchase. Additionally, we purchase improved lots in certain
markets by acquiring a small number of improved lots with an option on additional lots. This allows us to minimize the
economic costs and risks of carrying a large land inventory, while maintaining our ability to commence new developments
during favorable market periods.
● Our option and purchase agreements are typically subject to numerous conditions, including, but not limited to, our ability to
obtain necessary governmental approvals for the proposed community. Generally, the deposit on the agreement will be
returned to us if all approvals are not obtained, although predevelopment costs may not be recoverable. By paying an additional
nonrefundable deposit, we have the right to extend a significant number of our options for varying periods of time. In most
instances, we have the right to cancel any of our land option agreements by forfeiture of our deposit on the agreement. In fiscal
2019, 2018 and 2017, rather than purchase additional lots in underperforming communities, we took advantage of this right
and walked away from 5,153 lots, 2,777 lots and 3,930 lots, respectively, out of 23,157 total lots, 20,387 total lots and 17,837
total lots, respectively, under option, resulting in pretax charges of $3.6 million, $1.4 million and $2.7 million, respectively.
Design - Our residential communities are generally located in urban and suburban areas easily accessible through public and
personal transportation. Our communities are designed as neighborhoods that fit existing land characteristics. We strive to create diversity
within the overall planned community by offering a mix of homes with differing architecture, textures and colors. Recreational amenities,
such as swimming pools, tennis courts, clubhouses, open areas and tot lots, are frequently included.
Construction - We design and supervise the development and building of our communities. Our homes are constructed
according to standardized prototypes, which are designed and engineered to provide innovative product design while attempting to
minimize costs of construction. We generally employ subcontractors for the installation of site improvements and construction of homes.
Agreements with subcontractors are generally short term and provide for a fixed price for labor and materials. We rigorously control costs
through the use of computerized monitoring systems.
Because of the risks involved in speculative building, our general policy is to construct an attached condominium or townhouse
building only after signing contracts for the sale of at least 50% of the homes in that building. A majority of our single-family detached
homes are constructed after the signing of a sales contract and mortgage approval has been obtained. This limits the buildup of inventory
of unsold homes and the costs of maintaining and carrying that inventory.
Materials and Subcontractors - We attempt to maintain efficient operations by utilizing standardized materials available from
a variety of sources. In addition, we generally contract with subcontractors to construct our homes. We have reduced construction and
administrative costs by consolidating the number of vendors serving certain markets and by executing national purchasing contracts with
select vendors. In recent years, we have experienced some construction delays due to shortage of labor in certain markets like Houston,
Dallas and Northern California; and we cannot predict the extent to which shortages in necessary materials or labor may occur in these or
other markets in the future.
Marketing and Sales - Our residential communities are sold principally through on-site sales offices. In order to respond to
our customers’ needs and trends in housing design, we rely upon our internal market research group to analyze information gathered from,
among other sources, buyer profiles, exit interviews at model sites, focus groups and demographic databases. We make use of our website,
internet, newspaper, radio, television, magazine, billboard, video and direct mail advertising, special and promotional events, illustrated
brochures and full-sized and scale model homes in our comprehensive marketing program. In addition, we have home design galleries in
our Florida, Illinois, New Jersey, Ohio and Virginia markets, which offer a wide range of customer options to satisfy individual customer
tastes.
4
Customer Service and Quality Control - In many of our markets, associates are responsible for customer service and preclosing
quality control inspections as well as responding to postclosing customer needs. Prior to closing, each home is inspected and any necessary
completion work is undertaken by us or our subcontractors. Our homes are enrolled in a standard limited warranty program which, in
general, provides a homebuyer with a limited warranty for the home’s materials and workmanship which follows each State’s applicable
statute of repose. All of the warranties contain standard exceptions, including, but not limited to, damage caused by the customer.
Customer Financing - We sell our homes to customers who generally finance their purchases through mortgages. Our financial
services segment provides our customers with competitive financing and coordinates and expedites the loan origination transaction through
the steps of loan application, loan approval, and closing and title services. We originate loans in each of the states in which we build homes.
We believe that our ability to offer financing to customers on competitive terms as a part of the sales process is an important factor in
completing sales.
During the year ended October 31, 2019, for the markets in which our mortgage subsidiaries originated loans, 11.1% of our
home buyers paid in cash and 70.9% of our noncash home buyers obtained mortgages from our mortgage banking subsidiary. The loans
we originated in fiscal 2019 were 65.8% prime and 29.8% Federal Housing Administration/Veterans Affairs (“FHA/VA”). The remaining
4.4% of our loan originations represent jumbo and/or USDA loans.
We sell virtually all of the loans and loan-servicing rights that we originate within a short period of time. Loans are sold either
individually or against forward commitments to institutional investors, including banks, mortgage banking firms, and savings and loan
associations.
Residential Development Activities
Our residential development activities include site planning and engineering, obtaining environmental and other regulatory
approvals and constructing roads, sewer, water, and drainage facilities, recreational facilities, and other amenities and marketing and selling
homes. These activities are performed by our associates, together with independent architects, consultants and contractors. Our associates
also carry out long-term planning of communities. A residential development generally includes single-family detached homes and/or a
number of residential buildings containing from two to 24 individual homes per building, together with amenities, such as club houses,
swimming pools, tennis courts, tot lots and open areas.
Current base prices for our homes in contract backlog at October 31, 2019, range from $153,000 to $860,000 in the Northeast,
from $217,000 to $2,252,000 in the Mid-Atlantic, from $155,000 to $622,000 in the Midwest, from $227,000 to $1,061,000 in the
Southeast, from $185,000 to $575,000 in the Southwest and from $239,000 to $956,000 in the West. Closings generally occur and are
typically reflected in revenues within six to nine months of when sales contracts are signed.
Information on homes delivered by segment for the year ended October 31, 2019, is set forth below:
(Housing revenue in thousands)
Northeast
Mid-Atlantic
Midwest
Southeast
Southwest
West
Consolidated total
Unconsolidated joint ventures (1)
Housing
Revenues
$116,889
356,674
203,734
219,860
627,201
425,324
$1,949,682
$485,324
Homes
Delivered Average Price
$608,797
547,046
299,609
403,413
336,121
420,696
$394,194
192
652
680
545
1,866
1,011
4,946
774
$627,034
(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 20
to the Consolidated Financial Statements for a further discussion of our unconsolidated joint ventures.
The value of our net sales contracts, excluding unconsolidated joint ventures, increased 14.5% to $2.1 billion for the year
ended October 31, 2019 from $1.8 billion for the year ended October 31, 2018. The number of homes contracted increased 14.3% to 5,340
in fiscal 2019 from 4,671 in fiscal 2018. The increase in the number of homes contracted occurred along with a 5.4% increase in the
average number of open-for-sale communities from 130 for fiscal 2018 to 137 for fiscal 2019. We contracted an average of 39.0 homes
per average active selling community in fiscal 2019 compared to 35.9 homes per average active selling community in fiscal 2018, an 8.6%
increase in sales pace per community as our performance per community improved in fiscal 2019 as compared to fiscal 2018.
5
Information on the value of net sales contracts by segment for the years ended October 31, 2019 and 2018, is set forth
below:
(Value of net sales contracts in thousands)
Northeast
Mid-Atlantic
Midwest
Southeast
Southwest
West
Consolidated total
Unconsolidated joint ventures(1)
2019
$172,950
385,862
219,266
233,645
677,244
411,577
$2,100,544
2018
$74,730
340,963
204,487
225,703
640,604
348,726
$1,835,213
Percentage of
Change
131.4%
13.2%
7.2%
3.5%
5.7%
18.0%
14.5%
$431,419
$556,745
(22.5)%
(1) Represents net contract dollars 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 20 to the Consolidated
Financial Statements for a further discussion of our unconsolidated joint ventures.
The following table summarizes our active selling communities under development as of October 31, 2019. The contracted
not delivered and remaining homes available in our active selling communities are included in the consolidated total homesites under the
total residential real estate chart in Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Active Selling Communities
Northeast
Mid-Atlantic
Midwest
Southeast
Southwest
West
Total
Approved
Communities
6
25
16
17
58
19
141
Homes
829
4,032
2,902
3,536
8,783
4,407
24,489
Homes
Delivered
330
1,751
1,144
908
4,296
1,942
10,371
Contracted
Not
Delivered(1)
152
343
450
282
663
301
2,191
Remaining
Homes
Available(2)
347
1,938
1,308
2,346
3,824
2,164
11,927
(1) Includes 278 home sites under option.
(2) Of the total remaining homes available, 843 were under construction or completed (including 80 models and sales offices), and 6,063
were under option.
Backlog
At October 31, 2019 and 2018, including unconsolidated joint ventures, we had a backlog of signed contracts for 2,652 homes
and 2,192 homes, respectively, with sales values aggregating $1.1 billion and $977.3 million, respectively. The majority of our backlog at
October 31, 2019 is expected to be completed and closed within the next six to nine months. At November 30, 2019 and 2018, our backlog
of signed contracts, including unconsolidated joint ventures, was 2,775 homes and 2,248 homes, respectively, with sales values aggregating
$1.1 billion and $1.0 billion, respectively. For information on our backlog excluding unconsolidated joint ventures, see the table on page
44 under Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Results of Operations -
Homebuilding.”
Sales of our homes typically are made pursuant to a standard sales contract that provides the customer with a statutorily
mandated right of rescission for a period ranging up to 15 days after execution. This contract requires a nominal customer deposit at the
time of signing. In addition, in the Northeast, and some sections of the Mid-Atlantic and Midwest, we typically obtain an additional 5% to
10% down payment due within 30 to 60 days after signing. In most markets, an additional deposit is required when a customer selects and
commits to optional upgrades in the home. The contract may include a financing contingency, which permits customers to cancel their
obligation in the event mortgage financing at prevailing interest rates (including financing arranged or provided by us) is unobtainable
within the period specified in the contract. This contingency period typically is four to eight weeks following the date of execution of the
contract. When housing values decline in certain markets, some customers cancel their contracts and forfeit their deposits. Cancellation
rates are discussed further in Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Sales
contracts are included in backlog once the sales contract is signed by the customer, which in some cases includes contracts that are in the
rescission or cancellation periods. However, revenues from sales of homes are recognized in the Consolidated Statements of Operations,
when title to the home is conveyed to the buyer, adequate initial and continuing investments have been received, and there is no continued
involvement.
6
Residential Land Inventory in Planning
It is our objective to control a supply of land, primarily through options, whenever possible, consistent with anticipated
homebuilding requirements in each of our housing markets. Controlled land (land owned and under option) as of October 31, 2019,
exclusive of communities under development described above under “Active Selling Communities” and excluding unconsolidated joint
ventures, is summarized in the following table. The proposed developable home sites in communities in planning are included in the 29,633
consolidated total home sites under the total residential real estate table in Item 7 “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” on page 37.
Communities in Planning
(Dollars in thousands)
Northeast:
Under option
Owned
Total
Mid-Atlantic:
Under option
Owned
Total
Midwest:
Under option
Owned
Total
Southeast:
Under option
Owned
Total
Southwest:
Under option
Owned
Total
West:
Under option
Owned
Total
Totals:
Under option
Owned
Combined total
Number
of Proposed
Communities
Proposed
Developable
Home Sites
Total
Land
Option
Price
Book
Value(1)
$11,078
$1,870
$12,948
2,791 $218,368
7
2,798
1,771 $208,359
1,245
3,016
$3,166
$47,496
$50,662
$44,244
$91,148
1,936
204
2,140
1,884
181
2,065
2,701 $162,993
-
2,701
580
2,215
2,795
$37,002
$3,620
$4,659
$8,279
$772
$11,975
$12,747
$11,465
$-
$11,465
$3,114
$9,350
$12,464
11,663 $762,114
3,852
15,515
$33,215
$75,350
$108,565
31
2
33
18
11
29
16
6
22
21
3
24
30
-
30
5
14
19
121
36
157
(1) Properties under option also include costs incurred on properties not under option but which are under evaluation. For properties
under option, as of October 31, 2019, option fees and deposits aggregated approximately $20.4 million. As of October 31, 2019, we
spent an additional $12.8 million in nonrefundable predevelopment costs on such properties, including properties not under option
but under evaluation.
We either option or acquire improved or unimproved home sites from land developers or other sellers. Under a typical
agreement with the land developer, we purchase a minimal number of home sites. The balance of the home sites to be purchased is covered
under an option agreement or a nonrecourse purchase agreement. During the declining homebuilding market, we decided to mothball (or
stop development on) certain communities where we determined that current market conditions did not justify further investment at that
time. When we decide to mothball a community, the inventory is reclassified on our Consolidated Balance Sheets from Sold and unsold
homes and lots under development to Land and land options held for future development or sale. See Note 3 to the Consolidated Financial
Statements for further discussion on mothballed communities. For additional financial information regarding our homebuilding segments,
see Note 10 to the Consolidated Financial Statements.
7
Raw Materials
The homebuilding industry has from time to time experienced raw material and labor shortages. In particular, shortages and
fluctuations in the price of lumber or in other important raw materials could result in delays in the start or completion of or increase the
cost of developing one or more of our residential communities. We attempt to maintain efficient operations by utilizing standardized
materials available from a variety of sources. In recent years, we have experienced some construction delays due to shortage of labor in
certain markets like Houston, Dallas and Northern California. We cannot predict, however, the extent to which shortages in necessary raw
materials or labor may occur in the future. In addition, we generally contract with subcontractors to construct our homes. We have reduced
construction and administrative costs by consolidating the number of vendors serving certain markets and by executing national purchasing
contracts with select vendors.
Seasonality
Our business is seasonal in nature and, historically, weather-related problems, typically in the fall, late winter and early spring,
can delay starts or closings and increase costs.
Competition
Our homebuilding operations are highly competitive. We are among the top 15 homebuilders in the United States in both
homebuilding revenues and home deliveries. We compete with numerous real estate developers in each of the geographic areas in which
we operate. Our competition ranges from small local builders to larger regional builders to publicly owned builders and developers, some
of which have greater sales and financial resources than we do. Previously owned homes and the availability of rental housing provide
additional competition. We compete primarily on the basis of reputation, price, location, design, quality, service and amenities.
Regulation and Environmental Matters
We are subject to extensive and complex laws and regulations that affect the development of land and home building, sales
and customer financing processes concerning zoning, building design, construction, and similar matters, including local regulations which
impose restrictive zoning and density requirements in order to limit the number of homes that can eventually be built within the boundaries
of a particular locality. In addition, we are subject to registration and filing requirements in connection with the construction, advertisement
and sale of our communities in certain states and localities in which we operate even if all necessary government approvals have been
obtained. We may also be subject to periodic delays or may be precluded entirely from developing communities due to building
moratoriums that could be implemented in the future in the states in which we operate. Generally, such moratoriums relate to insufficient
water or sewerage facilities or inadequate road capacity.
In addition, some state and local governments in markets where we operate have approved, and others may approve, slow-
growth, or no-growth initiatives that could negatively affect the availability of land and building opportunities within those areas. Approval
of these initiatives could adversely affect our ability to build and sell homes in the affected markets and/or could require the satisfaction
of additional administrative and regulatory requirements, which could result in slowing the progress or increasing the costs of our
homebuilding operations in these markets. Any such delays or costs could have a negative effect on our future revenues and earnings.
We are also 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 which apply to any given community vary greatly according to the community
site, the site’s environmental conditions and the present and former uses of the site. See Risk Factors – “Homebuilders are subject to a
number of federal, local, state, and foreign laws and regulations concerning the development of land, the homebuilding, sales, and
customer financing processes and the protection of the environment, which can cause us to incur delays and costs associated with
compliance and which can prohibit or restrict our activity in some regions or areas”, Item 3 “Legal Proceedings” and Note 18 to the
Consolidated Financial Statements.
Despite our past ability to obtain necessary permits and approvals for our communities, we anticipate that increasingly
stringent requirements will be imposed on developers and homebuilders in the future. Although we cannot reliably predict the extent of
any effect these requirements 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 interpretation and application.
8
ITEM 1A
RISK FACTORS
You should carefully consider the following risks in addition to the other information included in this Annual Report on Form
10-K, including the Consolidated Financial Statements and the notes thereto.
The homebuilding industry is significantly affected by changes in general and local economic conditions, real estate markets, and weather
and other environmental conditions, which could affect our ability to build homes at prices our customers are willing or able to pay, could
reduce profits that may not be recaptured, could result in cancellation of sales contracts, and could affect our liquidity.
The homebuilding industry is cyclical, has from time to time experienced significant difficulties, and is significantly affected
by changes in general and local economic conditions such as:
●
●
●
●
●
●
●
●
●
●
Employment levels and wage and job growth;
Availability and affordability of financing for home buyers;
Interest rates;
Adverse changes in tax laws;
Foreclosure rates;
Inflation;
Consumer confidence;
Housing demand in general and for our particular community locations and product designs, as well as consumer interest in
purchasing a home compared to other housing alternatives;
Population growth; and
Availability of water supply in locations in which we operate.
Turmoil in the financial markets could affect our liquidity. In addition, our cash balances are primarily invested in short-term
government-backed instruments. The remaining cash balances are held at numerous financial institutions and may, at times, exceed
insurable amounts. We seek to mitigate this risk by depositing our cash in major financial institutions and diversifying our investments. In
addition, our homebuilding operations often require us to obtain letters of credit. We have certain stand-alone letter of credit facilities and
agreements pursuant to which letters of credit are issued. However, we may need additional letters of credit above the amounts provided
under these facilities and letters of credit may not be issued under our current senior secured revolving credit facility. If we are unable to
obtain such additional letters of credit as needed to operate our business, we would be adversely affected.
Weather conditions and man-made or natural disasters such as hurricanes, tornadoes, earthquakes, floods, droughts, fires and
other environmental conditions can harm the local homebuilding business. For example, wildfires in California and hurricanes in Texas
and Florida in recent years have at various times caused utility company delays, slowing of our production process, increased cost of
operations and also have impacted our sales and construction activity in affected markets during the related time periods.
The difficulties described above could cause us to take longer and incur more costs to build our homes. In addition, our
insurance may not fully cover business interruptions or losses caused by weather conditions and manmade or natural disasters and we may
not be able to recapture increased costs by raising prices in many cases because we fix our prices up to 12 months in advance of delivery
by signing home sales contracts. Some home buyers may also cancel or not honor their home sales contracts altogether.
9
A significant downturn in the homebuilding industry could materially and adversely affect our business.
The homebuilding industry experienced a significant and sustained downturn that began in 2007, during which the lowest
volumes of housing starts were significantly below troughs in previous downturns. This downturn resulted in an industry-wide softening
of demand for new homes due to a lack of consumer confidence, decreased availability of mortgage financing, and large supplies of resale
and new home inventories, among other factors. In addition, an oversupply of alternatives to new homes, such as rental properties, resale
homes and foreclosures, depressed prices and reduced margins for the sale of new homes. Industry conditions had a material adverse effect
on our business and results of operations in fiscal years 2007 through 2011. Further, we had substantially increased our inventory through
fiscal 2006, which required significant cash outlays and which increased our price and margin exposure as we worked through this
inventory. Although the homebuilding market has improved in the last few years, the recovery has been slow by historical standards and
the volume of housing starts is still below normal historical averages and our business, liquidity and results of operations continue to be
impacted by the lasting effects of the significant and sustained downturn and it may continue to materially adverse our business and results
of operations in future years. If the homebuilding industry experiences another significant or sustained downturn, it would materially
adversely affect our business and results of operations in future years.
Several challenges, such as general U.S. economic uncertainty and the potential for more rapid inflation, extreme weather
conditions, increasing cycle times due to labor shortages, increasing labor and materials costs, including because of changes in immigration
laws and trends in labor migration, the restrictive mortgage lending environment and rising mortgage interest rates and regulatory changes,
could further impact the housing market and, consequently, our performance. For example, if rising house construction costs substantially
outpace increases in the income of potential purchasers we may be limited in our ability to raise home sales prices, which may result in
lower gross margins.
Our high leverage may restrict our ability to operate, may prevent us from fulfilling our obligations, and may adversely affect our financial
condition.
We have a significant amount of debt.
●
●
Our debt (excluding nonrecourse secured debt and debt of our financial subsidiaries), as of October 31, 2019, including the
debt of the subsidiaries that guarantee our debt, was $1,549.1 million ($1,480.0 million net of discount and premiums and
debt issuance costs). Additionally, we have a $125.0 million senior secured revolving credit facility, which was fully
available for borrowing as of October 31, 2019.
Our debt service payments for the year ended October 31, 2019, were $829.8 million, which represented interest incurred
and payments on the principal of our debt and do not include principal and interest on nonrecourse secured debt, debt of our
financial subsidiaries and fees under our letter of credit and other credit facilities and agreements.
See Note 9 “Senior Notes and Credit Facilities” to our consolidated financial statements for a discussion of our recently
completed financing transitions. See also Note 23 “Subsequent Events” to our consolidated financial statements for transactions related to
our debt in the first quarter of fiscal 2020.
As of October 31, 2019, we had $19.2 million in aggregate outstanding face amount of letters of credit issued under various
letter of credit and other credit facilities and agreements, certain of which were collateralized by $19.9 million of cash. Our fees for these
letters of credit for the year ended October 31, 2019, which are based on both the used and unused portion of the facilities and agreements,
were $0.1 million. We also had substantial contractual commitments and contingent obligations, including $202.9 million of performance
bonds as of October 31, 2019. See Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations—
Contractual Obligations.”
Our significant amount of debt could have important consequences. For example, it could:
Limit our ability to obtain future financing for working capital, capital expenditures, acquisitions, debt service requirements,
or other requirements;
Require us to dedicate a substantial portion of our cash flow from operations to the payment of our debt and reduce our
ability to use our cash flow for other purposes, including land investments;
Require us to pay higher interest rates upon refinancing debt if interest rates rise or due to the concentration of debt maturities;
Limit our flexibility in planning for, or reacting to, changes in our business;
●
●
●
●
10
●
●
●
Place us at a competitive disadvantage because we have more debt than some of our competitors;
Limit our ability to implement our strategies and operational actions;
Require us to consider selling some of our assets or debt or equity securities, possibly on unfavorable terms, to satisfy
obligations; and
●
Make us more vulnerable to downturns in our business and general economic conditions.
Our ability to meet our debt service and other obligations will depend upon our future performance. We are engaged in
businesses that are substantially affected by changes in economic cycles. Our revenues and earnings vary with the level of general economic
activity in the markets we serve. Our businesses are also affected by customer sentiment and financial, political, business, and other factors,
many of which are beyond our control. The factors that affect our ability to generate cash can also affect our ability to raise additional
funds for these purposes through the sale of equity or debt securities, the refinancing of debt, or the sale of assets. Changes in prevailing
interest rates may affect our ability to meet our debt service obligations to the extent we have any floating rate indebtedness. A higher
interest rate on our debt service obligations could result in lower earnings or increased losses.
Our sources of liquidity are limited and may not be sufficient to meet our needs.
We are largely dependent on our current cash balance and future cash flows from operations (which may not be positive) to
enable us to service our indebtedness, to cover our operating expenses, and/or to fund our other liquidity needs. Cash used in and provided
from operating activities in fiscal 2019 and fiscal 2018 were $249.1 million and $66.8 million, respectively. Depending on the levels of
our land purchases, we could generate negative or positive cash flow in future years. In 2016, we used a significant portion of cash to repay
debt because financing was unavailable to us in the capital and loan markets. If the homebuilding industry does not experience improved
conditions over the next several years, our cash flows could be insufficient to fund our obligations and support land purchases; if we cannot
buy additional land we would ultimately be unable to generate future revenues from the sale of houses. In addition, we will need to
refinance all or a portion of our debt on or before maturity, which we may not be able to do on favorable terms or at all. If our cash flows
and capital resources are insufficient to fund our debt service obligations or we are unable to refinance our indebtedness, we may be forced
to reduce or delay investments and capital expenditures, sell assets, seek additional capital, or restructure our indebtedness. These
alternative measures may not be successful or, if successful, made on desirable terms and may not permit us to meet our debt service
obligations. We have also entered into certain cash collateralized letters of credit agreements and facilities that require us to maintain
specified amounts of cash in segregated accounts as collateral to support our letters of credit issued thereunder. If our available cash and
capital resources are insufficient to meet our debt service and other obligations, we could face liquidity problems and might be required to
dispose of material assets or operations to meet our debt service and other obligations. We may not be able to consummate those
dispositions or the proceeds from the dispositions may not be permitted under the terms of our debt instruments to be used to service
indebtedness or may not be adequate to meet any debt service obligations then due. For additional information about capital resources and
liquidity, see Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Capital Resources and
Liquidity.”
Our cash flows, liquidity and consolidated financial statements could be materially and adversely affected if we are unable to obtain letters
of credit.
Our homebuilding operations often require us to obtain letters of credit. We have certain stand-alone letter of credit facilities
and agreements pursuant to which letters of credit are issued. However, letters of credit may not be issued under our current senior secured
revolving credit facility and we may need additional letters of credit above the amounts provided under these stand-alone facilities and
agreements. If we are unable to obtain such additional letters of credit as needed to operate our business, we would be adversely affected.
We may have difficulty in obtaining the additional financing required to operate and develop our business.
Our operations require significant amounts of cash, and we may be required to seek additional capital, whether from sales of
debt or equity securities or borrowing additional money, for the future growth and development of our business. The terms and/or
availability of additional capital is uncertain. Moreover, the agreements governing our outstanding debt instruments contain provisions
that restrict the debt we may incur in the future and our ability to pay dividends on equity. If we are not successful in obtaining sufficient
capital, it could reduce our sales and may hinder our future growth and results of operations. In addition, pledging substantially all of our
assets to support our senior secured revolving credit facility and our senior secured notes may make it more difficult to raise additional
financing in the future.
Restrictive covenants in our debt instruments may restrict our and certain of our subsidiaries’ ability to operate, and if our financial
performance worsens, we may not be able to undertake transactions within the restrictions of our debt instruments.
The indentures governing our outstanding debt securities and our credit facilities impose certain restrictions on our and certain
of our subsidiaries’ operations and activities. The most significant restrictions relate to debt incurrence (including non-recourse
indebtedness), creation of liens, repayment of certain indebtedness prior to its respective stated maturity, sales of assets (including in
certain land banking transactions), cash distributions, (including paying dividends on common and preferred stock), capital stock
repurchases, and investments by us and certain of our subsidiaries (including in joint ventures). Because of these restrictions, we are
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currently prohibited from paying dividends on our common and preferred stock and anticipate that we will remain prohibited for the
foreseeable future.
The restrictions in our debt instruments could prohibit or restrict our and certain of our subsidiaries’ activities, such as
undertaking capital raising or restructuring activities or entering into other transactions. In addition, if we fail to comply with these
restrictions or to make timely payments on this debt and other material indebtedness, an event of default could occur and our debt under
these debt instruments could become due and payable prior to maturity. Any such event of default could lead to cross defaults under certain
of our other debt or negatively impact other covenants. In any of these situations, we may be unable to amend the applicable instrument or
obtain a waiver without significant additional cost, or at all. In such a situation, there can be no assurance that we would be able to obtain
alternative financing. Any such situation could have a material adverse effect on the solvency of the Company.
The terms of our debt instruments allow us to incur additional indebtedness.
Under the terms of our indebtedness under our indentures and credit facilities, we have the ability, subject to our debt
covenants, to incur additional amounts of debt, including secured debt. The incurrence of additional indebtedness could magnify the risks
described above. In addition, certain obligations, such as standby letters of credit and performance bonds issued in the ordinary course of
business, including those issued under our stand-alone letter of credit agreements and facilities, are not considered indebtedness under our
debt instruments (and may be secured), and therefore, are not subject to limits in our debt covenants.
We could be adversely affected by a negative change in our credit rating.
Our ability to access capital on favorable terms is a key factor in our ability to service our indebtedness to cover our operating
expenses and to fund our other liquidity needs. Negative rating actions by credit agencies, including downgrades, may make it more
difficult and costly for us to access capital. Therefore, any downgrade by any of the principal credit agencies may exacerbate these
difficulties. There can be no assurances that our credit ratings will not be downgraded in the future, whether as a result of deteriorating
general economic conditions, a more protracted downturn in the housing industry, failure to successfully implement our operating strategy,
the adverse impact on our results of operations or liquidity position of any of the above, or otherwise.
Our business is seasonal in nature and our quarterly operating results fluctuate.
Our quarterly operating results generally fluctuate by season. The construction of a customer’s home typically begins after
signing the agreement of sale and can take six to nine months or more to complete. Weather-related problems, typically in the fall, winter
and early spring, can delay starts or closings and increase costs and thus reduce profitability. In addition, delays in opening communities
could have an adverse effect on our sales and revenues. Due to these factors, our quarterly operating results will likely continue to fluctuate.
Our success depends on the availability of suitable undeveloped land and improved lots at acceptable prices and our having sufficient
liquidity to fund such investments.
Our success in developing land and in building and selling homes depends in part upon the continued availability of suitable
undeveloped land and improved lots at acceptable prices. The homebuilding industry is highly competitive for land that is suitable for
residential development and the availability of undeveloped land and improved lots for purchase at favorable prices depends on a number
of factors outside of our control, including the risk of competitive overbidding on land and lots, geographical or topographical constraints
and restrictive governmental regulation. Should suitable land opportunities become less available, our ability to implement our strategies
and operational actions would be limited and the number of homes we may be able to build and sell would be reduced, which would reduce
revenue and profits. In addition, our ability to make land purchases will depend upon us having sufficient liquidity to fund such purchases.
We may be at a disadvantage in competing for land compared to others who have more substantial cash resources.
Raw material and labor shortages and price fluctuations could delay or increase the cost of home construction and adversely affect our
operating results.
The homebuilding industry is vulnerable to raw material and labor shortages and has from time to time experienced such
shortages. In particular, shortages and fluctuations in the price of lumber or in other important raw materials could result in delays in the
start or completion of, or increase the cost of, developing one or more of our residential communities. For example, manufacturers increased
the price of drywall in 2013 by approximately 20% as compared to the prior year. Pricing for labor and raw materials can be affected by
various national, regional, local, economic and political factors. For example, although the tariffs recently imposed on products from China
and elsewhere have not had a material impact on our financial results to date, future government-imposed tariffs and trade regulations on
imported building supplies could have significant impacts on the cost to construct our homes or on our customer's budgets and may
therefore have a more significant impact on our business in the future. Delays or cost increases caused by raw material and labor shortages
and price fluctuations, including as a result of inflation or wage increases, could also harm our operating results, the impact of which may
be further affected depending on our ability to raise sales prices to offset increased costs. We have experienced some labor shortages and
increased labor costs over the past few years. The cost of labor may be adversely affected by changes in immigration laws and trends in
labor migration. If rising labor and house construction costs substantially outpace increases in the income of potential purchasers we may
be limited in our ability to raise home sale prices, which may result in lower gross margins.
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We rely on subcontractors to construct our homes and may incur costs or losses if these subcontractors fail to properly construct our
homes or manage and pay their employees.
We engage subcontractors to perform the actual construction of our homes and, in some cases, to select and obtain building
materials. Therefore, the timing and quality of our construction depends on the availability, skill, and cost of our subcontractors. Despite
our quality control efforts, we may discover that our subcontractors failed to properly construct our homes or may use defective materials.
The occurrence of such events could require us to repair the homes in accordance with our standards and as required by law. The cost of
satisfying our legal obligations in these instances may be significant, and we may be unable to recover the cost of repair from subcontractors
and insurers.
We also can suffer damage to our reputation, and may be exposed to possible liability, if subcontractors fail to comply with
applicable laws. When we learn about possibly improper practices by subcontractors, we attempt to cause the subcontractors to discontinue
them and may terminate the use of such subcontractors. However, attempts at mitigation may not avoid claims against us relating to actions
of or matters relating to our subcontractors that are out of our control. For example, although we do not have the ability to control what
these independent subcontractors pay their own employees, or their own subcontractors, or the work rules they impose on such personnel,
federal and state governmental agencies, including the U.S. National Labor Relations Board, have sought, and may in the future seek, to
hold contracting parties like us responsible for subcontractors’ violations of wage and hour laws, or workers’ compensation, collective
bargaining and/or other employment-related obligations related to subcontractors’ workforces. Governmental agency determinations or
attempts by others to make us responsible for subcontractors’ labor practices or obligations, could create substantial adverse exposure for
us in these types of situations even though not within our control.
We also can suffer damage to our reputation, and may be exposed to possible liability, if subcontractors fail to comply with
applicable laws, including laws involving actions or matters that are not within our control.
When we learn about possibly improper practices by subcontractors, we attempt to cause the subcontractors to discontinue
them and may terminate the use of such subcontractors. However, attempts at mitigation may not avoid claims against us relating to actions
of or matters relating to our subcontractors.
Products supplied to us and work done by subcontractors can expose us to risks that could adversely affect our business.
We rely on subcontractors to perform the actual construction of our homes, and, in some cases, to select and obtain building
materials. Despite our detailed specifications and quality control procedures, in some cases, subcontractors may use improper construction
processes or defective materials. Defective products widely used by the homebuilding industry can result in the need to perform extensive
repairs to large numbers of homes. The cost of complying with our warranty obligations may be significant if we are unable to recover the
cost of repairs from subcontractors, materials suppliers and insurers.
Changes in economic and market conditions could result in the sale of homes at a loss or holding land in inventory longer than planned,
the cost of which can be significant.
Land inventory risk can be substantial for homebuilders. We must continuously seek and make acquisitions of land for
expansion into new markets and for replacement and expansion of land inventory within our current markets. We incur many costs even
before we begin to build homes in a community. Depending on the stage of development of a land parcel when we acquire it, these may
include costs of preparing land, finishing and entitling lots, installing roads, sewers, water systems and other utilities, taxes and other costs
related to ownership of the land on which we plan to build homes. The market value of undeveloped land, buildable lots, and housing
inventories can fluctuate significantly as a result of changing economic and market conditions. In the event of significant changes in
economic or market conditions, we may have to sell homes at a loss or hold land in inventory longer than planned. In the case of land
options, we could choose not to exercise them, in which case we would write-off the value of these options. Inventory carrying costs can
be significant and can result in losses in a poorly performing project or market. The assessment of communities for indication of impairment
is performed quarterly. While we consider available information to determine what we believe to be our best estimates as of the reporting
period, these estimates are subject to change in future reporting periods as facts and circumstances change. See Item 7 “Management’s
Discussion and Analysis of Financial Condition and Results of Operation—Critical Accounting Policies.” For example, during more recent
years, we did not have significant land option write-offs or impairments; however, during fiscal 2011, 2010 and 2009, we decided not to
exercise many option contracts and walked away from land option deposits and predevelopment costs, which resulted in land option write-
offs of $24.3 million, $13.2 million, and $45.4 million, respectively. Also, in fiscal 2011, 2010 and 2009, as a result of the difficult market
conditions, we recorded inventory impairment losses on owned property of $77.5 million, $122.5 million and $614.1 million, respectively.
If market conditions worsen, additional inventory impairment losses and land option write-offs will likely be necessary.
We conduct a significant portion of our business in Arizona, California, Florida, New Jersey, Ohio, Texas and Virginia, and accordingly,
regional factors affecting home sales and activities in these markets may have a large impact on our results of operations.
We presently conduct a significant portion of our business in Arizona, California, Florida, New Jersey, Ohio, Texas and
Virginia, which subjects us to risks associated with the regional and local economies of these markets. Home prices and sales activities in
these markets and in most of the other markets in which we operate have declined from time to time, particularly as a result of slow
economic growth. These markets may also depend, to a degree, on certain sectors of the economy and any declines in those sectors may
impact home sales and activities in that region. For example, to the extent the oil and gas industries, which can be very volatile, are
negatively impacted by declining commodity prices, climate change, legislation or other factors, it could result in reduced employment, or
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other negative economic consequences, which in turn could adversely impact our home sales and activities in Texas. Furthermore,
precarious economic and budget situations at the state government level may adversely affect the market for our homes in the affected
areas. Weather-related or other events impacting these markets could also negatively affect these markets as well as the other markets in
which we operate. If home prices and sales activity decline in one or more of the markets in which we operate, our costs may not decline
at all or at the same rate and the Company’s business, financial condition and results of operations could be materially adversely affected.
See also “—The homebuilding industry is significantly affected by changes in general and local economic conditions, real estate markets,
and weather and other environmental conditions, which could affect our ability to build homes at prices our customers are willing or able
to pay, could reduce profits that may not be recaptured, could result in cancellation of sales contracts, and could affect our liquidity.”
Increases in cancellations of agreements of sale could have an adverse effect on our business.
Our backlog reflects agreements of sale with our home buyers for homes that have not yet been delivered. We have received
a deposit from our home buyer for each home, which is reflected in our backlog, and we generally have the right to retain the deposit if
the home buyer does not complete the purchase. In some situations, however, a home buyer may cancel the agreement of sale and receive
a complete or partial refund of the deposit for reasons such as state and local law, his or her inability to obtain mortgage financing at
prevailing interest rates (including financing arranged or provided by us), his or her inability to sell his or her current home, or our inability
to complete and deliver the home within the specified time. At October 31, 2019, including unconsolidated joint ventures, we had a backlog
of signed contracts for 2,652 homes with a sales value aggregating $1.1 billion. If mortgage financing becomes less accessible, or if
economic conditions deteriorate, more home buyers may cancel their agreements of sale with us, which could have an adverse effect on
our business and results of operations.
Interest rates have been at historic lows over the last several years and may increase. Because almost all of our customers require mortgage
financing, increases in interest rates or the decreased availability of mortgage financing could impair the affordability of our homes, lower
demand for our products, limit our marketing effectiveness, and limit our ability to fully realize our backlog.
Virtually all of our customers finance their acquisitions through lenders providing mortgage financing. Mortgage rates have
remained low compared to most historical periods for the last several years, which has made the homes we sell more affordable. However,
we cannot predict whether interest rates will continue to fall, remain low or rise. Increases in interest rates (or the perception that interest
rates will rise, including as a result of government actions), increases in the costs to obtain mortgages or decreases in availability of
mortgage financing could lower demand for new homes because of the increased monthly mortgage costs and cash required to close on
mortgages to potential home buyers. Even if potential customers do not need financing, changes in interest rates and mortgage availability
could make it harder for them to sell their existing homes to potential buyers who need financing. This could prevent or limit our ability
to attract new customers as well as our ability to fully realize our backlog because our sales contracts generally include a financing
contingency. Financing contingencies permit the customer to cancel his/her obligation in the event mortgage financing at prevailing interest
rates, including financing arranged or provided by us, is unobtainable within the period specified in the contract. This contingency period
is typically four to eight weeks following the date of execution of the sales contract. We believe that the availability of mortgage financing,
including through federal government agencies or government-sponsored enterprises (such as Federal National Mortgage Association,
Federal Home Loan Mortgage Corporation and FHA/VA financing), is an important factor in marketing many of our homes. Any
limitations or restrictions on the availability of mortgage financing could reduce our sales. Further, if we are unable to originate mortgages
for any reason going forward, our customers may experience significant mortgage loan funding issues, which could have a material impact
on our homebuilding business and our consolidated financial statements.
Increases in the after-tax costs of owning a home could prevent potential customers from buying our homes and adversely affect our
business or financial results.
Significant expenses of owning a home, including mortgage interest expenses and real estate taxes, have historically been
deductible expenses for an individual’s federal, and in some cases state, income taxes, subject to limitations under tax law and policy. The
"Tax Cuts and Jobs Act" which was signed into law in December 2017 includes provisions which impose significant limitations with
respect to these income tax deductions. For instance, the annual deduction for real estate taxes and state and local income taxes (or sales
taxes in lieu of income taxes) is now generally limited to $10,000. Furthermore, through the end of 2025, the deduction for mortgage
interest is generally only available with respect to the first $750,000 of a new mortgage and there is no longer a federal deduction for
interest on home equity loans. In addition, if the federal government or a state government further changes its income tax laws to further
eliminate or substantially limit these income tax deductions, the after-tax cost of owning a new home would further increase for many of
our potential customers. The loss or reduction of these homeowner tax deductions that have historically been available has and could
further reduce the perceived affordability of homeownership, and therefore the demand for and sales price of new homes, including ours.
In addition, increases in property tax rates or fees on developers by local governmental authorities, as experienced in response to reduced
federal and state funding or to fund local initiatives, such as funding schools or road improvements, or increases in insurance premiums
can adversely affect the ability of potential customers to obtain financing or their desire to purchase new homes, and can have an adverse
impact on our business and financial results.
We conduct certain of our operations through unconsolidated joint ventures with independent third parties in which we do not have a
controlling interest. These investments involve risks and are highly illiquid.
We currently operate through a number of unconsolidated homebuilding and land development joint ventures with
independent third parties in which we do not have a controlling interest. At October 31, 2019, we had invested an aggregate of
$127.0 million in these joint ventures, including advances to these joint ventures of $1.4 million. In addition, as part of our strategy, we
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intend to continue to evaluate additional joint venture opportunities; however, we may be limited in pursuing all such desirable
opportunities because the indentures governing our outstanding debt securities and our credit facilities impose certain restrictions, among
others, on investments by us and certain of our subsidiaries (including in joint ventures).
These investments involve risks and are highly illiquid. There are a limited number of sources willing to provide acquisition,
development, and construction financing to land development and homebuilding joint ventures, and if market conditions become more
challenging, it may be difficult or impossible to obtain financing for our joint ventures on commercially reasonable terms. Over the past
few years, it has been difficult to obtain financing for newly created joint ventures. In addition, we lack a controlling interest in these joint
ventures and, therefore, are usually unable to require that our joint ventures sell assets or return invested capital, make additional capital
contributions, or take any other action without the vote of at least one of our venture partners. Therefore, absent partner agreement, we
will be unable to liquidate our joint venture investments to generate cash.
Homebuilders are subject to a number of federal, local, state, and foreign laws and regulations concerning the development of land, the
homebuilding, sales, and customer financing processes and the protection of the environment, which can cause us to incur delays and
costs associated with compliance and which can prohibit or restrict our activity in some regions or areas.
We are subject to extensive and complex laws and regulations that affect the development of land and homebuilding, 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. In addition, some state and local governments in markets where we operate have approved, and others may approve, slow-
growth or no-growth initiatives that could negatively impact the availability of land and building opportunities within those areas. Approval
of these initiatives could adversely affect our ability to build and sell homes in the affected markets and/or could require the satisfaction
of additional administrative and regulatory requirements, which could result in slowing the progress or increasing the costs of our
homebuilding operations in these markets. Any of the above delays or costs could have a negative effect on our future revenues and
earnings.
We also are subject to a variety of local, state, federal and foreign laws and regulations concerning protection of health and
the environment, including those regulating the emission or discharge of materials into the environment, the management of storm water
runoff at construction sites, the handling, use, storage and disposal of hazardous substances, impacts to wetlands and other sensitive
environments, and the remediation of contamination at properties that we have owned or developed or currently own or are developing
(“environmental laws”). The particular environmental laws that apply to a site may vary greatly according to the community site, for
example, due to the community, the environmental conditions at or near the site, and the present and former uses of the site. These
environmental laws may result in delays, may cause us to incur substantial compliance, remediation and/or other costs, and can prohibit
or severely restrict development and homebuilding activity. In addition, noncompliance with these laws and regulations could result in
fines and penalties, obligations to remediate, permit revocations or other sanctions; and contamination or other environmental conditions
at or in the vicinity of our developments may result in claims against us for personal injury, property damage or other losses. In addition,
there is a growing concern from advocacy groups and the general public that the emissions of greenhouse gases and other human activities
have caused, or will cause, significant changes in weather patterns and temperatures and the frequency and severity of natural disasters.
Government mandates, standards and regulations enacted in response to these projected climate change impacts could result in restrictions
on land development in certain areas or increased energy, transportation and raw material costs. There is a variety of legislation being
enacted, or considered for enactment at the federal, state, local and international levels relating to energy and climate change. This
legislation relates to items such as carbon dioxide emissions control and building codes that impose energy efficiency standards. New
building code requirements that impose stricter energy efficiency standards could significantly increase out cost to construct homes.
We anticipate that increasingly stringent requirements will continue to be imposed on developers and homebuilders in the
future. For example, for a number of years, the EPA and U.S. Army Corps of Engineers have been engaged in rulemakings to clarify the
scope of federally regulated wetlands, which included a June 2015 rule many affected businesses contend impermissibly expanded the
scope of such wetlands that was challenged in court, stayed, and remains in litigation. A proposal was made in June 2017 to formally
rescind the June 2015 rule and reinstate the rule scheme previously in place while the agencies initiate a new substantive rulemaking on
the issue. A February 2018 rule purported to delay the effective date of the June 2015 rule until February 2020, but was enjoined nationwide
in August 2018 by a federal district court in South Carolina and later by a federal district court in the State of Washington in response to
lawsuits (the net result of which, according to the EPA, is that the June 2015 rule applies in 22 states, the District of Columbia, and the
United States territories, and that the pre-June 2015 regime applies in the rest). In October 2019, the EPA and U.S. Army Corps of Engineers
promulgated a new rule, to become effective December 23, 2019, repealing the June 2015 rule and reinstating the previous rule scheme. It
is unclear how these and related developments, including at the state or local level, ultimately may affect the scope of regulated wetlands
where we operate. Although we cannot reliably predict the extent of any effect these developments regarding wetlands, or any other
requirements that may take effect may have on us, they could result in time-consuming and expensive compliance programs and in
substantial expenditures, which could cause delays and increase our cost of operations. In addition, our ability to obtain or renew permits
or approvals and the continued effectiveness of permits already granted or approvals already obtained is dependent upon many factors,
some of which are beyond our control, such as changes in policies, rules and regulations and their interpretations and application.
In March 2013, we received a letter from the Environmental Protection Agency (“EPA”) requesting information about our
involvement in a housing redevelopment project in Newark, New Jersey that a Company entity undertook during the 1990s. We understand
that the development is in the vicinity of a former lead smelter and that tests on soil samples from properties within the development
conducted by the EPA showed elevated levels of lead. We also understand that the smelter ceased operations many years before the
Company entity involved acquired the properties in the area and carried out the re-development project. We responded to the
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EPA’s request. In August 2013, we were notified that the EPA considers us a potentially responsible party (or “PRP”) with respect to the
site, that the EPA will clean up the site, and that the EPA is proposing that we fund and/or contribute towards the cleanup of the
contamination at the site. We began preliminary discussions with the EPA concerning a possible resolution but do not know the scope or
extent of the Company’s obligations, if any, that may arise from the site and therefore cannot provide any assurance that this matter will
not have a material impact on the Company. The EPA requested additional information in April 2014 and again in March 2017 and the
Company responded to the information requests. On May 2, 2018 the EPA sent a letter to the Company entity demanding reimbursement
for 100% of the EPA’s costs to clean-up the site in the amount of $2.7 million. The Company responded to the EPA’s demand letter on
June 15, 2018 setting forth the Company’s defenses and expressing its willingness to enter into settlement negotiations. The parties
subsequently executed a Tolling Agreement to toll the statute of limitations on collection until December 20, 2019 and are preparing an
agreement to extend it to June 20, 2020 to allow the parties time to discuss settlement. The Company received a letter from the EPA on
November 4, 2019 asking if the Company remained interested in settlement negotiations. The Company responded affirmatively and such
negotiations are ongoing. Two other PRPs identified by the EPA are now also in negotiations with the EPA and in preliminary negotiations
with the Company regarding the site. In the course of negotiations, the EPA informed the Company that the New Jersey Department of
Environmental Protection has also incurred costs remediating part of the site. We believe that we have adequate reserves for this matter.
In 2015, the condominium association of the Four Seasons at Great Notch condominium community (the “Great Notch
Plaintiff”) filed a lawsuit in the Superior Court of New Jersey, Law Division, Passaic County (the “Court”) alleging various construction
defects, design defects, and geotechnical issues relating to the community. The operative complaint (“Complaint”) asserts claims against
Hovnanian Enterprises, Inc. and several of its affiliates, including K. Hovnanian at Great Notch, LLC, K. Hovnanian Construction
Management, Inc., and K. Hovnanian Companies, LLC. The Complaint also asserts claims against various other design professionals and
contractors. The Great Notch Plaintiff has also filed a motion, which remains pending, to permit it to pursue a claim to pierce the corporate
veil of K. Hovnanian at Great Notch, LLC to hold its alleged parent entities liable for any damages awarded against it. To date, the
Hovnanian-affiliated defendants have reached a partial settlement with the Great Notch Plaintiff as to a portion of the Great Notch
Plaintiff’s claims against them for an amount immaterial to the Company. On its remaining claims against the Hovnanian-affiliated
defendants, the Great Notch Plaintiff has asserted damages of approximately $119.5 million, which amount is potentially subject to treble
damages pursuant to the Great Notch Plaintiff’s claim under the New Jersey Consumer Fraud Act. On August 17, 2018, the Hovnanian-
affiliated defendants filed a motion for summary judgment seeking dismissal of all of the Great Notch Plaintiff’s remaining claims against
them, which was withdrawn without prejudice to re-file with supplemental evidence. The trial is currently scheduled for April 20, 2020.
An initial court-ordered mediation session took place on November 19, 2019. An additional mediation session is contemplated, but has
not yet been scheduled. The Hovnanian-affiliated defendants intend to defend these claims vigorously.
Legal claims not resolved in our favor, such as product liability litigation and warranty claims may be costly.
As discussed in Item 3 – “Legal Proceedings,” in the ordinary course of business we are involved in litigation from time to
time, including with home owners associations, home buyers and other persons with whom we have relationships. For example, as a
homebuilder, we are subject to construction defect and home warranty claims, including moisture intrusion and related claims, arising in
the ordinary course of business. Such claims are common in the homebuilding industry and can be costly. For example, in the past we have
received construction defect and home warranty claims associated with, and we were involved in a multidistrict litigation concerning,
allegedly defective drywall manufactured in China that may have been responsible for noxious smells and accelerated corrosion of certain
metals in certain homes we have constructed. We remediated certain homes in response to such claims and settled the litigation.
With regard to certain general liability exposures such as product liability claims, construction defect claims and related
claims, assessment of claims and the related liability and reserve estimation process is highly judgmental and subject to a high degree of
variability due to uncertainties such as trends in construction defect claims relative to our markets and the types of products we build, claim
settlement patterns, insurance industry practices and legal interpretations, among others. Because of the high degree of judgment required
in determining these estimated liability amounts, actual future costs could differ significantly from our currently estimated amounts.
Furthermore, after claims are asserted for construction defects, it can be difficult to determine the extent to which assertions of such claims
will expand geographically. For example, the Company has been a party to litigation in New Jersey concerning alleged defects in
construction (see Item 3 – “Legal Proceedings” and Note 18 to our Consolidated Financial Statements for the year ended October 31,
2019). In addition, the amount and scope of coverage offered by insurance companies is currently limited, and this coverage may be further
restricted and become more costly. If we are not able to obtain adequate insurance against such claims, if the costs associated with such
claims significantly exceed the amount of our insurance coverage, or if our insurers do not pay on claims under our policies (whether
because of dispute, inability, or otherwise), we may experience losses that could hurt our financial results.
Our financial results could also be adversely affected if we were to experience an unusually high number of claims or unusually
severe claims. Our insurance companies have the right to review our claims and claims history, and do so from time to time, and could
decline to pay on such claims if such reviews determine the claims did not meet the terms for coverage. Additionally, we may need to
significantly increase our construction defect and home warranty reserves as a result of insurance not being available for any of the reasons
discussed above, such claims or the results of our annual actuarial study.
Mortgage investors could seek to have us buy back loans or compensate them for losses incurred on mortgages we have sold based on
claims that we breached our limited representations or warranties.
Our financial services segment originates mortgages, primarily for our homebuilding customers. Substantially all of the
mortgage loans originated are sold within a short period of time in the secondary mortgage market on a servicing released, nonrecourse
basis, although we remain liable for certain limited representations, such as fraud, and warranties related to loan sales. Accordingly,
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mortgage investors have in the past and could in the future seek to have us buy back loans or compensate them for losses incurred on
mortgages we have sold based on claims that we breached our limited representations or warranties. While we believe these reserves are
adequate for known losses and projected repurchase requests, given the volatility in the mortgage industry and the uncertainty regarding
the ultimate resolution of these claims, if either actual repurchases or the losses incurred resolving those repurchases exceed our
expectations, additional expense may be incurred. There can be no assurance that we will not have significant liabilities in respect of such
claims in the future, which could exceed our reserves, or that the impact of such claims on our results of operations will not be material.
Further, an increase in the default rate on the mortgages we originate may adversely affect our ability to sell mortgages or the pricing we
receive upon the sale of mortgages.
We compete on several levels with homebuilders that may have greater sales and financial resources, which could hurt future earnings.
We compete not only for home buyers but also for desirable properties, financing, raw materials, and skilled labor often within
larger subdivisions designed, planned, and developed by other homebuilders. Our competitors include other local, regional and national
homebuilders, some of which have greater sales and financial resources or more established relationships with suppliers and subcontractors
in the markets in which we operate. In addition, we compete with other housing alternatives, such as existing homes and rental housing.
In the homebuilding industry, we compete primarily on the basis of reputation, price, location, design, quality, service and amenities. Our
financial services segment competes with other mortgage providers, primarily on the basis of fees, interest rates and other features of
mortgage loan products.
The competitive conditions in the homebuilding industry together with current market conditions have, and could continue to,
result in:
●
●
●
●
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difficulty in acquiring suitable land at acceptable prices (see also “−Our success depends on the availability of suitable
undeveloped land and improved lots at acceptable prices and our having sufficient liquidity to fund such investments”);
increased selling incentives;
lower sales;
delays in construction; or
impairment of our ability to implement our strategies and operational actions.
Any of these problems could increase costs and/or lower profit margins.
Our future growth may include additional acquisitions of companies that may not be successfully integrated and may not achieve expected
benefits.
Acquisitions of companies have contributed to our historical growth and may again be a component of our growth strategy in
the future. In the future, we may acquire businesses, some of which may be significant. As a result of acquisitions of companies, we may
need to seek additional financing and integrate product lines, dispersed operations, and distinct corporate cultures. These integration efforts
may not succeed or may distract our management from operating our existing business. Additionally, we may not be able to enhance our
earnings as a result of acquisitions. Our failure to successfully identify and manage future acquisitions could harm our operating results.
Our controlling stockholders are able to exercise significant influence over us.
Members of the Hovnanian family, including Ara K. Hovnanian, our chairman of the board, president, and chief executive
officer, have voting control, through personal holdings, the limited partnership and the limited liability company established for members
of Mr. Hovnanian’s family and family trusts of Class A and Class B common stock that enabled them to cast approximately 56% of the
votes that could be cast by the holders of our outstanding Class A and Class B common stock combined as of October 31, 2019. Their
combined stock ownership enables them to exert significant control over us, including power to control the election of the Board of
Directors and to approve matters presented to our stockholders. This concentration of ownership may also make some transactions,
including mergers or other changes in control, more difficult or impossible without their support. Also, because of their combined voting
power, circumstances may occur in which their interests could be in conflict with the interests of other stakeholders.
Our net operating loss carryforwards could be substantially limited if we experience an ownership change as defined in the Internal
Revenue Code.
Based on past impairments and our current financial performance, we generated a federal net operating loss carryforward of
$1.6 billion through the fiscal year ended October 31, 2019, and we may generate net operating loss carryforwards in future years.
Section 382 of the United States Internal Revenue Code of 1986, as amended (the “Code”), contains rules that limit the ability
of a company that undergoes an ownership change, which is generally any change in ownership of more than 50% of its stock over a three-
year period, to utilize its net operating loss carryforwards and certain built-in losses recognized in years after the ownership change. These
17
rules generally operate by focusing on ownership shifts among stockholders owning directly or indirectly 5% or more of the stock of a
company and any change in ownership arising from a new issuance of stock by the company.
If we undergo an ownership change for purposes of Section 382 as a result of future transactions involving our stock, including
purchases or sales of stock between 5% shareholders, our ability to use our net operating loss carryforwards and to recognize certain built-
in losses would be subject to the limitations of Section 382. Depending on the resulting limitation, a significant portion of our net operating
loss carryforwards could expire before we would be able to use them. A limitation imposed under Section 382 on our ability to utilize our
net operating loss carryforwards could have a negative impact on our financial position and results of operations.
The value of our deferred tax assets is also dependent upon the tax rates expected to be in effect at the time the taxable income
is expected to be generated. A decrease in enacted corporate tax rates in our major jurisdictions, especially the U.S. federal corporate rate,
would decrease the value of our deferred tax assets, which could be material.
Our Board of Directors has adopted, and our shareholders have approved, a shareholder rights plan (the “Rights Plan”)
designed to preserve shareholder value and the value of certain tax assets primarily associated with net operating loss carryforwards and
built-in losses under Section 382 of the Code. The Rights Plan is intended to act as a deterrent to any person or group acquiring 4.9% or
more of our outstanding Class A common stock (any such person an “Acquiring Person”), without the approval of the Company’s Board
of Directors. Subject to the terms, provisions and conditions of the Rights Plan, if and when they become exercisable, each right would
entitle its holder to purchase from the Company one ten-thousandth of a share of the Company’s Series B Junior Preferred Stock for a
purchase price of $16.60 per share (the “purchase price”). The rights will not be exercisable until the earlier of (i) 10 business days after a
public announcement by us that a person or group has become an Acquiring Person and (ii) 10 business days after the commencement of
a tender or exchange offer by a person or group for 4.9% of the Class A common stock (the “distribution date”). If issued, each fractional
share of Series B Junior Preferred Stock would give the stockholder approximately the same dividend, voting and liquidation rights as
does one share of the Company’s Class A common stock. However, prior to exercise, a right does not give its holder any rights as a
stockholder of the Company, including without limitation any dividend, voting or liquidation rights. After the distribution date, each holder
of a right, other than rights beneficially owned by the Acquiring Person (which will thereupon become void), will thereafter have the right
to receive upon exercise of a right and payment of the purchase price, that number of shares of Class A common stock or Class B common
stock, as the case may be, having a market value of two times the purchase price. After the distribution date, our Board of Directors may
exchange the rights (other than rights owned by an Acquiring Person which will have become void), in whole or in part, at an exchange
ratio of one share of common stock, or a fractional share of Series B Junior Preferred Stock (or of a share of a similar class or series of
Hovnanian’s preferred stock having similar rights, preferences and privileges) of equivalent value, per right (subject to adjustment).
In addition, our Restated Certificate of Incorporation restricts certain transfers of our common stock in order to preserve the
tax treatment of our net operating loss carryforwards and built-in losses under Section 382 of the Code. Subject to certain exceptions
pertaining to pre-existing 5% stockholders and Class B stockholders, the transfer restrictions in our Restated Certificate of Incorporation
generally restrict any direct or indirect transfer (such as transfers of the Company’s stock that result from the transfer of interests in other
entities that own the Company’s stock) if the effect would be to: (i) increase the direct or indirect ownership of the Company’s stock by
any person (or public group) from less than 5% to 5% or more of the Company’s stock; (ii) increase the percentage of the Company’s
stock owned directly or indirectly by a person (or public group) owning or deemed to own 5% or more of the Company’s stock; or
(iii) create a new “public group” (as defined in the applicable United States Treasury regulations).
Utility shortages and outages or rate fluctuations could have an adverse effect on our operations.
In prior years, the areas in which we operate in California have experienced power shortages, including periods without
electrical power, as well as significant fluctuations in utility costs. We may incur additional costs and may not be able to complete
construction on a timely basis if such power shortages and outages and utility rate fluctuations continue. Furthermore, power shortages
and outages and rate fluctuations may adversely affect the regional economies in which we operate, which may reduce demand for our
homes. Our operations may be adversely affected if further rate fluctuations and/or power shortages and outages occur in California, the
Northeast or in our other markets.
Geopolitical risks and market disruption could adversely affect our operating results and financial condition.
Geopolitical events, acts of war or terrorism, civil unrest, any outbreak or escalation of hostilities throughout the world, health
pandemics, catastrophic storms, other severe weather or significant environmental accidents, may have a substantial impact on the
economy, consumer confidence, the housing market, our associates and our customers. Further, perceived threats to national security and
other actual or potential conflicts or wars and related geopolitical risks have created many economic and political uncertainties. If any such
events were to occur, it could have a material adverse impact on our results of operations and financial condition.
We could be adversely impacted by the loss of key management personnel or if we fail to attract qualified personnel.
To a significant degree, our future success depends on the efforts of our senior management, many of whom have been with
the Company for a significant number of years, and our ability to attract qualified personnel. Our operations could be adversely affected if
key members of our senior management leave the Company or if we cannot attract qualified personnel to manage growth in our business.
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Information technology failures and data security breaches could harm our business.
We use information technology, digital telecommunications and other computer resources to carry out important operational
activities and to maintain our business records. In addition, we rely on the systems of third parties, such as third-party vendors. Our
computer systems, including our backup systems, and those of the third-parties on whose systems we rely, are subject to damage or
interruption from computer and telecommunications failures, computer viruses, power outages, security breaches (including through data-
theft and cyber-attack), usage errors by our associates and catastrophic events, such as fires, floods, hurricanes and tornadoes. As part of
our normal business activities, we collect and store certain personal identifying and confidential information relating to our homebuyers,
employees, vendors and suppliers, and maintain operational and financial information related to our business. We may share some of this
confidential information with our vendors. We rely on our vendors and third-party service providers to maintain effective cybersecurity
measures to keep our information secure. If our computer systems and our backup systems, or those of the third-parties on whose systems
we rely, are breached, compromised, damaged, or otherwise cease to function properly, we could suffer interruptions in our operations or
the misappropriation of proprietary, personal identifying or confidential information, including information about our business partners
and home buyers. Our or our vendors’ and third-party service providers’ failure to maintain the security of the data we are required to
protect could result in damage to our reputation, financial obligations to third parties, fines, penalties, regulatory proceedings and private
litigation with potentially large costs, and also in deterioration in customers’ confidence in us and other competitive disadvantages.
We maintain cybersecurity insurance coverage have implemented systems and processes intended to secure our information
technology systems and prevent unauthorized access to or loss of sensitive, confidential and personal data, including through the use of
encryption and authentication technologies. Additionally, we have increased our monitoring capabilities to enhance early detection and
rapid response to potential security anomalies. These measures, which require ongoing monitoring and updating as technologies change
and efforts to overcome security measures become increasingly sophisticated, are costly and may not be effective in preventing or
mitigating significant negative occurrences or irregularities in our systems or those of third-parties on whose systems we rely. While, to
date, we have not had a significant cybersecurity breach or attack that has a material impact on our business or results of operations, there
can be no assurance that our efforts to maintain the security and integrity of our IT networks and related systems will be effective or that
attempted security breaches or disruptions would not be successful or damaging.
Negative publicity could adversely affect our reputation and our business, financial results and stock price.
Unfavorable media related to our industry, company, brand, personnel, operations, business performance, or prospects may
impact our stock price and the performance of our business, regardless of its accuracy or inaccuracy. The speed at which negative publicity
is disseminated has increased dramatically through the use of electronic communication, including social media outlets, websites, "tweets",
and blogs. Our success in maintaining and expanding our brand image depends on our ability to adapt to this rapidly changing media
environment. Adverse publicity or negative commentary from any media outlets could damage our reputation and reduce the demand for
our homes, which would adversely affect our business.
ITEM 1B
UNRESOLVED STAFF COMMENTS
None.
ITEM 2
PROPERTIES
We rent approximately 57,000 square feet of office space in the Northeast for our corporate headquarters. We own 215,000
square feet of office and warehouse space throughout the Midwest. We lease approximately 322,000 square feet of space for our segments
located in the Northeast, Mid-Atlantic, Midwest, Southeast, Southwest and West.
ITEM 3
LEGAL PROCEEDINGS
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 as
discussed in Note 16 to the Consolidated Financial Statements.
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
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environmental laws may result in delays, may cause us to incur substantial compliance, remediation and/or other costs, and can prohibit
or severely restrict development and homebuilding activity. In addition, noncompliance with these laws and regulations could result in
fines and penalties, obligations to remediate, permit revocations or other sanctions; and contamination or other environmental conditions
at or in the vicinity of our developments may result in claims against us for personal injury, property damage or other losses.
We anticipate that increasingly stringent requirements will continue to be imposed on developers and homebuilders in the
future. For example, for a number of years, the EPA and U.S. Army Corps of Engineers have been engaged in rulemakings to clarify the
scope of federally regulated wetlands, which included a June 2015 rule many affected businesses contend impermissibly expanded the
scope of such wetlands that was challenged in court, stayed, and remains in litigation. A proposal was made in June 2017 to formally
rescind the June 2015 rule and reinstate the rule scheme previously in place while the agencies initiate a new substantive rulemaking on
the issue. A February 2018 rule purported to delay the effective date of the June 2015 rule until February 2020, but was enjoined nationwide
in August 2018 by a federal district court in South Carolina and later by a federal district court in the State of Washington in response to
lawsuits (the net result of which, according to the EPA, is that the June 2015 rule applies in 22 states, the District of Columbia, and the
United States territories, and that the pre-June 2015 regime applies in the rest). In October 2019, the EPA and U.S. Army Corps of Engineers
promulgated a new rule, to become effective December 23, 2019, repealing the June 2015 rule and reinstating the previous rule scheme. It
is unclear how these and related developments, including at the state or local level, ultimately may affect the scope of regulated wetlands
where we operate. Although we cannot reliably predict the extent of any effect these developments regarding wetlands, or any other
requirements that may take effect may have on us, they could result in time-consuming and expensive compliance programs and in
substantial expenditures, which could cause delays and increase our cost of operations. In addition, our ability to obtain or renew permits
or approvals and the continued effectiveness of permits already granted or approvals already obtained is dependent upon many factors,
some of which are beyond our control, such as changes in policies, rules and regulations and their interpretations and application.
In March 2013, we received a letter from the Environmental Protection Agency (“EPA”) requesting information about our
involvement in a housing redevelopment project in Newark, New Jersey that a Company entity undertook during the 1990s. We understand
that the development is in the vicinity of a former lead smelter and that tests on soil samples from properties within the development
conducted by the EPA showed elevated levels of lead. We also understand that the smelter ceased operations many years before the
Company entity involved acquired the properties in the area and carried out the re-development project. We responded to the
EPA’s request. In August 2013, we were notified that the EPA considers us a potentially responsible party (or “PRP”) with respect to the
site, that the EPA will clean up the site, and that the EPA is proposing that we fund and/or contribute towards the cleanup of the
contamination at the site. We began preliminary discussions with the EPA concerning a possible resolution but do not know the scope or
extent of the Company’s obligations, if any, that may arise from the site and therefore cannot provide any assurance that this matter will
not have a material impact on the Company. The EPA requested additional information in April 2014 and again in March 2017 and the
Company responded to the information requests. On May 2, 2018 the EPA sent a letter to the Company entity demanding reimbursement
for 100% of the EPA’s costs to clean-up the site in the amount of $2.7 million. The Company responded to the EPA’s demand letter on
June 15, 2018 setting forth the Company’s defenses and expressing its willingness to enter into settlement negotiations. The parties
subsequently executed a Tolling Agreement to toll the statute of limitations on collection until December 20, 2019 and are preparing an
agreement to extend it to June 20, 2020 to allow the parties time to discuss settlement. The Company received a letter from the EPA on
November 4, 2019 asking if the Company remained interested in settlement negotiations. The Company responded affirmatively and such
negotiations are ongoing. Two other PRPs identified by the EPA are now also in negotiations with the EPA and in preliminary negotiations
with the Company regarding the site. In the course of negotiations, the EPA informed the Company that the New Jersey Department of
Environmental Protection has also incurred costs remediating part of the site. We believe that we have adequate reserves for this matter.
In 2015, the condominium association of the Four Seasons at Great Notch condominium community (the “Great Notch
Plaintiff”) filed a lawsuit in the Superior Court of New Jersey, Law Division, Passaic County (the “Court”) alleging various construction
defects, design defects, and geotechnical issues relating to the community. The operative complaint (“Complaint”) asserts claims against
Hovnanian Enterprises, Inc. and several of its affiliates, including K. Hovnanian at Great Notch, LLC, K. Hovnanian Construction
Management, Inc., and K. Hovnanian Companies, LLC. The Complaint also asserts claims against various other design professionals and
contractors. The Great Notch Plaintiff has also filed a motion, which remains pending, to permit it to pursue a claim to pierce the corporate
veil of K. Hovnanian at Great Notch, LLC to hold its alleged parent entities liable for any damages awarded against it. To date, the
Hovnanian-affiliated defendants have reached a partial settlement with the Great Notch Plaintiff as to a portion of the Great Notch
Plaintiff’s claims against them for an amount immaterial to the Company. On its remaining claims against the Hovnanian-affiliated
defendants, the Great Notch Plaintiff has asserted damages of approximately $119.5 million, which amount is potentially subject to treble
damages pursuant to the Great Notch Plaintiff’s claim under the New Jersey Consumer Fraud Act. On August 17, 2018, the Hovnanian-
affiliated defendants filed a motion for summary judgment seeking dismissal of all of the Great Notch Plaintiff’s remaining claims against
them, which was withdrawn without prejudice to re-file with supplemental evidence. The trial is currently scheduled for April 20, 2020.
An initial court-ordered mediation session took place on November 19, 2019. An additional mediation session is contemplated, but has
not yet been scheduled. The Hovnanian-affiliated defendants intend to defend these claims vigorously.
ITEM 4
MINE SAFETY DISCLOSURES
Not applicable
INFORMATION ABOUT OUR EXECUTIVE OFFICERS
Information on executive officers of the registrant is incorporated herein from Part III, Item 10.
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PART II
ITEM 5
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES
OF EQUITY SECURITIES
Our Class A Common Stock is traded on the New York Stock Exchange under the symbol “HOV” and was held by
416 stockholders of record at December 13, 2019. There is no established public trading market for our Class B Common Stock, which
was held by 214 stockholders of record at December 13, 2019. If a shareholder desires to sell shares of Class B Common Stock (other than
to Permitted Transferees (as defined in the Company’s amended Certificate of Incorporation)), such stock must be converted into shares
of Class A Common Stock at a one to one conversion rate.
Recent Sales of Unregistered Equity Securities
On October 31, 2019, in connection with the issuance of the 7.75% Senior Secured 1.25 Lien Notes due 2026, we issued and
sold an aggregate of 178,427 shares of Class A Common Stock, par value $0.01 per share (and associated Preferred Stock Purchase Rights),
to the purchasers of such Notes for an aggregate purchase price of $1,784.27. The issuance was exempt from registration under Section
4(a)(2) of the Securities Act of 1933.
Issuer Purchases of Equity Securities
No shares of our Class A Common Stock or Class B Common Stock were purchased by or on behalf of the Company or any
affiliated purchaser during the fiscal fourth quarter of 2019. The maximum number of shares that may yet be purchased under the
Company’s repurchase plans or programs is 22 thousand.
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ITEM 6
SELECTED FINANCIAL DATA
The following table sets forth our selected consolidated financial data and should be read in conjunction with Item 7
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our Consolidated Financial Statements
and Notes thereto included elsewhere in this Annual Report on Form 10-K.
Summary of Consolidated Statements of Operations Data
(In thousands, except per share data)
Revenues
Expenses excluding inventory impairment loss and land option
write-offs
Inventory impairment loss and land option write-offs
Total expenses
Loss on extinguishment of debt
Income (loss) from unconsolidated joint ventures
(Loss) income before income taxes
State and federal income tax provision (benefit)
Net (loss) income
Per share data:
Basic:
Net (loss) income per common share
Weighted-average number of common shares outstanding
Assuming dilution:
Net (loss) income per common share
Weighted-average number of common shares outstanding
Summary of Consolidated Balance Sheet Data
(In thousands)
Total assets(1)
Mortgages and lines of credit (1)
Term loans and revolving loans, senior notes, senior
amortizing notes, senior exchangeable notes and tangible
equity unit (“TEU”) senior subordinated amortizing notes
(net of discount and premium)
Total equity deficit
October 31,
October 31,
Year Ended
October 31,
October 31,
2019
$2,016,916
2018
$1,991,233
2017
$2,451,665
2016
$2,752,247
October 31,
2015
$2,148,480
2,036,792
6,288
2,043,080
(42,436)
28,932
(39,668)
2,449
$(42,117)
1,996,083
3,501
1,999,584
(7,536)
24,033
8,146
3,626
$4,520
2,437,195
17,813
2,455,008
(34,854 )
(7,047 )
(45,244 )
286,949
$(332,193 )
2,708,912
33,353
2,742,265
(3,200 )
(4,346 )
2,436
5,255
$(2,819 )
2,162,370
12,044
2,174,414
-
4,169
(21,765)
(5,665)
$(16,100)
$(7.06)
5,968
$(7.06)
5,968
$0.73
5,941
$0.72
6,072
$(56.23 )
5,908
$(56.23 )
5,908
$(0.48 )
5,898
$(0.48 )
5,898
$(2.74)
5,876
$(2.74)
5,876
October 31,
October 31,
October 31,
October 31,
2019
$1,881,424
$343,862
2018
$1,662,042
$208,733
2017
$1,900,898
$244,088
2016
$2,354,956
$294,015
October 31,
2015
$2,577,398
$310,672
$1,479,990
$(489,776)
$1,439,238
$(453,504)
$1,585,837
$(460,371 )
$1,573,333
$(128,510 )
$1,827,924
$(128,084)
(1) In connection with our adoption of Accounting Standards Update 2015-03 in November 2016, certain prior year amounts for unamortized debt
issuance costs were reclassified between the lines “Total assets” and “Mortgages and lines of credit” and “Term loans and revolving loans, senior
notes, senior amortizing notes, senior exchangeable notes and tangible equity unit (“TEU”) senior subordinated amortizing note (net of discount
and premium)”.
ITEM 7
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).
Overview
Our community count increased 14.6% from 123 communities at October 31, 2018 to 141 at October 31, 2019. For seven
consecutive quarters through the third quarter of fiscal 2019, our total number of lots controlled increased as compared to the same period of
the prior year. Although there was a slight decrease in total lots controlled of 3.2% as of October 31, 2019 as compared to October 31,
2018, the growth in lots controlled in previous quarters has led to the year-over-year community count growth. Our strategy has been to
grow through increased open for sale communities. As our recently opened communities begin delivering homes, we believe it should lead
to additional delivery and revenue growth, and in turn profitability in future periods, absent adverse market factors.
Our cash position has allowed us to spend $562.8 million on land purchases and land development during fiscal 2019, and
still have total liquidity of $275.9 million, including $131.0 million of homebuilding cash and cash equivalents as of October 31, 2019.
We continue to see opportunities to purchase land at prices that make economic sense in light of our current sales prices, sales pace and
construction costs and plan to continue actively pursuing such land acquisitions. New land purchases at pricing that we believe will generate
appropriate investment returns and drive greater operating efficiencies are needed to return to sustained profitability; however, we remain
cautious and are carefully evaluating market conditions when pursuing new land acquisitions.
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Additional results for the year ended October 31, 2019 were as follows:
● For the year ended October 31, 2019, sale of homes revenues increased 2.3% as compared to the prior year, as a
result of a 2.0% increase in deliveries, primarily due to our increased community count.
● Gross margin percentage decreased from 15.2% for the year ended October 31, 2018 to 14.2% for the year ended
October 31, 2019. This decrease was primarily due to the increase in cost of sales interest as a result of changes in
estimates of interest per home for deliveries during fiscal 2019 in connection with our semi-annual community life
planning process, along with a decrease due to the mix of communities delivering in each period. During this
planning process, the duration of communities and timing of spending thereon could change, resulting in changes
in total estimated community life capitalized interest. Estimated community life capitalized interest is written-off
with each delivery. Gross margin percentage, before cost of sales interest expense and land charges, decreased
slightly from 18.4% for the year ended October 31, 2018 to 18.1% for the year ended October 31, 2019, primarily
due to the mix of communities delivering.
● Selling, general and administrative costs (including corporate general and administrative expenses) increased $4.3
million for the year ended October 31, 2019 as compared to the prior year, primarily as a result of our increased
community count, along with a lower adjustment to our warranty reserves (as a result of our annual actuarial
analysis) in fiscal 2019 as compared to fiscal 2018. However, as a percentage of total revenue, such costs remained
relatively flat at 11.6% for the year ended October 31, 2019 compared to 11.5% for the year ended October 31,
2018.
● Active selling communities at October 31, 2019 increased 14.6% over last year, and our average active selling
communities increased by 5.4% over last year. Net contracts increased 14.3% for the year ended October 31, 2019,
compared to the prior year.
● Net contracts per average active selling community increased to 39.0 for the year ended October 31, 2019
compared to 35.9 in the prior year.
● Contract backlog increased from 1,826 homes at October 31, 2018 to 2,191 homes at October 31, 2019, with a
dollar value of $880.1 million, representing a 18.0% increase in dollar value compared to the prior year.
When comparing sequentially from the third quarter of fiscal 2019 to the fourth quarter of fiscal 2019, our gross margin
percentage increased slightly from 14.0% to 14.5% and our gross margin percentage, before cost of sales interest expense and land charges,
also increased slightly from 18.4% to 18.9%, both primarily as a result of product mix, as well as a minor increase due to the increase in
delivery volume. Selling, general and administrative costs (including corporate general and administrative expenses) as a percentage of
total revenues decreased from 12.1% to 7.6%, as compared to the third quarter of fiscal 2019, primarily due to the increase in delivery
volume.
Critical Accounting Policies
Management believes that the following critical accounting policies require its most significant judgments and estimates used
in the preparation of the consolidated financial statements:
Income Recognition from Mortgage Loans - Our Financial Services segment originates mortgages, primarily for our
homebuilding customers. 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.
We elected the fair value option for our mortgage loans held for sale in accordance with Accounting Standards Codification
(“ASC”) 825, “Financial Instruments,” which permits us to measure our loans held for sale at fair value. Management believes that the
election of the fair value option for loans held for sale improves financial reporting by mitigating volatility in reported earnings caused by
measuring the fair value of the loans and the derivative instruments used to economically hedge them without having to apply complex
hedge accounting provisions.
Substantially all of the mortgage loans originated are sold within a short period of time in the secondary mortgage market on
a servicing released, nonrecourse basis, although the Company remains liable for certain limited representations, such as fraud, and
warranties related to loan sales. Mortgage investors could seek to have us buy back loans or compensate them for losses incurred on
mortgages we have sold based on claims that we breached our limited representations and warranties. We have established reserves for
probable losses. While we believe these reserves are adequate for known losses and projected repurchase requests, given the volatility in
the mortgage industry and the uncertainty regarding the ultimate resolution of these claims, if either actual repurchases or the losses
incurred resolving those repurchases exceed our expectations, additional expense may be incurred.
Inventories - Inventories consist of land, land development, home construction costs, capitalized interest, construction
overhead and property taxes. Construction costs are accumulated during the period of construction and charged to cost of sales under
specific identification methods. Land, land development and common facility costs are allocated based on buildable acres to product types
within each community, then charged to cost of sales equally based upon the number of homes to be constructed in each product type.
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We record inventories in our consolidated balance sheets at cost unless the inventory is determined to be impaired, in which
case the inventory is written down to its fair value. Our inventories consist of the following three components: (1) sold and unsold homes
and lots under development, which includes all construction, land, capitalized interest and land development costs related to started homes
and land under development in our active communities; (2) land and land options held for future development or sale, which includes all
costs related to land in our communities in planning or mothballed communities; and (3) consolidated inventory not owned, which includes
all costs related to variable interest entities and other options, which consists primarily of model homes financed with an investor and
inventory related to land banking arrangements accounted for as financings.
We decide to mothball (or stop development on) certain communities when we determine that the current performance does
not justify further investment at the time. When we decide to mothball a community, the inventory is reclassified on our Consolidated
Balance Sheets from “Sold and unsold homes and lots under development” to “Land and land options held for future development or sale.”
As of October 31, 2019, the net book value associated with our 13 mothballed communities was $13.8 million, net of impairment charges
recorded in prior periods of $138.1 million. We regularly review communities to determine if mothballing is appropriate. During fiscal
2019, we did not mothball any communities, but we sold two previously mothballed communities and re-activated three previously
mothballed communities.
We sell and lease back certain of our model homes with the right to participate in the potential profit when each home is sold
to a third party at the end of the respective lease. As a result of our continued involvement, for accounting purposes in accordance with
ASC 606-10-55-68, these sale and leaseback transactions are considered a financing rather than a sale. Therefore, for purposes of our
Consolidated Balance Sheets, at October 31, 2019, inventory of $54.2 million was recorded to “Consolidated inventory not owned,” with
a corresponding amount of $51.2 million recorded to “Liabilities from inventory not owned.”
We have land banking arrangements, whereby we sell our land parcels to the land banker and they provide us an option to
purchase back finished lots on a quarterly basis. Because of our options to repurchase these parcels, for accounting purposes, in accordance
with ASC 606-10-55-70, these transactions are considered financings rather than sales. For purposes of our Consolidated Balance Sheets,
at October 31, 2019, inventory of $136.1 million was recorded as “Consolidated inventory not owned,” with a corresponding amount of
$89.8 million recorded to “Liabilities from inventory not owned” for the amount of net cash received from the transactions.
The recoverability of inventories and other long-lived assets is assessed in accordance with the provisions of ASC 360-10,
“Property, Plant and Equipment − Overall” (“ASC 360-10”). ASC 360-10 requires long-lived assets, including inventories, held for
development to be evaluated for impairment based on undiscounted future cash flows of the assets at the lowest level for which there are
identifiable cash flows. As such, we evaluate inventories for impairment at the individual community level, the lowest level of discrete
cash flows that we measure.
We evaluate inventories of communities under development and held for future development for impairment when indicators
of potential impairment are present. Indicators of impairment include, but are not limited to, decreases in local housing market values,
decreases in gross margins or sales absorption rates, decreases in net sales prices (base sales price net of sales incentives), or actual or
projected operating or cash flow losses. The assessment of communities for indication of impairment is performed quarterly. As part of
this process, we prepare detailed budgets for all of our communities at least semi-annually and identify those communities with a projected
operating loss. For those communities with projected losses, we estimate the remaining undiscounted future cash flows and compare those
to the carrying value of the community, to determine if the carrying value of the asset is recoverable.
The projected operating profits, losses, or cash flows of each community can be significantly impacted by our estimates of the
following:
●
●
●
●
future base selling prices;
future home sales incentives;
future home construction and land development costs; and
future sales absorption pace and cancellation rates.
These estimates are dependent upon specific market conditions for each community. While we consider available information
to determine what we believe to be our best estimates as of the end of a quarterly reporting period, these estimates are subject to change in
future reporting periods as facts and circumstances change. Local market-specific conditions that may impact our estimates for a
community include:
●
●
●
the intensity of competition within a market, including available home sales prices and home sales incentives offered
by our competitors;
the current sales absorption pace for both our communities and competitor communities;
community specific attributes, such as location, availability of lots in the market, desirability and uniqueness of our
community, and the size and style of homes currently being offered;
24
●
●
●
●
potential for alternative product offerings to respond to local market conditions;
changes by management in the sales strategy of the community;
current local market economic and demographic conditions and related trends of forecasts; and
existing home inventory supplies, including foreclosures and short sales.
These and other local market-specific conditions that may be present are considered by management in preparing projection
assumptions for each community. The sales objectives can differ between our communities, even within a given market. For example,
facts and circumstances in a given community may lead us to price our homes with the objective of yielding a higher sales absorption pace,
while facts and circumstances in another community may lead us to price our homes to minimize deterioration in our gross margins,
although it may result in a slower sales absorption pace. In addition, the key assumptions included in our estimate of future undiscounted
cash flows may be interrelated. For example, a decrease in estimated base sales price or an increase in homes sales incentives may result
in a corresponding increase in sales absorption pace. Additionally, a decrease in the average sales price of homes to be sold and closed in
future reporting periods for one community that has not been generating what management believes to be an adequate sales absorption
pace may impact the estimated cash flow assumptions of a nearby community. Changes in our key assumptions, including estimated
construction and development costs, absorption pace and selling strategies, could materially impact future cash flow and fair-value
estimates. Due to the number of possible scenarios that would result from various changes in these factors, we do not believe it is possible
to develop a sensitivity analysis with a level of precision that would be meaningful to an investor.
If the undiscounted cash flows are more than the carrying value of the community, then the carrying amount is recoverable,
and no impairment adjustment is required. However, if the undiscounted cash flows are less than the carrying amount, then the community
is deemed impaired and is written down to its fair value. We determine the estimated fair value of each community by determining the
present value of its estimated future cash flows at a discount rate commensurate with the risk of the respective community, or in limited
circumstances, prices for land in recent comparable sale transactions, market analysis studies, which include the estimated price a willing
buyer would pay for the land (other than in a forced liquidation sale), and recent bona fide offers received from outside third parties. Our
discount rates used for all impairments recorded from October 31, 2017 to October 31, 2019 ranged from 16.8% to 19.8%. The estimated
future cash flow assumptions are virtually the same for both our recoverability and fair value assessments. Should the estimates or
expectations used in determining estimated cash flows or fair value, including discount rates, decrease or differ from current estimates in
the future, we may be required to recognize additional impairments related to current and future communities. The impairment of a
community is allocated to each lot on a relative fair value basis.
From time to time, we write off deposits and approval, engineering and capitalized interest costs when we determine that it is
no longer probable that we will exercise options to buy land in specific locations or when we redesign communities and/or abandon certain
engineering costs. In deciding not to exercise a land option, we take into consideration changes in market conditions, the timing of required
land takedowns, the willingness of land sellers to modify terms of the land option contract (including timing of land takedowns), and the
availability and best use of our capital, among other factors. The write-off is recorded in the period it is deemed not probable that the
optioned property will be acquired. In certain instances, we have been able to recover deposits and other pre-acquisition costs that were
previously written off. These recoveries have not been significant in comparison to the total costs written off.
Inventories held for sale are land parcels ready for sale in their current condition, where we have decided not to build homes
but are instead actively marketing for sale. These land parcels represented $6.4 million of our total inventories at October 31, 2018, and
are reported at the lower of carrying amount or fair value less costs to sell. There were no inventories held for sale at October 31, 2019. In
determining fair value for land held for sale, management considers, among other things, prices for land in recent comparable sale
transactions, market analysis studies, which include the estimated price a willing buyer would pay for the land (other than in a forced
liquidation sale) and recent bona fide offers received from outside third parties.
Unconsolidated Homebuilding and Land Development Joint Ventures - Investments in unconsolidated homebuilding and land
development joint ventures are accounted for under the equity method of accounting. Under the equity method, we recognize our
proportionate share of earnings and losses earned by the joint venture upon the delivery of lots or homes to third parties. Our ownership
interests in the joint ventures vary but our voting interests are generally 50% or less. In determining whether or not we must consolidate
joint ventures where we are the managing member of the joint venture, we assess whether the other partners have specific rights to
overcome the presumption of control by us as the manager of the joint venture. In most cases, the presumption is overcome because the
joint venture agreements require that both partners agree on establishing the significant operating and capital decisions of the partnership,
including budgets, in the ordinary course of business. The evaluation of whether or not we control a venture can require significant
judgment. In accordance with ASC 323-10, “Investments - Equity Method and Joint Ventures – Overall,” we assess our investments in
unconsolidated joint ventures for recoverability, and if it is determined that a loss in value of the investment below its carrying amount is
other than temporary, we write down the investment to its fair value. We evaluate our equity investments for impairment based on the joint
venture’s projected cash flows. This process requires significant management judgment and estimates. During fiscal 2019 and fiscal 2017,
we wrote down certain joint venture investments by $0.9 million and $2.8 million, respectively. There were no write-downs in fiscal 2018.
Warranty Costs and Construction Defect Reserves - We accrue for warranty costs that are covered under our existing general
liability and construction defect policy as part of our general liability insurance deductible. This accrual is expensed as selling, general,
and administrative costs. For homes delivered in fiscal 2019 and 2018, our deductible under our general liability insurance is a $20 million
aggregate for construction defect and warranty claims. For bodily injury claims, our deductible per occurrence in fiscal 2019 and 2018 is
25
$0.25 million, up to a $5 million limit. Our aggregate retention for construction defect, warranty and bodily injury claims is $20 million
for fiscal 2019 and 2018. We do not have a deductible on our worker's compensation insurance. Reserves for estimated losses for
construction defects, warranty and bodily injury claims have been established using the assistance of a third-party actuary. We engage a
third-party actuary that uses our historical warranty and construction defect data to assist our management in estimating our unpaid claims,
claim adjustment expenses and incurred but not reported claims reserves for the risks that we are assuming under the general liability and
construction defect programs. The estimates include provisions for inflation, claims handling and legal fees. These estimates are subject
to a high degree of variability due to uncertainties such as trends in construction defect claims relative to our markets and the types of
products we build, claim settlement patterns, insurance industry practices and legal interpretations, among others. Because of the high
degree of judgment required in determining these estimated liability amounts, actual future costs could differ significantly from our
currently estimated amounts. In addition, we establish a warranty accrual for lower cost-related issues to cover home repairs, community
amenities and land development infrastructure that are not covered under our general liability and construction defect policy. We accrue
an estimate for these warranty costs as part of cost of sales at the time each home is closed and title and possession have been transferred
to the homebuyer. See Note 16 to the Consolidated Financial Statements for additional information on the amount of warranty costs
recognized in cost of goods sold and administrative expenses.
Recent Accounting Pronouncements
See Note 3 to the Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K.
Capital Resources and Liquidity
Our operations consist primarily of residential housing development and sales in the Northeast (New Jersey and Pennsylvania),
the Mid-Atlantic (Delaware, Maryland, Virginia, Washington D.C. and West Virginia), the Midwest (Illinois and Ohio), the Southeast
(Florida, Georgia and South Carolina), the Southwest (Arizona and Texas) and the West (California). In addition, we provide certain
financial services to our homebuilding customers.
We have historically funded our homebuilding and financial services operations with cash flows from operating activities,
borrowings under our credit facilities, the issuance of new debt and equity securities and other financing activities. Due to covenant
restrictions in our debt instruments, we are currently limited in the amount of debt we can incur that does not qualify as refinancing
indebtedness (a limitation that we expect to continue for the foreseeable future), even if market conditions would otherwise be favorable,
which could also impact our ability to grow our business.
Operating, Investing and Financing Activities – Overview
Our homebuilding cash balance at October 31, 2019 decreased $56.9 million from October 31, 2018. We spent $562.8 million
on land and land development during the period. After considering this land and land development and all other operating activities,
including revenue received from deliveries, we used $249.1 million of cash from operations. However, as of October 31, 2019, we
had $125.0 million of borrowing capacity under our Secured Credit Agreement (defined below), and therefore, our total liquidity at October
31, 2019 was $275.9 million, which is above our target liquidity range of $170.0 to $245.0 million. During fiscal 2019, we used $8.3 million
of cash for investing activities, primarily for investments in joint ventures, partially offset by distributions from joint ventures. Cash
provided by financing activities was $206.7 million during fiscal 2019, which included net proceeds of $8.2 million from debt issuances,
$78.5 million from land banking and model sale leaseback programs, $109.0 million of net proceeds from nonrecourse mortgages
and $27.1 million from in mortgage warehouse lines of credit. Subject to covenant restrictions in our debt instruments, we intend to
continue to use nonrecourse mortgage financings, model sale leaseback, joint ventures, and land banking programs as our business needs
dictate.
Our cash uses during the years ended October 31, 2019 and 2018 were for operating expenses, land purchases, land deposits,
land development, construction spending, debt refinancings and payments, state income taxes, interest payments, litigation matters and
investments in joint ventures. During these periods, we provided for our cash requirements from available cash on hand, housing and land
sales, financing transactions, model sale leasebacks, land banking transactions, joint ventures, financial service revenues and other
revenues. We believe that these sources of cash together with available borrowings under our senior secured revolving credit facility will
be sufficient through fiscal 2020 to finance our working capital requirements.
Our net income (loss) historically does not approximate cash flow from operating activities. The difference between net
income (loss) and cash flow from operating activities is primarily caused by changes in inventory levels together with changes in
receivables, prepaid and other assets, mortgage loans held for sale, interest and other accrued liabilities, deferred income taxes, accounts
payable and other liabilities, and noncash charges relating to depreciation, stock compensation awards and impairment losses for inventory.
When we are expanding our operations, inventory levels, prepaids and other assets increase causing cash flow from operating activities to
decrease. Certain liabilities also increase as operations expand and partially offset the negative effect on cash flow from operations caused
by the increase in inventory levels, prepaids and other assets. Similarly, as our mortgage operations expand, net income from these
operations increases, but for cash flow purposes net income is partially offset by the net change in mortgage assets and liabilities. The
opposite is true as our investment in new land purchases and development of new communities decrease, causing us to generate positive
cash flow from operations. In fiscal 2019 and 2018, with continued spending on land purchases and land development, we used cash in
operations. As we continue to actively seek land investment opportunities, we will also remain focused on liquidity.
See “Inventory Activities” below for a detailed discussion of our inventory position.
26
Debt Transactions
Senior notes and credit facilities balances as of October 31, 2019 and October 31, 2018, were as follows:
(In thousands)
Senior Secured Notes:
9.5% Senior Secured Notes due November 15, 2020
2.0% Senior Secured Notes due November 1, 2021
5.0% Senior Secured Notes due November 1, 2021
10.0% Senior Secured Notes due July 15, 2022
10.5% Senior Secured Notes due July 15, 2024
7.75% Senior Secured 1.125 Lien Notes due February 15, 2026
10.5% Senior Secured 1.25 Lien Notes due February 15, 2026
11.25% Senior Secured 1.5 Lien Notes due February 15, 2026
Total Senior Secured Notes
Senior Notes:
8.0% Senior Notes due November 1, 2019 (2)
13.5% Senior Notes due February 1, 2026
5.0% Senior Notes due February 1, 2040
Total Senior Notes
Senior Unsecured Term Loan Credit Facility due February 1, 2027
Senior Secured Revolving Credit Facility (3)
Net discounts and premium
Net debt issuance costs
Total notes payable, net of discount, premium and debt issuance costs
October 31,
2019(1)
October 31,
2018(1)
$-
-
-
218,994
211,391
350,000
282,322
103,141
$1,165,848
$-
90,590
90,120
$180,710
$202,547
$-
$(49,145)
$(19,970)
$1,479,990
$75,000
53,203
141,797
440,000
400,000
-
-
-
$1,110,000
$-
90,590
90,120
$180,710
$202,547
$-
$(39,934)
$(14,085)
$1,439,238
(1) “ Notes payable” on our Consolidated Balance Sheets as of October 31, 2019 and 2018 consists of the total senior secured and senior
notes shown above, as well as accrued interest of $19.1 million and $35.6 million, respectively.
(2) $26.0 million of 8.0% Senior Notes due 2019 are owned by a wholly-owned consolidated subsidiary of HEI. Therefore, in accordance
with GAAP, such notes are not reflected on the Consolidated Balance sheets of HEI. On November 1, 2019, the maturity of the 8.0%
Senior Notes was extended to November 1, 2027.
(3) At October 31, 2019, provides for up to $125.0 million in aggregate amount of senior secured first lien revolving loans.
Availability thereunder will terminate on December 28, 2022.
Except for K. Hovnanian, the issuer of the notes and borrower under the senior unsecured term loan facility (the “Term Loan
Facility”) and under our $125.0 million senior secured revolving credit facility (the “Secured Credit Facility” and together with the term
loan facility, 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 October 31, 2019 (collectively, the “Notes Guarantors”), which include the subsidiaries that had
guaranteed (collectively, the “Former New Secured Group Guarantors”) K. Hovnanian’s 9.50% Notes, 2.000% Notes and 5.000% Notes
(each as defined under below). As a result of the 2019 Transactions (as defined in and described under below), K. Hovnanian’s obligations
under the Credit Facilities, the senior secured notes and senior notes are guaranteed by the Notes Guarantors (including the Former New
Secured Group Guarantors) and, in the case of the Secured Credit Facility and the senior secured notes, will be secured in accordance with
the terms of the applicable Debt Instrument by substantially all of the assets owned by K. Hovnanian and the Notes Guarantors (including
the assets owned by the Former New Secured Group Guarantors), subject to permitted liens and certain exceptions.
The credit agreements governing the Credit Facilities and the indentures governing the senior secured and senior notes
(together, the “Debt Instruments”) outstanding at October 31, 2019 do not contain any financial maintenance covenants, but do contain
restrictive covenants that limit, among other things, the Company’s ability and that of certain of its subsidiaries, including K. Hovnanian,
to incur additional indebtedness (other than non-recourse indebtedness, certain permitted indebtedness and refinancing indebtedness), pay
dividends and make distributions on common and preferred stock, repay certain indebtedness prior to its respective stated maturity,
repurchase common and preferred stock, make other restricted payments (including investments), sell certain assets (including in certain
land banking transactions), incur liens, consolidate, merge, sell or otherwise dispose of all or substantially all of their assets and enter into
certain transactions with affiliates. The Debt Instruments also contain customary events of default which would permit the lenders or
holders thereof to exercise remedies with respect to the collateral (as applicable), declare the loans made under the Term Loan Facility
(defined below) (the “Term Loans”) and loans made under the Secured Credit Agreement (as defined below) (the “Secured Revolving
Loans”) or notes to be immediately due and payable if not cured within applicable grace periods, including the failure to make timely
payments on the 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
Term Loans and Secured Revolving Loans, material inaccuracy of representations and warranties and with respect to the Term Loans and
Secured Revolving Loans, a change of control, and, with respect to the Secured Revolving Loans and senior secured notes, the failure of
27
the documents granting security for the Secured Revolving Loans and senior secured notes to be in full force and effect, and the failure of
the liens on any material portion of the collateral securing the Secured Revolving Loans and senior secured notes to be valid and perfected.
As of October 31, 2019, we believe we were in compliance with the covenants of the Debt Instruments.
If our consolidated fixed charge coverage ratio is less than 2.0 to 1.0, as defined in the applicable Debt Instrument, we are
restricted from making certain payments, including dividends, and from incurring indebtedness other than certain permitted indebtedness,
refinancing indebtedness and nonrecourse indebtedness. As a result of this ratio restriction, we are currently restricted from paying
dividends (in the case of the payment of dividends on preferred stock, our secured debt leverage ratio must also be less than 4.0 to 1.0),
which are not cumulative, on our 7.625% Series A Preferred Stock. We anticipate that we will continue to be restricted from paying
dividends for the foreseeable future. Our inability to pay dividends is in accordance with covenant restrictions and will not result in a
default under our Debt Instruments or otherwise affect compliance with any of the covenants contained in our Debt Instruments.
Under the terms of our Debt Instruments, we have the right to make certain redemptions and prepayments and, depending on
market conditions 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
and/or extend maturities, and will seek to do so with the right opportunity. We may also continue to make debt purchases and/or exchanges
for debt or equity from time to time through tender offers, exchange offers, open market purchases, private transactions, or otherwise, or
seek to raise additional debt or equity capital, depending on market conditions and covenant restrictions.
On January 15, 2019, pursuant to a Commitment Letter, the Company issued $25.0 million in aggregate principal amount of
the Additional 10.5% 2024 Notes to certain funds managed, advised or sub-advised by GSO at a discount for a purchase price of $21.3
million in cash. The Additional 10.5% 2024 Notes were issued as additional notes of the same series as the 10.5% 2024 Notes.
On October 31, 2019, K. Hovnanian, the Company, the Notes Guarantors, Wilmington Trust, National Association, as
administrative agent, and affiliates of certain investment managers (the “Investors”), as lenders, entered into a credit agreement (the
“Secured Credit Agreement”) providing for up to $125.0 million in aggregate amount of Secured Revolving Loans to be used for general
corporate purposes, upon the terms and subject to the conditions set forth therein. Secured Revolving Loans are to be borrowed by K.
Hovnanian and guaranteed by the Notes Guarantors. Availability under the Secured Credit Agreement will terminate on December 28,
2022 and the Secured Revolving Loans will bear interest at a rate per annum equal to 7.75%, and interest will be payable in arrears, on the
last business day of each fiscal quarter. In connection with the entering into of the Secured Credit Agreement, K. Hovnanian terminated
its then existing Secured Credit Facility.
On October 31, 2019, K. Hovnanian completed private placements of senior secured notes as follows: (i) K. Hovnanian issued
an aggregate of $350.0 million of 7.75% Senior Secured 1.125 Lien Notes due 2026 (the “1.125 Lien Notes”) in part pursuant to a Note
Purchase Agreement, dated October 31, 2019, among K. Hovnanian, the Notes Guarantors and certain Investors as purchasers thereof (the
“1.125 Lien Notes Purchase Agreement”) and in part pursuant to the Exchange Agreement (as defined below), with the proceeds from the
sale of 1.125 Lien Notes under the 1.125 Lien Notes Purchase Agreement used to fund the cash payments to certain Exchanging Holders
(as defined below) under the Exchange Agreement; and (ii) K. Hovnanian issued an aggregate of $282.3 million of 10.5% Senior Secured
1.25 Lien Notes due 2026 (the “1.25 Lien Notes”), pursuant to a Note Purchase Agreement (the “1.25 Lien Notes Purchase Agreement”),
dated October 31, 2019, among K. Hovnanian, the Notes Guarantors and certain Investors as purchasers thereof (the “1.25 Lien Notes
Purchasers”), the proceeds of which were used to fund the Satisfaction and Discharge (as defined below).
In addition, on October 31, 2019, K. Hovnanian completed private exchanges of (i) approximately $221.0 million aggregate
principal amount of its 10.0% Senior Secured Notes due 2022 (the “10.0% 2022 Notes”) and approximately $114.0 million aggregate
principal amount of its 10.5% Senior Secured Notes due 2024 (the “10.5% 2024 Notes” and, together with the 10.0% 2022 Notes, the
“Second Lien Notes”) held by certain participating bondholders (the “Exchanging Holders”) for a portion of the $350.0 million aggregate
principal amount of 1.125 Lien Notes described above and/or cash, and (ii) approximately $99.6 million aggregate principal amount of its
10.5% 2024 Notes held by certain of the Exchanging Holders for approximately $103.1 million aggregate principal amount of 11.25%
Senior Secured 1.5 Lien Notes due 2026 (the “1.5 Lien Notes” and, together with the 1.125 Lien Notes and the 1.25 Lien Notes, the “New
Secured Notes”), pursuant to an Exchange Agreement, dated October 30, 2019 (the “Exchange Agreement”), among K. Hovnanian, the
Notes Guarantors and the Exchanging Holders.
On October 31, 2019, K. Hovnanian issued notices of redemption for all of its outstanding 9.50% Senior Secured Notes due
2020 (the “9.50% Notes”), 2.000% Senior Secured Notes due 2021 (the “2.000% Notes”) and 5.000% Senior Secured Notes due 2021 (the
“5.000% Notes”) and deposited with Wilmington Trust, National Association, as trustee under the indenture (the “9.50% Notes Indenture”)
governing the 9.50% Notes and as trustee under the indenture (the “5.000%/2.000% Notes Indenture”) governing the 5.000% Notes and
the 2.000% Notes sufficient funds to satisfy and discharge (collectively, the “Satisfaction and Discharge”) (i) the 9.50% Indenture and to
fund the redemption of all outstanding 9.50% Notes and to pay accrued and unpaid interest on the redeemed notes to, but not including,
the November 10, 2019 redemption date and (ii) the 5.000%/2.000% Indenture and to fund the redemption of all outstanding 5.000% Notes
and 2.000% Notes and to pay accrued and unpaid interest on the redeemed notes to, but not including, the November 30, 2019 redemption
date. Proceeds from the issuance of the 1.25 Lien Notes together with cash on hand were used to fund the Satisfaction and Discharge.
Upon the Satisfaction and Discharge of the 9.50% Notes Indenture, all of the collateral securing the 9.50% Notes was released and the
restrictive covenants and events of default contained therein ceased to have effect and upon the Satisfaction and Discharge of the
5.000%/2.000% Notes Indenture, all of the collateral securing the 5.000% Notes and the 2.000% Notes was released and the restrictive
covenants and events of default contained therein ceased to have effect as to both such series of Notes.
28
The Company and K. Hovnanian obtained the consent of certain lenders/holders under its existing debt instruments to amend
such debt instruments in connection with the issuance of the New Secured Notes and the execution of the indentures governing the New
Secured Notes and the Secured Credit Agreement. The Company, K. Hovnanian and the guarantors also amended such debt instruments
to add the Former New Secured Group Guarantors as guarantors thereunder and, in the case of the Second Lien Notes, to add the Former
New Secured Group Guarantors as pledgors and grantors of their assets (subject to permitted liens and certain exceptions) to secure such
Second Lien Notes.
The transactions that were consummated on October 31, 2019, as described, are collectively referred to herein as the “2019
Transactions.” The 2019 Transactions resulted in a loss in extinguishment of debt of $42.4 million for the year ended October 31, 2019
which is included as “Loss on Extinguishment of Debt” on the Consolidated Statement of Operations.
See Note 9 to the Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K for a further
discussion of K. Hovnanian’s Credit Facilities, senior secured notes and senior notes.
Mortgages and Notes Payable
We have nonrecourse mortgage loans for certain communities totaling $203.6 million and $95.6 million (net of debt issuance
costs) at October 31, 2019 and October 31, 2018, respectively, which are secured by the related real property, including any improvements,
with an aggregate book value of $410.2 million and $241.9 million, respectively. The weighted-average interest rate on these obligations
was 8.3% and 6.1% at October 31, 2019 and October 31, 2018, respectively, and the mortgage loan payments on each community primarily
correspond to home deliveries.
Our wholly owned mortgage banking subsidiary, K. Hovnanian American Mortgage, LLC (“K. Hovnanian Mortgage”),
originates mortgage loans primarily from the sale of our homes. Such mortgage loans and related servicing rights are sold in the secondary
mortgage market within a short period of time. In certain instances, we retain the servicing rights for a small amount of loans. The loans
are secured by the mortgages held for sale and repaid when we sell the underlying mortgage loans to permanent investors. As of October
31, 2019 and 2018, we had an aggregate of $140.2 million and $113.2 million, respectively, outstanding under several of K. Hovnanian
Mortgage’s short-term borrowing facilities.
See Note 8 to the Consolidated Financial Statements for a discussion of these agreements and facilities.
Equity
On July 3, 2001, our Board of Directors authorized a stock repurchase program to purchase up to 0.2 million shares of Class
A Common Stock. We did not repurchase any shares under this program during fiscal 2019 or 2018. As of October 31, 2019, the maximum
number of shares of Class A Common Stock that may yet be purchased under this program is 22 thousand. (See Part II, Item 5 for
information on equity purchases).
On July 12, 2005, we issued 5,600 shares of 7.625% Series A Preferred Stock, with a liquidation preference of $25,000 per
share. Dividends on the Series A Preferred Stock are not cumulative and are payable at an annual rate of 7.625%. The Series A Preferred
Stock is not convertible into the Company’s common stock and is redeemable in whole or in part at our option at the liquidation preference
of the shares. The Series A Preferred Stock is traded as depositary shares, with each depositary share representing 1/1000th of a share of
Series A Preferred Stock. The depositary shares are listed on the NASDAQ Global Market under the symbol “HOVNP.” In fiscal 2019,
2018 and 2017, we did not make any dividend payments on the Series A Preferred Stock as a result of covenant restrictions in our debt
instruments. Certain debt instruments to which we are a party contain restrictions on the payment of cash dividends. As a result of the most
restrictive of these provisions, we are not currently able to pay any cash dividends. We have never paid a cash dividend to common
stockholders. We anticipate that we will continue to be restricted from paying dividends, which are not cumulative, for the foreseeable
future.
On October 31, 2019, in connection with the issuance of the 7.75% Senior Secured 1.25 Lien Notes due 2026, we issued and
sold an aggregate of 178,427 shares of Class A Common Stock, par value $0.01 per share (and associated Preferred Stock Purchase Rights),
to the purchasers of such Notes for an aggregate purchase price of $1,784.27. The issuance was exempt from registration under Section
4(a)(2) of the Securities Act of 1933.
Inventory Activities
Total inventory, excluding consolidated inventory not owned, increased $111.9 million during the year ended October 31,
2019 from October 31, 2018. Total inventory, excluding consolidated inventory not owned, increased in the Northeast by $12.6 million,
in the Mid-Atlantic by $46.5 million, in the Midwest by $9.7 million, in the Southeast by $3.8 million, in the Southwest by $7.5 million
and in the West by $31.8 million. These inventory fluctuations were primarily attributable to new land purchases and land development,
partially offset by home deliveries and land sales during the period. During the year ended October 31, 2019, we had aggregate impairments
in the amount of $2.7 million. We wrote-off costs in the aggregate amount of $3.6 million during the year ended October 31, 2019 related
to land options that expired or that we terminated, as the communities’ forecasted profitability was not projected to produce adequate
returns on investment commensurate with the risk. In the last few years, we have been able to acquire new land parcels at prices that we
believe will generate reasonable returns under current homebuilding market conditions. There can be no assurances that this trend will
29
continue in the near term. Substantially all homes under construction or completed and included in inventory at October 31, 2019 are
expected to be closed during the next six to nine months.
Consolidated inventory not owned increased $102.4 million. Consolidated inventory not owned consists of options related to
land banking and model financing transactions that were added to our Consolidated Balance Sheets in accordance with US GAAP. The
increase from October 31, 2018 to October 31, 2019 was primarily due to an increase in land banking transactions along with an increase
in the sale and leaseback of certain model homes during the period. We have land banking arrangements, whereby we sell land parcels to
the land bankers and they provide us an option to purchase back finished lots on a predetermined schedule. Because of our options to
repurchase these parcels, for accounting purposes in accordance with ASC 606-10-55-70, these transactions are considered a financing
rather than a sale. For purposes of our Consolidated Balance Sheet, at October 31, 2019, inventory of $136.1 million was recorded to
“Consolidated inventory not owned,” with a corresponding amount of $89.8 million (net of debt issuance costs) recorded to “Liabilities
from inventory not owned” for the amount of net cash received from the transactions. In addition, we sell and lease back certain of our
model homes with the right to participate in the potential profit when each home is sold to a third party at the end of the respective lease. As
a result of our continued involvement, for accounting purposes in accordance with ASC 606-10-55-68, these sale and leaseback transactions
are considered a financing rather than a sale. Therefore, for purposes of our Consolidated Balance Sheet, at October 31, 2019, inventory
of $54.2 million was recorded to “Consolidated inventory not owned,” with a corresponding amount of $51.2 million (net of debt issuance
costs) recorded to “Liabilities from inventory not owned” for the amount of net cash received from the transactions.
When possible, we option property for development prior to acquisition. By optioning property, we are only subject to the
loss of the cost of the option and predevelopment costs if we choose not to exercise the option. As a result, our commitment for major land
acquisitions is reduced. The costs associated with optioned properties are included in “Land and land options held for future development
or sale” on the Consolidated Balance Sheets. Also included in “Land and land options held for future development or sale” are amounts
associated with inventory in mothballed communities. We mothball (or stop development on) certain communities when we determine the
current performance does not justify further investment at the time. That is, we believe we will generate higher returns if we decide against
spending money to improve land today and save the raw land until such time as the markets improve or we determine to sell the property. As
of October 31, 2019, we had mothballed land in 13 communities. The book value associated with these communities at October 31, 2019
was $13.8 million, which was net of impairment charges recorded in prior periods of $138.1 million. We continually review communities
to determine if mothballing is appropriate. During fiscal 2019, we did not mothball any additional communities, but we sold two previously
mothballed communities and re-activated three previously mothballed communities.
Inventories held for sale, which are land parcels where we have decided not to build homes, and are actively marketing the
land for sale, represented $6.4 million of our total inventories at October 31, 2018, and are reported at the lower of carrying amount or fair
value less costs to sell. There were no inventories held for sale at October 31, 2019. In determining fair value for land held for sale,
management considers, among other things, prices for land in recent comparable sale transactions, market analysis studies, which include
the estimated price a willing buyer would pay for the land (other than in a forced liquidation sale) and recent bona fide offers received
from outside third parties.
30
The following tables summarize home sites included in our total residential real estate.
October 31, 2019:
Northeast
Mid-Atlantic
Midwest
Southeast
Southwest
West
Consolidated total
Unconsolidated joint ventures
Owned
Optioned
Construction to permanent financing lots
Consolidated total
Lots controlled by unconsolidated joint ventures
October 31, 2018:
Northeast
Mid-Atlantic
Midwest
Southeast
Southwest
West
Consolidated total
Unconsolidated joint ventures
Owned
Optioned
Construction to permanent financing lots
Consolidated total
Lots controlled by unconsolidated joint ventures
Total
Home
Contracted
Not
Sites
Delivered
Remaining
Home
Sites
Available
3,297
5,297
3,898
4,693
7,188
5,260
29,633
4,226
11,374
18,004
255
29,633
4,226
3,920
4,795
4,758
4,671
6,783
5,630
30,557
4,029
12,729
17,610
218
30,557
4,029
152
343
450
282
663
301
2,191
461
1,658
278
255
2,191
461
51
296
394
251
523
311
1,826
366
1,356
252
218
1,826
366
3,145
4,954
3,448
4,411
6,525
4,959
27,442
3,765
9,716
17,726
-
27,442
3,765
3,869
4,499
4,364
4,420
6,260
5,319
28,731
3,663
11,373
17,358
-
28,731
3,663
The following table summarizes our started or completed unsold homes and models, excluding unconsolidated joint ventures,
in active and substantially completed communities. The increase in the total homes from October 31, 2018 to October 31, 2019 is primarily
due to the increase in community count during the period, along with a planned increase of additional unsold homes in certain markets to
take advantage of increased sales pace.
Northeast
Mid-Atlantic
Midwest
Southeast
Southwest
West
Total
October 31, 2019
Unsold
Homes Models
12
12
10
15
12
19
80
58
63
31
78
320
213
763
October 31, 2018
Unsold
Homes Models
5
19
10
11
14
12
71
24
38
19
62
335
93
571
Total
70
75
41
93
332
232
843
Total
29
57
29
73
349
105
642
Started or completed unsold homes and
models per active selling communities (1)
5.4
0.6
6.0
4.6
0.6
5.2
(1) Active selling communities (which are communities that are open for sale with ten or more home sites available) were 141 and 123
at October 31, 2019 and 2018, respectively. This ratio does not include substantially completed communities, which are communities
with less than ten home sites available.
31
Other Balance Sheet Activities
Homebuilding – Restricted cash and cash equivalents increased $8.1 million from October 31, 2018 to $20.9 million at October
31, 2019. The increase was primarily due to cash collateral for new letters of credit issued during the period.
Investments in and advances to unconsolidated joint ventures increased $3.3 million during the fiscal year ended October 31,
2019 compared to October 31, 2018. The increase was primarily due to the income from two of our joint ventures during fiscal 2019, along
with new capital contributions for existing joint ventures and a new joint venture during fiscal 2019, partially offset by a note receivable
from one of our joint ventures that was paid off the fourth quarter of fiscal 2019, along with partner distributions during the period. As of
October 31, 2019 and October 31, 2018, we had investments in ten and nine unconsolidated homebuilding joint ventures,
respectively, and one unconsolidated land development joint venture for both periods. We have no guarantees associated with our
unconsolidated joint ventures, other than guarantees limited only to performance and completion of development, environmental
indemnification and standard warranty and representation against fraud, misrepresentation and similar actions, including a voluntary
bankruptcy.
Receivables, deposits and notes, net increased $9.7 million from October 31, 2018 to $44.9 million at October 31, 2019. The
increase was primarily due to an increase in receivables for reimbursements of expenditures in connection with certain structured lot option
agreements, along with increased receivables related to the timing of home closings during the period, as well as a new insurance receivable
for premium adjustments and a new receivable related to the funding of the Satisfaction and Discharge as described under “ – Capital
Resources and Liquidity”. These increases were partially offset by a decrease related the return of a municipal receivable during the period.
Prepaid expenses and other assets were as follows as of:
(In thousands)
Prepaid insurance
Prepaid project costs
Other prepaids
Other assets
Total
October 31, 2019 October 31, 2018
$2,514
28,667
7,505
464
$39,150
$2,061
32,015
10,808
820
$45,704
Dollar Change
$(453)
3,348
3,303
356
$6,554
Prepaid insurance decreased slightly due to the timing of premium payments. These costs are amortized over the life of the
associated insurance policy, which can be one to three years. Prepaid project costs consist of community specific expenditures that are
used over the life of the community. Such prepaids are expensed as homes are delivered, and therefore have increased as our community
count has increased. Other prepaids increased primarily due to costs associated with the refinancing of our senior secured revolving credit
facility in the fourth quarter of fiscal 2019.
Financial services assets consist primarily of residential mortgages receivable held for sale of which $163.0 million and $129.0
million at October 31, 2019 and 2018, 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, 2018 was primarily related to an increase in the volume of loans
originated during the fourth quarter of 2019 compared to the fourth quarter of 2018, partially offset by a decrease in the average loan value.
Nonrecourse mortgages secured by inventory increased to $203.6 million at October 31, 2019, from $95.6 million at October
31, 2018. The increase was primarily due to a new mortgage on several communities that are part of a consolidated joint venture entered
into in the second quarter of fiscal 2019, along with new mortgages for other communities in most of our segments obtained during fiscal
2019, as well as additional loan borrowings on existing mortgages, partially offset by the payment of existing mortgages during the period.
Accounts payable and other liabilities are as follows as of:
(In thousands)
Accounts payable
Reserves
Accrued expenses
Accrued compensation
Other liabilities
Total
October 31, 2019 October 31, 2018
$127,795
99,229
14,884
53,200
9,791
$304,899
$141,667
92,083
19,208
53,157
14,078
$320,193
Dollar Change
$13,872
(7,146)
4,324
(43)
4,287
$15,294
The increase in accounts payable was primarily due to the increase in deliveries in the fourth quarter of fiscal 2019 as compared
to the fourth quarter of fiscal 2018. Reserves decreased during the period, primarily due to a reduction in our construction defect reserves in
connection with our annual assessment as our loss experience has continued to improve over the past few years. Accrued expenses
increased primarily due to accruals for legal fees associated with the 2019 Transactions (as previously defined). Other liabilities increased
primarily due to several new municipal loans and bonds for land development issued during the period.
Customers’ deposits increased $5.8 million from October 31, 2018 to $35.9 million at October 31, 2019. The increase was
primarily related to the increase in backlog during the year.
32
Liabilities from inventory not owned increased $77.6 million to $141.0 million at October 31, 2019. The increase was due an
increase in land banking transactions during the period, along with an increase in the sale and leaseback of certain model homes, both of
which are accounted for as financing transactions as described above.
Accrued interest decreased $16.5 million to $19.1 million at October 31, 2019. The decrease was primarily due to interest
payments made on debt in connection with the 2019 Transactions (as previously defined) during the fourth quarter of fiscal 2019.
Financial Services (liabilities) increased $25.7 million from $143.4 million at October 31, 2018, to $169.1 million at October
31, 2019. The increase is 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.
Results of Operations
Total Revenues
Compared to the prior period, revenues increased (decreased) as follows:
(Dollars in thousands)
Homebuilding:
Sale of homes
Land sales
Other revenues
Financial services
Total change
Total revenues percent change
Homebuilding
October 31, 2019
Year Ended
October 31, 2018
October 31, 2017
$43,454
(15,066)
(3,502)
797
$25,683
1.3%
$(433,805 )
(24,319 )
3,080
(5,388 )
$(460,432 )
$(260,757)
(27,445)
1,494
(13,874)
$(300,582)
(18.8 )%
(10.9)%
Sale of homes revenues increased $43.5 million, or 2.3%, for the year ended October 31, 2019, decreased $433.8 million, or
18.5%, for the year ended October 31, 2018, and decreased $260.8 million, or 10.0%, for the year ended October 31, 2017 as compared to
the same period of the prior year. The increased revenues in fiscal 2019 were primarily due to the number of home deliveries increasing
2.0%, and the average price per home increasing to $394,194 in fiscal 2019 from $393,280 in fiscal 2018. The increase in deliveries in
fiscal 2019 were primarily due to the result of an increase in community count in fiscal 2019 as compared to fiscal 2018 of 14.6%. The
decreased revenues in fiscal 2018 were primarily due to the number of home deliveries decreasing 13.5% and the average price per home
decreasing to $393,280 in fiscal 2018 from $417,714 in fiscal 2017. The decreased revenues in fiscal 2017 were primarily due to the
number of home deliveries decreasing 13.3%, partially offset by the average price per home increasing to $417,714 in fiscal 2017 from
$402,350 in fiscal 2016. The decrease in fiscal 2018 and 2017 deliveries were primarily the result of a reduction in community count by
5.4% and 22.2%, respectively. The fluctuations in average prices for fiscal 2019, 2018, and 2017 were primarily the result of geographic
and community mix of our deliveries. For fiscal 2018, there were also home price decreases (which we increase or decrease in communities
depending on the respective community’s performance), partially offset by price increases in some communities primarily in the West.
For fiscal 2017, we were also able to raise home prices in certain communities. For further detail on changes in segment revenues see
“Homebuilding Operations by Segment” below. For further detail on land sales and other revenue, see the section titled “Land Sales and
Other Revenues” below.
33
Information on homes delivered by segment is set forth below:
(Housing Revenue in thousands)
Northeast:
Housing revenues
Homes delivered
Average price
Mid-Atlantic:
Housing revenues
Homes delivered
Average price
Midwest:
Housing revenues
Homes delivered
Average price
Southeast:
Housing revenues
Homes delivered
Average price
Southwest:
Housing revenues
Homes delivered
Average price
West:
Housing revenues
Homes delivered
Average price
Consolidated total:
Housing revenues
Homes delivered
Average price
Unconsolidated joint ventures:(1)
Housing revenues
Homes delivered
Average price
Year Ended
October 31, 2019 October 31, 2018 October 31, 2017
$116,889
192
$608,797
$356,674
652
$547,046
$203,734
680
$299,609
$219,860
545
$403,413
$627,201
1,866
$336,121
$425,324
1,011
$420,696
$96,012
178
$539,393
$354,153
672
$527,013
$196,307
662
$296,536
$237,948
596
$399,242
$637,568
1,873
$340,399
$384,240
866
$443,695
$1,949,682
4,946
$394,194
$1,906,228
4,847
$393,280
$485,324
774
$627,034
$599,979
984
$609,735
$166,752
351
$475,077
$463,271
856
$541,205
$199,009
640
$310,951
$257,066
614
$418,675
$826,422
2,357
$350,624
$427,513
784
$545,297
$2,340,033
5,602
$417,714
$310,573
547
$567,774
(1) Represents housing revenue 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 20
to the Consolidated Financial Statements for a further discussion of our joint ventures.
The increase in housing revenues during year ended October 31, 2019, as compared to year ended October 31, 2018, was
primarily attributed to our increased deliveries, as our community count has increased year over year, and by the increase in average sales
price. Housing revenues in fiscal 2019 increased in all of our homebuilding segments combined by 2.3%, and average sales price increased
by 0.2%, excluding unconsolidated joint ventures. In our homebuilding segments, homes delivered increased in fiscal 2019 as compared
to fiscal 2018 by 7.9%, 2.7% and 16.7% in the Northeast, Midwest and West, respectively, and decreased by 3.0%, 8.6% and 0.4% in the
Mid-Atlantic, Southeast and Southwest, respectively. Overall in fiscal 2019 as compared to fiscal 2018 homes delivered increased 2.0%
across all our segments, excluding unconsolidated joint ventures.
The decrease in housing revenues during year ended October 31, 2018, as compared to year ended October 31, 2017, was
primarily attributed to our decreased deliveries, as our community count decreased year over year, and by the decrease in average sales
price. Housing revenues in fiscal 2018 decreased in all of our homebuilding segments combined by 18.5%, and average sales price
decreased by 5.8%, excluding unconsolidated joint ventures. In our homebuilding segments, homes delivered decreased in fiscal 2018 as
compared to fiscal 2017 by 49.3%, 21.5%, 2.9% and 20.5% in the Northeast, Mid-Atlantic, Southeast and Southwest, respectively, and
increased by 3.4% and 10.5% in the Midwest and West, respectively. Overall in fiscal 2018 as compared to fiscal 2017 homes delivered
decreased 13.5% across all our segments, excluding unconsolidated joint ventures.
34
Quarterly housing revenues and net sales contracts by segment, excluding unconsolidated joint ventures, for the years ended
October 31, 2019, 2018 and 2017 are set forth below (net contracts are defined as new contracts executed during the period for the purchase
of homes, less cancellations of contracts in the same period):
(In thousands)
Housing revenues:
Northeast
Mid-Atlantic
Midwest
Southeast
Southwest
West
Consolidated total
Sales contracts (net of cancellations):
Northeast
Mid-Atlantic
Midwest
Southeast
Southwest
West
Consolidated total
(In thousands)
Housing revenues:
Northeast
Mid-Atlantic
Midwest
Southeast
Southwest
West
Consolidated total
Sales contracts (net of cancellations):
Northeast
Mid-Atlantic
Midwest
Southeast
Southwest
West
Consolidated total
(In thousands)
Housing revenues:
Northeast
Mid-Atlantic
Midwest
Southeast
Southwest
West
Consolidated total
Sales contracts (net of cancellations):
Northeast
Mid-Atlantic
Midwest
Southeast
Southwest
West
Consolidated total
Quarter Ended
October 31,
2019
July 31,
2019
April 30,
2019
January 31,
2019
$70,650
135,866
68,714
76,414
213,089
127,413
$692,146
$37,860
86,296
54,682
69,765
166,723
102,460
$517,786
$20,694
86,811
47,261
50,217
152,615
110,251
$467,849
$37,560
99,807
58,794
58,648
202,553
131,483
$588,845
$13,040
80,818
42,870
49,346
143,634
97,844
$427,552
$62,580
118,245
68,744
64,772
192,630
120,616
$627,587
$12,505
53,179
44,889
43,883
117,863
89,816
$362,135
$34,950
81,514
37,046
40,460
115,338
57,018
$366,326
Quarter Ended
October 31,
2018
July 31,
2018
April 30,
2018
January 31,
2018
$25,606
99,493
67,395
72,828
193,000
135,353
$593,675
$16,044
84,027
44,167
41,126
123,485
83,933
$392,782
$26,701
79,593
45,579
47,472
157,406
86,108
$442,859
$18,045
76,324
43,596
71,381
177,174
102,183
$488,703
$23,513
104,058
42,816
60,974
158,958
77,798
$468,117
$15,278
117,399
67,308
62,741
198,487
93,213
$554,426
$20,192
71,009
40,517
56,674
128,204
84,981
$401,577
$25,363
63,213
49,416
50,455
141,458
69,397
$399,302
Quarter Ended
October 31,
2017
July 31,
2017
April 30,
2017
January 31,
2017
$27,913
149,881
72,944
78,267
209,223
128,555
$666,783
$24,407
77,112
38,139
56,354
142,926
91,048
$429,986
35
$40,015
113,111
40,620
68,408
209,041
103,087
$574,282
$26,648
97,017
48,257
73,896
177,285
103,342
$526,445
$45,917
100,120
41,794
54,005
224,898
100,819
$567,553
$29,918
123,045
61,489
55,577
227,500
142,522
$640,051
$52,907
100,159
43,651
56,386
183,260
95,052
$531,415
$38,045
102,246
45,566
46,451
170,884
84,423
$487,615
Contracts per average active selling community in fiscal 2019 were 39.0 compared to fiscal 2018 of 35.9. Our reported level
of sales contracts (net of cancellations) has been positively impacted by an increase in community count, along with an increase in the
pace of sales in most of the Company’s segments during fiscal 2019. Cancellation rates represent the number of cancelled contracts in the
quarter divided by the number of gross sales contracts executed in the quarter. For comparison, the following are historical cancellation
rates, excluding unconsolidated joint ventures:
Quarter
First
Second
Third
Fourth
2019
2018
2017
2016
2015
24 %
19 %
19 %
21 %
18 %
17 %
19 %
23 %
19 %
18 %
19 %
22 %
20 %
19 %
21 %
20 %
16 %
16 %
20 %
20 %
Another common and meaningful way to analyze our cancellation trends is to compare the number of contract cancellations
as a percentage of the beginning backlog. The following table provides this historical comparison, excluding unconsolidated joint ventures.
Quarter
First
Second
Third
Fourth
2019
2018
2017
2016
2015
16 %
20 %
16 %
14 %
12 %
15 %
14 %
13 %
12 %
16 %
13 %
12 %
13 %
14 %
12 %
11 %
11 %
14 %
13 %
12 %
Most cancellations occur within the legal rescission period, which varies by state but is generally less than two weeks after
the signing of the contract. Cancellations also occur as a result of a buyer's failure to qualify for a mortgage, which generally occurs during
the first few weeks after signing. As shown in the tables above, the contract cancellations over the past several years have been within
what we believe to be a normal range. However, market conditions remain uncertain and it is difficult to predict what cancellation rates
will be in the future.
An important indicator of our future results is recently signed contracts and our home contract backlog for future deliveries.
Our consolidated contract backlog, excluding unconsolidated joint ventures, by segment is set forth below:
(Dollars in thousands)
Northeast:
Total contract backlog
Number of homes
Mid-Atlantic: (1)
Total contract backlog
Number of homes
Midwest:
Total contract backlog
Number of homes
Southeast:
Total contract backlog
Number of homes
Southwest:
Total contract backlog
Number of homes
West:
Total contract backlog
Number of homes
Totals: (1)
Total consolidated contract backlog
Number of homes
October 31,
October 31,
2019
2018
October 31,
2017
$86,557
152
$30,496
51
$51,778
98
$193,387
343
$180,546
296
$185,123
309
$122,681
450
$107,149
394
$121,921
282
$108,137
251
$230,898
663
$180,854
523
$124,700
301
$138,448
311
$880,144
2,191
$745,630
1,826
$98,969
382
$120,382
285
$177,818
509
$173,963
400
$808,033
1,983
(1) Contract backlog as of October 31, 2019 excludes 29 homes that were sold to one of our joint ventures at the time of the joint venture
formation.
Contract backlog dollars increased 18.0% as of October 31, 2019 compared to October 31, 2018, and the number of homes in
backlog increased 20.0% for the same period. The increase in backlog was driven by a 14.3% increase in net contracts and the increase in
community count for the year ended October 31, 2019 compared to the prior fiscal year. In the month of November 2019, excluding
unconsolidated joint ventures, we signed an additional 404 net contracts amounting to $159.1 million in contract value.
Total cost of sales on our Consolidated Statements of Operations includes expenses for consolidated housing and land and lot
sales, including inventory impairment loss and land option write-offs (defined as “land charges” in the tables below). A breakout of such
expenses for housing sales and homebuilding gross margin is set forth below.
36
Homebuilding gross margin before cost of sales interest expense and land charges is a non-GAAP financial measure. This
measure should not be considered as an alternative to homebuilding gross margin determined in accordance with GAAP as an indicator of
operating performance.
Management believes this non-GAAP measure enables investors to better understand our operating performance. This
measure is also useful internally, helping management evaluate our operating results on a consolidated basis and relative to other companies
in our industry. In particular, the magnitude and volatility of land charges for the Company, and for other homebuilders, have been
significant and, as such, have made financial analysis of our industry more difficult. Homebuilding metrics excluding land charges, as well
as interest amortized to cost of sales, and other similar presentations prepared by analysts and other companies are frequently used to assist
investors in understanding and comparing the operating characteristics of homebuilding activities by eliminating many of the differences
in companies’ respective level of impairments and levels of debt.
(Dollars in thousands)
Sale of homes
Cost of sales, excluding interest expense and land charges
Homebuilding gross margin, before cost of sales interest expense and land
charges
Cost of sales interest expense, excluding land sales interest expense
Homebuilding gross margin, after cost of sales interest expense, before land
charges
Land charges
Homebuilding gross margin
Gross margin percentage
Gross margin percentage, before cost of sales interest expense and land
charges
Gross margin percentage, after cost of sales interest expense, before land
charges
October 31,
2019
$1,949,682
1,596,237
Year Ended
October 31,
2018
$1,906,228
1,555,894
October 31,
2017
$2,340,033
1,937,116
353,445
70,520
282,925
6,288
$276,637
350,334
56,588
293,746
3,501
$290,245
14.2 %
15.2 %
18.1 %
18.4 %
14.5 %
15.4 %
402,917
76,902
326,015
17,813
$308,202
13.2 %
17.2 %
13.9 %
Cost of sales expenses as a percentage of consolidated home sales revenues are presented below:
Sale of homes
Cost of sales, excluding interest expense and land charges:
Housing, land and development costs
Commissions
Financing concessions
Overheads
Total cost of sales, before interest expense and land charges
Cost of sales interest
Land charges
Gross margin percentage
Gross margin percentage, before cost of sales interest expense and land
charges
Gross margin percentage, after cost of sales interest expense and before land
charges
October 31,
2019
100.0 %
Year Ended
October 31,
2018
100 %
October 31,
2017
100 %
72.1 %
3.7 %
1.4 %
4.7 %
81.9 %
3.6 %
0.3 %
14.2 %
71.9 %
3.6 %
1.2 %
4.9 %
81.6 %
3.0 %
0.2 %
15.2 %
18.1 %
18.4 %
14.5 %
15.4 %
73.1 %
3.4 %
1.2 %
5.1 %
82.8 %
3.3 %
0.7 %
13.2 %
17.2 %
13.9 %
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 14.2% for the year ended October 31, 2019 compared to 15.2% for the same period last year. This decrease was primarily
due to the increase in cost of sales interest as previously discussed in “ – Overview.” Also contributing to the decrease is the mix of
communities delivering compared to the same period of the prior year, along with a slight increase in direct costs and financing concessions.
Total homebuilding gross margin percentage increased to 15.2% for the year ended October 31, 2018 compared to 13.2% for the same
period of the prior year. This increase was primarily due to the mix of communities delivering homes and the reduction of our warranty
reserves, as a result of our annual analysis performed in the fourth quarter of each year, along with a $6.3 million benefit from a one-time
credit related to a land development reimbursement from a municipality in California. For the years ended October 31, 2019, 2018 and
2017, gross margin was favorably impacted by the reversal of prior period inventory impairments of $37.7 million, $51.7 million and $74.4
million, respectively, which represented 1.9%, 2.7% and 3.2%, respectively, of “Sale of homes” revenue.
37
Reflected as inventory impairment loss and land option write-offs in cost of sales (“land charges”), we have written off or
written down certain inventories totaling $6.3 million, $3.5 million and $17.8 million during the years ended October 31, 2019, 2018 and
2017, respectively, to their estimated fair value. See Note 12 to the Consolidated Financial Statements for an additional discussion. During
the years ended October 31, 2019, 2018 and 2017, we wrote off residential land options and approval and engineering costs totaling $3.6
million, $1.4 million and $2.7 million, respectively, which are included in the total land charges mentioned above. Option, approval and
engineering costs are written off when a community’s pro forma profitability is not projected to produce adequate returns on the investment
commensurate with the risk and when we believe it is probable we will cancel the option, or when a community is redesigned engineering
costs related to the initial design are written off. Such write-offs were located in all segments in fiscal 2019, 2018 and 2017. The inventory
impairments amounted to $2.7 million, $2.1 million and $15.1 million for the years ended October 31, 2019, 2018 and 2017, respectively.
It is difficult to predict impairment levels, and should it become necessary or desirable to have additional land sales, further lower prices,
or should the estimates or expectations used in determining estimated cash flows or fair value decrease or differ from current estimates in
the future, we may need to recognize additional impairments.
Below is a breakdown of our lot option walk-aways and impairments by segment for fiscal 2019. In fiscal 2019, we walked
away from 22.3% of all the lots we controlled under option contracts. The remaining 77.7% of our option lots are in communities that we
believe remain economically feasible.
The following table represents lot option walk-aways by segment for the year ended October 31, 2019:
(Dollars in millions)
Northeast
Mid-Atlantic
Midwest
Southeast
Southwest
West
Total
Dollar
Amount
of Walk
Number of
Walk-
Away
Away
$0.6
0.5
0.9
0.3
0.6
0.7
$3.6
Lots
880
976
901
825
778
793
5,153
% of
Walk-
Away
Lots
17.1 %
18.9 %
17.5 %
16.0 %
15.1 %
15.4 %
100.0 %
Walk-
Away
Lots as a
% of Total
Option
Lots
23.9 %
25.0 %
26.3 %
21.7 %
13.3 %
32.0 %
22.3 %
Total
Option
Lots(1)
3,681
3,906
3,427
3,806
5,856
2,481
23,157
(1) Includes lots optioned at October 31, 2019 and lots optioned that the Company walked away from in the year ended October 31, 2019.
The following table represents impairments by segment for the year ended October 31, 2019:
(In millions)
Northeast
Mid-Atlantic
Midwest
Southeast
Southwest
West
Total
Dollar
Amount of
Impairment
$0.2
0.3
1.4
0.7
0.1
-
$2.7
% of
Impairments
7.4 %
11.1 %
51.9 %
25.9 %
3.7 %
- %
100.0 %
Pre-
Impairment
Value(1)
$7.8
1.7
4.6
2.2
1.2
-
$17.5
% of Pre-
Impairment
Value
2.6 %
17.6 %
30.4 %
31.8 %
8.3 %
- %
15.4 %
(1) Represents carrying value, net of prior period impairments, if any, at the time of recording the applicable period’s impairments.
Land Sales and Other Revenues
Land sales and other revenues consist primarily of land and lot sales. A breakout of land and lot sales is set forth below:
(In thousands)
Land and lot sales
Cost of sales, excluding interest
Land and lot sales gross margin, excluding interest
Land and lot sales interest expense
Land and lot sales gross margin, including interest
Year Ended
October 31,
October 31,
2019
$9,211
8,540
671
205
$466
2018
$24,277
10,661
13,616
4,097
$9,519
October 31,
2017
$48,596
24,688
23,908
11,634
$12,274
Land sales are ancillary to our residential homebuilding operations and are expected to continue in the future but may
significantly fluctuate up or down. Although we budget land sales, they are often dependent upon receiving approvals and entitlements,
38
the timing of which can be uncertain. As a result, projecting the amount and timing of land sales is difficult. There were six land sales in
the year ended October 31, 2019, compared to four in the same period of the prior year, resulting in a $15.1 million decrease in land sales
revenue. Despite an increase in the number of land sales in fiscal 2019, there was a significant land sale in the Northeast segment in fiscal
2018 which resulted in the decrease in land sales revenue during fiscal 2019. There were four land sales in the year ended October 31,
2018, compared to ten in the same period of the prior year, resulting in a $24.3 million decrease in land sales revenue.
Land sales and other revenues decreased $18.6 million for the year ended October 31, 2019 and decreased $21.2 million for
the year ended October 31, 2018 compared to the same periods in the prior year. Other revenues include income from contract cancellations
where the deposit has been forfeited due to contract terminations, interest income, cash discounts and miscellaneous one-time receipts.
The decrease from fiscal 2018 to fiscal 2019 and the decrease from fiscal 2017 to fiscal 2018 was mainly due to the fluctuations in land
sales revenue noted above. Slightly offsetting the decrease from fiscal 2017 to fiscal 2018 was the gain recognized from the sale of our
former corporate headquarters building in the first quarter of fiscal 2018.
Homebuilding Selling, General and Administrative
Homebuilding selling, general and administrative (“SGA”) expenses increased $7.6 million to $166.8 million for the year
ended October 31, 2019 as compared to the year ended October 31, 2018. The increase was primarily related to a decrease of joint venture
management fees received of $4.2 million, which offset general and administrative expenses, as a result of less unconsolidated joint venture
deliveries, and $3.3 million less of a reduction of our construction defect reserves (a $6.9 million reduction in fiscal 2019 as compared to
$10.2 million reduction in fiscal 2018) based on our annual actuarial analysis. SGA decreased $37.1 million to $159.2 million for the year
ended October 31, 2018 as compared to the year ended October 31, 2017. The decrease was primarily related to a $10.2 million reduction
in our construction defect reserves based on our annual actuarial analysis, along with a $2.3 million reduction for a litigation settlement,
and $12.5 million of additional reserves recorded in fiscal 2017 related to the Grandview II litigation. The remaining decrease is due to the
reduction of our community count, a decrease in insurance costs and the increase of joint venture management fees received, which offset
general and administrative expenses, as a result of more joint venture deliveries.
Homebuilding Operations by Segment
Financial information relating to the Company’s operations was as follows:
Segment Analysis (Dollars in thousands, except average sales price)
Northeast
Homebuilding revenue
Income before income taxes
Homes delivered
Average sales price
Mid-Atlantic
Homebuilding revenue
Income before income taxes
Homes delivered
Average sales price
Midwest
Homebuilding revenue
(Loss) income before income taxes
Homes delivered
Average sales price
Southeast
Homebuilding revenue
Loss before income taxes
Homes delivered
Average sales price
Southwest
Homebuilding revenue
Income before income taxes
Homes delivered
Average sales price
West
Homebuilding revenue
Income before income taxes
Homes delivered
Average sales price
Years Ended October 31,
Variance 2019
Compared
Variance 2018
Compared
2019
to 2018
2018
to 2017
2017
$124,372
$20,954
192
$608,797
$357,247
$14,327
652
$547,046
$204,461
$(649)
680
$299,609
$220,082
$(10,060)
545
$403,413
$629,344
$33,459
1,866
$336,121
$425,516
$40,018
1,011
$420,696
$8,076
$85
14
$69,404
$2,557
$(4,430)
(20)
$20,033
$7,862
$(2,177)
18
$3,073
$(21,538)
$(146)
(51)
$4,171
$(8,938)
$(16,393)
(7)
$(4,278)
$40,889
$(7,969)
145
$(22,999)
39
$116,296
$20,869
178
$539,393
$354,690
$18,757
672
$527,013
$196,599
$1,528
662
$296,536
$241,620
$(9,914)
596
$399,242
$638,282
$49,852
1,873
$340,399
$384,627
$47,987
866
$443,695
$(93,213)
$18,569
(173)
$64,316
$(109,436)
$1,566
(184)
$(14,192)
$(3,171)
$2,679
22
$(14,415)
$(18,782)
$(3,715)
(18)
$(19,433)
$(189,221)
$(21,688)
(484)
$(10,225)
$(45,919)
$28,351
82
$(101,602)
$209,509
$2,300
351
$475,077
$464,126
$17,191
856
$541,205
$199,770
$(1,151 )
640
$310,951
$260,402
$(6,199 )
614
$418,675
$827,503
$71,540
2,357
$350,624
$430,546
$19,636
784
$545,297
Homebuilding Results by Segment
Northeast – Homebuilding revenues increased 6.9% in fiscal 2019 compared to fiscal 2018 primarily due to a 7.9% increase
in homes delivered and a 12.9% increase in average selling price, partially offset by a $12.8 million decrease in land sales and other
revenue. The increase in average sales price was the result of new communities delivering higher priced, larger single family homes and
townhomes in higher-end submarkets of the segment in fiscal 2019 compared to certain communities delivering in fiscal 2018 that had
lower priced, single family homes and townhomes in lower-end submarkets of the segment that are no longer delivering.
Income before income taxes increased $0.1 million to $21.0 million, which was mainly due to the increase in homebuilding
revenues discussed above and the increase in gross margin percentage before interest expense for fiscal 2019 compared to fiscal 2018.
This increase was partially offset by a $1.0 million decrease in income from unconsolidated joint ventures and a $0.5 million increase in
selling, general and administrative costs for fiscal 2019 compared to fiscal 2018.
Homebuilding revenues decreased 44.5% in fiscal 2018 compared to fiscal 2017 primarily due to a 49.3% decrease in homes
delivered, partially offset by a 13.5% increase in average selling price. The increase in average sales price was the result of some new
communities delivering higher priced single family homes in higher-end submarkets of the segment in fiscal 2018 compared to
certain communities delivering in fiscal 2017 that had lower priced single family homes in similar submarkets of the segment that are no
longer delivering. Also impacting the increase in average sales price was higher option revenue and location premiums and the result of
our ability to raise prices in fiscal 2018 in certain communities that were delivering homes during both periods.
Income before income taxes increased $18.6 million to $20.9 million, which was mainly due a $24.6 million improvement in
loss from unconsolidated joint ventures to income, along with a $10.6 million decrease in selling, general and administrative costs and a
$2.8 million decrease in inventory impairment loss and land option write-offs. The increase was partially offset by the decrease in
homebuilding revenues discussed above and the decrease in gross margin percentage before interest expense for fiscal 2018 compared to
fiscal 2017.
Mid-Atlantic – Homebuilding revenues increased 0.7% in fiscal 2019 compared to fiscal 2018 primarily due to a 3.8% increase
in average sales price, partially offset by a 3.0% decrease in homes delivered. The increase in average sales price was the result of new
communities delivering higher priced, larger single family homes in higher-end submarkets of the segment in fiscal 2019 compared to
certain communities delivering in fiscal 2018 that had lower priced, single family homes and townhomes in mid to higher-end submarkets
of the segment that are no longer delivering.
Income before income taxes decreased $4.4 million to $14.3 million, due mainly to a $0.6 million increase in inventory
impairment loss and land option write-offs and a slight decrease in gross margin percentage before interest expense for fiscal 2019
compared to fiscal 2018.
Homebuilding revenues decreased 23.6% in fiscal 2018 compared to fiscal 2017 primarily due to a 21.5% decrease in homes
delivered and a 2.6% decrease in average sales price. The decrease in average sales price was the result of new communities delivering
lower priced, smaller single family homes in lower-end submarkets of the segment in fiscal 2018 compared to certain communities
delivering in fiscal 2017 that had higher priced, larger single family homes in higher-end submarkets of the segment that are no longer
delivering.
Income before income taxes increased $1.6 million to $18.8 million, due mainly to a $2.3 million decrease in selling, general
and administrative costs and a $1.9 million decrease in inventory impairment loss and land option write-offs and a slight increase in gross
margin percentage before interest expense for fiscal 2018 compared to fiscal 2017.
Midwest – Homebuilding revenues increased 4.0% in fiscal 2019 compared to fiscal 2018 primarily due to a 2.7% increase in
homes delivered and a 1.0% increase in average sales price. The increase in average sales price was the result of new communities
delivering higher priced, larger single family homes in higher-end submarkets of the segment in fiscal 2019 compared to
certain communities delivering in fiscal 2018 that had lower priced, smaller single family homes in lower-end submarkets of the segment
that are no longer delivering. Also impacting the increase in average sales price was higher option revenue in certain communities.
Income before taxes decreased $2.2 million to a loss of $0.6 million. The decrease was primarily due to a $2.0 million increase
in selling, general and administrative costs and a $2.1 million increase in inventory impairment loss and land option write-offs, while gross
margin percentage before interest expense was flat for fiscal 2019 compared to fiscal 2018.
Homebuilding revenues decreased 1.6% in fiscal 2018 compared to fiscal 2017. There was a 4.6% decrease in average sales
price, partially offset by a 3.4% increase in homes delivered. The decrease in average sales price was the result of new communities
delivering lower priced, smaller single family homes in lower-end submarkets of the segment in fiscal 2018 compared to
certain communities delivering in fiscal 2017 that had higher priced, larger single family homes in higher-end submarkets of the segment
that are no longer delivering.
Loss before income taxes improved $2.7 million to income of $1.5 million. The improvement was primarily due to a $2.7
million decrease in selling, general and administrative costs and the $0.6 million decrease in loss from unconsolidated joint ventures,
partially offset by a slight decrease in gross margin percentage before interest expense.
40
Southeast – Homebuilding revenues decreased 8.9% in fiscal 2019 compared to fiscal 2018 primarily due to an 8.6% decrease
in homes delivered, partially offset by a 1.0% increase in average sales price. The increase in average sales price was the result of new
communities delivering higher priced, single family homes in higher-end submarkets of the segment in fiscal 2019 compared to
certain communities delivering in fiscal 2018 that had lower priced, smaller single family homes and townhomes in lower-end submarkets
of the segment that are no longer delivering. Also impacting the increase in average sales price was higher option revenue in certain
communities.
Loss before income taxes increased $0.1 million to a loss of $10.0 million due to the decrease in homebuilding revenue
discussed above and a $1.2 million increase in selling, general and administrative costs, partially offset by a $0.6 million decrease in
inventory impairment loss and land option write-offs, a $3.3 million improvement in loss from unconsolidated joint ventures to income
and a slight increase in gross margin percentage before interest expense for fiscal 2019 compared to fiscal 2018.
Homebuilding revenues decreased 7.2% in fiscal 2018 compared to fiscal 2017. The decrease was primarily due to a 2.9%
decrease in homes delivered and a 4.6% decrease in average sales price. The decrease in average sales price was the result of new
communities delivering lower priced, single family homes and townhomes in lower-end submarkets of the segment in fiscal 2018 compared
to some communities delivering in fiscal 2017 that had higher priced, larger single family homes and townhomes in higher-end submarkets
of the segment that are no longer delivering.
Loss before income taxes increased $3.7 million to a loss of $9.9 million due to the decrease in homebuilding revenue
discussed above, a $1.6 million increase in selling, general and administrative costs and a $2.9 million decrease in income from
unconsolidated joint ventures to a loss, partially offset by a $7.3 million decrease in inventory impairment loss and land option write-offs.
Additionally, the gross margin percentage before interest expense was flat for fiscal 2018 compared to fiscal 2017.
Southwest – Homebuilding revenues decreased 1.4% in fiscal 2019 compared to fiscal 2018 primarily due to a 0.4% decrease
in homes delivered and a 1.3% decrease in average sales price. The decrease in average sales price was the result of new communities
delivering lower priced, smaller single family homes in lower-end submarkets of the segment in fiscal 2019 compared to some communities
delivering in fiscal 2018 that had higher priced, larger single family homes in higher-end submarkets of the segment that are no longer
delivering.
Income before income taxes decreased $16.4 million to $33.5 million in fiscal 2019 mainly due to the decrease in
homebuilding revenues discussed above and a decrease in gross margin percentage before interest expense for fiscal 2019 compared to
fiscal 2018, partially offset by a $2.8 million increase in income from unconsolidated joint ventures and a $1.9 million decrease in selling,
general and administrative costs.
Homebuilding revenues decreased 22.9% in fiscal 2018 compared to fiscal 2017 primarily due to a 20.5% decrease in homes
delivered and a 2.9% decrease in average sales price. The decrease in average sales price was the result of new communities delivering
lower priced, smaller single family homes in lower-end submarkets of the segment in fiscal 2018 compared to some communities delivering
in fiscal 2017 that had higher priced, larger single family homes and townhomes in higher-end submarkets of the segment that are no
longer delivering.
Income before income taxes decreased $21.7 million to $49.9 million in fiscal 2018 mainly due to the decrease in
homebuilding revenues discussed above, partially offset by a $5.5 million increase in income from unconsolidated joint ventures.
Additionally, the gross margin percentage before interest expense was flat for fiscal 2018 compared to fiscal 2017.
West – Homebuilding revenues increased 10.6% in fiscal 2019 compared to fiscal 2018 primarily due to a 16.7% increase in
homes delivered, partially offset by a 5.2% decrease in average sales price. The decrease in average sales price was the result of new
communities delivering lower priced, smaller single family homes in lower-end submarkets of the segment in fiscal 2019 compared to
some communities delivering in fiscal 2018 that had higher priced, larger single family homes in higher-end submarkets of the segment
that are no longer delivering.
Income before income taxes decreased $8.0 million to $40.0 million in fiscal 2019 due mainly to a $4.1 million increase in
selling, general and administrative costs, a $3.2 million decrease in income from unconsolidated joint ventures to a loss and a slight
decrease in gross margin percentage before interest expense.
Homebuilding revenues decreased 10.7% in fiscal 2018 compared to fiscal 2017 primarily due to an 18.6% decrease in average
sales price and a $2.6 million decrease in land sales and other revenue, partially offset by 10.5% increase in homes delivered. The decrease
in average sales price was the result of new communities delivering lower priced, single family homes in lower-end submarkets of the
segment in fiscal 2018 compared to some communities delivering in fiscal 2017 that had higher priced, single family homes in higher-end
submarkets of the segment that are no longer delivering. Partially offsetting the decrease in average sales price was the impact of price
increases in certain communities within the segment.
Income before income taxes increased $28.4 million to $48.0 million in fiscal 2018 due mainly to an increase in gross margin
percentage before interest expense, along with a $3.6 million increase in income from unconsolidated joint ventures and a $1.8 million
decrease in inventory impairment loss and land option write-offs. This increase in income was partially offset by a $4.7 million increase
in selling, general and administrative costs.
41
Financial Services
Financial services consist primarily of originating mortgages from our home buyers, selling such mortgages in the secondary
market, and title insurance activities. We use mandatory investor commitments and forward sales of MBS to hedge our mortgage-related
interest rate exposure on agency and government loans. These instruments involve, to varying degrees, elements of credit and interest rate
risk. Credit risk associated with MBS forward commitments and loan sales transactions is managed by limiting our counterparties to
investment banks, federally regulated bank affiliates and other investors meeting our credit standards. Our risk, in the event of default by
the purchaser, is the difference between the contract price and fair value of the MBS forward commitments. For the years ended October
31, 2019, 2018 and 2017, our conforming conventional loan originations as a percentage of our total loans were 65.8%, 69.8% and 69.0%,
respectively. FHA/VA loans represented 29.8%, 24.6%, and 25.1%, respectively, of our total loans. The remaining 4.4%, 5.6% and 5.9%
of our loan originations represent jumbo and/or USDA loans. Profits and losses relating to the sale of mortgage loans are recognized when
legal control passes to the buyer of the mortgage and the sales price is collected.
During the years ended October 31, 2019, 2018, and 2017, financial services provided a $17.6 million, $18.2 million and
$26.4 million pretax profit, respectively. In fiscal 2019, financial services pretax profit decreased $0.6 million primarily due to the
geographic mix of title company activity within each period. In fiscal 2018, financial services pretax profit decreased $8.2 million
compared to fiscal 2017 due to the decrease in homebuilding deliveries, and the decrease in the basis point spread between the loans
originated and the implied rate from the sale of the loans as a result of the competitive financial services market and recent increases in
mortgage rates. In the market areas served by our wholly owned mortgage banking subsidiaries, 70.9%, 72.4%, and 67.8% of our noncash
home buyers obtained mortgages originated by these subsidiaries during the years ended October 31, 2019, 2018, and 2017, respectively.
Corporate General and Administrative
Corporate general and administrative expenses include the operations at our headquarters in New Jersey. These expenses
include payroll, stock compensation, legal expenses, rent and facility costs and other costs associated with our executive offices,
information services, human resources, corporate accounting, training, treasury, process redesign, internal audit, national and digital
marketing, construction services and administration of insurance, quality and safety. Corporate general and administrative expenses
decreased $3.3 million for the year ended October 31, 2019 compared to the year ended October 31, 2018, and increased $10.3 million for
the year ended October 31, 2018 compared to the year ended October 31, 2017. The decrease in expense for fiscal 2019 was due to
decreased legal fees (including litigation) related to financing transactions and higher costs for ongoing litigations involving the Company
during fiscal 2018 which did not recur in fiscal 2019, along with a decrease in stock compensation expense, primarily due to the cancellation
of certain stock awards that did not meet their performance criteria in fiscal 2019. Also impacting the decrease for fiscal 2019 is an increase
in the adjustment to reserves for self-insured medical claims, which were reduced based on claim estimates. The increase in expense for
fiscal 2018 was primarily due to increased legal (including litigation) fees related to our fiscal 2018 financing transactions and higher costs
for ongoing litigations involving the Company. Also contributing to the increase in corporate general and administrative expenses was rent
expense incurred during the year ended October 31, 2018, related to (i) the sale and leaseback of our former corporate headquarters building
for the period from November 2017 to February 2018, and (ii) our new corporate headquarters building which we moved into in February
2018. Additionally impacting the increase was an increase in stock compensation expense in fiscal 2018, as a result of lower expense in
fiscal 2017, resulting from the forfeiture of compensation under our long-term incentive plan due to the retirement of a senior executive,
along with the cancellation of certain stock awards that did not meet their performance criteria.
Other Interest
Other interest decreased $13.2 million to $90.1 million for the year ended October 31, 2019 compared to October 31, 2018,
and increased $6.0 million to $103.3 million for the year ended October 31, 2018 compared to October 31, 2017. Our assets that qualify
for interest capitalization (inventory under development) are less than our debt, and therefore a portion of interest not covered by qualifying
assets must be directly expensed. In fiscal 2019, the decrease was due to our assets that qualify for interest capitalization increasing by
more than our debt, therefore the amount of directly expensed interest decreased. In fiscal 2018, the increase was attributed to more interest
incurred as a result of the senior secured notes issued in July 2017 that have a higher interest rate than the senior secured notes which they
refinanced and additional amounts outstanding under the term loan facility in fiscal 2018 compared to fiscal 2017.
Loss on Extinguishment of Debt
As a result of the 2019 Transactions we consummated on October 31, 2019 and discussed above under “- Capital Resources
and Liquidity - Debt Transactions” and under Note 9 to the Consolidated Financial Statements. We incurred a $42.4 million loss on
extinguishment of debt, a majority of which was non-cash.
We incurred a $7.5 million loss on extinguishment of debt during the year ended October 31, 2018 due to several financing
and refinancing transactions completed in fiscal 2018 as described in Note 9 to the Consolidated Financial Statements under “ - Fiscal
2018.”
We incurred a $34.9 million loss on extinguishment of debt during the year ended October 31, 2017 due to three items that
occurred during fiscal 2017. First, we repurchased in open market transactions $31.5 million aggregate principal amount of Senior Notes
and 6,925 senior exchangeable note units representing $6.9 million stated amount of senior exchangeable note units. The aggregate
purchase price for these transactions was $30.8 million, plus accrued and unpaid interest. These transactions resulted in a gain on
extinguishment of debt of $7.8 million. Second, we incurred $0.4 million of costs associated with the Senior Secured Notes issued during
42
the fourth quarter of fiscal 2016. Third, we completed certain refinancing transactions as described in Note 9 to the Consolidated Financial
Statements under “ – Fiscal 2017,” which resulted in a loss on extinguishment of debt of $42.3 million.
Income (Loss) from Unconsolidated Joint Ventures
Income (loss) from unconsolidated joint ventures consists of our share of the earnings or losses of our joint ventures. Income
(loss) from unconsolidated joint ventures increased $4.9 million for the year ended October 31, 2019 from income of $24.0 million for the
year ended October 31, 2018 to income of $28.9 million. The increase is due to our share of income from certain of our joint ventures
delivering more homes resulting in increased profits for fiscal 2019 compared to fiscal 2018. Income (loss) from unconsolidated joint
ventures increased $31.0 million for the year ended October 31, 2018 from a loss of $7.0 million for the year ended October 31, 2017 to
income of $24.0 million. The increase is due to the recognition of our share of income from certain of our joint ventures delivering more
homes and increased profits in the current fiscal year as compared to the prior fiscal year when they reported losses primarily due to startup
costs.
Total Taxes
The total income tax expense of $2.4 million and $3.6 million for the years ended October 31, 2019 and 2018 was primarily
related to state tax expense from income generated that was not offset by tax benefits in states where we fully reserve the tax benefit from
net operating losses. The total income tax expense of $286.9 million for the year ended October 31, 2017 was primarily due to increasing
our valuation allowance to fully reserve against our deferred tax assets (“DTAs”). In addition, the same years were also impacted by state
tax expense from income generated in some states, which was not offset by tax benefits in other states that had losses for which we fully
reserve the net operating losses.
Deferred federal and state income tax assets primarily represent the deferred tax benefits arising from net operating loss
(“NOL”) carryforwards and temporary differences between book and tax income which will be recognized in future years as an offset
against future taxable income. If the combination of future years’ income (or loss) and the reversal of the timing differences results in a
loss, such losses can be carried forward to future years. In accordance with ASC 740, we evaluate our deferred tax assets (“DTAs”)
quarterly to determine if valuation allowances are required. ASC 740 requires that companies assess whether valuation allowances should
be established based on the consideration of all available evidence using a “more likely than not” standard.
As of October 31, 2019, we considered all available positive and negative evidence to determine whether, based on the weight
of that evidence, our valuation allowance for our DTAs was appropriate in accordance with ASC 740. As listed in Note 11 to the
Consolidated Financial Statements, in order of the weighting of each factor, is the available positive and negative evidence that we
considered in determining that it is more likely than not that all of our DTAs will not be realized. In analyzing these factors, overall the
negative evidence, both objective and subjective, outweighed the positive evidence. Based on this analysis, we determined that the current
valuation allowance for deferred taxes of $623.2 million as of October 31, 2019, which fully reserves for our DTAs, is appropriate.
Off-Balance Sheet Financing
In the ordinary course of business, we enter into land and lot option purchase contracts in order to procure land or lots for the
construction of homes. Lot option contracts enable us to control significant lot positions with a minimal capital investment and substantially
reduce the risks associated with land ownership and development. At October 31, 2019, we had $70.0 million in option deposits in cash and
letters of credit to purchase land and lots with a total purchase price of $1.3 billion. Our financial exposure is generally limited to forfeiture
of the nonrefundable deposits, letters of credit and other nonrefundable amounts incurred. We have no material third-party guarantees.
Unconsolidated Joint Ventures
As discussed in Note 20 – Investments in Unconsolidated Joint Ventures in the Notes to Consolidated Financial Statements,
we have investments in unconsolidated joint ventures in various markets where our homebuilding operations are located. Our
unconsolidated joint ventures had total combined assets of $539.7 million at October 31, 2019 and $602.0 million at October 31, 2018.
Our investments in unconsolidated joint ventures totaled $127.0 million at October 31, 2019 and $123.7 million at October 31, 2018. As
of October 31, 2019 and 2018, our unconsolidated joint ventures had outstanding debt totaling $186.9 and $236.7 million, respectively,
under separate construction loan agreements with different third-party lenders and affiliates of certain investment partners to finance their
respective land development activities, with the outstanding debt secured by the corresponding underlying property and related project
assets and non-recourse to us. While we and our unconsolidated joint venture partners provide certain guarantees and indemnities to the
lender, we do not have a guaranty or any other obligation to repay our outstanding debt or to support the value of the collateral underlying
the outstanding debt. We do not believe that our existing exposure under our guaranty and indemnity obligations related to the outstanding
debt is material to our consolidated financial statements. As discussed in Note 19 – Variable Interest Entities in the Notes to Consolidated
Financial Statements. We determined that none of our joint ventures at October 31, 2019 and 2018 were a variable interest entity. All our
unconsolidated joint ventures were accounted for under the equity method because we did not have a controlling financial interest.
43
Contractual Obligations
The following summarizes our aggregate contractual commitments at October 31, 2019.
Payments Due by Period (1)
(In thousands)
Long term debt (2)(3)(4)
Operating leases
Total
Total
$2,391,127
30,833
$2,421,960
$139,331
9,785
$149,116
$492,180
14,722
$506,902
Less than
1 year 1-3 years 3-5 years
More than
5 years
$440,704 $1,318,912
1,754
$445,276 $1,320,666
4,572
(1) Total contractual obligations exclude our accrual for uncertain tax positions of $1.3 million recorded for financial reporting purposes
as of October 31, 2019 because we were unable to make reasonable estimates as to the period of cash settlement with the respective
taxing authorities.
(2) Represents our senior unsecured term loan credit facility, senior secured and senior notes and other notes payable and $839.5 million
of related interest payments for the life of such debt.
(3) Does not include $203.6 million of nonrecourse mortgages secured by inventory. These mortgages have various maturities spread
over the next two to three years and are paid off as homes are delivered.
(4) Does not include the mortgage warehouse lines of credit made under our Master Repurchase Agreements. See“- Capital Resources
and Liquidity.” Also does not include our $125.0 million Secured Credit Facility under which there were no borrowings outstanding
as of October 31, 2019.
We had outstanding letters of credit and performance bonds of $19.2 million and $202.9 million, respectively, at October 31,
2019, related principally to our obligations to local governments to construct roads and other improvements in various developments. We
do not believe that any such letters of credit or bonds are likely to be drawn upon.
Inflation
Inflation has a long-term effect, because increasing costs of land, materials and labor result in increasing sale prices of our
homes. In general, these price increases have been commensurate with the general rate of inflation in our housing markets and have not
had a significant adverse effect on the sale of our homes. A significant risk faced by the housing industry generally is that rising house
construction costs, including land and interest costs, will substantially outpace increases in the income of potential purchasers and therefore
limit our ability to raise home sale prices, which may result in lower gross margins.
Inflation has a lesser short-term effect, because we generally negotiate fixed price contracts with many, but not all, of our
subcontractors and material suppliers for the construction of our homes. These prices usually are applicable for a specified number of
residential buildings or for a time period of between three to twelve months. Construction costs for residential buildings represent
approximately 54.0% of our homebuilding cost of sales for fiscal 2019.
Safe Harbor Statement
All statements in this Annual Report on Form 10-K that are not historical facts should be considered as “Forward-Looking
Statements” within the meaning of the “Safe Harbor” provisions of the Private Securities Litigation Reform Act of 1995. Such statements
involve known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements of the
Company to be materially different from any future results, performance or achievements expressed or implied by the forward-looking
statements. Such forward-looking statements include but are not limited to statements related to the Company's goals and expectations
with respect to its financial results for future financial periods. Although we believe that our plans, intentions and expectations reflected
in, or suggested by, such forward-looking statements are reasonable, we can give no assurance that such plans, intentions or expectations
will be achieved. By their nature, forward-looking statements: (i) speak only as of the date they are made, (ii) are not guarantees of future
performance or results and (iii) are subject to risks, uncertainties and assumptions that are difficult to predict or quantify. Therefore, actual
results could differ materially and adversely from those forward-looking statements as result of a variety of factors. Such risks, uncertainties
and other factors include, but are not limited to:
● Changes in general and local economic, industry and business conditions and impacts of a significant homebuilding downturn;
● Adverse weather and other environmental conditions and natural disasters;
● 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;
● The seasonality of the Company’s business;
44
● The availability and cost of suitable land and improved lots and sufficient liquidity to invest in such land and lots;
● Shortages in, and price fluctuations of, raw materials and labor, including due to changes in trade policies, including the imposition
of tariffs and duties on homebuilding materials and products and related trade disputes with and retaliatory measures taken by other
countries;
● Reliance on, and the performance of, subcontractors;
● Regional and local economic factors, including dependency on certain sectors of the economy, and employment levels affecting
home prices and sales activity in the markets where the Company builds homes;
Increases in cancellations of agreements of sale;
●
● Fluctuations in interest rates and the availability of mortgage financing;
● Changes in tax laws affecting the after-tax costs of owning a home;
● Operations through unconsolidated joint ventures with third parties;
● Government regulation, including regulations concerning development of land, the home building, sales and customer financing
processes, tax laws and the environment;
● Legal claims brought against us and not resolved in our favor, such as product liability litigation, warranty claims and claims made
by mortgage investors;
● Levels of competition;
● Successful identification and integration of acquisitions;
● Significant influence of the Company’s controlling stockholders;
● Availability of net operating loss carryforwards;
● Utility shortages and outages or rate fluctuations;
● Geopolitical risks, terrorist acts and other acts of war;
● Loss of key management personnel or failure to attract qualified personnel;
●
● Negative publicity.
Information technology failures and data security breaches; and
Certain risks, uncertainties and other factors are described in detail in Part I, Item 1 “Business” and Part I, Item 1A “Risk
Factors” in this Annual Report on Form 10-K as updated by our subsequent filings with the SEC. 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 Annual Report on Form 10-K.
ITEM 7A
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
A primary market risk facing us is interest rate risk on our long term debt, including debt instruments at variable interest rates.
In connection with our mortgage operations, mortgage loans held for sale and the associated mortgage warehouse lines of credit under
our Master Repurchase Agreements are subject to interest rate risk; however, such obligations reprice frequently and are short-term in
duration. In addition, we hedge the interest rate risk on mortgage loans by obtaining forward commitments from private investors.
Accordingly, the interest rate risk from mortgage loans is not material. We do not use financial instruments to hedge interest rate risk
except with respect to mortgage loans. We are also subject to foreign currency risk but we do not believe this risk is material. The following
tables set forth as of October 31, 2019 and 2018, our long-term debt obligations, principal cash flows by scheduled maturity, weighted-
average interest rates and estimated fair value (“FV”).
Long-Term Debt Tables
(Dollars in thousands)
Long term debt(1)(2):
Fixed rate
Long-Term Debt as of October 31, 2019 by Fiscal Year of Debt Maturity
2020
2021
2022
2023
2024
Thereafter
Total
FV at
10/31/19
$-
$-
$218,994
$0
$211,391
$1,118,720
$1,549,105
$1,310,638
Weighted-average interest rate
- %
- %
10.0 %
0 %
10.50 %
8.51 %
8.99 %
(1) Does not include the mortgage warehouse lines of credit made under our Master Repurchase Agreements. Also does not include our
$125.0 million Secured Credit Facility under which there were no borrowings outstanding as of October 31, 2019.
(2) Does not include $203.6 million of nonrecourse mortgages secured by inventory. These mortgages have various maturities spread
over the next two to three years and are paid off as homes are delivered.
45
(Dollars in thousands)
Long term debt(1)(2):
Fixed rate
Long-Term Debt as of October 31, 2018 by Fiscal Year of Debt Maturity
2019
2020
2021
2022
2023
Thereafter
Total
FV at
10/31/18
$-
$-
$75,000
$635,000
$-
$783,257
$1,493,257
$1,357,179
Weighted-average interest rate
- %
- %
9.50 %
8.21 %
- %
8.79 %
8.58 %
(1) Does not include the mortgage warehouse lines of credit made under our Master Repurchase Agreements. Also does not include our
$125.0 million Secured Credit Facility under which there were no borrowings outstanding as of October 31, 2018.
(2) Does not include $95.6 million of nonrecourse mortgages secured by inventory. These mortgages have various maturities spread
over the next two to three years and are paid off as homes are delivered.
ITEM 8
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial statements of Hovnanian Enterprises, Inc. and its consolidated subsidiaries are set forth herein beginning on
page 68.
ITEM 9
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A
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 October 31, 2019. 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.
Changes in Internal Control Over Financial Reporting
There was no change in the Company’s internal control over financial reporting that occurred during the quarter ended October
31, 2019 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such
term is defined in Exchange Act Rule 13a-15(f).
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined
to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
Under the supervision and with the participation of our management, including our principal executive officer and principal
financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework
in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013
Framework). Based on our evaluation under the framework in Internal Control - Integrated Framework, our management concluded that
our internal control over financial reporting was effective as of October 31, 2019.
The effectiveness of the Company’s internal control over financial reporting as of October 31, 2019 has been audited by
Deloitte & Touche LLP, the Company’s independent registered public accounting firm, as stated in their report below.
ITEM 9B
OTHER INFORMATION
None.
46
PART III
ITEM 10
DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
The information called for by Item 10, except as set forth in this Item 10, is incorporated herein by reference to our definitive
proxy statement to be filed pursuant to Regulation 14A in connection with our annual meeting of shareholders to be held on March 24,
2020, which will involve the election of directors.
Information About Our Executive Officers
Our executive officers are listed below and brief summaries of their business experience and certain other information with
respect to them are set forth following the table. Each executive officer holds such office for a one-year term.
Name
Ara K. Hovnanian
Lucian T. Smith, III
J. Larry Sorsby
Brad G. O’Connor
Age
62
59
64
49
Position
Chairman of the Board, Chief Executive Officer, President and Director of the Company
Chief Operating Officer
Executive Vice President, Chief Financial Officer and Director of the Company
Vice President, Chief Accounting Officer and Corporate Controller
Year
Started
With
Company
1979
2007
1988
2004
Mr. Hovnanian has been Chief Executive Officer since July 1997 after being appointed President in 1988 and Executive Vice
President in 1983. Mr. Hovnanian joined the Company in 1979 and has been a Director of the Company since 1981 and was Vice Chairman
from 1998 through November 2009. In November 2009, he was elected Chairman of the Board following the death of Kevork S.
Hovnanian, the chairman and founder of the Company and the father of Mr. Hovnanian.
Mr. Smith was appointed Chief Operating Officer, effective November 1, 2016. Mr. Smith joined the Company in April 2007
as a Region President and was promoted to Group President in January 2010. Most recently Mr. Smith has served as Executive Vice
President of Homebuilding Operations, a position he had held since August 2015.
Mr. Sorsby has been Chief Financial Officer of Hovnanian Enterprises, Inc. since 1996, and Executive Vice President since
November 2000. Mr. Sorsby was also Senior Vice President from March 1991 to November 2000 and was elected as a Director of the
Company in 1997. He is Chairman of the Board of Visitors for Urology at The Children’s Hospital of Philadelphia (“CHOP”) and also
serves on the Foundation Board of Overseers at CHOP.
Mr. O’Connor joined the Company in April 2004 as Vice President and Associate Corporate Controller. In December 2007,
he was promoted to Vice President, Corporate Controller and then in May 2011, he also became Vice President, Chief Accounting Officer.
Prior to joining the Company, Mr. O’Connor was the Corporate Controller for Amershem Biosciences, and prior to that a Senior Manager
in the audit practice of PricewaterhouseCoopers LLP.
Code of Ethics and Corporate Governance Guidelines
In more than 50 years of doing business, we have been committed to enhancing our shareholders’ investment through conduct
that is in accordance with the highest levels of integrity. Our Code of Ethics is a set of guidelines and policies that govern broad principles
of ethical conduct and integrity embraced by our Company. Our Code of Ethics applies to our principal executive officer, principal financial
officer, chief accounting officer, and all other associates of our Company, including our directors and other officers.
We also remain committed to fostering sound corporate governance principles. The Company’s Corporate Governance
Guidelines assist the Board of Directors of the Company (the “Board”) in fulfilling its responsibilities related to corporate governance
conduct. These guidelines serve as a framework, addressing the function, structure, and operations of the Board, for purposes of promoting
consistency of the Board’s role in overseeing the work of management.
We have posted our Code of Ethics on our web site at www.khov.com under “Investor Relations/Corporate Governance.” We
have also posted our Corporate Governance Guidelines on our web site at www.khov.com under “Investor Relations/Corporate
Governance.” A printed copy of the Code of Ethics and Guidelines is also available to the public at no charge by writing to: Hovnanian
Enterprises, Inc., Attn: Human Resources Department, 90 Matawan Road, Fifth Floor, Matawan, NJ 07747 or calling corporate
headquarters at 732-747-7800. We will post amendments to or waivers from our Code of Ethics that are required to be disclosed by the
rules of either the SEC or the New York Stock Exchange (the “NYSE”) on our web site at www.khov.com under “Investor
Relations/Corporate Governance.”
47
Audit Committee, Compensation Committee and Corporate Governance and Nominating Committee Charters
We have adopted charters that apply to the Company’s Audit Committee, Compensation Committee and Corporate
Governance and Nominating Committee. We have posted the text of these charters on our web site at www.khov.com under “Investor
Relations/Corporate Governance.” A printed copy of each charter is available at no charge to any shareholder who requests it by writing
to: Hovnanian Enterprises, Inc., Attn: Human Resources Department, 90 Matawan Road, Fifth Floor, Matawan, NJ 07747 or calling
corporate headquarters at 732-747-7800.
ITEM 11
EXECUTIVE COMPENSATION
The information called for by Item 11 is incorporated herein by reference to our definitive proxy statement to be filed pursuant
to Regulation 14A in connection with our annual meeting of shareholders to be held on March 24, 2020.
ITEM 12
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
The information called for by Item 12, is incorporated herein by reference to our definitive proxy statement to be filed pursuant
to Regulation 14A in connection with our annual meeting of shareholders to be held on March 24, 2020.
ITEM 13
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
The information called for by Item 13 is incorporated herein by reference to our definitive proxy statement to be filed pursuant
to Regulation 14A in connection with our annual meeting of shareholders to be held on March 24, 2020.
ITEM 14
PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information called for by Item 14 is incorporated herein by reference to our definitive proxy statement to be filed pursuant
to Regulation 14A in connection with our annual meeting of shareholders to be held on March 24, 2020.
48
PART IV
ITEM 15
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
FINANCIAL STATEMENTS:
Index to Consolidated Financial Statements ..................................................................................................................................
Report of Independent Registered Public Accounting Firm ...........................................................................................................
Consolidated Balance Sheets at October 31, 2019 and 2018 .........................................................................................................
Consolidated Statements of Operations for the years ended October 31, 2019, 2018 and 2017 ....................................................
Consolidated Statements of Changes in Equity Deficit for the years ended October 31, 2019, 2018 and 2017 .............................
Consolidated Statements of Cash Flows for the years ended October 31, 2019, 2018 and 2017 ...................................................
Notes to Consolidated Financial Statements ..................................................................................................................................
57
58
59
60
61
62
63
Page
No schedules have been prepared because the required information of such schedules is not present, is not present in amounts sufficient to
require submission of the schedule, or because the required information is included in the financial statements and notes thereto.
49
ITEM 16
Form 10-K Summary
None.
Exhibits:
3(a)
3(b)
4(a)
4(b)
4(c)
4(d)
4(e)
4(f)
4(g)
4(h)
4(i)
4(j)
4(k)
4(l)
4(m)
4(n)
4(o)
Restated Certificate of Incorporation of the Registrant (Incorporated by reference to Exhibits to Current Report of the
Registrant on Form 8-K filed on March 29, 2019).
Amended and Restated Bylaws of the Registrant (Incorporated by reference to Exhibits to Current Report on Form 8-K of
the Registrant filed December 3, 2018).
Specimen Class A Common Stock Certificate (Incorporated by reference to Exhibits to Current Report of the Registrant on
Form 8-K filed on March 29, 2019).
Specimen Class B Common Stock Certificate (Incorporated by reference to Exhibits to Current Report of the Registrant on
Form 8-K filed on March 29, 2019).
Certificate of Designations, Powers, Preferences and Rights of the 7.625% Series A Preferred Stock of Hovnanian
Enterprises, Inc., dated July 12, 2005 (Incorporated by reference to Exhibits to Current Report on Form 8-K of the Registrant
filed on July 13, 2005).
Certificate of Designations of the Series B Junior Preferred Stock of Hovnanian Enterprises, Inc., dated August 14, 2008
(Incorporated by reference to Exhibits to Quarterly Report on Form 10-Q for the quarter ended July 31, 2008 of the
Registrant).
Rights Agreement, dated as of August 14, 2008, between Hovnanian Enterprises, Inc. and National City Bank, as Rights
Agent, which includes the Form of Certificate of Designation as Exhibit A, Form of Right Certificate as Exhibit B and the
Summary of Rights as Exhibit C (Incorporated by reference to Exhibits to the Registration Statement on Form 8-A of the
Registrant filed August 14, 2008).
Amendment No. 1 to Rights Agreement, dated as of January 11, 2018, between Hovnanian Enterprises, Inc. and
Computershare Trust Company, N.A (as successor to National City Bank), as Rights Agent, which includes the amended
and restated Form of Rights Certificate as Exhibit 1 and the amended and restated Summary of Rights as Exhibit 2
(Incorporated by reference to Exhibits to Current Report on Form 8-K of the Registrant filed January 11, 2018).
Indenture, dated as of February 1, 2018, relating to the 13.5% Senior Notes due 2026 and 5.0% Senior Notes due 2040, by
and among K. Hovnanian Enterprises, Inc., Hovnanian Enterprises, Inc., the other guarantors party thereto and Wilmington
Trust, National Association, as Trustee, including the forms of 13.5% Senior Notes due 2026 and 5.0% Senior Notes due
2040 (Incorporated by reference to Exhibits to Current Report on Form 8-K of the Registrant filed February 2, 2018).
Second Supplemental Indenture, dated as of May 30, 2018, relating to the 13.5% Senior Notes due 2026 and 5.0% Senior
Notes due 2040, among K. Hovnanian Enterprises, Inc., Hovnanian Enterprises, Inc., the other guarantors party thereto and
Wilmington Trust, National Association, as trustee (Incorporated by reference to Exhibits to Current Report on Form 8-K of
the Registrant filed May 30, 2018).
Sixth Supplemental Indenture, dated as of October 31, 2019, relating to the 13.5% Senior Notes due 2026 and 5.0% Senior
Notes due 2040, among K. Hovnanian Enterprises, Inc., Hovnanian Enterprises, Inc., the other guarantors party thereto and
Wilmington Trust, National Association, as trustee (Incorporated by reference to Exhibits to Current Report on Form 8-K of
the Registrant filed on October 31, 2019).
Indenture dated as of July 27, 2017, relating to the 10.000% Senior Secured Notes due 2022 and the 10.500% Senior Secured
Notes due 2024, among K. Hovnanian Enterprises, Inc., Hovnanian Enterprises, Inc., the other guarantors party thereto and
Wilmington Trust, National Association, as trustee and collateral agent, including the forms of 10.000% Senior Secured
Notes due 2022 and the 10.500% Senior Secured Note due 2024 (Incorporated by reference to Exhibits to Current Report on
Form 8-K of the Registrant filed on July 28, 2017).
Second Supplemental Indenture, dated January 16, 2018, relating to the 10.500% Senior Secured Notes due 2024, by and
among K. Hovnanian Enterprises, Inc., Hovnanian Enterprises, Inc., the other guarantors party thereto and Wilmington Trust,
National Association, as trustee and collateral agent (Incorporated by reference to Exhibits to Current Report on Form 8-K
of the Registrant filed January 16, 2018).
Ninth Supplemental Indenture, dated as of October 30, 2019, relating to the 10.000% Senior Secured Notes due 2022 and
10.500% Senior Secured Notes due 2024, among K. Hovnanian Enterprises, Inc., Hovnanian Enterprises, Inc., the other
guarantors party thereto and Wilmington Trust, National Association, as trustee and collateral agent (Incorporated by
reference to Exhibits to Current Report on Form 8-K of the Registrant filed on October 31, 2019).
Indenture, dated as of November 5, 2014, relating to the 8.000% Senior Notes due 2027, among K. Hovnanian Enterprises,
Inc., Hovnanian Enterprises, Inc., the other guarantors party thereto and Wilmington Trust, National Association, as Trustee,
including the form of 8.000% Senior Notes (Incorporated by reference to Exhibits to Current Report on Form 8-K of the
Registrant filed November 5, 2014).
Eighteenth Supplemental Indenture, dated as of October 17, 2019, relating to the 8.000% Senior Notes due 2027, among K.
Hovnanian Enterprises, Inc., Hovnanian Enterprises, Inc., the other guarantors party thereto and Wilmington Trust, National
Association, as trustee (Incorporated by reference to Exhibits to Current Report on Form 8-K of the Registrant filed on
October 31, 2019).
Nineteenth Supplemental Indenture, dated as of October 31, 2019, relating to the 8.000% Senior Notes due 2027, among K.
Hovnanian Enterprises, Inc., Hovnanian Enterprises, Inc., the other guarantors party thereto and Wilmington Trust, National
Association, as trustee (Incorporated by reference to Exhibits to Current Report on Form 8-K of the Registrant filed on
October 31, 2019).
50
4(p)
4(q)
4(r)
4(s)
4(t)
4(u)
4(v)
4(w)
4(x)
4(y)
10(a)
10(b)
10(c)
10(d)
10(e)
10(f)
10(g)
10(h)
Twentieth Supplemental Indenture, dated as of November 1, 2019, relating to 8.000% Senior Notes due 2027, among K.
Hovnanian Enterprises, Inc., Hovnanian Enterprises, Inc., the other guarantors party thereto and Wilmington Trust, National
Association, as trustee (Incorporated by reference to Exhibits to Current Report on Form 8-K of the Registrant filed
November 5, 2019).
Indenture, dated as of October 31, 2019, relating to the 7.75% Senior Secured 1.125 Lien Notes due 2026, among K.
Hovnanian Enterprises, Inc., Hovnanian Enterprises, Inc., the other guarantors party thereto and Wilmington Trust, National
Association, as trustee and collateral agent, including the form of 7.75% Senior Secured 1.125 Lien Notes due 2026
(Incorporated by reference to Exhibits to Current Report on Form 8-K of the Registrant filed on October 31, 2019).
First Supplemental Indenture, dated as of November 27, 2019, relating to the 7.75% Senior Secured 1.125 Lien Notes due
2026, among K. Hovnanian Enterprises, Inc., Hovnanian Enterprises, Inc., the other guarantors party thereto and Wilmington
Trust, National Association, as trustee and collateral agent (Incorporated by reference to Exhibits to Current Report on Form
8-K of the Registrant filed December 3, 2019).
Indenture, dated as of October 31, 2019, relating to the 10.5% Senior Secured 1.25 Lien Notes due 2026, among K.
Hovnanian Enterprises, Inc., Hovnanian Enterprises, Inc., the other guarantors party thereto and Wilmington Trust, National
Association, as trustee and collateral agent, including the form of 10.5% Senior Secured 1.25 Lien Notes due 2026
(Incorporated by reference to Exhibits to Current Report on Form 8-K of the Registrant filed on October 31, 2019).
First Supplemental Indenture, dated as of November 27, 2019, relating to the 10.5% Senior Secured 1.25 Lien Notes due
2026, among K. Hovnanian Enterprises, Inc., Hovnanian Enterprises, Inc., the other guarantors party thereto and Wilmington
Trust, National Association, as trustee and collateral agent (Incorporated by reference to Exhibits to Current Report on Form
8-K of the Registrant filed December 3, 2019).
Tenth Supplemental Indenture, dated as of December 6, 2019, relating to the 10.500% Senior Secured Notes due 2024, by
and among K. Hovnanian Enterprises, Inc., Hovnanian Enterprises, Inc., the other guarantors party thereto and Wilmington
Trust, National Association, as trustee and collateral agent (Incorporated by reference to Exhibits to Current Report on form
8-K of the Registrant filed December 6, 2019).
Indenture, dated as of October 31, 2019, relating to the 11.25% Senior Secured 1.5 Lien Notes due 2026, among K.
Hovnanian Enterprises, Inc., Hovnanian Enterprises, Inc., the other guarantors party thereto and Wilmington Trust, National
Association, as trustee and collateral agent, including the form of 11.25% Senior Secured 1.5 Lien Notes due 2026
(Incorporated by reference to Exhibits to Current Report on Form 8-K of the Registrant filed on October 31, 2019).
First Supplemental Indenture, dated as of November 27, 2019, relating to the 11.25% Senior Secured 1.5 Lien Notes due
2026, among K. Hovnanian Enterprises, Inc., Hovnanian Enterprises, Inc., the other guarantors party thereto and Wilmington
Trust, National Association, as trustee and collateral agent (Incorporated by reference to Exhibits to Current Report on Form
8-K of the Registrant filed December 3, 2019).
Indenture, dated as of December 10, 2019, relating to the 10.000% Senior Secured 1.75 Lien Notes due 2025, among K.
Hovnanian Enterprises, Inc., Hovnanian Enterprises, Inc., the other guarantors party thereto and Wilmington Trust, National
Association, as trustee and collateral agent, including the form of 10.000% Senior Secured 1.75 Lien Notes due 2025
(Incorporated by reference to Exhibits to Current Report on Form 8-K of the Registrant filed December 11, 2019).
Description of the Registrant’s securities.
Credit Agreement, dated as of October 31, 2019, by and among K. Hovnanian Enterprises Inc., Hovnanian Enterprises, Inc.,
the other guarantors party thereto, Wilmington Trust, National Association, as Administrative Agent, and the lenders party
thereto (Incorporated by reference to Exhibits to Current Report on Form 8-K of the Registrant filed on October 31, 2019).
First Amendment, dated as of November 27, 2019, to the Credit Agreement, dated as of October 31, 2019, among Hovnanian
Enterprises, Inc., K. Hovnanian Enterprises Inc., the subsidiary guarantors party thereto, the lenders party thereto and
Wilmington Trust, National Association, as administrative agent (Incorporated by reference to Exhibits to Current Report on
Form 8-K of the Registrant filed December 3, 2019).
$212,500,000 Credit Agreement, dated as of January 29, 2018, by and among K. Hovnanian Enterprises Inc., Hovnanian
Enterprises, Inc., the other guarantors party thereto, Wilmington Trust, National Association, as Administrative Agent, and
the lenders party thereto (Incorporated by reference to Exhibits to Current Report on Form 8-K of the Registrant filed
February 2, 2018).
First Amendment, dated as of May 14, 2018, to the $212,500,000 Credit Agreement, dated as of January 29, 2018, among
Hovnanian Enterprises, Inc., K. Hovnanian Enterprises Inc., the subsidiary guarantors party thereto, the lenders party thereto
and Wilmington Trust, National Association, as administrative agent (Incorporated by reference to Exhibits to Current Report
on Form 8-K of the Registrant filed May 14, 2018).
Second Amendment, dated as of October 31, 2019, to the $212,500,000 Credit Agreement, dated as of January 29, 2018,
among Hovnanian Enterprises, Inc., K. Hovnanian Enterprises Inc., the subsidiary guarantors party thereto, the lenders party
thereto and Wilmington Trust, National Association, as administrative agent.
Collateral Agency Agreement, dated as of July 27, 2017, among K. Hovnanian Enterprises, Inc., Hovnanian Enterprises,
Inc., the other guarantors party thereto, Wilmington Trust, National Association, as Notes Collateral Agent and Wilmington
Trust, National Association, as Collateral Agent (Incorporated by reference to Exhibits to Current Report on Form 8-K of
the Registrant filed on July 28, 2017).
Security Agreement, dated as of July 27, 2017, among K. Hovnanian Enterprises, Inc., Hovnanian Enterprises, Inc., the other
guarantors party thereto and Wilmington Trust, National Association, as Collateral Agent (Incorporated by reference to
Exhibits to Current Report on Form 8-K of the Registrant filed on July 28, 2017).
Pledge Agreement, dated as of July 27, 2017, among K. Hovnanian Enterprises, Inc., Hovnanian Enterprises, Inc., the other
guarantors party thereto and Wilmington Trust, National Association, as Collateral Agent (Incorporated by reference to
Exhibits to Current Report on Form 8-K of the Registrant filed on July 28, 2017).
51
10(i)
10(j)
10(k)
10(l)
10(m)
10(n)*
10(o)*
10(p)*
10(q)*
10(r)*
10(s)*
10(t)*
10(u)*
10(v)*
10(w)*
10(x)*
10(y)*
10(z)*
10(aa)*
10(bb)*
10(cc)*
10(dd)*
10(ee)*
10(ff)*
10(gg)*
Third Amended and Restated Mortgage Tax Collateral Agency Agreement, dated as of October 31, 2019, among K.
Hovnanian Enterprises, Inc., Hovnanian Enterprises, Inc., the other guarantors party thereto and Wilmington Trust, National
Association, as Mortgage Tax Collateral Agent, Notes Collateral Agent and Junior Joint Collateral Agent (Incorporated by
reference to Exhibits to Current Report on Form 8-K of the Registrant filed on October 31, 2019).
Trademark Security Agreement, dated as of July 27, 2017, between K. HOV IP II, Inc. and Wilmington Trust, National
Association, as Collateral Agent (Incorporated by reference to Exhibits to Current Report on Form 8-K of the Registrant
filed on July 28, 2017).
Second Amended and Restated Intercreditor Agreement, dated as of October 31, 2019, among K. Hovnanian Enterprises,
Inc., Hovnanian Enterprises, Inc., the other guarantors party thereto and Wilmington Trust, National Association, as
Administrative Agent, 1.125 Lien Trustee, 1.125 Lien Collateral Agent, 1.25 Lien Trustee, 1.25 Lien Collateral Agent, 1.5
Lien Trustee, 1.5 Lien Collateral Agent, Joint First Lien Collateral Agent, Mortgage Tax Collateral Agent, 10.000% Junior
Trustee, 10.000% Junior Collateral Agent, 10.500% Junior Trustee, 10.500% Junior Collateral Agent and Junior Joint
Collateral Agent (Incorporated by reference to Exhibits to Current Report on Form 8-K of the Registrant filed on October
31, 2019).
Credit Agreement, dated as of December 10, 2019, relating to the 1.75 Lien Term Loans, among K. Hovnanian Enterprises,
Inc., Hovnanian Enterprises, Inc., the subsidiary guarantors named therein, Wilmington Trust, National Association, as
Administrative Agent, and the lenders party thereto (Incorporated by reference to Exhibits to Current Report on Form 8-K
of the Registrant filed December 11, 2019).
Joinder, dated as of December 10, 2019, to the Second Amended and Restated Intercreditor Agreement, dated as of October
31, 2019, among K. Hovnanian Enterprises, Inc., Hovnanian Enterprises, Inc., the subsidiary guarantors named therein and
Wilmington Trust, National Association, as 1.75 Lien Trustee, 1.75 Term Loan Administrative Agent and 1.75 Pari Passu
Lien Collateral Agent (Incorporated by reference to Exhibits to Current Report on Form 8-K of the Registrant filed December
11, 2019).
Form of 2019 Long-Term Incentive Program Award Agreement (Incorporated by reference to Exhibits to Quarterly Report
on Form 10-Q for the quarter ended April 30, 2019 of the Registrant).
Form of Non-Qualified Stock Option Agreement (2012) for Ara K. Hovnanian (Incorporated by reference to Exhibits to
Quarterly Report on Form 10-Q for the quarter ended July 31, 2012 the Registrant).
Amended and Restated 2008 Hovnanian Enterprises, Inc. Stock Incentive Plan (Incorporated by reference to Appendix A to
the Registrant’s definitive Proxy Statement on Schedule 14A of the Registrant filed on February 1, 2010).
Management Agreement dated August 12, 1983, for the management of properties by K. Hovnanian Investment
Properties, Inc (Incorporated by reference to Exhibits to Registration Statement (No. 2-85198) on Form S-1 of the
Registrant).
Management Agreement dated December 15, 1985, for the management of properties by K. Hovnanian Investment
Properties, Inc (Incorporated by reference to Exhibits to Annual Report on Form 10-K for the year ended October 31, 2003
of the Registrant).
Executive Deferred Compensation Plan as amended and restated on January 1, 2014 (Incorporated by reference to Exhibits
to Annual Report on Form 10-K for the year ended October 31, 2018 of the Registrant).
Death and Disability Agreement between the Registrant and Ara K. Hovnanian, dated February 2, 2006 (Incorporated by
reference to Exhibits to Quarterly Report on Form 10-Q for the quarter ended January 31, 2006 of the Registrant).
Form of Nonqualified Stock Option Agreement (Class B shares) (Incorporated by reference to Exhibits to Annual Report on
Form 10-K for the year ended October 31, 2008 of the Registrant).
Form of Stock Option Agreement for Directors (Incorporated by reference to Exhibits to Annual Report on Form 10-K for
the year ended October 31, 2008 of the Registrant).
Form of 2018 Long-Term Incentive Program Award Agreement (Incorporated by reference to Exhibits to Quarterly Report
on Form 10-Q for the quarter ended January 31, 2018 of the Registrant).
Form of 2016 Long Term Incentive Program Award Agreement (Incorporated by reference to Exhibits to Quarterly Report
on Form 10-Q for the quarter ended January 31, 2016 of the Registrant).
Form of Change in Control Severance Protection Agreement entered into with Brad G. O’Connor (Incorporated by reference
to Exhibits to Quarterly Report on Form 10-Q for the quarter ended January 31, 2012 of the Registrant).
Form of Amendment to Outstanding Stock Option Grants (Incorporated by reference to Exhibits to Quarterly Report on
Form 10-Q for the quarter ended April 30, 2012 of the Registrant.).
Form of Amendment to 2011 Non-Qualified Stock Option Agreement for Ara K. Hovnanian (Incorporated by reference to
Exhibits to Quarterly Report on Form 10-Q for the quarter ended April 30, 2012 of the Registrant.).
Form of Amendment to 2011 Incentive Stock Option Agreement for J. Larry Sorsby (Incorporated by reference to Exhibits
to Quarterly Report on Form 10-Q for the quarter ended April 30, 2012 of the Registrant.).
Form of Incentive Stock Option Agreement (2012) (Incorporated by reference to Exhibits to Quarterly Report on Form 10-
Q for the quarter ended July 31, 2012 of the Registrant).
Form of Stock Option Agreement (2012) for Directors (Incorporated by reference to Exhibits to Quarterly Report on Form
10-Q for the quarter ended July 31, 2012 of the Registrant).
Form of Market Share Unit Agreement Class A shares (2014 grants and thereafter) (Incorporated by reference to Exhibits to
Quarterly Report on Form 10-Q for the quarter ended July 31, 2014 of the Registrant).
Form of Market Share Unit Agreement Class B shares (2014 grants and thereafter) (Incorporated by reference to Exhibits to
Quarterly Report on Form 10-Q for the quarter ended July 31, 2014 of the Registrant).
Form of Incentive Stock Option Agreement (2014 grants and thereafter) (Incorporated by reference to Exhibits to Quarterly
Report on Form 10-Q for the quarter ended July 31, 2014 of the Registrant).
52
10(hh)*
10(ii)*
10(jj)*
10(kk)*
10(ll)*
Form of Restricted Share Unit Agreement (2014 grants and thereafter) (Incorporated by reference to Exhibits to Quarterly
Report on Form 10-Q for the quarter ended July 31, 2014 of the Registrant).
Form of Stock Option Agreement for Directors (2014 grants and thereafter) (Incorporated by reference to Exhibits to
Quarterly Report on Form 10-Q for the quarter ended July 31, 2014 of the Registrant).
2012 Hovnanian Enterprises, Inc. Amended and Restated Stock Incentive Plan (Incorporated by reference to Appendix A to
the Registrant’s definitive Proxy Statement on Schedule 14A filed on February 4, 2019).
Amended and Restated Hovnanian Enterprises, Inc. Senior Executive Short-Term Incentive Plan (Incorporated by reference
to Appendix B to the Registrant’s definitive Proxy Statement on Schedule 14A filed on January 27, 2014).
Form of Letter Agreement Relating to Change in Control Severance Protection Agreement entered into with Brad G.
O’Connor (Incorporated by reference to Exhibits to Quarterly Report on Form 10-Q for the quarter ended January 31, 2015
of the Registrant).
10(mm)* Market Share Unit Agreement Class A (2016 grants and thereafter) (Incorporated by reference to Exhibits to Quarterly Report
10(nn)*
10(oo)*
10(pp)*
10(qq)*
10(rr)*
10(ss)*
10(tt)*
10(uu)*
10(vv)*
10(ww)*
10(xx)*
10(yy)*
10(zz)*
on Form 10-Q for the quarter ended July 31, 2016 of the Registrant).
Market Share Unit Agreement Class B (2016 grants and thereafter) (Incorporated by reference to Exhibits to Quarterly Report
on Form 10-Q for the quarter ended July 31, 2016 of the Registrant).
Market Share Unit Agreement (Gross Margin Performance Vesting) Class A (2016 grants and thereafter) (Incorporated by
reference to Exhibits to Quarterly Report on Form 10-Q for the quarter ended July 31, 2016 of the Registrant).
Market Share Unit Agreement (Gross Margin Performance Vesting) Class B (2016 grants and thereafter) (Incorporated by
reference to Exhibits to Quarterly Report on Form 10-Q for the quarter ended July 31, 2016 of the Registrant).
Market Share Unit Agreement (Debt Reduction Performance Vesting) Class A (2016 grants and thereafter) (Incorporated by
reference to Exhibits to Quarterly Report on Form 10-Q for the quarter ended July 31, 2016 of the Registrant).
Market Share Unit Agreement (Debt Reduction Performance Vesting) Class B (2016 grants and thereafter) (Incorporated by
reference to Exhibits to Quarterly Report on Form 10-Q for the quarter ended July 31, 2016 of the Registrant).
Premium-Priced Incentive Stock Option Agreement Class A (2016 grants and thereafter) (Incorporated by reference to
Exhibits to Quarterly Report on Form 10-Q for the quarter ended July 31, 2016 of the Registrant).
Premium-Priced Non-qualified Stock Option Agreement Class B (2016 grants and thereafter) (Incorporated by reference to
Exhibits to Quarterly Report on Form 10-Q for the quarter ended July 31, 2016 of the Registrant).
Incentive Stock Option Agreement Class A (2016 grants and thereafter) (Incorporated by reference to Exhibits to Quarterly
Report on Form 10-Q for the quarter ended July 31, 2016 of the Registrant).
Restricted Share Unit Agreement Class A (2016 grants and thereafter) (Incorporated by reference to Exhibits to Quarterly
Report on Form 10-Q for the quarter ended July 31, 2016 of the Registrant).
Director Restricted Share Unit Agreement Class A (2016 grants and thereafter) (Incorporated by reference to Exhibits to
Quarterly Report on Form 10-Q for the quarter ended July 31, 2016 of the Registrant).
Market Share Unit Agreement (Pre-tax Profit performance Vesting) Class A (2017 grants and thereafter) (Incorporated by
reference to Exhibits to Quarterly Report on Form 10-Q for the quarter ended July 31, 2017 of the Registrant).
Market Share Unit Agreement (Pre-tax Profit performance Vesting) Class B (2017 grants and thereafter) (Incorporated by
reference to Exhibits to Quarterly Report on Form 10-Q for the quarter ended July 31, 2017 of the Registrant).
Market Share Unit Agreement (Gross Margin Improvement Performance Vesting) Class A (2017 grants and thereafter)
(Incorporated by reference to Exhibits to Quarterly Report on Form 10-Q for the quarter ended July 31, 2017 of the
Registrant).
10(aaa)* Market Share Unit Agreement (Gross Margin Improvement Performance Vesting) Class B (2017 grants and thereafter)
(Incorporated by reference to Exhibits to Quarterly Report on Form 10-Q for the quarter ended July 31, 2017 of the
Registrant).
10(bbb)* Market Share Unit Agreement Class A (Pre-tax Profit Performance Vesting) (2018 grants and thereafter) (Incorporated by
reference to Quarterly Report on Form 10-Q for the quarter ended July 31, 2018 of the Registrant).
10(ccc)* Market Share Unit Agreement Class B (Pre-tax Profit Performance Vesting) (2018 grants and thereafter) (Incorporated by
reference to Quarterly Report on Form 10-Q for the quarter ended July 31, 2018 of the Registrant).
10(ddd)* Market Share Unit Agreement Class A (Stock Multiplier Performance Vesting) (2018 grants and thereafter) (Incorporated
by reference to Quarterly Report on Form 10-Q for the quarter ended July 31, 2018 of the Registrant).
10(eee)* Market Share Unit Agreement Class B (Stock Multiplier Performance Vesting) (2018 grants and thereafter) (Incorporated
10(fff)*
by reference to Quarterly Report on Form 10-Q for the quarter ended July 31, 2018 of the Registrant).
Market Share Unit Agreement Class A (Community Count Performance Vesting) (2018 grants and thereafter) (Incorporated
by reference to Quarterly Report on Form 10-Q for the quarter ended July 31, 2018 of the Registrant).
10(ggg)* Market Share Unit Agreement Class B (Community Count Performance Vesting) (2018 grants and thereafter) (Incorporated
10(hhh)*
10(iii)*
10(jjj)*
10(kkk)*
10(lll)*
by reference to Quarterly Report on Form 10-Q for the quarter ended July 31, 2018 of the Registrant).
Premium-Priced Incentive Stock Option Agreement Class A (2018 grants and thereafter) (Incorporated by reference to
Quarterly Report on Form 10-Q for the quarter ended July 31, 2018 of the Registrant).
Premium-Priced Non-Qualified Stock Option Agreement Class B (2018 grants and thereafter) (Incorporated by reference to
Quarterly Report on Form 10-Q for the quarter ended July 31, 2018 of the Registrant).
Incentive Stock Option Agreement Class A (2018 grants and thereafter) (Incorporated by reference to Quarterly Report on
Form 10-Q for the quarter ended July 31, 2018 of the Registrant).
Non-Qualified Stock Option Agreement Class B (2018 grants and thereafter) (Incorporated by reference to Quarterly Report
on Form 10-Q for the quarter ended July 31, 2018 of the Registrant).
Director Stock Option Agreement Class A (2018 grants and thereafter) (Incorporated by reference to Quarterly Report on
Form 10-Q for the quarter ended July 31, 2018 of the Registrant).
53
10(mmm)* Form of Letter Agreement entered into with Lucian Theon Smith III (Incorporated by reference to Annual Report on Form
10(nnn)*
10(ooo)
10(ppp)
10(qqq)
10(rrr)
10(sss)
10(ttt)
10(uuu)
10(vvv)
10(www)
10(xxx)
10(yyy)
10(zzz)
10(aaaa)
10(bbbb)
10(cccc)
10(dddd)
10-K for the year ended October 31, 2017 of the Registrant).
Amendment to Form of Letter Agreement entered into with Lucian Theon Smith III (Incorporated by reference to Exhibits
to Quarterly Report on Form 10-Q for the quarter ended January 31, 2018 of the Registrant).
Security Agreement, dated as of October 31, 2019, relating to Senior Secured Revolving Credit Facility, made by K.
Hovnanian Enterprises, Inc., Hovnanian Enterprises, Inc. and the other guarantors party thereto in favor of Wilmington Trust,
National Association, as Administrative Agent and Joint First Lien Collateral Agent (Incorporated by reference to Exhibits
to Current Report on Form 8-K of the Registrant filed on October 31, 2019).
Pledge Agreement, dated as of October 31, 2019, relating to Senior Secured Revolving Credit Facility, given by K.
Hovnanian Enterprises, Inc., Hovnanian Enterprises, Inc. and the other guarantors party thereto to Wilmington Trust,
National Association, as Administrative Agent and Joint First Lien Collateral Agent (Incorporated by reference to Exhibits
to Current Report on Form 8-K of the Registrant filed on October 31, 2019).
Trademark Security Agreement, dated as of October 31, 2019, relating to Senior Secured Revolving Credit Facility, made
by K. HOV IP II, Inc. in favor of Wilmington Trust, National Association, as Administrative Agent (Incorporated by
reference to Exhibits to Current Report on Form 8-K of the Registrant filed on October 31, 2019).
1.125 Lien Security Agreement, dated as of October 31, 2019, relating to the 7.75% Senior Secured 1.125 Lien Notes due
2026, made by K. Hovnanian Enterprises, Inc., Hovnanian Enterprises, Inc. and the other guarantors party thereto in favor
of Wilmington Trust, National Association, as 1.125 Lien Collateral Agent and Joint First Lien Collateral Agent
(Incorporated by reference to Exhibits to Current Report on Form 8-K of the Registrant filed on October 31, 2019).
1.125 Lien Pledge Agreement, dated as of October 31, 2019, relating to the 7.75% Senior Secured 1.125 Lien Notes due
2026, given by K. Hovnanian Enterprises, Inc., Hovnanian Enterprises, Inc. and the other guarantors party thereto to
Wilmington Trust, National Association, as 1.125 Lien Collateral Agent and Joint First Lien Collateral Agent (Incorporated
by reference to Exhibits to Current Report on Form 8-K of the Registrant filed on October 31, 2019).
1.125 Lien Trademark Security Agreement, dated as of October 31, 2019, made by K. HOV IP II, Inc. in favor of Wilmington
Trust, National Association, as 1.125 Lien Collateral Agent (Incorporated by reference to Exhibits to Current Report on Form
8-K of the Registrant filed on October 31, 2019).
1.25 Lien Security Agreement, dated as of October 31, 2019, relating to the 10.5% Senior Secured 1.25 Lien Notes due 2026,
made by K. Hovnanian Enterprises, Inc., Hovnanian Enterprises, Inc. and the other guarantors party thereto in favor of
Wilmington Trust, National Association, as 1.25 Lien Collateral Agent and Joint First Lien Collateral Agent (Incorporated
by reference to Exhibits to Current Report on Form 8-K of the Registrant filed on October 31, 2019).
1.25 Lien Pledge Agreement, dated as of October 31, 2019, relating to the 10.5% Senior Secured 1.25 Lien Notes due 2026,
given by K. Hovnanian Enterprises, Inc., Hovnanian Enterprises, Inc. and the other guarantors party thereto to Wilmington
Trust, National Association, as the 1.25 Lien Collateral Agent and the Joint First Lien Collateral Agent (Incorporated by
reference to Exhibits to Current Report on Form 8-K of the Registrant filed on October 31, 2019).
1.25 Lien Trademark Security Agreement, dated as of October 31, 2019, by K. HOV IP II, Inc. in favor of Wilmington Trust,
National Association, as 1.25 Lien Collateral Agent (Incorporated by reference to Exhibits to Current Report on Form 8-K
of the Registrant filed on October 31, 2019).
1.5 Lien Security Agreement, dated as of October 31, 2019, relating to the 11.25% Senior Secured 1.5 Lien Notes due 2026,
made by K. Hovnanian Enterprises, Inc., Hovnanian Enterprises, Inc. and the other guarantors party thereto in favor of
Wilmington Trust, National Association, as the 1.5 Lien Collateral Agent and the Joint First Lien Collateral Agent
(Incorporated by reference to Exhibits to Current Report on Form 8-K of the Registrant filed on October 31, 2019).
1.5 Lien Pledge Agreement, dated as of October 31, 2019, relating to the 11.25% Senior Secured 1.5 Lien Notes due 2026,
given by K. Hovnanian Enterprises, Inc., Hovnanian Enterprises, Inc. and the other guarantors party thereto to Wilmington
Trust, National Association, as the 1.5 Lien Collateral Agent and the Joint First Lien Collateral Agent (Incorporated by
reference to Exhibits to Current Report on Form 8-K of the Registrant filed on October 31, 2019).
1.5 Lien Trademark Security Agreement, dated as of October 31, 2019, made by K. HOV IP II, Inc. in favor of Wilmington
Trust, National Association, as 1.5 Lien Collateral Agent (Incorporated by reference to Exhibits to Current Report on Form
8-K of the Registrant filed on October 31, 2019).
1.75 Lien Security Agreement, dated as of December 10, 2019, relating to the 10.000% Senior Secured 1.75 Lien Notes due
2025 and the 1.75 Lien Term Loans, made by K. Hovnanian Enterprises, Inc., Hovnanian Enterprises, Inc. and the other
guarantors party thereto in favor of Wilmington Trust, National Association, as the 1.75 Lien Pari Passu Collateral Agent,
the Joint First Lien Collateral Agent, Administrative Agent and 1.75 Lien Collateral Agent (Incorporated by reference to
Exhibits to Current Report on Form 8-K of the Registrant filed December 11, 2019).
1.75 Lien Pledge Agreement, dated as of December 10, 2019, relating to the 10.000% Senior Secured 1.75 Lien Notes due
2025 and the 1.75 Lien Term Loans, given by K. Hovnanian Enterprises, Inc., Hovnanian Enterprises, Inc. and the other
guarantors party thereto in favor of Wilmington Trust, National Association, as the 1.75 Lien Pari Passu Collateral Agent
and the Joint First Lien Collateral Agent (Incorporated by reference to Exhibits to Current Report on Form 8-K of the
Registrant filed December 11, 2019).
1.75 Lien Trademark Security Agreement, dated as of December 10, 2019, made by K. HOV IP II, Inc. in favor of
Wilmington Trust, National Association, as 1.75 Lien Pari Passu Collateral Agent (Incorporated by reference to Exhibits to
Current Report on Form 8-K of the Registrant filed December 11, 2019).
First Lien Collateral Agency Agreement, dated as of October 31, 2019, among K. Hovnanian Enterprises, Inc., Hovnanian
Enterprises, Inc., the other guarantors party thereto and Wilmington Trust, National Association, as Administrative Agent,
1.125 Lien Collateral Agent, 1.25 Lien Collateral Agent, 1.5 Lien Collateral Agent and Joint First Lien Collateral Agent
(Incorporated by reference to Exhibits to Current Report on Form 8-K of the Registrant filed on October 31, 2019).
54
10(eeee)
10(ffff)
10(gggg)
21
23(a)
23(b)
23(c)
31(a)
31(b)
32(a)
32(b)
99(a)
99(b)
101
First Lien Intercreditor Agreement, dated as of October 31, 2019, among K. Hovnanian Enterprises, Inc., Hovnanian
Enterprises, Inc., the other guarantors party thereto and Wilmington Trust, National Association, as Administrative Agent,
1.125 Lien Trustee, 1.125 Lien Collateral Agent, 1.25 Lien Trustee, 1.25 Lien Collateral Agent, 1.5 Lien Trustee, 1.5 Lien
Collateral Agent and Joint First Lien Collateral Agent (Incorporated by reference to Exhibits to Current Report on Form 8-
K of the Registrant filed on October 31, 2019).
Joinder No. 1, dated as of December 10, 2019, to the First Lien Intercreditor Agreement and First Lien Collateral Agency
Agreement, each dated as of October 31, 2019, among Wilmington Trust, National Association, as 1.75 Lien Trustee and
1.75 Pari Passu Lien Collateral Agent, and acknowledged by Wilmington Trust, National Association, as 1.75 Lien Collateral
Agent, with acknowledged receipt by Wilmington Trust, National Association, as Senior Credit Agreement Administrative
Agent, 1.125 Lien Trustee, 1.125 Lien Collateral Agent, 1.25 Lien Trustee, 1.25 Lien Collateral Agent, 1.5 Lien Trustee, 1.5
Lien Collateral Agent and Joint First Lien Collateral Agent (Incorporated by reference to Exhibits to Current Report on Form
8-K of the Registrant filed December 11, 2019).
Joinder No. 2, dated as of December 10, 2019, to the First Lien Intercreditor Agreement and First Lien Collateral Agency
Agreement, each dated as of October 31, 2019, among Wilmington Trust, National Association, as Administrative Agent
and 1.75 Pari Passu Lien Collateral Agent, with acknowledged receipt by the Senior Credit Agreement Administrative Agent,
1.125 Lien Trustee, 1.125 Lien Collateral Agent, 1.25 Lien Trustee, 1.25 Lien Collateral Agent, 1.5 Lien Trustee, 1.5 Lien
Collateral Agent and Joint First Lien Collateral Agent (Incorporated by reference to Exhibits to Current Report on Form 8-
K of the Registrant filed December 11, 2019).
Subsidiaries of the Registrant.
Consent of Deloitte & Touche LLP.
Consent of Deloitte & Touche LLP.
Consent of Deloitte & Touche LLP.
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.
Section 1350 Certification of Chief Executive Officer.
Section 1350 Certification of Chief Financial Officer.
Financial Statements of GTIS – HOV Holdings V, L.L.C.
Financial Statements of GTIS – HOV Holdings VI, L.L.C.
The following financial information from our Annual Report on Form 10-K for the year ended October 31, 2019, formatted
in Extensible Business Reporting Language (XBRL): (i) the Consolidated Balance Sheets at October 31, 2019 and October
31, 2018, (ii) the Consolidated Statements of Operations for the years ended October 31, 2019, 2018 and 2017, (iii) the
Consolidated Statements of Changes in Equity Deficit for years ended October 31, 2019, 2018 and 2017 (iv) the Consolidated
Statements of Cash Flows for the years ended October 31, 2019, 2018 and 2017, and (v) the Notes to Consolidated Financial
Statements.
* Management contracts or compensatory plans or arrangements.
55
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Annual
Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.
HOVNANIAN ENTERPRISES, INC.
By:
/s/ ARA K. HOVNANIAN
Ara K. Hovnanian
Chairman of the Board, Chief Executive
Officer and President
December 19, 2019
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf
of the registrant on December 19, 2019, and in the capacities indicated.
/s/ ARA K. HOVNANIAN
Ara K. Hovnanian
Chairman of the Board, Chief Executive Officer, President and Director
(Principal Executive Officer)
/s/ J. LARRY SORSBY
J. Larry Sorsby
Executive Vice President, Chief Financial Officer and Director
(Principal Financial Officer)
/s/ BRAD G. O’CONNOR
Brad G. O’Connor
Vice President – Chief Accounting Officer and Corporate Controller
(Principal Accounting Officer)
/s/ EDWARD A. KANGAS
Edward A. Kangas
/s/ JOSEPH A. MARENGI
Joseph A. Marengi
/s/ VINCENT PAGANO JR.
Vincent Pagano Jr.
Chairman of Audit Committee and Director
Chairman of Compensation Committee and Director
Chairman of Corporate Governance and Nominating Committee and Director
56
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Financial Statements:
Report of Independent Registered Public Accounting Firm ..............................................................................................................
Consolidated Balance Sheets as of October 31, 2019 and 2018 ........................................................................................................
Consolidated Statements of Operations for the Years Ended October 31, 2019, 2018 and 2017 ......................................................
Consolidated Statements of Changes in Equity Deficit for the Years Ended October 31, 2019, 2018 and 2017 ..............................
Consolidated Statements of Cash Flows for the Years Ended October 31, 2019, 2018 and 2017 .....................................................
Notes to Consolidated Financial Statements .....................................................................................................................................
Page
58
59
60
61
62
63
No schedules have been prepared because the required information of such schedules is not present, is not present in amounts sufficient to
require submission of the schedule, or because the required information is included in the financial statements and notes thereto.
57
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Hovnanian Enterprises Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Hovnanian Enterprises Inc. and subsidiaries (the "Company") as of
October 31, 2019 and 2018, the related consolidated statements of operations, equity deficit, and cash flows, for each of the three years in
the period ended October 31, 2019, and the related notes (collectively referred to as the "financial statements"). We also have audited the
Company’s internal control over financial reporting as of October 31, 2019, based on criteria established in Internal Control — Integrated
Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as
of October 31, 2019 and 2018, and the results of their operations and their cash flows for each of the three years in the period ended
October 31, 2019, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the
Company maintained, in all material respects, effective internal control over financial reporting as of October 31, 2019, based on criteria
established in Internal Control — Integrated Framework (2013) issued by COSO.
Basis for Opinions
The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial
reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying
Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on these financial
statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm
registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect
to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange
Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and
whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial
statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a
test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements.
Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control
based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances.
We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations
of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of
any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ DELOITTE & TOUCHE LLP
New York, New York
December 19, 2019
We have served as the Company's auditor since 2009.
58
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
ASSETS
Homebuilding:
Cash and cash equivalents
Restricted cash and cash equivalents
Inventories:
Sold and unsold homes and lots under development
Land and land options held for future development or sale
Consolidated inventory not owned
Total inventories
Investments in and advances to unconsolidated joint ventures
Receivables, deposits and notes, net
Property, plant and equipment, net
Prepaid expenses and other assets
Total homebuilding
Financial services
Total assets
LIABILITIES AND EQUITY
Homebuilding:
Nonrecourse mortgages secured by inventory, net of debt issuance costs
Accounts payable and other liabilities
Customers’ deposits
Liabilities from inventory not owned, net of debt issuance costs
Revolving and term loan credit facilities, net of debt issuance costs
Notes payable (net of discount, premium and debt issuance costs) and accrued interest
Total homebuilding
Financial services
Income taxes payable
Total liabilities
Equity:
Hovnanian Enterprises, Inc. stockholders' equity deficit:
Preferred stock, $0.01 par value - authorized 100,000 shares; issued and outstanding 5,600
shares with a liquidation preference of $140,000 at October 31, 2019 and 2018
Common stock, Class A, $0.01 par value - authorized 16,000,000 shares; issued 5,973,727
shares at October 31, 2019 and 5,783,858 shares at October 31, 2018
Common stock, Class B, $0.01 par value (convertible to Class A at time of sale) -
authorized 2,400,000 shares; issued 650,363 shares at October 31, 2019 and 649,673
shares at October 31, 2018
Paid in capital - common stock
Accumulated deficit
Treasury stock - at cost – 470,430 shares of Class A common stock and 27,669 shares of Class
B common stock at October 31, 2019 and 2018
Total Hovnanian Enterprises, Inc. stockholders’ equity deficit
Noncontrolling interest in consolidated joint ventures
Total equity deficit
Total liabilities and equity
See notes to consolidated financial statements.
October 31,
2019
October 31,
2018
$130,976
20,905
$187,871
12,808
993,647
108,565
190,273
1,292,485
127,038
44,914
20,127
45,704
1,682,149
878,876
111,368
87,921
1,078,165
123,694
35,189
20,285
39,150
1,497,162
199,275
$1,881,424
164,880
$1,662,042
$203,585
320,193
35,872
141,033
201,528
1,297,543
2,199,754
169,145
2,301
2,371,200
$95,557
304,899
30,086
63,387
201,389
1,273,446
1,968,764
143,448
3,334
2,115,546
135,299
135,299
60
58
7
715,504
(1,225,973)
(115,360)
(490,463)
687
(489,776)
$1,881,424
6
710,349
(1,183,856)
(115,360)
(453,504)
-
(453,504)
$1,662,042
59
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per share data)
Revenues:
Homebuilding:
Sale of homes
Land sales and other revenues
Total homebuilding
Financial services
Total revenues
Expenses:
Homebuilding:
Cost of sales, excluding interest
Cost of sales interest
Inventory impairment loss and land option write-offs
Total cost of sales
Selling, general and administrative
Total homebuilding expenses
Financial services
Corporate general and administrative
Other interest
Other operations
Total expenses
Loss on extinguishment of debt
Income (loss) from unconsolidated joint ventures
(Loss) income before income taxes
State and federal income tax provision:
State
Federal
Total income taxes
Net (loss) income
Per share data:
Basic:
Net (loss) income per common share
Weighted-average number of common shares outstanding
Assuming dilution:
Net (loss) income per common share
Weighted-average number of common shares outstanding
See notes to consolidated financial statements.
October 31,
2019
Year Ended
October 31,
2018
October 31,
2017
$1,949,682
13,082
1,962,764
54,152
2,016,916
$1,906,228
31,650
1,937,878
53,355
1,991,233
$2,340,033
52,889
2,392,922
58,743
2,451,665
1,604,777
70,725
6,288
1,681,790
166,784
1,848,574
36,525
66,364
90,056
1,561
2,043,080
(42,436 )
28,932
(39,668 )
2,449
-
2,449
$(42,117 )
1,566,555
60,685
3,501
1,630,741
159,202
1,789,943
35,128
69,632
103,297
1,584
1,999,584
(7,536)
24,033
8,146
3,626
-
3,626
$4,520
1,961,804
88,536
17,813
2,068,153
196,320
2,264,473
32,346
59,367
97,304
1,518
2,455,008
(34,854)
(7,047)
(45,244)
11,261
275,688
286,949
$(332,193)
$(7.06 )
5,968
$(7.06 )
5,968
$0.73
5,941
$0.72
6,072
$(56.23)
5,908
$(56.23)
5,908
60
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY DEFICIT
A Common Stock
Shares
Issued and
B Common Stock
Shares
Issued and
Preferred Stock
Shares
Issued and
Outstanding Amount
Outstanding Amount
Outstanding Amount
Paid-In
Capital
Accumulated
Treasury
Noncontrolling
Deficit
Stock
Interest
Total
5,281,840
$58
610,042
$6
5,600 $135,299 $707,670
$(856,183 ) $(115,360 )
- $(128,510 )
1,930
7,542
2,362
100
(100 )
556
(224 )
(332,193 )
556
(224 )
-
(332,193 )
5,291,412
$58
612,304
$6
5,600 $135,299 $708,002
$(1,188,376 ) $(115,360 )
-
(460,371 )
1,210
20,672
9,834
134
(134 )
802
1,545
4,520
802
1,545
-
4,520
5,313,428
$58
622,004
$6
5,600 $135,299 $710,349
$(1,183,856 ) $(115,360 )
- $(453,504 )
11,210
922
1
178,427
2
232
(232 )
808
(126 )
4,473
808
(125 )
4,475
-
5,503,297
$60
622,694
$7
5,600 $135,299 $715,504
$(1,225,973 ) $(115,360 )
$687 $(489,776 )
(42,117 )
687
687
(42,117 )
(Dollars in
thousands)
Balance,
October 31,
2016
Stock options,
amortization
and issuances
Restricted
stock
amortization,
issuances and
forfeitures
Conversion of
Class B to
Class A
common stock
Net (loss)
Balance,
October 31,
2017
Stock options,
amortization
and issuances
Restricted
stock
amortization,
issuances and
forfeitures
Conversion of
Class B to
Class A
common stock
Net income
Balance,
October 31,
2018
Stock options,
amortization
and issuances
Restricted
stock
amortization,
issuances and
forfeitures
Issuance of
shares for debt
Conversion of
Class B to
Class A
common stock
Changes in
noncontrolling
interest in
consolidated
joint ventures
Net (loss)
Balance,
October 31,
2019
See notes to consolidated financial statements.
61
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Cash flows from operating activities:
Net (loss) income
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:
October 31, 2019
Year Ended
October 31, 2018
October 31, 2017
$(42,117 )
$4,520
$(332,193)
Depreciation
Compensation from stock options and awards
Amortization of bond discounts, premiums and deferred financing costs
Gain on sale and retirement of property and assets
(Income) loss from unconsolidated joint ventures
Distributions of earnings from unconsolidated joint venture
Loss on extinguishment of debt
Noncontrolling interest in consolidated joint ventures
Inventory impairment and land option write-offs
Deferred income tax provision
(Increase) decrease in assets:
Origination of mortgage loans
Sale of mortgage loans
Receivables, prepaids, deposits and other assets
Inventories
(Decrease) increase in liabilities:
State and federal income tax payable
Customers’ deposits
Accounts payable, accrued interest and other accrued liabilities
Net cash (used in) provided by operating activities
Cash flows from investing activities:
Proceeds from sale of property and assets
Purchase of property, equipment, and other fixed assets and acquisitions
Investment in and advances to unconsolidated joint ventures
Distributions of capital from unconsolidated joint ventures
Net cash (used in) provided by investing activities
Cash flows from financing activities:
Proceeds from mortgages and notes
Payments related to mortgages and notes
Proceeds from model sale leaseback financing programs
Payments related to model sale leaseback financing programs
Proceeds from land bank financing programs
Payments related to land bank financing programs
Proceeds from partner contributions to consolidated joint venture
Net proceeds (payments) related to mortgage warehouse lines of credit
Payments related to unsecured revolving credit facility
Payments related to senior secured term loan facility
Proceeds from senior unsecured term loan facility
Proceeds from senior secured notes, net of discount
Payments related to senior secured, senior, senior amortizing and senior exchangeable notes
Deferred financing costs from land banking financing programs and note issuances
Net cash provided by (used in) financing activities
Net (decrease) increase in cash and cash equivalents, and restricted cash and cash equivalents
Cash and cash equivalents, and restricted cash and cash equivalents balance, beginning of year
Cash and cash equivalents, and restricted cash and cash equivalents balance, end of year
Supplemental disclosures of cash flows:
Cash paid during the period for:
Interest, net of capitalized interest (see Note 3 to the Consolidated Financial Statements)
Income taxes
Reconciliation of Cash, cash equivalents and restricted cash
Homebuilding: Cash and cash equivalents
Homebuilding: Restricted cash and cash equivalents
Financial Services: Cash and cash equivalents, included in Financial services assets
Financial Services: Restricted cash and cash equivalents, included in Financial services assets
Total cash, cash equivalents and restricted cash shown in the statement of cash flows
See notes to consolidated financial statements.
Supplemental disclosure of noncash investing activities:
4,172
721
8,128
(25 )
(28,932 )
29,919
42,436
4
6,288
-
(1,089,825 )
1,054,535
(15,911 )
(220,608 )
(1,033 )
5,786
(2,665 )
(249,127 )
29
(4,005 )
(13,256 )
8,925
(8,307 )
318,462
(209,445 )
33,188
(25,791 )
104,961
(33,902 )
683
27,101
-
-
-
578,231
(570,032 )
(16,748 )
206,708
(50,726 )
232,992
$182,266
3,156
3,669
8,822
(3,619)
(24,033)
-
7,536
-
3,501
-
(1,069,519)
1,071,250
20,669
(58,801)
1,107
(3,686)
(31,394)
(66,822)
38,303
(5,193)
(26,271)
28,662
35,501
181,101
(162,192)
22,749
(30,123)
18,827
(38,991)
-
(1,388)
(52,000)
(76,829)
202,547
-
(285,095)
(8,035)
(229,429)
(260,750)
493,742
$232,992
$109,107
$3,483
$112,016
$2,520
$130,976
20,905
5,578
24,807
$182,266
$187,871
12,808
6,948
25,365
$232,992
4,249
557
13,875
(166)
7,047
1,864
34,854
-
17,813
285,578
(1,045,991)
1,078,649
5,249
255,444
282
(3,657)
(21,876)
301,578
270
(6,478)
(36,803)
13,304
(29,707)
199,275
(218,468)
10,270
(28,798)
29,190
(71,757)
-
(31,023)
-
-
-
840,000
(861,976)
(14,556)
(147,843)
124,028
369,714
$493,742
$89,836
$1,089
$463,697
2,077
5,623
22,345
$493,742
In the first quarter of fiscal 2018, we acquired the remaining assets of one of our joint ventures, resulting in a $13.0 million reduction in our
investment in the joint venture and a corresponding increase to inventory.
Supplemental disclosure of noncash financing activities:
In the second quarter of fiscal 2018, we completed a debt for debt exchange of existing 8.0% Senior Notes due November 1, 2019 for newly
issued 13.5% Senior Notes due 2026 and 5.0% Senior Notes due 2040. See Note 9 for further information.
In the fourth quarter of fiscal 2019, we completed a partial debt for debt exchange of existing 10.0% Senior Secured Notes due 2022 and
10.5% Senior Secured Notes due 2024 for a combination of cash and newly issued 7.75% 1.125 Lien Notes due 2026 and 11.25% 1.5 Lien Notes due 2026.
See Note 9 for further information.
62
HOVNANIAN ENTERPRISES, INC.
Notes to Consolidated Financial Statements
1. Basis of Presentation
Basis of Presentation - The accompanying Consolidated Financial Statements have been prepared in accordance with
generally accepted accounting principles in the United States of America (“US GAAP”) and include Hovnanian Enterprises, Inc.’s (“HEI”)
accounts and those of all its consolidated subsidiaries, after elimination of all intercompany balances and transactions. HEI’s fiscal year
ends October 31. Noncontrolling interest represents the proportionate equity interest in a consolidated joint venture that is not 100% owned
by the Company. One of HEI's subsidiaries owns a 99% controlling interest in the consolidated joint venture and therefore HEI is required
to consolidate the joint venture within its Consolidated Financial Statements. The 1% that we do not own is accounted for as noncontrolling
interest.
Reclassifications - Effective October 31, 2018 we early adopted Accounting Standards Update (“ASU”) 2016-18 “Statement
of Cash Flows (Topic 230): Restricted Cash” (“ASU 2016-18”). As a result, restricted cash amounts are no longer shown within the
operating and investing activities as these balances are now included in the beginning and ending cash balances in our Consolidated
Statements of Cash Flows. The adoption also resulted in the reclassification of restricted cash in operating and investing activities of $4.0
million and $2.6 million, respectively, for the year ended October 31, 2017. These amounts are now included in the beginning and ending
cash balances for the respective periods. See also the reconciliation of cash, cash equivalents and restricted cash on the Consolidated
Statements of Cash Flows.
Reverse Stock Split – As discussed in Note 14, in March 2019, the Company's stockholders approved and the Board of
Directors determined to effectuate a reverse stock split (the “Reverse Stock Split”) of the Company’s common stock at a ratio of 1-for-25,
and a corresponding decrease in the number of authorized shares of the common stock. The Reverse Stock Split became effective on March
29, 2019, and every 25 issued shares (including treasury shares) of Class A Common Stock, par value $0.01 per share (the “Class A
Common Stock”), were combined into one share of Class A Common Stock, and every 25 issued shares (including treasury shares) of
Class B Common Stock, par value $0.01 per share (the “Class B Common Stock”), were combined into one share of Class B Common
Stock. All share and per share amounts throughout this report have been retroactively adjusted to reflect the reverse stock split.
2. Business
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). Our operations consist of homebuilding, financial services and corporate. Our homebuilding operations are made
up of six reportable segments defined as Northeast, Mid-Atlantic, Midwest, Southeast, Southwest and West. Homebuilding operations
comprise the substantial part of our business, representing approximately 97% of consolidated revenues for the year ended October 31,
2019, approximately 97% for the year ended October 31, 2018 and approximately 98% for the year ended October 31, 2017. HEI is a
Delaware corporation, which through its subsidiaries, was building and selling homes at October 31, 2019 in 141 consolidated new home
communities in Arizona, California, Delaware, Florida, Georgia, Illinois, Maryland, New Jersey, Ohio, Pennsylvania, South Carolina,
Texas, Virginia, Washington, D.C. and West Virginia. Our homebuilding subsidiaries offer a wide variety of homes that are designed to
appeal to first-time buyers, first and second-time move-up buyers, luxury buyers, active lifestyle buyers and empty nesters. Our financial
services operations, which are a reportable segment, provide mortgage banking and title services to the homebuilding operations’
customers. Our financial services subsidiaries do not typically retain or service the mortgages that they originate but rather sell the
mortgages and related servicing rights to investors. Corporate primarily includes the operations of our corporate office whose primary
purpose is to provide executive services, accounting, information services, human resources, management reporting, training, cash
management, internal audit, risk management, and administration of process redesign, quality, and safety.
See Note 10 “Operating and Reporting Segments” for further disclosure of our reportable segments.
3. Summary of Significant Accounting Policies
Use of Estimates - The preparation of financial statements in conformity with US 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 financial statements.
Income Recognition from Home and Land Sales - We are primarily engaged in the development, construction, marketing and
sale of residential single-family and multi-family homes where the planned construction cycle is less than 12 months. For these homes, in
accordance with Accounting Standards Codification (“ASC”) 606-10, “ Revenue from Contracts with Customers,” revenue is recognized
when title is conveyed to the buyer, adequate initial and continuing investments have been received and there is no continued involvement.
63
Income Recognition from Mortgage Loans - Our Financial Services segment originates mortgages, primarily for our
homebuilding customers. 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.
We elected the fair value option for our mortgage loans held for sale in accordance with ASC 825, “Financial Instruments,”
which permits us to measure our loans held for sale at fair value. Management believes that the election of the fair value option for loans
held for sale improves financial reporting by mitigating volatility in reported earnings caused by measuring the fair value of the loans and
the derivative instruments used to economically hedge them without having to apply complex hedge accounting provisions.
Substantially all of the mortgage loans originated are sold within a short period of time in the secondary mortgage market on
a servicing released, nonrecourse basis, although the Company remains liable for certain limited representations, such as fraud, and
warranties related to loan sales. Mortgage investors could seek to have us buy back loans or compensate them from losses incurred on
mortgages we have sold based on claims that we breached our limited representations and warranties. We have established reserves for
probable losses.
Cash and Cash Equivalents - Cash represents cash deposited in checking accounts. Cash equivalents include certificates of
deposit, Treasury bills and government money–market funds with maturities of 90 days or less when purchased. Our cash balances are
held at a few financial institutions and may, at times, exceed insurable amounts. We believe we help to mitigate this risk by depositing our
cash in major financial institutions. At October 31, 2019 and 2018, $143.1 million and $199.6 million, respectively, of the total cash and
cash equivalents was in cash equivalents and Restricted cash and cash equivalents, the book value of which approximates fair value.
Fair Value of Financial Instruments - The fair value of financial instruments is determined by reference to various market
data and other valuation techniques as appropriate. Our financial instruments consist of cash and cash equivalents, restricted cash and cash
equivalents, receivables, deposits and notes, accounts payable and other liabilities, customer deposits, mortgage loans held for sale,
nonrecourse mortgages, mortgage warehouse lines of credit, senior secured revolving credit facility, accrued interest, senior unsecured
term loan credit facility, senior secured notes and senior notes. The fair value of the senior secured credit facility, senior unsecured term
loan credit facility, senior secured notes and senior notes is estimated based on the quoted market prices for the same or similar issues or
on the current rates offered to us for debt of the same remaining maturities or when not available, are estimated based on third-party broker
quotes or management's estimate of the fair value based on available trades for similar debt instruments. The fair value of all of our other
financial instruments approximates their carrying amounts.
Inventories - Inventories consist of land, land development, home construction costs, capitalized interest, construction
overhead and property taxes. Construction costs are accumulated during the period of construction and charged to cost of sales under
specific identification methods. Land, land development and common facility costs are allocated based on buildable acres to product types
within each community, then charged to cost of sales equally based upon the number of homes to be constructed in each product type.
We record inventories in our consolidated balance sheets at cost unless the inventory is determined to be impaired, in which
case the inventory is written down to its fair value. Our inventories consist of the following three components: (1) sold and unsold homes
and lots under development, which includes all construction, land, capitalized interest and land development costs related to started homes
and land under development in our active communities; (2) land and land options held for future development or sale, which includes all
costs related to land in our communities in planning or mothballed communities; and (3) consolidated inventory not owned, which includes
all costs related to variable interest entities, and other options, which consists primarily of model homes financed with an investor and
inventory related to land banking arrangements accounted for as financings.
We decide to mothball (or stop development on) certain communities when we determine that the current performance does
not justify further investment at the time. When we decide to mothball a community, the inventory is reclassified on our Consolidated
Balance Sheets from “Sold and unsold homes and lots under development” to “Land and land options held for future development or
sale.” During fiscal 2019, we did not mothball any communities, but we sold two previously mothballed communities and re-activated
three previously mothballed communities. As of October 31, 2019 and 2018, the net book value associated with our 13 and 18 total
mothballed communities was $13.8 million and $24.5 million, respectively, which was net of impairment charges recorded in prior periods
of $138.1 million and $186.1 million, respectively.
We sell and lease back certain of our model homes with the right to participate in the potential profit when each home is sold
to a third party at the end of the respective lease. As a result of our continued involvement, for accounting purposes in accordance with
ASC 606-10-55-68, these sale and leaseback transactions are considered a financing rather than a sale. Therefore, for purposes of our
Consolidated Balance Sheets, at October 31, 2019 and 2018, inventory of $54.2 million and $50.5 million, respectively, was recorded to
“Consolidated inventory not owned,” with a corresponding amount of $51.2 million and $43.9 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 the 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, for accounting purposes, in
accordance with ASC 606-10-55-70, these transactions are considered a financing rather than a sale. For purposes of our Consolidated
Balance Sheets, at October 31, 2019 and 2018, inventory of $136.1 million and $37.4 million, respectively, was recorded to “Consolidated
inventory not owned,” with a corresponding amount of $89.8 million and $19.5 million, respectively, recorded to “Liabilities from
inventory not owned” for the amount of net cash received from the transactions.
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The recoverability of inventories and other long-lived assets is assessed in accordance with the provisions of ASC 360-10,
“Property, Plant and Equipment – Overall.” ASC 360-10 requires long-lived assets, including inventories, held for development to be
evaluated for impairment based on undiscounted future cash flows of the assets at the lowest level for which there are identifiable cash
flows. As such, we evaluate inventories for impairment at the individual community level, the lowest level of discrete cash flows that we
measure.
We evaluate inventories of communities under development and held for future development for impairment when indicators
of potential impairment are present. Indicators of impairment include, but are not limited to, decreases in local housing market values,
decreases in gross margins or sales absorption rates, decreases in net sales prices (base sales price net of sales incentives), or actual or
projected operating or cash flow losses. The assessment of communities for indication of impairment is performed quarterly. As part of
this process, we prepare detailed budgets for all of our communities at least semi-annually and identify those communities with a projected
operating loss. For those communities with projected losses, we estimate the remaining undiscounted future cash flows and compare those
to the carrying value of the community, to determine if the carrying value of the asset is recoverable.
The projected operating profits, losses or cash flows of each community can be significantly impacted by our estimates of the
following:
●
●
●
●
future base selling prices;
future home sales incentives;
future home construction and land development costs; and
future sales absorption pace and cancellation rates.
These estimates are dependent upon specific market conditions for each community. While we consider available information
to determine what we believe to be our best estimates as of the end of a quarterly reporting period, these estimates are subject to change in
future reporting periods as facts and circumstances change. Local market-specific conditions that may impact our estimates for a
community include:
●
●
●
●
●
●
●
the intensity of competition within a market, including available home sales prices and home sales incentives offered
by our competitors;
the current sales absorption pace for both our communities and competitor communities;
community-specific attributes, such as location, availability of lots in the market, desirability and uniqueness of our
community, and the size and style of homes currently being offered;
potential for alternative product offerings to respond to local market conditions;
changes by management in the sales strategy of the community;
current local market economic and demographic conditions and related trends and forecasts; and
existing home inventory supplies, including foreclosures and short sales.
These and other local market-specific conditions that may be present are considered by management in preparing projection
assumptions for each community. The sales objectives can differ between our communities, even within a given market. For example,
facts and circumstances in a given community may lead us to price our homes with the objective of yielding a higher sales absorption pace,
while facts and circumstances in another community may lead us to price our homes to minimize deterioration in our gross margins,
although it may result in a slower sales absorption pace. In addition, the key assumptions included in our estimate of future undiscounted
cash flows may be interrelated. For example, a decrease in estimated base sales price or an increase in homes sales incentives may result
in a corresponding increase in sales absorption pace. Additionally, a decrease in the average sales price of homes to be sold and closed in
future reporting periods for one community that has not been generating what management believes to be an adequate sales absorption
pace may impact the estimated cash flow assumptions of a nearby community. Changes in our key assumptions, including estimated
construction and development costs, absorption pace and selling strategies, could materially impact future cash flow and fair value
estimates. Due to the number of possible scenarios that would result from various changes in these factors, we do not believe it is possible
to develop a sensitivity analysis with a level of precision that would be meaningful to an investor.
If the undiscounted cash flows are more than the carrying value of the community, then the carrying amount is recoverable,
and no impairment adjustment is required. However, if the undiscounted cash flows are less than the carrying amount, then the community
is deemed impaired and is written down to its fair value. We determine the estimated fair value of each community by determining the
present value of its estimated future cash flows at a discount rate commensurate with the risk of the respective community, or in limited
circumstances, prices for land in recent comparable sale transactions, market analysis studies, which include the estimated price a willing
buyer would pay for the land (other than in a forced liquidation sale), and recent bona fide offers received from outside third parties. Our
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discount rates used for all impairments recorded from October 31, 2017 to October 31, 2019 ranged from 16.8% to 19.8%. The estimated
future cash flow assumptions are virtually the same for both our recoverability and fair value assessments. Should the estimates or
expectations used in determining estimated cash flows or fair value, including discount rates, decrease or differ from current estimates in
the future, we may be required to recognize additional impairments related to current and future communities. The impairment of a
community is allocated to each lot on a relative fair value basis.
From time to time, we write off deposits and approval, engineering and capitalized interest costs when we determine that it is
no longer probable that we will exercise options to buy land in specific locations or when we redesign communities and/or abandon certain
engineering costs. In deciding not to exercise a land option, we take into consideration changes in market conditions, the timing of required
land takedowns, the willingness of land sellers to modify terms of the land option contract (including timing of land takedowns), and the
availability and best use of our capital, among other factors. The write-off is recorded in the period it is deemed not probable that the
optioned property will be acquired. In certain instances, we have been able to recover deposits and other pre-acquisition costs that were
previously written off. These recoveries have not been significant in comparison to the total costs written off.
Inventories held for sale are land parcels ready for sale in their current condition, where we have decided not to build homes
but are instead actively marketing for sale. These land parcels represented $6.4 million of our total inventories at October 31, 2018 and are
reported at the lower of carrying amount or fair value less costs to sell. There were no inventories held for sale at October 31, 2019. In
determining fair value for land held for sale, management considers, among other things, prices for land in recent comparable sale
transactions, market analysis studies, which include the estimated price a willing buyer would pay for the land (other than in a forced
liquidation sale) and recent bona fide offers received from outside third parties.
Warranty Costs and Construction Defect Reserves - We accrue for warranty costs that are covered under our existing general
liability and construction defect policy as part of our general liability insurance deductible. This accrual is expensed as selling, general and
administrative costs. For homes delivered in fiscal 2019 and 2018, our deductible under our general liability insurance is a $20 million
aggregate for construction defect and warranty claims. For bodily injury claims, our deductible per occurrence in fiscal 2019 and 2018 is
$0.25 million, up to a $5 million limit. Our aggregate retention for construction defect, warranty and bodily injury claims is $20 million
for fiscal 2019 and 2018. We do not have a deductible on our worker's compensation insurance. Reserves for estimated losses for
construction defects, warranty and bodily injury claims have been established using the assistance of a third-party actuary. We engage a
third-party actuary that uses our historical warranty and construction defect data to assist our management in estimating our unpaid claims,
claim adjustment expenses and incurred but not reported claims reserves for the risks that we are assuming under the general liability and
construction defect programs. The estimates include provisions for inflation, claims handling and legal fees. These estimates are subject
to a high degree of variability due to uncertainties such as trends in construction defect claims relative to our markets and the types of
products we build, claim settlement patterns, insurance industry practices and legal interpretations, among others. Because of the high
degree of judgment required in determining these estimated liability amounts, actual future costs could differ significantly from our
currently estimated amounts. In addition, we establish a warranty accrual for lower cost-related issues to cover home repairs, community
amenities and land development infrastructure that are not covered under our general liability and construction defect policy. We accrue
an estimate for these warranty costs as part of cost of sales at the time each home is closed and title and possession have been transferred
to the homebuyer. See Note 16 for additional information on the amount of warranty costs recognized in cost of goods sold and
administrative expenses.
Interest - Interest attributable to properties under development during the land development and home construction period is
capitalized and expensed along with the associated cost of sales as the related inventories are sold. Interest incurred in excess of interest
capitalized, which occurs when assets qualifying for interest capitalization are less than our outstanding debt balances, is expensed as
incurred in “Other interest.”
Interest costs incurred, expensed and capitalized were:
(In thousands)
Interest capitalized at beginning of year
Plus interest incurred(1)
Less cost of sales interest expensed
Less other interest expensed(2)(3)
Less interest contributed to unconsolidated joint venture(4)
Interest capitalized at end of year(5)
Year Ended
October 31,
October 31,
2019
$68,117
165,906
70,725
90,056
1,978
$71,264
2018
$71,051
161,048
60,685
103,297
-
$68,117
October 31,
2017
$96,688
160,203
88,536
97,304
-
$71,051
(1)
(2)
(3)
Data does not include interest incurred by our mortgage and finance subsidiaries.
Other interest expensed includes interest that does not qualify for interest capitalization because our assets that qualify for interest capitalization
(inventory under development) do not exceed our debt, which amounted to $56.9 million, $76.2 million and $69.1 million for the years ended
October 31, 2019, 2018 and 2017, respectively. Other interest also includes interest on completed homes, land in planning and fully developed
lots without homes under construction, which does not qualify for capitalization, and therefore, is expensed. This component of other interest
was $33.2 million, $27.1 million and $28.2 million for the years ended October 31, 2019, 2018 and 2017, respectively.
Cash paid for interest, net of capitalized interest, is the sum of other interest expensed, as defined above, and interest paid by our mortgage and
finance subsidiaries adjusted for the change in accrued interest on notes payable, which is calculated as follows:
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(In thousands)
Other interest expensed
Interest paid by our mortgage and finance subsidiaries
Decrease (increase) in accrued interest
Cash paid for interest, net of capitalized interest
Year Ended
October 31,
October 31,
2019
$90,056
2,536
16,515
$109,107
2018
$103,297
2,478
6,241
$112,016
October 31,
2017
$97,304
1,944
(9,412)
$89,836
(4)
(5)
Represents capitalized interest which was included as part of the assets contributed to the joint venture the Company entered into in June 2019,
as discussed in Note 20. There was no impact to the Consolidated Statement of Operations as a result of this transaction.
Capitalized interest amounts are shown gross before allocating any portion of impairments, if any, to capitalized interest.
Land Options - Costs incurred to obtain options to acquire improved or unimproved home sites are capitalized. Such amounts
are either included as part of the purchase price if the land is acquired or charged to “Inventory impairments loss and land option write-
offs” if we determine we will not exercise the option. If the options are with variable interest entities and we are the primary beneficiary,
we record the land under option on the Consolidated Balance Sheets under “Consolidated inventory not owned” with an offset under
“Liabilities from inventory not owned.” If the option has terms that require us to record it as financing, then we record the option on the
Consolidated Balance Sheets under “Consolidated inventory not owned” with an offset under “Liabilities from inventory not owned.” In
accordance with ASC 810-10 “Consolidation – Overall,” we record costs associated with other options on the Consolidated Balance Sheets
under “Land and land options held for future development or sale.”
Unconsolidated Homebuilding and Land Development Joint Ventures - Investments in unconsolidated homebuilding and land
development joint ventures are accounted for under the equity method of accounting. Under the equity method, we recognize our
proportionate share of earnings and losses earned by the joint venture upon the delivery of lots or homes to third parties. Our ownership
interests in the joint ventures vary but our voting interests are generally 50% or less. In determining whether or not we must consolidate
joint ventures where we are the managing member of the joint venture, we assess whether the other partners have specific rights to
overcome the presumption of control by us as the manager of the joint venture. In most cases, the presumption is overcome because the
joint venture agreements require that both partners agree on establishing the significant operating and capital decisions of the partnership,
including budgets, in the ordinary course of business. The evaluation of whether or not we control a venture can require significant
judgment. In accordance with ASC 323-10, “Investments - Equity Method and Joint Ventures – Overall,” we assess our investments in
unconsolidated joint ventures for recoverability, and if it is determined that a loss in value of the investment below its carrying amount is
other than temporary, we write down the investment to its fair value. We evaluate our equity investments for impairment based on the joint
venture’s projected cash flows. This process requires significant management judgment and estimates. During fiscal 2019 and fiscal 2017,
we wrote down certain joint venture investments by $0.9 million and $2.8 million, respectively. There were no write-downs in fiscal 2018.
Deferred Bond Issuance Costs - Costs associated with borrowings under our credit facilities and the issuance of senior secured
and senior notes are capitalized and amortized over the term of each note’s issuance. The capitalization of the costs are recorded as a contra
liability within our debt balances, except for the revolving credit facility costs, which are recorded as a prepaid asset.
Debt Issued At a Discount/Premium - Debt issued at a discount or premium to the face amount is amortized up or down, as
applicable, to its face amount utilizing the effective interest method over the term of the note and recorded as a component of interest on
the Consolidated Statements of Operations.
Advertising Costs - Advertising costs are expensed as incurred. During the years ended October 31, 2019, 2018 and 2017,
advertising costs expensed totaled $17.1 million, $16.4 million and $17.9 million, respectively.
Deferred Income Taxes - Deferred income taxes are provided for temporary differences between amounts recorded for
financial reporting and for income tax purposes. If the combination of future years’ income (or loss) combined with the reversal of the
timing differences results in a loss, such losses can be carried back to prior years or carried forward to future years to recover the deferred
tax assets. In accordance with ASC 740-10, “Income Taxes – Overall,” we evaluate our deferred tax assets quarterly to determine if
valuation allowances are required. ASC 740-10 requires that companies assess whether valuation allowances should be established based
on the consideration of all available evidence using a “more-likely-than-not” standard.
In evaluating the exposures associated with our various tax filing positions, we recognize tax liabilities in accordance with
ASC 740-10, for more likely than not exposures. We re-evaluate the exposures associated with our tax positions on a quarterly basis. This
evaluation is based on factors such as changes in facts or circumstances, changes in tax law, new audit activity by taxing authorities, and
effectively settled issues. Determining whether an uncertain tax position is effectively settled requires judgment. Such a change in
recognition or measurement would result in the recognition of a tax benefit or an additional charge to the tax provision. A number of years
may elapse before a particular matter for which we have established a liability is audited and fully resolved or clarified. We adjust our
liability for unrecognized tax benefits and income tax provision in the period in which an uncertain tax position is effectively settled, or
the statute of limitations expires for the relevant taxing authority to examine the tax position or when more information becomes available.
Due to the complexity of some of these uncertainties, the ultimate resolution may result in a liability that is materially different from our
current estimate. Any such changes will be reflected as increases or decreases to income tax expense in the period in which they are
determined.
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Prepaid Expenses - Prepaid expenses which relate to specific housing communities (model setup, architectural fees,
homeowner warranty program fees, etc.) are amortized to cost of sales as the applicable inventories are sold. All other prepaid expenses
are amortized over a specific time period or as used and charged to overhead expense.
Allowance for Doubtful Accounts – We regularly review our receivable balances, which are included in Receivables, deposits
and notes on the Consolidated Balance Sheets, for collectability and record an allowance against a receivable when it is deemed that
collectability is uncertain. These receivables include receivables from our insurance carriers, receivables from municipalities related to the
development of utilities or other infrastructure, and other miscellaneous receivables. The balance for allowance for doubtful accounts was
$12.2 million and $11.4 million at October 31, 2019 and 2018, respectively, which primarily related to allowances for receivables from
municipalities and an allowance for a receivable for a prior year land sale. During fiscal 2019 and 2018, we recorded $0.5 million and $0.6
million, respectively, in recoveries. During fiscal 2019 and 2018, we recorded $1.3 million and $4.8 million of additional reserves,
respectively. There were $0.1 million of write-offs in fiscal 2018.
Stock Options - We account for our stock options under ASC 718-10, “Compensation - Stock Compensation – Overall,” which
requires the fair-value based method of accounting for stock awards granted to employees and measures and records the cost of employee
services received in exchange for an award of equity instruments based on the grant-date fair value of the award. That cost is recognized
over the period during which an employee is required to provide service in exchange for the award.
Compensation cost arising from nonvested stock granted to employees and from nonemployee stock awards is based on the
fair value of the awards at the grant date recognized as expense using the straight-line method over the vesting period.
Per Share Calculations - Basic earnings per share is computed by dividing net income (loss) (the “numerator”) by the
weighted-average number of common shares outstanding, adjusted for nonvested shares of restricted stock (the “denominator”) for the
period. Computing diluted earnings per share is similar to computing basic earnings per share, except that the denominator is increased to
include the dilutive effects of options and nonvested shares of restricted stock, as well as common shares issuable upon exchange of our
Senior Exchangeable Notes issued as part of our 6.0% Exchangeable Note Units (which matured and were paid in full in fiscal 2018). Any
options that have an exercise price greater than the average market price are considered to be anti-dilutive and are excluded from the diluted
earnings per share calculation.
All outstanding nonvested shares that contain nonforfeitable rights to dividends or dividend equivalents that participate in
undistributed earnings with common stock are considered participating securities and are included in computing earnings per share
pursuant to the two-class method. The two-class method is an earnings allocation formula that determines earnings per share for each class
of common stock and participating securities according to dividends or dividend equivalents and participation rights in undistributed
earnings in periods where we have net income. The Company’s restricted common stock (“nonvested shares”) are considered participating
securities.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2014-09, “Revenue from Contracts with
Customers” (Topic 606), (“ASU 2014-09”). ASU 2014-09 requires entities to recognize revenue that represents the transfer of promised
goods or services to customers in an amount equivalent to the consideration to which the entity expects to be entitled to in exchange for
those goods or services. The following steps should be applied to determine this amount: (1) identify the contract(s) with a customer; (2)
identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance
obligations in the contract; and (5) recognize revenue when (or as) the entity satisfies a performance obligation. ASU 2014-09 supersedes
the revenue recognition requirements in ASC 605, “Revenue Recognition,” and most industry-specific guidance in the Accounting
Standards Codification. The FASB has also issued a number of updates to this standard. The standard was effective for us for annual and
interim periods beginning November 1, 2018 and we applied the modified retrospective method of adoption. The implementation did not
result in any significant changes to our business processes, systems, or internal controls, or have a material impact on our Consolidated
Financial Statements.
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)” (“ASU 2016-02”), which provides guidance for
accounting for leases. ASU 2016-02 requires lessees to classify leases as either finance or operating leases and to record a right-of-use
asset and a lease liability for all leases with a term greater than 12 months regardless of the lease classification. The lease classification
will determine whether the lease expense is recognized based on an effective interest rate method or on a straight line basis over the term
of the lease. Accounting for lessors remains largely unchanged from current GAAP. ASU 2016-02 is effective for the Company beginning
November 1, 2019. In July 2018, the FASB issued ASU No. 2018-10 “Codification Improvements to Topic 842, Leases” (“ASU 2018-
10”) and ASU No. 2018-11 “Leases (Topic 842) Targeted Improvements” (“ASU 2018-11”). ASU 2018-10 provides certain amendments
that affect narrow aspects of the guidance issued in ASU 2016-02. ASU 2018-11 allows all entities adopting ASU 2016-02 to choose an
additional (and optional) transition method of adoption, under which an entity initially applies the new leases standard at the adoption date
and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. ASU 2018-11 also
allows lessors to not separate nonlease components from the associated lease component if certain conditions are met. We have elected to
apply the modified retrospective transition approach. Our consolidated balance sheets will be impacted by the recording of a right of use
asset and corresponding lease liability for substantially all of our current operating leases, which is primarily comprised of office space
leases. The liability will be equal to the present value of the remaining lease payments, which we estimate will be approximately
$25 million, while the right of use asset will be based on the liability, subject to adjustment, such as for internal direct costs. The right of
use asset and lease liability are expected to have a gross-up impact on our consolidated balance sheets, however, we do not expect this to
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have a material impact on our consolidated statements of operations or cash flows. We also do not expect significant changes to our
business processes, systems, or internal controls as a result of implementing this standard.
In July 2018, the FASB issued ASU No. 2018-09, “Codification Improvements” (“ASU 2018-09”). ASU 2018-09 provides
amendments to a wide variety of topics in the FASB’s Accounting Standards Codification, which applies to all reporting entities within
the scope of the affected accounting guidance. The transition and effective date guidance are based on the facts and circumstances of each
amendment. Some of the amendments in ASU 2018-09 do not require transition guidance and were effective upon issuance of ASU 2018-
09. However, many of the amendments do have transition guidance with effective dates for annual periods beginning after December 15,
2018. We do not expect any material impact of adopting the applicable guidance on our Consolidated Financial Statements.
In August 2018, the FASB issued ASU No. 2018-13, “Fair Value Measurement (Topic 820) - Disclosure Framework” (“ASU
2018-13”), which improves the disclosure requirements for fair value measurements. ASU 2018-13 is effective for us beginning
November 1, 2020. Early adoption is permitted for any removed or modified disclosures. We are currently evaluating the potential impact
of adopting this guidance on our Consolidated Financial Statements.
In August 2018, the FASB issued ASU No. 2018-15 “Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-
40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract” (“ASU
2018-15”). ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service
contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. ASU 2018-15 is
effective for us beginning November 1, 2020. Early adoption is permitted. We are currently evaluating the potential impact of adopting
this guidance on our Consolidated Financial Statements.
4. Leases
We lease certain property under non-cancelable leases. Office leases are generally for terms of three to five years and generally
provide renewal options. Model home leases are generally for shorter terms of approximately one to three years with renewal options on
a month-to-month basis. In most cases, we expect that in the normal course of business, leases that will expire will be renewed or replaced
by other leases. The future lease payments required under operating leases that have initial or remaining non-cancelable terms in excess of
one year are as follows:
Years Ending October 31,
2020
2021
2022
2023
2024
Thereafter
Total
(In thousands)
$9,785
8,009
6,713
3,384
1,188
1,754
$30,833
Net rental expense for the three years ended October 31, 2019, 2018 and 2017, was $14.8 million, $14.4 million and $10.8
million, respectively. These amounts represent all of the above described lease types and also include rent expense for our corporate
headquarters and various month-to-month leases on model homes, furniture and equipment. Certain leases contain renewal or purchase
options and generally provide that the Company shall pay for insurance, taxes and maintenance.
5. Property, Plant and Equipment
Homebuilding property, plant, and equipment consists of land, land improvements, buildings, building improvements,
furniture and equipment used to conduct day-to-day business and are recorded at cost less accumulated depreciation.
Property, plant, and equipment balances as of October 31, 2019 and 2018 were as follows:
(In thousands)
Land and land improvements
Buildings
Building improvements
Furniture
Equipment, including capitalized software
Total
Less accumulated depreciation
Total
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October 31,
2019
2018
$1,639
9,155
11,552
4,338
35,423
62,107
41,980
20,127
$1,639
9,155
10,958
5,305
33,015
60,072
39,787
20,285
6. Restricted Cash and Deposits
Homebuilding - Restricted cash and cash equivalents on the Consolidated Balance Sheets totaled $20.9 million and $12.8
million as of October 31, 2019 and 2018, respectively, which primarily consists of cash collateralizing our letter of credit agreements and
facilities as discussed in Note 9.
Financial services restricted cash and cash equivalents, which are included in Financial services other assets on the
Consolidated Balance Sheets, totaled $24.8 million and $25.4 million as of October 31, 2019 and 2018, respectively. Included in these
balances were (1) financial services customers’ deposits of $22.8 million at October 31, 2019 and $23.4 million as of October 31, 2018,
which are subject to restrictions on our use, and (2) $2.0 million at both October 31, 2019 and 2018 of restricted cash under the terms of
our mortgage warehouse lines of credit.
Total Homebuilding Customers’ deposits are shown as a liability on the Consolidated Balance Sheets. These liabilities are
significantly more than the applicable periods’ restricted cash balances because in some states the deposits are not restricted from use and,
in other states, we are able to release the majority of these customer deposits to cash by pledging letters of credit and surety bonds.
7. Mortgage Loans Held for Sale
Our wholly owned mortgage banking subsidiary, K. Hovnanian American Mortgage, LLC (“K. Hovnanian Mortgage”)
originates mortgage loans, primarily from the sale of our homes. Such mortgage loans are sold in the secondary mortgage market within a
short period of time of origination. Mortgage loans held for sale consist primarily of single-family residential loans collateralized by the
underlying property. We have elected the fair value option to record loans held for sale and therefore these loans are recorded at fair value
with the changes in the value recognized in the Consolidated Statements of Operations in “Revenues: Financial services.” We currently
use forward sales of mortgage-backed securities (“MBS”), interest rate commitments from borrowers and mandatory and/or best efforts
forward commitments to sell loans to third-party purchasers to protect us from interest rate fluctuations. These short-term instruments,
which do not require any payments to be made to the counterparty or purchaser in connection with the execution of the commitments, are
recorded at fair value. Gains and losses on changes in the fair value are recognized in the Consolidated Statements of Operations in
“Revenues: Financial services.”
At October 31, 2019 and 2018, $143.2 million and $115.2 million, respectively, of mortgages held for sale were pledged
against our mortgage warehouse lines of credit (see Note 8). We may incur losses with respect to mortgages that were previously sold that
are delinquent and which had underwriting defects, but only to the extent the losses are not covered by mortgage insurance or resale value
of the home. The reserves for these estimated losses are included in the “Financial services” liability balances on the Consolidated Balance
Sheets. As of October 31, 2019 and 2018, we had reserves specifically for 20 and 46 identified mortgage loans, respectively, as well as
reserves for an estimate for future losses on mortgages sold but not yet identified to us. In fiscal 2018, the adjustment to pre-existing
provisions for losses from changes in estimates was primarily due to the settlement of a dispute for significantly less than the amount that
had been previously reserved.
The activity in our loan origination reserves in fiscal 2019 and 2018 was as follows:
(In thousands)
Loan origination reserves, beginning of period
Provisions for losses during the period
Adjustments to pre-existing provisions for losses from changes in estimates
Payments/settlements
Loan origination reserves, end of period
8. Mortgages
Year Ended
October 31,
2019
2018
$2,563
198
(143)
(1,350)
$1,268
$3,158
160
(755)
-
$2,563
Nonrecourse. We have nonrecourse mortgage loans for certain communities totaling $203.6 million and $95.6 million (net of
debt issuance costs) at October 31, 2019 and 2018, respectively, which are secured by the related real property, including any
improvements, with an aggregate book value of $410.2 million and $241.9 million, respectively. The weighted-average interest rate on
these obligations was 8.3% and 6.1% at October 31, 2019 and 2018, respectively, and the mortgage loan payments on each community
primarily correspond to home deliveries.
Mortgage loans. K. Hovnanian Mortgage originates mortgage loans primarily from the sale of our homes. Such mortgage
loans and related servicing rights are sold in the secondary mortgage market within a short period of time. In certain instances, we retain
the servicing rights for a small amount of loans. K. Hovnanian Mortgage finances the origination of mortgage loans through various master
repurchase agreements, which are recorded in financial services liabilities on the Consolidated Balance Sheets.
70
Our secured Master Repurchase Agreement with JPMorgan Chase Bank, N.A. (“Chase Master Repurchase Agreement”) is a
short-term borrowing facility that provides up to $50.0 million through its maturity on January 31, 2020. The loan is secured by the
mortgages held for sale and is repaid when we sell the underlying mortgage loans to permanent investors. Interest is payable monthly on
outstanding advances at an adjusted LIBOR rate, which was 1.78% at October 31, 2019, plus the applicable margin of 2.5% or 2.625%
based upon type of loan. As of October 31, 2019 and 2018, the aggregate principal amount of all borrowings outstanding under the Chase
Master Repurchase Agreement was $47.1 million and $40.3 million, respectively.
K. Hovnanian Mortgage has another secured Master Repurchase Agreement with Customers Bank (“Customers Master
Repurchase Agreement”) which is a short-term borrowing facility that provides up to $50.0 million through its maturity on February 14,
2020. The loan is secured by the mortgages held for sale and is repaid when we sell the underlying mortgage loans to permanent
investors. Interest is payable daily or as loans are sold to permanent investors on outstanding advances at the current LIBOR rate, plus the
applicable margin ranging from 2.25% to 5.0% based on the type of loan and the number of days outstanding on the warehouse line. As
of October 31, 2019 and 2018, the aggregate principal amount of all borrowings outstanding under the Customers Master Repurchase
Agreement was $47.6 million and $40.2 million, respectively.
K. Hovnanian Mortgage also has a secured Master Repurchase Agreement with Comerica Bank (“Comerica Master
Repurchase Agreement”) which is a short-term borrowing facility that provides up to $50.0 million through its maturity on June 17, 2020.
The loan is secured by the mortgages held for sale and is repaid when we sell the underlying mortgage loans to permanent investors. Interest
is payable monthly at the current LIBOR rate, subject to a floor of 0.25%, plus the applicable margin of 2.0% or 3.25% based upon the
type of loan. As of October 31, 2019 and 2018, the aggregate principal amount of all borrowings outstanding under the Comerica Master
Repurchase Agreement was $45.5 million and $32.7 million, respectively.
The Chase Master Repurchase Agreement, Customers Master Repurchase Agreement and Comerica Master Repurchase
Agreement (together, the “Master Repurchase Agreements”) require K. Hovnanian Mortgage to satisfy and maintain specified financial
ratios and other financial condition tests. Because of the extremely short period of time mortgages are held by K. Hovnanian Mortgage
before the mortgages are sold to investors (generally a period of a few weeks), the immateriality to us on a consolidated basis of the size
of the Master Repurchase Agreements, the levels required by these financial covenants, our ability based on our immediately available
resources to contribute sufficient capital to cure any default, were such conditions to occur, and our right to cure any conditions of default
based on the terms of the applicable agreement, we do not consider any of these covenants to be substantive or material. As of October 31,
2019, we believe we were in compliance with the covenants under the Master Repurchase Agreements.
9. Senior Notes and Credit Facilities
Senior notes and credit facilities balances as of October 31, 2019 and October 31, 2018, were as follows:
(In thousands)
Senior Secured Notes:
9.5% Senior Secured Notes due November 15, 2020
2.0% Senior Secured Notes due November 1, 2021
5.0% Senior Secured Notes due November 1, 2021
10.0% Senior Secured Notes due July 15, 2022
10.5% Senior Secured Notes due July 15, 2024
7.75% Senior Secured 1.125 Lien Notes due February 15, 2026
10.5% Senior Secured 1.25 Lien Notes due February 15, 2026
11.25% Senior Secured 1.5 Lien Notes due February 15, 2026
Total Senior Secured Notes
Senior Notes:
8.0% Senior Notes due November 1, 2019 (2)
13.5% Senior Notes due February 1, 2026
5.0% Senior Notes due February 1, 2040
Total Senior Notes
Senior Unsecured Term Loan Credit Facility due February 1, 2027
Senior Secured Revolving Credit Facility (3)
Net discounts and premium
Net debt issuance costs
Total notes payable, net of discount, premium and debt issuance costs
October 31,
2019(1)
October 31,
2018(1)
$-
-
-
218,994
211,391
350,000
282,322
103,141
$1,165,848
$-
90,590
90,120
$180,710
$202,547
$-
$(49,145)
$(19,970)
$1,479,990
$75,000
53,203
141,797
440,000
400,000
-
-
-
$1,110,000
$-
90,590
90,120
$180,710
$202,547
$-
$(39,934)
$(14,085)
$1,439,238
(1) “Notes payable” on our Consolidated Balance Sheets as of October 31, 2019 and 2018 consists of the total senior secured and senior notes shown above, as well as accrued
interest of $19.1 million and $35.6 million, respectively.
(2) $26.0 million of 8.0% Senior Notes due 2019 are owned by a wholly-owned consolidated subsidiary of HEI. Therefore, in accordance with GAAP, such notes are not reflected
on the Consolidated Balance Sheets of HEI. On November 1, 2019, the maturity of the 8.0% Senior Notes was extended to November 1, 2027.
(3) At October 31, 2019, provides for up to $125.0 million in aggregate amount of senior secured first lien revolving loans. Availability thereunder will terminate
on December 28, 2022.
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As of October 31, 2019, future maturities of our borrowings were as follows (in thousands):
Fiscal Year Ended October 31, (1)
2020
2021
2022
2023
2024
Thereafter
Total
$-
-
218,994
-
211,391
1,118,720
$1,549,105
(1) Does not include our $125.0 million Senior Secured Revolving Credit Facility under which there were no borrowings outstanding as of October 31,
2019.
General
Except for K. Hovnanian, the issuer of the notes and borrower under the Credit Facilities (as defined below), our home
mortgage subsidiaries, certain of our title insurance subsidiaries, joint ventures and subsidiaries holding interests in our joint ventures, we
and each of our subsidiaries are guarantors of the Credit Facilities, the senior secured notes and senior notes outstanding at October 31,
2019 (collectively, the “Notes Guarantors”), which include the subsidiaries that had guaranteed (collectively, the “Former New Secured
Group Guarantors”) K. Hovnanian’s 9.50% Notes, 2.000% Notes and 5.000% Notes (each as defined under “—Fiscal 2019” below). As a
result of the 2019 Transactions (as defined in and described under “—Fiscal 2019” below), K. Hovnanian’s obligations under the Credit
Facilities, the senior secured notes and senior notes are guaranteed by the Notes Guarantors (including the Former New Secured Group
Guarantors) and, in the case of the Senior Secured Revolving Credit Facility and the senior secured notes, will be secured in accordance
with the terms of the applicable Debt Instrument by substantially all of the assets owned by K. Hovnanian and the Notes Guarantors
(including the assets owned by the Former New Secured Group Guarantors), subject to permitted liens and certain exceptions.
The credit agreements governing the Credit Facilities and the indentures governing the senior secured and senior notes
(together, the “Debt Instruments”) outstanding at October 31, 2019 do not contain any financial maintenance covenants, but do contain
restrictive covenants that limit, among other things, the Company’s ability and that of certain of its subsidiaries, including K. Hovnanian,
to incur additional indebtedness (other than non-recourse indebtedness, certain permitted indebtedness and refinancing indebtedness), pay
dividends and make distributions on common and preferred stock, repay certain indebtedness prior to its respective stated maturity,
repurchase common and preferred stock, make other restricted payments (including investments), sell certain assets (including in certain
land banking transactions), incur liens, consolidate, merge, sell or otherwise dispose of all or substantially all of their assets and enter into
certain transactions with affiliates. The Debt Instruments also contain customary events of default which would permit the lenders or
holders thereof to exercise remedies with respect to the collateral (as applicable), declare the loans made under the Term Loan Facility
(defined below) (the “Term Loans”) and loans made under the Secured Credit Agreement (as defined below) (the “Secured Revolving
Loans”) or notes to be immediately due and payable if not cured within applicable grace periods, including the failure to make timely
payments on the 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
Term Loans and Secured Revolving Loans, material inaccuracy of representations and warranties and with respect to the Term Loans and
Secured Revolving Loans, a change of control, and, with respect to the Secured Revolving Loans and senior secured notes, the failure of
the documents granting security for the Secured Revolving Loans and senior secured notes to be in full force and effect, and the failure of
the liens on any material portion of the collateral securing the Secured Revolving Loans and senior secured notes to be valid and perfected.
As of October 31, 2019, we believe we were in compliance with the covenants of the Debt Instruments.
If our consolidated fixed charge coverage ratio is less than 2.0 to 1.0, as defined in the applicable Debt Instrument, we are
restricted from making certain payments, including dividends, and from incurring indebtedness other than certain permitted indebtedness,
refinancing indebtedness and nonrecourse indebtedness. As a result of this ratio restriction, we are currently restricted from paying
dividends (in the case of the payment of dividends on preferred stock, our secured debt leverage ratio must also be less than 4.0 to 1.0),
which are not cumulative, on our 7.625% Series A Preferred Stock. We anticipate that we will continue to be restricted from paying
dividends for the foreseeable future. Our inability to pay dividends is in accordance with covenant restrictions and will not result in a
default under our Debt Instruments or otherwise affect compliance with any of the covenants contained in our Debt Instruments.
Under the terms of our Debt Instruments, we have the right to make certain redemptions and prepayments and, depending on
market conditions 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
and/or extend maturities, and will seek to do so with the right opportunity. We may also continue to make debt purchases and/or exchanges
for debt or equity from time to time through tender offers, exchange offers, open market purchases, private transactions, or otherwise, or
seek to raise additional debt or equity capital, depending on market conditions and covenant restrictions.
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Fiscal 2019
On January 15, 2019, pursuant to the Commitment Letter (defined below under “ - Fiscal 2018”), the Company issued $25.0
million in aggregate principal amount of the Additional 10.5% 2024 Notes to the GSO Entities (defined below under “- Fiscal 2018”) at a
discount for a purchase price of $21.3 million in cash. The Additional 10.5% 2024 Notes were issued as additional notes of the same series
as the 10.5% 2024 Notes.
On October 31, 2019, K. Hovnanian, the Company, the Notes Guarantors, Wilmington Trust, National Association, as
administrative agent, and affiliates of certain investment managers (the “Investors”), as lenders, entered into a credit agreement (the
“Secured Credit Agreement” and, together with the Term Loan Facility, the “Credit Facilities”) providing for up to $125.0 million in
aggregate amount of Secured Revolving Loans to be used for general corporate purposes, upon the terms and subject to the conditions set
forth therein. Secured Revolving Loans are to be borrowed by K. Hovnanian and guaranteed by the Notes Guarantors. Availability under
the Secured Credit Agreement will terminate on December 28, 2022 and the Secured Revolving Loans will bear interest at a rate per annum
equal to 7.75%, and interest will be payable in arrears, on the last business day of each fiscal quarter. In connection with the entering into
of the Secured Credit Agreement, K. Hovnanian terminated the 2018 Secured Credit Facility (as defined below under “—Fiscal 2018”).
On October 31, 2019, K. Hovnanian completed private placements of senior secured notes as follows: (i) K. Hovnanian issued
an aggregate of $350.0 million of 7.75% Senior Secured 1.125 Lien Notes due 2026 (the “1.125 Lien Notes”) in part pursuant to a Note
Purchase Agreement, dated October 31, 2019, among K. Hovnanian, the Notes Guarantors and certain Investors as purchasers thereof (the
“1.125 Lien Notes Purchase Agreement”) and in part pursuant to the Exchange Agreement (as defined below), with the proceeds from the
sale of 1.125 Lien Notes under the 1.125 Lien Notes Purchase Agreement used to fund the cash payments to certain Exchanging Holders
(as defined below) under the Exchange Agreement; and (ii) K. Hovnanian issued an aggregate of $282.3 million of 10.5% Senior Secured
1.25 Lien Notes due 2026 (the “1.25 Lien Notes”), pursuant to a Note Purchase Agreement (the “1.25 Lien Notes Purchase Agreement”),
dated October 31, 2019, among K. Hovnanian, the Notes Guarantors and certain Investors as purchasers thereof (the “1.25 Lien Notes
Purchasers”), the proceeds of which were used to fund the Satisfaction and Discharge (as defined below).
In addition, on October 31, 2019, K. Hovnanian completed private exchanges of (i) approximately $221.0 million aggregate
principal amount of its 10.0% Senior Secured Notes due 2022 (the “10.0% 2022 Notes”) and approximately $114.0 million aggregate
principal amount of its 10.5% Senior Secured Notes due 2024 (the “10.5% 2024 Notes” and, together with the 10.0% 2022 Notes, the
“Second Lien Notes”) held by certain participating bondholders (the “Exchanging Holders”) for a portion of the $350.0 million aggregate
principal amount of 1.125 Lien Notes described above and/or cash, and (ii) approximately $99.6 million aggregate principal amount of its
10.5% 2024 Notes held by certain of the Exchanging Holders for approximately $103.1 million aggregate principal amount of 11.25%
Senior Secured 1.5 Lien Notes due 2026 (the “1.5 Lien Notes” and, together with the 1.125 Lien Notes and the 1.25 Lien Notes, the “New
Secured Notes”), pursuant to an Exchange Agreement, dated October 30, 2019 (the “Exchange Agreement”), among K. Hovnanian, the
Notes Guarantors and the Exchanging Holders.
On October 31, 2019, K. Hovnanian issued notices of redemption for all of its outstanding 9.50% Senior Secured Notes due
2020 (the “9.50% Notes”), 2.000% Senior Secured Notes due 2021 (the “2.000% Notes”) and 5.000% Senior Secured Notes due 2021 (the
“5.000% Notes”) and deposited with Wilmington Trust, National Association, as trustee under the indenture (the “9.50% Notes Indenture”)
governing the 9.50% Notes and as trustee under the indenture (the “5.000%/2.000% Notes Indenture”) governing the 5.000% Notes and
the 2.000% Notes sufficient funds to satisfy and discharge (collectively, the “Satisfaction and Discharge”) (i) the 9.50% Indenture and to
fund the redemption of all outstanding 9.50% Notes and to pay accrued and unpaid interest on the redeemed notes to, but not including,
the November 10, 2019 redemption date and (ii) the 5.000%/2.000% Indenture and to fund the redemption of all outstanding 5.000% Notes
and 2.000% Notes and to pay accrued and unpaid interest on the redeemed notes to, but not including, the November 30, 2019 redemption
date. Proceeds from the issuance of the 1.25 Lien Notes together with cash on hand were used to fund the Satisfaction and Discharge.
Upon the Satisfaction and Discharge of the 9.50% Notes Indenture, all of the collateral securing the 9.50% Notes was released and the
restrictive covenants and events of default contained therein ceased to have effect and upon the Satisfaction and Discharge of the
5.000%/2.000% Notes Indenture, all of the collateral securing the 5.000% Notes and the 2.000% Notes was released and the restrictive
covenants and events of default contained therein ceased to have effect as to both such series of Notes.
The Company and K. Hovnanian obtained the consent of certain lenders/holders under its existing debt instruments to amend
such debt instruments in connection with the issuance of the New Secured Notes and the execution of the indentures governing the New
Secured Notes and the Secured Credit Agreement. The Company, K. Hovnanian and the guarantors also amended such debt instruments
to add the Former New Secured Group Guarantors as guarantors thereunder and, in the case of the Second Lien Notes, to add the Former
New Secured Group Guarantors as pledgors and grantors of their assets (subject to permitted liens and certain exceptions) to secure such
Second Lien Notes.
The transactions that were consummated on October 31, 2019, as described, are collectively referred to herein as the “2019
Transactions.” The 2019 Transactions resulted in a loss in extinguishment of debt of $42.4 million for the year ended October 31, 2019,
which is included as “Loss on Extinguishment of Debt” on the Consolidated Statement of Operations.
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Fiscal 2018
On December 1, 2017, our 6.0% Senior Exchangeable Note Units were paid in full, which units consisted of $53.9 million
principal amount of our Senior Exchangeable Notes that matured and the final installment payment of $2.1 million on our 11.0% Senior
Amortizing Notes.
On December 28, 2017, the Company and K. Hovnanian announced that they had entered into a commitment letter (the
“Commitment Letter”) in respect of certain financing transactions with GSO Capital Partners LP (“GSO”) on its own behalf and on behalf
of one or more funds managed, advised or sub-advised by GSO (collectively, the “GSO Entities”), and had commenced a private exchange
offer with respect to the 8.0% Senior Notes due 2019 (on November 1, 2019, the maturity of such Notes was extended to 2027) (the “8.0%
Notes”) (the “Exchange Offer”).
Pursuant to the Commitment Letter, the GSO Entities agreed to, among other things, provide the principal amount of the
following: (i) a senior unsecured term loan credit facility (the “Term Loan Facility”) to be borrowed by K. Hovnanian and guaranteed by
the Company and certain of its subsidiaries, pursuant to which the GSO Entities committed to lend K. Hovnanian Term Loans consisting
of $132.5 million of initial term loans (the “Initial Term Loans”) on the settlement date of the Exchange Offer for purposes of refinancing
K. Hovnanian’s 7.0% Senior Notes due 2019 (the “7.0% Notes”), and up to $80.0 million of delayed draw term loans (the “Delayed Draw
Term Loans”) for purposes of refinancing certain of the 8.0% Notes, in each case, upon the terms and subject to the conditions set forth
therein, and (ii) a senior secured first lien credit facility (the “2018 Secured Credit Facility”) to be borrowed by K. Hovnanian and
guaranteed by certain of its subsidiaries, pursuant to which the GSO Entities committed to lend to K. Hovnanian up to $125.0 million of
senior secured first priority loans to fund the repayment of K. Hovnanian’s then outstanding secured term loans and for general corporate
purposes, upon the terms and subject to the conditions set forth therein. In addition, pursuant to the Commitment Letter, the GSO Entities
committed to purchase, and K. Hovnanian agreed to issue and sell, on January 15, 2019, $25.0 million in aggregate principal amount of
additional 10.5% 2024 Notes (the “Additional 10.5% 2024 Notes”), upon the terms and subject to conditions set forth therein.
On January 29, 2018, K. Hovnanian, the Notes Guarantors, Wilmington Trust, National Association, as administrative agent,
and the GSO Entities entered into the Term Loan Facility. K. Hovnanian borrowed the Initial Term Loans on February 1, 2018 to fund,
together with cash on hand, the redemption on February 1, 2018 of all $132.5 million aggregate principal amount of 7.0% Notes, which
resulted in a loss on extinguishment of debt of $0.5 million for the nine months ended July 31, 2018. On May 29, 2018, K. Hovnanian
completed the redemption of $65.7 million aggregate principal amount of the 8.0% Notes (representing all of the outstanding 8.0% Notes,
excluding the $26 million of 8% Notes held by the Subsidiary Purchaser (as defined below)) with approximately $70.0 million in
borrowings on the Delayed Draw Term Loans under the Unsecured Term Loan Facility (with the completion of this redemption, the
remaining committed amounts under the Delayed Draw Term Loans may not be borrowed). This transaction resulted in a loss on
extinguishment of debt of $4.3 million for the year ended October 31, 2018. The Term Loans bear interest at a rate equal to 5.0% per
annum and interest is payable in arrears, on the last business day of each fiscal quarter. The Term Loans will mature on February 1, 2027.
On January 29, 2018, K. Hovnanian, the subsidiary guarantors named therein, Wilmington Trust, National Association, as
administrative agent, and the GSO Entities entered into the Secured Credit Facility, which provided for a $125.0 million secured revolving
credit facility. This Secured Credit Facility was terminated on October 31, 2019 in connection with the 2019 Transactions.
On February 1, 2018, K. Hovnanian accepted all of the $170.2 million aggregate principal amount of 8.0% Notes validly
tendered and not validly withdrawn in the Exchange Offer (representing 72.14% of the aggregate principal amount of 8.0% Notes
outstanding prior to the Exchange Offer), and in connection therewith, K. Hovnanian issued $90.6 million aggregate principal amount of
its 13.5% Senior Notes due 2026 (the “2026 Notes”) and $90.1 million aggregate principal amount of its 5.0% Senior Notes due 2040 (the
“2040 Notes”) under a new indenture. Also, as part of the Exchange Offer, K. Hovnanian at Sunrise Trail III, LLC, a wholly-owned
subsidiary of the Company (the “Subsidiary Purchaser”), purchased for $26.5 million in cash an aggregate of $26.0 million in principal
amount of the 8.0% Notes (the “Purchased 8.0% Notes”). The 2026 Notes and the 2040 Notes were issued by K. Hovnanian and guaranteed
by certain of its subsidiaries, except the Subsidiary Purchaser, which does not guarantee the 2026 Notes or the 2040 Notes. The 2026 Notes
bear interest at 13.5% per annum and mature on February 1, 2026. The 2040 Notes bear interest at 5.0% per annum and mature on February
1, 2040. Interest on the 2026 Notes and the 2040 Notes is payable semi-annually on February 1 and August 1 of each year to holders of
record at the close of business on January 15 or July 15, as the case may be, immediately preceding each such interest payment date. The
Exchange Offer was treated as a substantial modification of debt, and resulted in a loss on extinguishment of debt of $0.9 million for the
fiscal year ended October 31, 2018. The 2026 Notes and the 2040 Notes were recorded at fair value (based on management's estimate
using available trades for similar debt instruments) on the date of the issuance of the 2026 Notes and the 2040 Notes.
K. Hovnanian’s 2026 Notes are redeemable in whole or in part at K. Hovnanian’s option at any time prior to February 1, 2025
at a redemption price equal to 100% of their principal amount plus an applicable “Make Whole Amount”. At any time and from time to
time on or after February 1, 2025, K. Hovnanian may also redeem some or all of the 2026 Notes at a redemption price equal to 100.0% of
their principal amount.
K. Hovnanian’s 2040 Notes are redeemable in whole or in part at K. Hovnanian’s option at any time prior to February 1, 2020
at a redemption price equal to 100.0% of their principal amount plus an applicable “Make-Whole Amount”. At any time and from time to
time on or after February 1, 2020 and prior to February 1, 2021 K. Hovnanian may redeem some or all of the 2040 Notes at a redemption
price equal to 102.50% of their principal amount and at any time and from time to time after February 1, 2020, K. Hovnanian may also
redeem some or all of the 2040 Notes at a redemption price equal to 100.0% of their principal amount.
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Fiscal 2017
During the year ended October 31, 2017, we repurchased in open market transactions $17.5 million aggregate principal amount
of 7.0% Notes, $14.0 million aggregate principal amount of 8.0% Notes and 6,925 senior exchangeable note units representing $6.9 million
stated amount of senior exchangeable note units. The aggregate purchase price for these transactions was $30.8 million, plus accrued and
unpaid interest. These transactions resulted in a gain on extinguishment of debt of $7.8 million, which is included as “Loss on
Extinguishment of Debt” on the Consolidated Statement of Operations. This gain was offset by $0.4 million of costs associated with the
9.50% 2020 Notes issued during the fourth quarter of fiscal 2016 and the debt transactions during the third quarter of fiscal 2017 discussed
below.
On July 27, 2017, K. Hovnanian issued $440.0 million aggregate principal amount of 10.0% 2022 Notes and $400.0 million
aggregate principal amount of 10.5% 2024 Notes. The net proceeds from these issuances together with available cash were used to (i)
purchase $575,912,000 principal amount of 7.25% Senior Secured First Lien Notes due 2020 (the “7.25% First Lien Notes”), $87,321,000
principal amount of 9.125% Senior Secured Second Lien Notes due 2020 (the “9.125% Second Lien Notes” and, together with the 7.25%
First Lien Notes, the “2020 Secured Notes”) and all $75,000,000 principal amount of 10.0% Senior Secured Second Lien Notes due 2018
(the “10.0% Second Lien Notes”) that were tendered and accepted for purchase pursuant to K. Hovnanian’s offers to purchase for cash
(the “Tender Offers”) any and all of the 7.25% First Lien Notes, the 9.125% Second Lien Notes and the 10.0% Second Lien Notes and to
pay related tender premiums and accrued and unpaid interest thereon to the date of purchase and (ii) satisfy and discharge all obligations
(and cause the release of the liens on the collateral securing such indebtedness) under the indentures under which the 7.25% First Lien
Notes, the 9.125% Second Lien Notes and the 10.0% Second Lien Notes were issued and in connection therewith to call for redemption
on October 15, 2017 and on November 15, 2017 all remaining $1,088,000 principal amount of 7.25% First Lien Notes and all remaining
$57,679,000 principal amount of 9.125% Second Lien Notes, respectively, that were not validly tendered and purchased in the applicable
Tender Offer in accordance with the redemption provisions of the indentures governing the 2020 Secured Notes. These transactions resulted
in a loss on extinguishment of debt of $42.3 million for fiscal 2017, which is included as “Loss on Extinguishment of Debt” on the
Consolidated Statement of Operations.
Secured Obligations
The 10.0% 2022 Notes have a maturity of July 15, 2022 and bear interest at a rate of 10.0% per annum payable semi-annually
on January 15 and July 15 of each year, to holders of record at the close of business on January 1 and July 1, as the case may be, immediately
preceding such interest payment dates. K. Hovnanian may also redeem some or all of the 10.0% 2022 Notes at 105.0% of principal
commencing July 15, 2019, at 102.50% of principal commencing July 15, 2020 and at 100.0% of principal commencing July 15, 2021.
The 10.5% 2024 Notes have a maturity of July 15, 2024 and bear interest at a rate of 10.5% per annum payable semi-annually
on January 15 and July 15 of each year, to holders of record at the close of business on January 1 and July 1, as the case may be, immediately
preceding such interest payment dates. The 10.5% 2024 Notes are redeemable in whole or in part at our option at any time prior to July
15, 2020 at 100.0% of their principal amount plus an applicable “Make-Whole Amount.” K. Hovnanian may also redeem some or all of
the 10.5% 2024 Notes at 105.25% of principal commencing July 15, 2020, at 102.625% of principal commencing July 15, 2021 and at
100.0% of principal commencing July 15, 2022. In addition, K. Hovnanian may also redeem up to 35.0% of the aggregate principal amount
of the 10.5% 2024 Notes prior to July 15, 2020 with the net cash proceeds from certain equity offerings at 110.50% of principal.
The 1.125 Lien Notes have a maturity of February 15, 2026 and bear interest at a rate of 7.75% per annum payable semi-
annually on February 15 and August 15 of each year, to holders of record at the close of business on February 1 and August 1, as the case
may be, immediately preceding such interest payment dates. The 1.125 Lien Notes are redeemable in whole or in part at our option at any
time prior to February 15, 2022 at 100.0% of their principal amount plus an applicable “Make-Whole Amount.” In addition, up to 35% of
the original aggregate principal amount of the 1.125 Lien Notes may be redeemed with the net cash proceeds from certain equity offerings
at 107.75% of principal at any time prior to February 15, 2022. K. Hovnanian may also redeem some or all of the 1.125 Lien Notes at
103.875% of principal commencing February 15, 2022, at 101.937% of principal commencing February 15, 2023 and at 100.0% of
principal commencing February 15, 2024.
The 1.25 Lien Notes have a maturity of February 15, 2026 and bear interest at a rate of 10.5% per annum payable semi-
annually on February 15 and August 15 of each year, to holders of record at the close of business on February 1 and August 1, as the case
may be, immediately preceding such interest payment dates. The 1.25 Lien Notes are redeemable in whole or in part at our option at any
time prior to February 15, 2022 at 100.0% of their principal amount plus an applicable “Make-Whole Amount.” In addition, up to 35% of
the original aggregate principal amount of the 1.25 Lien Notes may be redeemed with the net cash proceeds from certain equity offerings
at 110.5% of principal at any time prior to February 15, 2022. K. Hovnanian may also redeem some or all of the 1.25 Lien Notes at
105.25% of principal commencing February 15, 2022, at 102.625% of principal commencing February 15, 2023 and at 100.0% of principal
commencing February 15, 2024.
The 1.5 Lien Notes have a maturity of February 15, 2026 and bear interest at a rate of 11.25% per annum payable semi-
annually on February 15 and August 15 of each year, to holders of record at the close of business on February 1 and August 1, as the case
may be, immediately preceding such interest payment dates. The 1.5 Lien Notes are redeemable in whole or in part at our option at any
time prior to February 15, 2026 at 100.0% of their principal amount.
75
Each series of New Secured Notes and the guarantees thereof are secured by the same assets (including the assets owned by
the Former New Secured Group Guarantors) that secure the Secured Credit Agreement and the Second Lien Notes. Among the New
Secured Notes, the liens securing the 1.125 Lien Notes are senior to the liens securing the 1.25 Lien Notes and the 1.5 Lien Notes and any
other future secured obligations that are junior in priority with respect to the assets securing the 1.125 Lien Notes, and the liens securing
the 1.25 Lien Notes are senior to the liens securing the 1.5 Lien Notes and any other future secured obligations that are junior in priority
with respect to the assets securing the 1.25 Lien Notes, in each case, with respect to the assets securing such New Secured Notes. In respect
of K. Hovnanian’s other secured obligations, the liens securing the New Secured Notes are junior to the liens securing the Secured Credit
Agreement, are on a parity with any future secured obligations that are equal in priority with respect to the assets securing the applicable
series of New Secured Notes and are senior to the liens securing the Second Lien Notes and any other future secured obligations that are
junior in priority with respect to the assets securing the applicable series of New Secured Notes.
As of October 31, 2019, the collateral securing the Secured Credit Facility, the New Secured Notes and the Second Lien Notes
would have included (in the case of the Secured Credit Facility and the New Secured Notes, such collateral will be perfected in accordance
with the terms of the applicable Debt Instrument) (1) $136.9 million of cash and cash equivalents, which included $19.9 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) $504.7 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 $188.9
million.
Senior Notes
On February 1, 2018, K. Hovnanian borrowed the Initial Term Loans in the amount of $132.5 million under the Term Loan
Facility, and proceeds of such Initial Term Loans, together with cash on hand, were used to redeem all of its outstanding $132.5 million
aggregate principal amount of 7.0% Notes (upon redemption, all 7.0% Notes were cancelled).
As discussed above, the 8.0% Notes were the subject of the Exchange Offer that closed on February 1, 2018 and, on May 29,
2018, K. Hovnanian completed the redemption of $65.7 million aggregate principal amount of the 8.0% Notes, which was funded with
borrowings of the Delayed Draw Term Loans under the Term Loan Facility (upon redemption, such redeemed 8.0% Notes were cancelled).
Other
In June 2013, K. Hovnanian, as borrower, and we and certain of our subsidiaries, as guarantors, entered into a five-year, $75.0
million unsecured revolving credit facility with Citicorp USA, Inc., as administrative agent and issuing bank, and Citibank, N.A., as a
lender. This facility matured and was paid in full in September 2018 with borrowings under the 2018 Secured Credit Facility and cash on
hand.
We have certain stand-alone cash collateralized letter of credit agreements and facilities under which there was a total of $19.2
million and $12.5 million letters of credit outstanding at October 31, 2019 and October 31, 2018, 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 October 31, 2019 and October 31, 2018, the amount
of cash collateral in these segregated accounts was $19.9 million and $12.7 million, respectively, which is reflected in “Restricted cash
and cash equivalents” on the Consolidated Balance Sheets.
10. Operating and Reporting Segments
HEI’s operating segments are components of the Company’s business for which discrete financial information is available
and reviewed regularly by the chief operating decision maker, our Chief Executive Officer, to evaluate performance and make operating
decisions. Based on this criteria, each of the Company's communities qualifies as an operating segment, and therefore, it is impractical to
provide segment disclosures for this many segments. As such, HEI has aggregated the homebuilding operating segments into six reportable
segments.
HEI’s homebuilding operating segments are aggregated into reportable segments based primarily upon geographic proximity,
similar regulatory environments, land acquisition characteristics and similar methods used to construct and sell homes. HEI’s reportable
segments consist of the following six homebuilding segments and a financial services segment noted below.
Homebuilding:
(1) Northeast (New Jersey and Pennsylvania)
(2) Mid-Atlantic (Delaware, Maryland, Virginia, Washington D.C. and West Virginia)
(3) Midwest (Illinois and Ohio)
(4) Southeast (Florida, Georgia and South Carolina)
(5) Southwest (Arizona and Texas)
(6) West (California)
76
Financial Services
Operations of the Homebuilding segments primarily include the sale and construction of single-family attached and detached
homes, attached townhomes and condominiums, urban infill and active lifestyle homes in planned residential developments. In addition,
from time to time, operations of the homebuilding segments include sales of land. Operations of the Financial Services segment include
mortgage banking and title services provided to the homebuilding operations’ customers. Our financial services subsidiaries do not
typically retain or service mortgages that we originate but rather sell the mortgages and related servicing rights to investors.
Corporate and unallocated primarily represents operations at our headquarters in New Jersey. This includes our executive
offices, information services, human resources, corporate accounting, training, treasury, process redesign, internal audit, construction
services, and administration of insurance, quality and safety. It also includes interest income and interest expense resulting from interest
incurred that cannot be capitalized in inventory in the Homebuilding segments, as well as the gains or losses on extinguishment of debt
from any debt repurchases or exchanges.
Evaluation of segment performance is based primarily on operating earnings from continuing operations before provision for
income taxes (“Income (loss) before income taxes”). Income (loss) before income taxes for the Homebuilding segments consist of revenues
generated from the sales of homes and land, income (loss) from unconsolidated entities, management fees and other income, less the cost
of homes and land sold, selling, general and administrative expenses and interest expense. Income (loss) before income taxes for the
Financial Services segment consist of revenues generated from mortgage financing, title insurance and closing services, less the cost of
such services and selling, general and administrative expenses incurred by the Financial Services segment.
Operational results of each segment are not necessarily indicative of the results that would have occurred had the segment
been an independent stand-alone entity during the periods presented.
Financial information relating to HEI’s segment operations was as follows:
(In thousands)
Revenues:
Northeast
Mid-Atlantic
Midwest
Southeast
Southwest
West
Total homebuilding
Financial services
Corporate and unallocated
Total revenues
Income (loss) before income taxes:
Northeast
Mid-Atlantic
Midwest
Southeast
Southwest
West
Total homebuilding
Financial services
Corporate and unallocated (1)
Income (loss) before income taxes
Year Ended October 31,
2019
2018
2017
$124,372
357,247
204,461
220,082
629,344
425,516
1,961,022
54,152
1,742
$2,016,916
$20,954
14,327
(649 )
(10,060 )
33,459
40,018
98,049
17,627
(155,344 )
$(39,668 )
$116,296
354,690
196,599
241,620
638,282
384,627
1,932,114
53,355
5,764
$1,991,233
$20,869
18,757
1,528
(9,914)
49,852
47,987
129,079
18,227
(139,160)
$8,146
$209,509
464,126
199,770
260,402
827,503
430,546
2,391,856
58,743
1,066
$2,451,665
$2,300
17,191
(1,151)
(6,199)
71,540
19,636
103,317
26,397
(174,958)
$(45,244)
(1) Corporate and unallocated for the year ended October 31, 2019 included corporate general and administrative costs of $66.4 million,
interest expense of $55.5 million (a component of Other interest on our Consolidated Statements of Operations), loss on extinguishment
of debt of $42.4 million, and $9.0 million of other income and expenses along with the adjustment to our insurance reserves. Corporate
and unallocated for the year ended October 31, 2018 included corporate general and administrative costs of $69.6 million, interest expense
of $76.2 million (a component of Other interest on our Consolidated Statements of Operations), loss on extinguishment of debt of $7.5
million, and $14.1 million of other income and expenses primarily related to interest income and gain on the sale of our former corporate
headquarters building, along with the adjustment to our insurance reserves. Corporate and unallocated for the year ended October 31,
2017 included corporate general and administrative costs of $59.4 million, interest expense of $69.1 million (a component of Other interest
on our Consolidated Statements of Operations), loss on extinguishment of debt of $34.9 million, $12.5 million adjustment for construction
defect reserves (discussed in Note 16) and $0.9 million of other income and expenses primarily related to interest income, rental income,
bond amortization and stock compensation.
77
(In thousands)
Assets:
Northeast
Mid-Atlantic
Midwest
Southeast
Southwest
West
Total homebuilding
Financial services
Corporate and unallocated
Total assets
(In thousands)
Investments in and advances to unconsolidated joint ventures:
Northeast
Mid-Atlantic
Midwest
Southeast
Southwest
West
Total homebuilding
Corporate and unallocated
Total investments in and advances to unconsolidated joint ventures
(In thousands)
Homebuilding interest expense:
Northeast
Mid-Atlantic
Midwest
Southeast
Southwest
West
Total homebuilding
Corporate and unallocated
Financial services interest expense (1)
Total interest expense, net
October 31,
2019
2018
$163,342
264,894
117,242
281,654
357,052
311,919
1,496,103
199,275
186,046
$1,881,424
$152,607
217,807
85,398
246,497
320,452
244,886
1,267,647
164,880
229,515
$1,662,042
October 31,
2019
2018
$49,340
9,166
4,382
52,983
10,019
(33)
125,857
1,181
$127,038
$51,094
7,307
3,738
39,509
18,219
2,445
122,312
1,382
$123,694
Year Ended October 31,
2019
2018
2017
$10,011
18,563
7,121
18,798
27,731
23,051
105,275
55,506
334
$161,115
$11,811
15,051
5,874
14,934
21,820
18,309
87,799
76,183
104
$164,086
$20,308
23,886
7,799
13,646
25,278
25,799
116,716
69,124
(630)
$185,210
(1) Financial services interest expenses are included in the Financial services lines on the Consolidated Statements of Operations
in the respective revenues and expenses sections.
(In thousands)
Depreciation:
Northeast
Mid-Atlantic
Midwest
Southeast
Southwest
West
Total homebuilding
Financial services
Corporate and unallocated
Total depreciation
Year Ended October 31,
2019
2018
2017
$188
209
1,097
230
331
326
2,381
14
1,777
$4,172
$135
63
1,106
124
70
45
1,543
14
1,599
$3,156
$71
50
858
83
78
94
1,234
16
2,999
$4,249
78
(In thousands)
Net additions to operating properties and equipment:
Northeast
Mid-Atlantic
Midwest
Southeast
Southwest
West
Total homebuilding
Financial services
Corporate and unallocated
Total net additions to operating properties and equipment
(In thousands)
Equity in earnings (losses) from unconsolidated joint ventures:
Northeast
Mid-Atlantic
Midwest
Southeast
Southwest
West
Total equity in earnings (losses) from unconsolidated joint ventures
Year Ended October 31,
2019
2018
2017
$107
168
237
221
741
921
2,395
-
1,610
$4,005
$142
318
621
701
23
55
1,860
-
3,333
$5,193
$442
71
3,773
28
18
80
4,412
-
2,066
$6,478
Year Ended October 31,
2019
2018
2017
$19,242
3,404
(432 )
1,310
7,951
(2,543 )
$28,932
$20,231
799
(775)
(2,032)
5,165
645
$24,033
$(4,376)
1,180
(1,424)
837
(306)
(2,958)
$(7,047)
11. Income Taxes
Income taxes payable (receivable), including deferred benefits, consists of the following:
(In thousands)
State income taxes:
Current
Deferred
Federal income taxes:
Current
Deferred
Total
The provision for income taxes is composed of the following charges:
(In thousands)
Current income tax expense:
Federal (1)
State (2)
Total current income tax expense:
Federal
State
Total deferred income tax expense:
Total
Year Ended October 31,
2019
2018
$2,301
-
-
-
$2,301
$3,334
-
-
-
$3,334
Year Ended October 31,
2019
2018
2017
$-
2,449
2,449
-
-
-
$2,449
$-
3,626
3,626
-
-
-
$3,626
$-
1,371
1,371
275,688
9,890
285,578
$286,949
(1)
(2)
The current federal income tax expense is net of the use of federal net operating losses totaling $0.8 million for the year ended
October 31, 2019. The current federal income tax expense did not include the use of federal net operating losses for the years
ended October 31, 2018 and 2017.
The current state income tax expense is net of the use of state net operating losses totaling $1.3 million, $4.4 million and $18.2
million for the years ended October 31, 2019, 2018 and 2017, respectively.
79
The total income tax expense of $2.4 million and $3.6 million for the periods ending October 31, 2019 and 2018 was primarily
related to state tax expense from income generated that was not offset by tax benefits in states where we fully reserve the tax benefit from
net operating losses. The total income tax expense of $286.9 million for the period ended October 31, 2017 was primarily due to increasing
our valuation allowance to fully reserve against our deferred tax assets (“DTAs”). In addition, the same periods were also impacted by
state tax expense from income generated in some states, which was not offset by tax benefits in other states that had losses for which we
fully reserve the net operating losses.
Our federal net operating losses of $1.6 billion expire between 2028 and 2037, and $16.5 million have an indefinite
carryforward period. Of our $2.5 billion of state NOLs, $211.4 million expire between 2020 through 2024; $1.2 billion expire between
2025 through 2029; $758.9 million expire between 2030 through 2034; $274.5 million expire between 2035 through 2039; and
$62.3 million have an indefinite carryforward period.
On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act of 2017 (the “Act”).
Effective January 1, 2018, the comprehensive U.S. tax reform package, among other things, lowered the corporate tax rate from 35% to
21%. Under the accounting rules, companies are required to recognize the effects of changes in tax laws and tax rates on deferred tax assets
and liabilities in the period in which the new legislation is enacted. The effects of the Act on the Company include one major category
which is the remeasurement of deferred taxes. Consequently, we recorded a decrease related to deferred tax assets and liabilities of $298.5
million and $12.2 million, respectively, with a corresponding net adjustment to the valuation allowance in fiscal 2018, therefore there was
no income tax expense or benefit as a result of the tax law changes. The Act contained additional changes that impacted our taxable income
determinations, including, but not limited to elimination of the corporate alternative minimum tax and limitations on the deductibility of
certain executive compensation in fiscal 2019. The ultimate impact of tax reform may differ from our interpretations and assumptions due
to additional regulatory guidance that may be issued. As of October 31, 2019, we have completed our analysis of the impacts of the Tax
Act under SAB 118 within the measurement period with immaterial differences to our provisional amounts previously recorded.
Deferred federal and state income tax assets (“DTAs”) primarily represent the deferred tax benefits arising from
NOL carryforwards and temporary differences between book and tax income which will be recognized in future years as an offset against
future taxable income. If the combination of future years’ income (or loss) and the reversal of the timing differences results in a loss, such
losses can be carried forward to future years. In accordance with ASC 740, we evaluate our DTAs quarterly to determine if valuation
allowances are required. ASC 740 requires that companies assess whether valuation allowances should be established based on the
consideration of all available evidence using a “more likely than not” standard.
As of October 31, 2019, we considered all available positive and negative evidence to determine whether, based on the weight
of that evidence, our valuation allowance for our DTAs was appropriate in accordance with ASC 740. Listed below, in order of the
weighting of each factor, is the available positive and negative evidence that we considered in determining that it is more likely than not
that all of our DTAs will not be realized. In analyzing these factors, overall the negative evidence, both objective and subjective,
outweighed the positive evidence. Based on this analysis, we determined that the current valuation allowance for deferred taxes of $623.2
million as of October 31, 2019, which fully reserves for our DTAs, is appropriate.
1. Fiscal 2017 financial results, especially the $50.2 million pre-tax loss in the third quarter of fiscal 2017 primarily from the $42.3
million loss on extinguishment of debt during the quarter, that put us in a cumulative three-year pre-tax loss position as of July
31, 2017. As of October 31, 2019, the Company has pre-tax income when adjusted for permanent differences on a three-year
cumulative basis. However, on a US GAAP basis, the Company is still in a three-year cumulative pre-tax loss position as of
October 31, 2019. Therefore, it is too early to conclude whether we will continue to not be in a three-year cumulative loss position
going forward on a tax accounting basis. Per ASC 740, cumulative losses are one of the most objectively verifiable forms of
negative evidence. (Negative Objective Evidence)
In the third quarter of fiscal 2017, second and third quarters of fiscal 2018, and fourth quarter of fiscal 2019, we completed debt
refinancing/restructuring transactions which, by extending our debt maturities, will enable us to allocate cash to invest in new
communities and grow our community count to get back to sustained profitability. (Positive Objective Evidence)
2.
3. Our net contracts per community and our absolute net contracts increased in the fourth quarter of fiscal 2019 compared to the
fourth quarter of 2018 and for the full fiscal year of 2019 compared to the full fiscal year of 2018. This is a reversal of the
negative trend we had seen in the second quarter of 2019. (Positive Objective Evidence)
4. We incurred pre-tax losses during the housing market decline and the slower than expected housing market recovery. (Negative
Objective Evidence)
5. We exited two geographic markets in fiscal 2016 and completed the wind down of operations in two other markets in fiscal
2018, that have historically had losses. By exiting these underperforming markets, the Company has been able to redeploy capital
to better performing markets, which over time should improve our profitability. (Positive Subjective Evidence)
6. The historical cyclicality of the U.S. housing market, a more restrictive mortgage lending environment compared to before the
housing downturn of 2007-2009, the uncertainty of the overall US economy and government policies and consumer confidence,
all or any of which could continue to hamper a sustained, stronger recovery of the housing market. (Negative Subjective
Evidence)
80
The deferred tax assets and liabilities have been recognized in the Consolidated Balance Sheets as follows:
(In thousands)
Deferred tax assets:
Inventory impairment loss
Uniform capitalization of overhead
Warranty and legal reserves
Acquisition intangibles
Compensation
Deferred Income
Interest Expense
Restricted stock bonus
Stock options
Provision for losses
Joint venture loss
Federal net operating losses
State net operating losses
Other
Total deferred tax assets
Total deferred tax liabilities
Valuation allowance
Net deferred income taxes
Year Ended October 31,
2019
2018
47,000
3,917
4,404
424
8,477
5,167
6,616
1,553
4,288
16,820
4,392
334,142
184,740
1,280
623,220
-
(623,220)
$-
60,854
4,183
4,774
1,185
11,033
428
1,646
1,344
4,358
18,044
3,384
334,971
191,064
923
638,191
-
(638,191)
$-
The effective tax rate varied from the statutory federal income tax rate. The effective tax rate is affected by a number of factors,
the most significant of which has been the valuation allowance related to our deferred tax assets. Due to the effects of these factors, our
effective tax rates for 2019, 2018 and 2017 are not correlated to the amount of our income or loss before income taxes. The sources of
these factors were as follows:
Computed “expected” tax rate
State income taxes, net of federal income tax benefit
Permanent differences, net
Deferred tax asset valuation allowance impact
Tax contingencies
Adjustments to prior years’ tax accruals
Effective tax rate
Year Ended October 31,
2019
21.0%
(5.0)
(42.4)
20.8
0.5
(1.0)
(6.1)%
2018
21.0%
17.2
74.0
(70.8)
1.0
2.1
44.5%
2017
35.0%
1.0
(2.4)
(667.8)
-
-
(634.2)%
ASC 740-10 provides that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that
the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical
merits.
Income tax positions must meet a more-likely-than-not recognition threshold at the effective date to be recognized upon the
adoption of ASC 740-10 and in subsequent periods. This interpretation also provides guidance on measurement, derecognition,
classification, interest and penalties, accounting in interim periods, disclosure, and transition.
We recognize tax liabilities in accordance with ASC 740-10 and we adjust these liabilities when our judgment changes as a
result of the evaluation of new information not previously available. Due to the complexity of some of these uncertainties, the ultimate
resolution may result in a liability that is materially different from our current estimate of the tax liabilities. These differences will be
reflected as increases or decreases to income tax expense in the period in which they are determined.
We recognize interest and penalties related to unrecognized tax benefits within the income tax expense line in the
accompanying consolidated statement of operations. Accrued interest and penalties are included within the related tax liability line in the
consolidated balance sheet.
81
The following is a tabular reconciliation of the total amount of unrecognized tax benefits for the year (in millions) excluding
interest and penalties:
Unrecognized tax benefit—November 1,
Gross increases—tax positions in current period
Lapse of statute of limitations
Unrecognized tax benefit—October 31,
Year Ended October 31,
2019
$1.2
-
(0.3 )
$0.9
2018
$1.1
0.3
(0.2)
$1.2
Related to the unrecognized tax benefits noted above, as of October 31, 2019 and 2018, we have recognized a liability for
interest and penalties of $0.4 and $0.3 million, respectively. For the years ended October 31, 2019 and 2018, we recognized $32 thousand
and $41 thousand, respectively, of interest and penalties in income tax expense. For the year ended October 31, 2017, we recognized
$45 thousand of interest and penalties in net income tax benefit.
It is likely that, within the next year, the amount of the Company's unrecognized tax benefits will decrease by $0.2 million,
excluding penalties and interest. This reduction is expected primarily due to the expiration of the statutes of limitation. The portion of
unrecognized tax benefits that, if recognized, would affect the Company’s effective tax rate (excluding any related impact to the valuation
allowance) is $0.9 million and $1.2 million for the years ended October 31, 2019 and 2018. The recognition of unrecognized tax benefits
could have an impact on the Company’s deferred tax assets and the valuation allowance.
The consolidated federal tax returns have been audited through October 31, 2018 and these years are closed. We are also
subject to various income tax examinations in the states in which we do business. The outcome for a particular audit cannot be determined
with certainty prior to the conclusion of the audit, appeal, and in some cases, litigation process. As each audit is concluded, adjustments,
if any, are appropriately recorded in the period determined. To provide for potential exposures, tax reserves are recorded, if applicable,
based on reasonable estimates of potential audit results. However, if the reserves are insufficient upon completion of an audit, there could
be an adverse impact on our financial position and results of operations. The statute of limitations for our major tax jurisdictions remains
open for examination for tax years 2015 – 2018.
12. Reduction of Inventory to Fair Value
We record impairment losses on inventories related to communities under development and held for future development when
events and circumstances indicate that they may be impaired and the undiscounted cash flows estimated to be generated by those assets
are less than their related carrying amounts. If the expected undiscounted cash flows are less than the carrying amount, then the community
is written down to its fair value. We estimate the fair value of each impaired community by determining the present value of the estimated
future cash flows at a discount rate commensurate with the risk of the respective community. For the years ended October 31, 2019, 2018
and 2017, our discount rates used for the impairments recorded ranged from 17.3% to 18.3%, 16.8% to 19.8% and 18.3% to 19.8%,
respectively. Should the estimates or expectations used in determining cash flows or fair value decrease or differ from current estimates in
the future, we may need to recognize additional impairments.
During the years ended October 31, 2019 and 2018, we evaluated inventories of all 393 and 391 communities under
development and held for future development or sale, respectively, for impairment indicators through preparation and review of detailed
budgets or other market indicators of impairment. We performed undiscounted future cash flow analyses during the years ended October
31, 2019 and 2018 for nine and five of those communities (i.e., those with a projected operating loss or other impairment indicators),
respectively, with an aggregate carrying value of $58.9 million and $11.2 million, respectively. As a result of our undiscounted future cash
flow analyses, we performed discounted cash flow analyses for six of those communities and recorded aggregate impairment losses, which
are included in the Consolidated Statement of Operations on the line entitled “Homebuilding: Inventory impairment loss and land option
write-offs” and deducted from inventory, of $2.7 million, $2.1 million and $15.1 million for the years ended October 31, 2019, 2018 and
2017, respectively. The three communities that did not require a discounted cash flow analysis to be performed during the year ended
October 31, 2019, had an aggregate carrying value of $41.3 million and undiscounted future cash flows that exceeded the carrying amount
by less than 20%. During the year ended October 31, 2018, all five communities that required discounted cash flow analyses were impaired,
which resulted in recording aggregate impairment losses of $2.1 million. The pre-impairment value in the table below represents the
carrying value, net of prior period impairments, if any, at the time of recording the impairments.
82
The following table represents impairments by segment for fiscal 2019, 2018 and 2017:
(Dollars in millions)
Northeast
Mid-Atlantic
Midwest
Southeast
Southwest
West
Total
(Dollars in millions)
Northeast
Mid-Atlantic
Midwest
Southeast
Southwest
West
Total
(Dollars in millions)
Northeast
Mid-Atlantic
Midwest
Southeast
Southwest
West
Total
Year Ended October 31, 2019
Number of
Communities
2
1
1
1
1
-
6
Dollar
Amount of
Impairment
$0.2
0.3
1.4
0.7
0.1
-
$2.7
Pre-
Impairment
Value (1)
$7.8
1.7
4.6
2.2
1.2
-
$17.5
Year Ended October 31, 2018
Number of
Communities
1
-
1
3
-
-
5
Dollar
Amount of
Impairment
$0.4
-
0.1
1.6
-
-
$2.1
Pre-
Impairment
Value (1)
$1.0
-
0.5
9.7
-
-
$11.2
Year Ended October 31, 2017
Number of
Communities
2
1
2
3
-
2
10
Dollar
Amount of
Impairment
$3.3
1.5
0.2
8.1
-
2.0
$15.1
Pre-
Impairment
Value (1)
$22.2
8.5
0.8
18.3
-
3.1
$52.9
(1)
Represents carrying value, net of prior period impairments, if any, at the time of recording the applicable period’s impairments.
The Consolidated Statements of Operations line entitled “Homebuilding: Inventory impairment loss and land option write-
offs” also includes write-offs of options and approval, engineering and capitalized interest costs that we record when we redesign
communities and/or abandon certain engineering costs and we do not exercise options in various locations because the communities’ pro
forma profitability is not projected to produce adequate returns on investment commensurate with the risk. The total aggregate write-offs
related to these items were $3.6 million, $1.4 million and $2.7 million for the years ended October 31, 2019, 2018 and 2017, respectively.
Occasionally, these write-offs are offset by recovered deposits (sometimes through legal action) that had been written off in a prior period
as walk-away costs. Historically, these recoveries have not been significant in comparison to the total costs written off.
The following table represents write-offs of such costs by segment for fiscal 2019, 2018 and 2017:
(In millions)
Northeast
Mid-Atlantic
Midwest
Southeast
Southwest
West
Total
Year Ended October 31,
2019
$0.6
0.5
0.9
0.3
0.6
0.7
$3.6
2018
$0.6
0.2
0.1
-
0.2
0.3
$1.4
2017
$0.5
0.6
0.3
0.8
0.4
0.1
$2.7
83
13. Per Share Calculations
Basic earnings per share is computed by dividing net (loss) income (the “numerator”) by the weighted-average number of
common shares outstanding, adjusted for nonvested shares of restricted stock (the “denominator”) for the period. Computing diluted
earnings per share is similar to computing basic earnings per share, except that the denominator is increased to include the dilutive effects
of options and nonvested shares of restricted stock, as well as common shares issuable upon exchange of our Senior Exchangeable Notes
issued as part of our 6.0% Exchangeable Notes Units (which matured and were paid in full in fiscal 2018). Any options that have an
exercise price greater than the average market price are considered to be anti-dilutive and are excluded from the diluted earnings per share
calculation.
All outstanding nonvested shares that contain nonforfeitable rights to dividends or dividend equivalents that participate in
undistributed earnings with common stock are considered participating securities and are included in computing earnings per share
pursuant to the two-class method. The two-class method is an earnings allocation formula that determines earnings per share for each class
of common stock and participating securities according to dividends or dividend equivalents and participation rights in undistributed
earnings in periods when we have net income. The Company’s restricted common stock (“nonvested shares”) are considered participating
securities.
Basic and diluted earnings per share for the periods presented below were calculated as follows:
(In thousands, except per share data)
Numerator:
Net (loss) earnings attributable to Hovnanian
Less: undistributed earnings allocated to nonvested shares
Numerator for basic earnings per share
Plus: undistributed earnings allocated to nonvested shares
Less: undistributed earnings reallocated to nonvested shares
Numerator for diluted earnings per share
Denominator:
Denominator for basic earnings per share
Effect of dilutive securities:
Share-based payments
Denominator for diluted earnings per share – weighted-average shares
outstanding
Basic earnings (loss) per share
Diluted earnings (loss) per share
2019
Year Ended October 31,
2018
2017
$(42,117)
-
$(42,117)
-
-
$(42,117)
$4,520
(159)
$4,361
159
(159)
$4,361
$(332,193)
-
$(332,193)
-
-
$(332,193)
5,968
5,941
5,908
-
5,968
$(7.06)
$(7.06)
131
6,072
$0.73
$0.72
-
5,908
$(56.23)
$(56.23)
Incremental shares attributed to nonvested stock and outstanding options to purchase common stock of 0.3 and 0.1 million for
the years ended October 31, 2019 and 2017 respectively, were excluded from the computation of diluted earnings per share because we
had a net loss for the period, and any incremental shares would not be dilutive. For the year ended October 31, 2018, 33 thousand shares
of common stock issuable upon the exchange of our 6% senior exchangeable note units (which were issued in fiscal 2012), were excluded
from the computation of diluted earnings per share because they were anti-dilutive. Also, for the year ended October 31, 2017, 0.4 million
shares of common stock issuable upon the exchange of our 6% senior exchangeable note units were excluded from the computation of
diluted earnings per share because we had a net loss for the period.
In addition, shares related to out-of-the money stock options that could potentially dilute basic earnings per share in the future
that were not included in the computation of diluted earnings per share were 0.2 million for each of the years ended October 31, 2019,
2018 and 2017, because to do so would have been anti-dilutive for the periods presented.
14. Capital Stock
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 March 19, 2019, the Company's stockholders approved at an annual meeting an amendment to our Certificate of
Incorporation to effect a reverse stock split (the “Reverse Stock Split”) of the Company’s common stock at a ratio of 1-for-25, and a
corresponding decrease in the number of authorized shares of the common stock. Following the stockholders' approval, the Board of
Directors, on March 19, 2019, determined to effectuate the Reverse Stock Split, which became effective on March 29, 2019, and every 25
issued shares (including treasury shares) of Class A Common Stock, par value $0.01 per share (the “Class A Common Stock”), were
combined into one share of Class A Common Stock, and every 25 issued shares (including treasury shares) of Class B Common Stock,
84
par value $0.01 per share (the “Class B Common Stock”), were combined into one share of Class B Common Stock. No fractional shares
were issued in connection with the Reverse Stock Split. All share and per share amounts have been retroactively adjusted to reflect the
reverse stock split.
On August 4, 2008, our Board of Directors adopted a shareholder rights plan (the “Rights Plan”), which was amended on
January 11, 2018, designed to preserve shareholder value and the value of certain tax assets primarily associated with net operating loss
(NOL) carryforwards and built-in losses under Section 382 of the Internal Revenue Code. Our ability to use NOLs and built-in losses
would be limited if there was an “ownership change” under Section 382. This would occur if shareholders owning (or deemed under
Section 382 to own) 5% or more of our stock increase their collective ownership of the aggregate amount of our outstanding shares by
more than 50 percentage points over a defined period of time. The Rights Plan was adopted to reduce the likelihood of an “ownership
change” occurring as defined by Section 382. Under the Rights Plan, one right was distributed for each share of Class A Common Stock
and Class B Common Stock outstanding as of the close of business on August 15, 2008. Effective August 15, 2008, if any person or group
acquires 4.9% or more of the outstanding shares of Class A Common Stock without the approval of the Board of Directors, there would
be a triggering event causing significant dilution in the voting power of such person or group. However, existing stockholders who owned,
at the time of the Rights Plan’s initial adoption on August 4, 2008, 4.9% or more of the outstanding shares of Class A Common Stock will
trigger a dilutive event only if they acquire additional shares. The approval of the Board of Directors’ decision to adopt the Rights Plan
may be terminated by the Board of Directors at any time, prior to the Rights being triggered. The Rights Plan will continue in effect until
August 14, 2021, unless it expires earlier in accordance with its terms. The approval of the Board of Directors’ decision to initially adopt
the Rights Plan and the amendment thereto were approved by shareholders. Our stockholders also approved an amendment to our
Certificate of Incorporation to restrict certain transfers of Class A Common Stock in order to preserve the tax treatment of our NOLs and
built-in losses under Section 382 of the Internal Revenue Code. Subject to certain exceptions pertaining to pre-existing 5% stockholders
and Class B stockholders, the transfer restrictions in our Restated Certificate of Incorporation generally restrict any direct or indirect
transfer (such as transfers of our stock that result from the transfer of interests in other entities that own our stock) if the effect would be
to (i) increase the direct or indirect ownership of our stock by any person (or public group) from less than 5% to 5% or more of our common
stock; (ii) increase the percentage of our common stock owned directly or indirectly by a person (or public group) owning or deemed to
own 5% or more of our common stock; or (iii) create a new “public group” (as defined in the applicable United States Treasury regulations).
Transfers included under the transfer restrictions include sales to persons (or public groups) whose resulting percentage ownership (direct
or indirect) of common stock would exceed the 5% thresholds discussed above, or to persons whose direct or indirect ownership of common
stock would by attribution cause another person (or public group) to exceed such threshold.
On July 3, 2001, our Board of Directors authorized a stock repurchase program to purchase up to 0.2 million shares of Class
A Common Stock. There were no shares purchased during the year ended October 31, 2019. As of October 31, 2019, the maximum number
of shares of Class A Common Stock that may yet be purchased under this program is 22 thousand.
On October 31, 2019, in connection with the issuance of the 7.75% Senior Secured 1.25 Lien Notes due 2026, we issued and
sold an aggregate of 178,427 shares of Class A Common Stock, par value $0.01 per share (and associated Preferred Stock Purchase Rights),
to the purchasers of such Notes for an aggregate purchase price of $1,784.27. The issuance was exempt from registration under Section
4(a)(2) of the Securities Act of 1933.
Preferred Stock - On July 12, 2005, we issued 5,600 shares of 7.625% Series A Preferred Stock, with a liquidation preference
of $25,000 per share. Dividends on the Series A Preferred Stock are not cumulative and are payable at an annual rate of 7.625%. The
Series A Preferred Stock is not convertible into the Company’s common stock and is redeemable in whole or in part at our option at the
liquidation preference of the shares. The Series A Preferred Stock is traded as depositary shares, with each depositary share representing
1/1000th of a share of Series A Preferred Stock. The depositary shares are listed on the NASDAQ Global Market under the symbol
“HOVNP.” In fiscal 2019, 2018 and 2017, we did not pay any dividends on the Series A Preferred Stock due to covenant restrictions in
our debt instruments. We anticipate that we will continue to be restricted from paying dividends, which are not cumulative, for the
foreseeable future.
Retirement Plan - We have established a tax-qualified, defined contribution savings and investment retirement plan (a 401(k)
plan). All associates are eligible to participate in the retirement plan, and employer contributions are based on a percentage of associate
contributions and our operating results. Plan costs charged to operations were $7.3 million, $7.0 million and $6.8 million for the years
ended October 31, 2019, 2018 and 2017, respectively.
15. Stock Plans
The fair value of option awards is established at the date of grant using a Black-Scholes option pricing model with the
following weighted-average assumptions for the years ended October 31, 2019, 2018 and 2017: risk free interest rate of 1.99%, 2.80% and
2.05%, respectively; dividend yield of zero; historical volatility factor of the expected market price of our common stock of 0.56, 0.50 and
0.53, respectively; a weighted-average expected life of the option of 7.98 years, 8.0 years and 7.64 years, respectively; and an estimated
forfeiture rate of 7.84%, 9.90% and 9.92%, respectively.
For the years ended October 31, 2019, 2018 and 2017, total stock-based compensation expense was $0.7 million, $3.7 million
($2.0 million post tax) and $0.6 million, respectively. Included in this total stock-based compensation expense was expense from stock
options of $0.8 million, $0.7 million and $0.5 million for the years ended October 31, 2019, 2018 and 2017, respectively. The fiscal 2019
expense includes income of $2.6 million from previously recognized expense of certain performance based restricted stock grants for
85
which the performance metrics are no longer expected to be satisfied. This income was offset by the vesting of restricted stock of $2.4
million during the year ended October 31, 2019. The fiscal 2017 expense includes income of $2.0 million from previously recognized
expense of certain performance based restricted stock grants for which the performance metrics are no longer expected to be satisfied. This
income was offset by the vesting of restricted stock of $2.1 million during the year ended October 31, 2017.
We have a stock incentive plan for certain officers and key employees and directors. Options are granted by a committee
appointed by the Board of Directors or its delegate in accordance with the stock incentive plan. The exercise price of all stock options must
be at least equal to the fair market value of the underlying shares on the date of the grant. Stock options granted to officers and associates
generally vest in four equal installments on the second, third, fourth and fifth anniversaries of the date of the grant. All options expire 10
years after the date of the grant. At the time of our annual stock grant in the third quarter of fiscal 2019, each of the six of our existing non-
employee directors of the Company were given the choice to receive stock options or a reduced number of shares of restricted stock units
subject to a two-year post-vesting holding period, or a combination thereof, with restricted stock units based on the fair market value on
the date of grant and stock options based on grant date Black-Scholes value. All such directors elected to receive restricted stock units.
Non-employee directors’ stock options and restricted stock units vest in three equal installments on the first, second and third anniversaries
of the date of the grant. Stock option transactions are summarized as follows:
Options outstanding at beginning of period
Granted
Exercised
Forfeited
Expired
Options outstanding at end of period
Options exercisable at end of period
Weighted-
Average
Exercise
Price
$73.76
$9.44
$-
$53.96
$64.41
$53.93
October
31, 2019
278,569
110,975
-
2,038
56,025
331,481
147,019
Weighted-
Average
Exercise
Price
$85.22
$56.30
$49.91
$64.25
$156.95
$73.76
October
31, 2018
274,423
37,825
1,210
2,000
30,469
278,569
191,748
Weighted-
Average
Exercise
Price
$100.80
$58.47
$51.85
$146.28
$416.94
$85.22
October
31, 2017
294,950
9,450
1,930
18,093
9,954
274,423
210,360
The total intrinsic value of options exercised during fiscal 2018 and 2017 was $26 thousand and $12 thousand, respectively.
The intrinsic value of a stock option is the amount by which the market value of the underlying stock exceeds the exercise price of the
option. At October 31, 2019, there were no options exercisable which had an intrinsic value. Exercise prices for options outstanding at
October 31, 2019 ranged from $7.85 to $157.00.
The weighted-average fair value of grants made in fiscal 2019, 2018 and 2017 was $4.46, $27.09 and $33.28 per share,
respectively. Based on the fair value at the time they were granted, the weighted-average fair value of options vested in fiscal 2019, 2018
and 2017 was $36.07, $69.56 and $65.24 per share, respectively.
The following table summarizes the exercise price range and related number of options outstanding at October 31, 2019:
Range of Exercise Prices
$7.85 – $38.50
$38.75 – $60.25
$61.00 – $110.25
$118.25 – $157.00
Weighted-
Number
Average
Outstanding Exercise Price
$9.60
$50.00
$73.55
$131.91
$53.93
111,575
102,530
65,197
52,179
331,481
Weighted-
Average
Remaining
Contractual
Life
9.61
5.26
4.99
1.67
6.11
The following table summarizes the exercise price range and related number of exercisable options at October 31, 2019:
Range of Exercise Prices
$7.85 – $38.50
$38.75 – $60.25
$61.00 – $110.25
$118.25 – $157.00
86
Weighted-
Number
Average
Exercisable Exercise Price
$38.50
$48.59
$79.75
$131.91
$87.15
300
52,029
42,511
52,179
147,019
Weighted-
Average
Remaining
Contractual
Life
6.66
3.28
3.13
1.67
2.67
Officers and key associates who are eligible to receive equity grants may elect to receive either a stated number of stock
options, or a reduced number of shares of restricted stock units, or a combination thereof. Shares underlying restricted stock units granted
to officers and associates generally vest in four equal installments on the second, third, fourth and fifth anniversaries of the grant
date. Participants aged 60 years or older, or aged 58 with 15 years of service, are eligible to vest in their equity awards on an accelerated
basis on their retirement (which in the case of the restricted stock units only applies to a retirement that is at least one year after the date
of grant). During the years ended October 31, 2019, 2018 and 2017, we granted 107,650 (including 103,612 units to certain of our non-
employee directors), 20,292 (including 15,904 units to certain of our non-employee directors) and 14,662 (including 11,937 units to certain
of our non-employee directors) restricted stock units, respectively, and also issued 8,380, 5,936 and 4,055 units, relating to awards granted
in prior fiscal years, respectively. During the years ended October 31, 2019 and 2017, 656 and 18,100 restricted stock units were forfeited,
respectively.
For the year ended October 31, 2019 total compensation cost recognized in the Consolidated Statement of Operations for the
annual restricted stock unit grants, market share unit grants (discussed below), and the stock portion of the long-term incentive plan (also
discussed below) was income of $0.2 million. For the years ended October 31, 2018 and 2017 total compensation cost recognized in the
Consolidated Statement of Operations for the annual restricted stock unit grants, market share unit grants (discussed below), and the stock
portion of the long-term incentive plan (also discussed below) was $2.8 million and $21 thousand, respectively. In addition to nonvested
share awards summarized in the following table, there were 33,643, 21,609 and 12,497 vested share awards at October 31, 2019, 2018 and
2017, respectively, which were deferred at the participants' election.
A summary of the Company’s nonvested Time-Based share awards for the years ended October 31, 2019, 2018, and 2017 are
as follows:
Nonvested Time-Based at beginning of period
Granted
Vested
Forfeited
Nonvested Time-Based at end of period
Weighted-
Average
Grant
Date
Fair Value
$61.77
$7.66
$45.52
$86.96
$23.01
Weighted-
Average
Grant
Date
Fair Value
$60.50
$54.95
$55.19
$20.87
$61.77
October
31, 2018
96,091
37,888
22,821
5,564
105,594
Weighted-
Average
Grant
Date
Fair Value
$63.70
$60.31
$75.78
$64.30
$60.50
October
31, 2017
100,300
32,349
15,511
21,047
96,091
October
31, 2019
105,594
164,050
21,329
17,106
231,210
A summary of the Company’s nonvested Performance-Based share awards for the years ended October 31, 2019, 2018, and
2017 are as follows:
Nonvested Performance-Based at beginning
of period
Granted
Vested
Forfeited
Nonvested Performance-Based at end of
period
Weighted-
Average
Grant
Date
Fair Value
Weighted-
Average
Grant
Date
Fair Value
Weighted-
Average
Grant
Date
Fair Value
October
31, 2017
October
31, 2018
$69.28
$10.10
$42.69
$93.31
150,881
47,277
5,390
91,361
$50.26
$70.41
$72.52
$38.27
189,275
17,000
33,147
22,247
$64.43
$70.88
$148.05
$40.84
October
31, 2019
101,407
56,400
8,655
12,836
136,316
$44.22
101,407
$69.28
150,881
$50.26
Included in the above table are awards for the share portion of long-term incentive plans (“LTIPs”) for certain officers and
associates, which are performance based plans. This includes 30,277 target 2018 LTIP shares which were granted during fiscal year
2018. This also includes the remaining 4,439 2016 LTIP shares which were granted during fiscal 2016 and based on performance outcomes
between 2016 and 2018. LTIP shares vest in the third, fourth and fifth fiscal years after grant date, subject to certain performance metrics.
Also included in the tables above are 98,550 target Time-based and 101,600 Performance-based Market Share Units (“MSUs”)
of which 56,400 of each Time-based and Performance-based were granted to certain officers in fiscal 2019. Also MSU grants from fiscal
years 2014 through 2017 were adjusted by 16,450 Time-based and 12,836 Performance-based in fiscal 2019, as certain performance
conditions at measurement periods were not met and only a portion of the shares were vested, resulting in the reversal of $2.6 million of
expense during the period. Additionally, 1,158 from the 2016 MSUs net shares were issued during fiscal 2019. Fifty percent of the MSUs
will vest in four equal annual installments, commencing on the second anniversary of the grant date subject to stock price performance
conditions, pursuant to which the actual number of shares issuable with respect to vested MSUs may range from 0% to 200% of the target
number of shares covered by the MSU awards, generally depending on the growth in the 60-day average trading price of the Company’s
shares during the period between the grant date and the relevant vesting dates. The remaining fifty percent of the MSUs are also subject to
financial performance conditions in addition to the stock price performance conditions applicable to all MSUs. These additional
performance-based MSUs vest in four equal installments with the first installment vesting on January 1, three years after the MSU grant
87
date (for example, January 1, 2022 for the 2019 MSU grant) and the remaining annual installments commencing on the third anniversary
of the grant date, except that no portion of the award will vest unless the Committee determines that the Company achieved (1) for the
2019 MSU grants, specified community count improvement (as to 25% of the MSU amount) and pre-tax profit (as to 25% of the MSU
amount) goals comparing the fiscal year of the grant date and the second fiscal year following the grant date (fiscal 2020 compared to
fiscal 2018), (2) for the 2017 and 2016 MSU grants, specified gross margin improvement (as to 25% of the MSU amount) and debt
reduction (as to 25% of the MSU amount) goals comparing the fiscal year of the grant date and the second fiscal year following the grant
date (fiscal 2019 compared to fiscal 2017).
The fair value of the MSU grants is determined using the Monte-Carlo simulation model, which simulates a range of possible
future stock prices and estimates the probabilities of the potential payouts. This model uses the average closing trading price of the
Company’s Class A Common Stock on the New York Stock Exchange over the 60 calendar day period ending on the grant date. This
model also incorporates the following ranges of assumptions:
●
●
●
The expected volatility is based on our stock’s historical volatility commensurate with the life 2 years, 2.6 years,
3 years, 4 years and 5 years.
The risk-free interest rate is based on the U.S. Treasury rate assumption ranging from 2-5 years.
The expected dividend yield is not applicable since we do not currently pay dividends.
The following assumptions were used for 2019 MSU grants: historical volatility factor of the expected market price of our
common stock of 62.51%, 59.60%, 57.04%, 60.03% and 56.86% for the 2 year, 2.6 year, 3 year, 4 year and 5 year vesting tranches,
respectively and the concluded risk free rate assumptions of 1.80% and 1.81% equals the continuously compounded 2.55 year and 4 year
yield, respectively and dividend yield of zero for all time periods. The following assumptions were used for 2018 MSU Grants: historical
volatility factor of the expected market price of our common stock of 48.41%, 51.92%, 56.11%, 52.59% and 49.57% for the 2 year, 2.6
year, 3 year, 4 year and 5 year vesting tranches, respectively; the concluded risk free rate assumptions of 2.56% and 2.68% equals the
continuously compounded 2.56 year and 4 year yield, respectively and dividend yield of zero for all time periods. The following
assumptions were used for 2017 MSU grants: historical volatility factor of the expected market price of our common stock of 57.93%,
54.61%, 52.66%, 48.85% and 50.78% for the 2 year, 2.6 year, 3 year, 4 year and 5 year vesting tranches, respectively; risk free interest
rates of 1.35%, 1.43%, 1.49%, 1.63% and 1.76% for each vesting tranche, respectively; and dividend yield of zero for all time periods.
Based on the terms of our equity compensation plans, awards that are forfeited become available to us for future grants under
the plan. As of October 31, 2019, we had 22 thousand shares authorized and remaining for future issuance under our equity compensation
plans. In addition, as of October 31, 2019, there were $4.2 million of total unrecognized compensation costs related to nonvested share-
based compensation arrangements. That cost is expected to be recognized over a weighted-average period of 1.8 years.
16. Warranty Costs
General liability insurance for homebuilding companies and their suppliers and subcontractors is very difficult to obtain. The
availability of general liability insurance is limited due to a decreased number of insurance companies willing to underwrite for the industry.
In addition, those few insurers willing to underwrite liability insurance have significantly increased the premium costs. To date, we have
been able to obtain general liability insurance but at higher premium costs with higher deductibles. Our subcontractors and suppliers have
advised us that they have also had difficulty obtaining insurance that also provides us coverage. As a result, we have an owner controlled
insurance program for certain of our subcontractors whereby the subcontractors pay us an insurance premium (through a reduction of
amounts we would otherwise owe such subcontractors for their work on our homes) based on the risk type of the trade. We absorb the
liability associated with their work on our homes as part of our overall general liability insurance at no additional cost to us because our
existing general liability and construction defect insurance policy and related reserves for amounts under our deductible covers construction
defects regardless of whether we or our subcontractors are responsible for the defect. For the fiscal years ended October 31, 2019 and
2018, we received $4.8 million and $4.6 million, respectively, from subcontractors related to the owner controlled insurance program,
which we accounted for as reductions to inventory.
88
We accrue for warranty costs that are covered under our existing general liability and construction defect policy as part of our
general liability insurance deductible. This accrual is expensed as selling, general and administrative costs. For homes delivered in fiscal
2019 and 2018, our deductible under our general liability insurance is a $20 million aggregate for construction defect and warranty
claims. For bodily injury claims, our deductible per occurrence in fiscal 2019 and 2018 is $0.25 million, up to a $5 million limit. Our
aggregate retention for construction defect, warranty and bodily injury claims is $20 million for fiscal 2019 and 2018. In addition, we
establish a warranty accrual for lower cost-related issues to cover home repairs, community amenities and land development infrastructure
that are not covered under our general liability and construction defect policy. We accrue an estimate for these warranty costs as part of
cost of sales at the time each home is closed and title and possession have been transferred to the homebuyer. Additions and charges in the
warranty reserve and general liability reserve for the fiscal years ended October 31, 2019 and 2018 were as follows:
(In thousands)
Balance, beginning of period
Additions – Selling, general and administrative
Additions – Cost of sales
Charges incurred during the period
Changes to pre-existing reserves
Balance, end of period
Year Ended October 31,
2018
2019
$95,064
8,408
6,260
(18,757)
(1,604)
$89,371
$127,702
9,024
17,180
(43,462)
(15,380)
$95,064
Warranty accruals are based upon historical experience. We engage a third-party actuary that uses our historical warranty and
construction defect data to assist our management in estimating our unpaid claims, claim adjustment expenses and incurred but not reported
claims reserves for the risks that we are assuming under the general liability and construction defect programs. The estimates include
provisions for inflation, claims handling and legal fees. The majority of the charges incurred during fiscal 2018 represented a payment for
construction defect reserves related to the settlement of a litigation matter. Also, as a result of reductions in our construction defect claims
in recent years and the impact of these reductions on the actuarial analysis on our total reserves, we recorded reductions in our construction
defect reserves of $6.9 million in the fourth quarter of fiscal 2019 and $10.2 million in the fourth quarter of fiscal 2018. These reductions
are reflected in the changes to pre-existing reserves in the table above.
Insurance claims paid by our insurance carriers, excluding insurance deductibles paid, were $0.1 million and $0.2 million for
the fiscal years ended October 31, 2019 and 2018, respectively, for prior year deliveries.
17. Transactions with Related Parties
During the years ended October 31, 2019, 2018 and 2017, an engineering firm owned by Tavit Najarian, a relative of Ara K.
Hovnanian, our Chairman of the Board of Directors and our Chief Executive Officer, provided services to the Company totaling $0.9
million, $0.7 million and $0.8 million, respectively. Neither the Company nor Mr. Hovnanian has a financial interest in the relative’s
company from whom the services were provided.
Mr. Carson Sorsby, the son of J. Larry Sorsby, one of our directors and Chief Financial Officer, is employed by the Company’s
mortgage subsidiary. His total commissions from the Company’s mortgage affiliate totaled approximately $223,000, $148,000 and
$191,000 in fiscal 2019, 2018 and 2017, respectively.
Mr. Alexander Hovnanian, the son of Ara K. Hovnanian, our Chairman of the Board of Directors and our Chief Executive
Officer, is employed by the Company. Mr. Hovnanian was Division President of the Northeast Division in fiscal 2019. His total
compensation was approximately $609,000, $514,000 and $336,000 in fiscal 2019, 2018 and 2017, respectively.
18. 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
89
fines and penalties, obligations to remediate, permit revocations or other sanctions; and contamination or other environmental conditions
at or in the vicinity of our developments may result in claims against us for personal injury, property damage or other losses.
We anticipate that increasingly stringent requirements will continue to be imposed on developers and homebuilders in the
future. For example, for a number of years, the EPA and U.S. Army Corps of Engineers have been engaged in rulemakings to clarify the
scope of federally regulated wetlands, which included a June 2015 rule many affected businesses contend impermissibly expanded the
scope of such wetlands that was challenged in court, stayed, and remains in litigation. A proposal was made in June 2017 to formally
rescind the June 2015 rule and reinstate the rule scheme previously in place while the agencies initiate a new substantive rulemaking on
the issue. A February 2018 rule purported to delay the effective date of the June 2015 rule until February 2020, but was enjoined nationwide
in August 2018 by a federal district court in South Carolina and later by a federal district court in the State of Washington in response to
lawsuits (the net result of which, according to the EPA, is that the June 2015 rule applies in 22 states, the District of Columbia, and the
United States territories, and that the pre-June 2015 regime applies in the rest). In October 2019, the EPA and U.S. Army Corps of Engineers
promulgated a new rule, to become effective December 23, 2019, repealing the June 2015 rule and reinstating the previous rule scheme. It
is unclear how these and related developments, including at the state or local level, ultimately may affect the scope of regulated wetlands
where we operate. Although we cannot reliably predict the extent of any effect these developments regarding wetlands, or any other
requirements that may take effect may have on us, they could result in time-consuming and expensive compliance programs and in
substantial expenditures, which could cause delays and increase our cost of operations. In addition, our ability to obtain or renew permits
or approvals and the continued effectiveness of permits already granted or approvals already obtained is dependent upon many factors,
some of which are beyond our control, such as changes in policies, rules and regulations and their interpretations and application.
In March 2013, we received a letter from the Environmental Protection Agency (“EPA”) requesting information about our
involvement in a housing redevelopment project in Newark, New Jersey that a Company entity undertook during the 1990s. We understand
that the development is in the vicinity of a former lead smelter and that tests on soil samples from properties within the development
conducted by the EPA showed elevated levels of lead. We also understand that the smelter ceased operations many years before the
Company entity involved acquired the properties in the area and carried out the re-development project. We responded to the
EPA’s request. In August 2013, we were notified that the EPA considers us a potentially responsible party (or “PRP”) with respect to the
site, that the EPA will clean up the site, and that the EPA is proposing that we fund and/or contribute towards the cleanup of the
contamination at the site. We began preliminary discussions with the EPA concerning a possible resolution but do not know the scope or
extent of the Company’s obligations, if any, that may arise from the site and therefore cannot provide any assurance that this matter will
not have a material impact on the Company. The EPA requested additional information in April 2014 and again in March 2017 and the
Company responded to the information requests. On May 2, 2018 the EPA sent a letter to the Company entity demanding reimbursement
for 100% of the EPA’s costs to clean-up the site in the amount of $2.7 million. The Company responded to the EPA’s demand letter on
June 15, 2018 setting forth the Company’s defenses and expressing its willingness to enter into settlement negotiations. The parties
subsequently executed a Tolling Agreement to toll the statute of limitations on collection until December 20, 2019 and are preparing an
agreement to extend it to June 20, 2020 to allow the parties time to discuss settlement. The Company received a letter from the EPA on
November 4, 2019 asking if the Company remained interested in settlement negotiations. The Company responded affirmatively and such
negotiations are ongoing. Two other PRPs identified by the EPA are now also in negotiations with the EPA and in preliminary negotiations
with the Company regarding the site. In the course of negotiations, the EPA informed the Company that the New Jersey Department of
Environmental Protection has also incurred costs remediating part of the site. We believe that we have adequate reserves for this matter.
In 2015, the condominium association of the Four Seasons at Great Notch condominium community (the “Great Notch
Plaintiff”) filed a lawsuit in the Superior Court of New Jersey, Law Division, Passaic County (the “Court”) alleging various construction
defects, design defects, and geotechnical issues relating to the community. The operative complaint (“Complaint”) asserts claims against
Hovnanian Enterprises, Inc. and several of its affiliates, including K. Hovnanian at Great Notch, LLC, K. Hovnanian Construction
Management, Inc., and K. Hovnanian Companies, LLC. The Complaint also asserts claims against various other design professionals and
contractors. The Great Notch Plaintiff has also filed a motion, which remains pending, to permit it to pursue a claim to pierce the corporate
veil of K. Hovnanian at Great Notch, LLC to hold its alleged parent entities liable for any damages awarded against it. To date, the
Hovnanian-affiliated defendants have reached a partial settlement with the Great Notch Plaintiff as to a portion of the Great Notch
Plaintiff’s claims against them for an amount immaterial to the Company. On its remaining claims against the Hovnanian-affiliated
defendants, the Great Notch Plaintiff has asserted damages of approximately $119.5 million, which amount is potentially subject to treble
damages pursuant to the Great Notch Plaintiff’s claim under the New Jersey Consumer Fraud Act. On August 17, 2018, the Hovnanian-
affiliated defendants filed a motion for summary judgment seeking dismissal of all of the Great Notch Plaintiff’s remaining claims against
them, which was withdrawn without prejudice to re-file with supplemental evidence. The trial is currently scheduled for April 20, 2020.
An initial court-ordered mediation session took place on November 19, 2019. An additional mediation session is contemplated, but has
not yet been scheduled. The Hovnanian-affiliated defendants intend to defend these claims vigorously.
19. Variable Interest Entities
The Company enters into land and lot option purchase contracts to procure land or lots for the construction of homes. Under
these contracts, the Company will fund a stated deposit in consideration for the right, but not the obligation, to purchase land or lots at a
future point in time with predetermined terms. Under the terms of the option purchase contracts, many of the option deposits are not
refundable at the Company's discretion. Under the requirements of ASC 810, certain option purchase contracts may result in the creation
of a variable interest in the entity (“VIE”) that owns the land parcel under option.
90
In compliance with ASC 810, the Company analyzes its option purchase contracts to determine whether the corresponding
land sellers are VIEs and, if so, whether the Company is the primary beneficiary. Although the Company does not have legal title to the
underlying land, ASC 810 requires the Company to consolidate a VIE if the Company is determined to be the primary beneficiary. In
determining whether it is the primary beneficiary, the Company considers, among other things, whether it has the power to direct the
activities of the VIE that most significantly impact the VIE’s economic performance. Such activities would include, among other things,
determining or limiting the scope or purpose of the VIE, selling or transferring property owned or controlled by the VIE, or arranging
financing for the VIE. The Company also considers whether it has the obligation to absorb losses of the VIE or the right to receive benefits
from the VIE. As a result of its analyses, the Company determined that as of October 31, 2019 and 2018, it was not the primary beneficiary
of any VIEs from which it is purchasing land under option purchase contracts.
We will continue to secure land and lots using options, some of which are with VIEs. Including deposits on our unconsolidated
VIEs, at October 31, 2019, we had total cash and letters of credit deposits amounting to $70.0 million to purchase land and lots with a total
purchase price of $1.3 billion. The maximum exposure to loss with respect to our land and lot options is limited to the deposits plus any
pre-development costs invested in the property, although some deposits are refundable at our request or refundable if certain conditions
are not met.
20. Investments in Unconsolidated Homebuilding and Land Development Joint Ventures
We enter into homebuilding and land development joint ventures from time to time as a means of accessing lot positions,
expanding our market opportunities, establishing strategic alliances, managing our risk profile, leveraging our capital base and enhancing
returns on capital. Our homebuilding joint ventures are generally entered into with third-party investors to develop land and construct
homes that are sold directly to third-party home buyers. Our land development joint ventures include those entered into with developers
and other homebuilders as well as financial investors to develop finished lots for sale to the joint venture’s members or other third parties.
During the first quarter of fiscal 2017, we transferred one community we owned and our option to buy three communities to
an existing joint venture, resulting in our receiving $11.2 million of net cash. During the first quarter of fiscal 2018, we acquired the
remaining assets of one of our joint ventures, resulting in a $13.0 million reduction in our investment in the joint venture and a
corresponding increase to inventory. During the third quarter of fiscal 2019, we contributed one community we owned to an existing joint
venture, resulting in our receiving $15.9 million of net cash.
The tables set forth below summarize the combined financial information related to our unconsolidated homebuilding and
land development joint ventures that are accounted for under the equity method.
(Dollars in thousands)
Assets:
Cash and cash equivalents
Inventories
Other assets
Total assets
Liabilities and equity:
Accounts payable and accrued liabilities
Notes payable
Total liabilities
Equity of:
Hovnanian Enterprises, Inc.
Others
Total equity
Total liabilities and equity
Debt to capitalization ratio
Homebuilding
October 31, 2019
Land
Development
Total
$108,520
397,804
24,896
$531,220
$71,297
186,882
258,179
120,891
152,150
273,041
$531,220
$2,203
6,038
233
$8,474
$592
-
592
4,747
3,135
7,882
$8,474
$110,723
403,842
25,129
$539,694
$71,889
186,882
258,771
125,638
155,285
280,923
$539,694
41 %
0 %
40 %
91
(Dollars in thousands)
Assets:
Cash and cash equivalents
Inventories
Other assets
Total assets
Liabilities and equity:
Accounts payable and accrued liabilities
Notes payable
Total liabilities
Equity of:
Hovnanian Enterprises, Inc.
Others
Total equity
Total liabilities and equity
Debt to capitalization ratio
Homebuilding
October 31, 2018
Land
Development
Total
$50,010
506,650
35,105
$591,765
$79,108
236,665
315,773
114,950
161,042
275,992
$591,765
$2,275
8,004
-
$10,279
$746
-
746
4,369
5,164
9,533
$10,279
$52,285
514,654
35,105
$602,044
$79,854
236,665
316,519
119,319
166,206
285,525
$602,044
46 %
0 %
45 %
As of October 31, 2019, we had advances outstanding of $1.4 million and as of October 31, 2018, we had advances and a note
receivable of $4.6 million to these unconsolidated joint ventures. These amounts were included in the “Accounts payable and accrued
liabilities” balances in the tables above. On our Consolidated Balance Sheets, our “Investments in and advances to unconsolidated joint
ventures” amounted to $127.0 million and $123.7 million at October 31, 2019 and 2018, respectively. In some cases, our net investment
in these joint ventures is less than our proportionate share of the equity reflected in the table above because of the differences between
asset impairments recorded against our joint venture investments and any impairments recorded in the applicable joint venture.
Impairments of joint venture investments are recorded at fair value while impairments recorded in the joint venture are recorded when
undiscounted cash flows trigger the impairment. During the year ended October 31, 2019, we recorded a $0.9 million write down in our
investment in one of our joint ventures in the West. During the year ended October 31, 2018, we did not write-down any of our joint
venture investments; however, one of our joint ventures in the Northeast and one of our joint ventures in the Mid-Atlantic recorded asset
impairments. We recorded our proportionate share of these impairment charges of $0.7 million and $0.6 million, respectively, as part of
our share of the net income (loss) of the ventures.
(Dollars in thousands)
Revenues
Cost of sales and expenses
Joint venture net income
Our share of net income
(Dollars in thousands)
Revenues
Cost of sales and expenses
Joint venture net income
Our share of net income
(Dollars in thousands)
Revenues
Cost of sales and expenses
Joint venture net (loss) income
Our share of net (loss) income
For The Year Ended October 31, 2019
Land
Development
Total
$8,704
(7,948)
$756
$378
$497,618
(464,511)
$33,107
$29,139
For The Year Ended October 31, 2018
Land
Development
Total
$6,418
(5,173)
$1,245
$623
$609,099
(582,279)
$26,820
$24,527
For The Year Ended October 31, 2017
Land
Development
Total
Homebuilding
$488,914
(456,563 )
$32,351
$28,761
Homebuilding
$602,681
(577,106 )
$25,575
$23,904
Homebuilding
$312,164
(324,514 )
$(12,350 )
$(7,189 )
$5,685
(4,633)
$1,052
$526
$317,849
(329,147)
$(11,298)
$(6,663)
“Income (loss) from unconsolidated joint ventures” is reflected as a separate line in the accompanying Consolidated
Statements of Operations and reflects our proportionate share of the income or loss of these unconsolidated homebuilding and land
development joint ventures. The difference between our share of the income or loss from these unconsolidated joint ventures in the tables
above compared to the Consolidated Statements of Operations is due primarily to the reclassification of the intercompany portion of
management fee income from certain joint ventures and the deferral of income for lots purchased by us from certain joint ventures. To
compensate us for the administrative services we provide as the manager of certain joint ventures we receive a management fee based on
a percentage of the applicable joint venture’s revenues. These management fees, which totaled $16.9 million, $21.1 million and $11.3
92
million for the years ended October 31, 2019, 2018 and 2017, are recorded in “Homebuilding: Selling, general and administrative” on the
Consolidated Statements of Operations.
In determining whether or not we must consolidate joint ventures that we manage, we assess whether the other partners have
specific rights to overcome the presumption of control by us as the manager of the joint venture. In most cases, the presumption is overcome
because the joint venture agreements require that both partners agree on establishing the operations and capital decisions of the partnership,
including budgets in the ordinary course of business.
Typically, our unconsolidated joint ventures obtain separate project specific mortgage financing. For some of our joint
ventures, obtaining financing was challenging, therefore, some of our joint ventures are capitalized only with equity. The total debt to
capitalization ratio of all our joint ventures is currently 40%. Any 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 joint venture entity
is considered a VIE under ASC 810-10 “Consolidation – Overall” due to the returns being capped to the equity holders; however, in these
instances, we have determined that we are not the primary beneficiary, and therefore we do not consolidate these entities.
21. Fair Value of Financial Instruments
ASC 820, "Fair Value Measurements and Disclosures," provides a framework for measuring fair value, expands disclosures
about fair-value measurements and establishes a fair-value hierarchy which prioritizes the inputs used in measuring fair value summarized
as follows:
Level 1: Fair value determined based on quoted prices in active markets for identical assets.
Level 2: Fair value determined using significant other observable inputs.
Level 3: Fair value determined using significant unobservable inputs.
Our financial instruments measured at fair value on a recurring basis are summarized below:
(In thousands)
Mortgage loans held for sale (1)
Forward contracts
Total
Interest rate lock commitments
Total
Fair Value
Hierarchy
Level 2
Level 2
Level 3
Fair Value at
October 31,
2019
Fair Value at
October 31,
2018
$166,007
(64)
$165,943
$42
$165,985
$130,709
13
$130,722
$(28)
$130,694
(1) The aggregate unpaid principal balance was $161.1 million and $127.6 million at October 31, 2019 and 2018, respectively.
We elected the fair value option for our loans held for sale in accordance with ASC 825, “Financial Instruments,” which
permits us to measure financial instruments at fair value on a contract-by-contract basis. Management believes that the election of the fair
value option for loans held for sale improves financial reporting by mitigating volatility in reported earnings caused by measuring the fair
value of the loans and the derivative instruments used to economically hedge them without having to apply complex hedge accounting
provisions. Fair value of loans held for sale is based on independent quoted market prices, where available, or the prices for other mortgage
loans with similar characteristics.
The Financial Services segment had a pipeline of loan applications in process of $484.2 million at October 31, 2019. Loans
in process for which interest rates were committed to the borrowers totaled $37.7 million as of October 31, 2019. Substantially all of these
commitments were for periods of 60 days or less. Since a portion of these commitments is expected to expire without being exercised by
the borrowers, the total commitments do not necessarily represent future cash requirements.
The Financial Services segment uses investor commitments and forward sales of mandatory MBS to hedge its mortgage-
related interest rate exposure. These instruments involve, to varying degrees, elements of credit and interest rate risk. Credit risk is managed
by entering into MBS forward commitments, option contracts with investment banks, federally regulated bank affiliates and loan sales
transactions with permanent investors meeting the segment’s credit standards. The segment’s risk, in the event of default by the purchaser,
is the difference between the contract price and fair value of the MBS forward commitments and option contracts. At October 31, 2019,
the segment had open commitments amounting to $11.5 million to sell MBS with varying settlement dates through November 20, 2019.
93
The assets accounted for using the fair value option are initially measured at fair value. Gains and losses from initial
measurement and subsequent changes in fair value are recognized in the Consolidated Financial Statements in “Revenues: Financial
services.” The fair values that are included in income are shown, by financial instrument and financial statement line item, below:
(In thousands)
Mortgage
Loans Held
for Sale
Year Ended October 31, 2019
Interest Rate
Lock
Commitments
Forward
Contracts
Fair value included in net loss all reflected in financial services revenues
$4,869
$42
$(64)
(In thousands)
Mortgage
Loans Held
for Sale
Year Ended October 31, 2018
Interest Rate
Lock
Commitments
Forward
Contracts
Fair value included in net income all reflected in financial services
revenues
$3,115
$(28)
$13
(In thousands)
Mortgage
Loans Held
for Sale
Year Ended October 31, 2017
Interest Rate
Lock
Commitments
Forward
Contracts
Fair value included in net loss all reflected in financial services revenues
$4,256
$(14)
$15
The Company's assets measured at fair value on a nonrecurring basis are those assets for which the Company has recorded
valuation adjustments and write-offs during the fiscal years ended October 31, 2019 and 2018. The assets measured at fair value on a
nonrecurring basis are all within the Company's Homebuilding operations and are summarized below:
Nonfinancial Assets
(In thousands)
Year Ended
October 31, 2019
Fair
Value
Hierarchy
Pre-
Impairment
Amount
Total Losses
Fair Value
Sold and unsold homes and lots under development
Land and land options held for future development or sale
Level 3
Level 3
$9,670
$7,801
$(2,494)
$(185)
$7,176
$7,616
(In thousands)
Year Ended
October 31, 2018
Fair
Value
Hierarchy
Pre-
Impairment
Amount
Total Losses
Fair Value
Sold and unsold homes and lots under development
Land and land options held for future development or sale
Level 3
Level 3
$11,170
$-
$(2,117)
$-
$9,053
$-
We record impairment losses on inventories related to communities under development and held for future development when
events and circumstances indicate that they may be impaired and the undiscounted cash flows estimated to be generated by those assets
are less than their related carrying amounts. If the expected undiscounted cash flows are less than the carrying amount, then the community
is written down to its fair value. We estimate the fair value of each impaired community by determining the present value of its estimated
future cash flows at a discount rate commensurate with the risk of the respective community. Should the estimates or expectations used in
determining cash flows or fair value decrease or differ from current estimates in the future, we may be required to recognize additional
impairments. We recorded inventory impairments, which are included in the Consolidated Statements of Operations as “Inventory
impairment loss and land option write-offs” and deducted from inventory, of $2.7 million, $2.1 million and $15.1 million for the years
ended October 31, 2019, 2018 and 2017, respectively. See Note 12 for further detail of the communities evaluated for impairment.
The fair value of our cash equivalents, restricted cash and cash equivalents and customer’s deposits approximates their carrying
amount, based on Level 1 inputs.
94
The fair value of each series of our Notes are listed below. Level 2 measurements are estimated based on recent trades or
quoted market prices for the same issues or based on recent trades or quoted market prices for our debt of similar security and maturity to
achieve comparable yields. Level 3 measurements are estimated based on third-party broker quotes or management’s estimate of the fair
value based on available trades for similar debt instruments.
Fair Value as of October 31, 2019
(In thousands)
Level 1
Level 2
Level 3
Total
Senior Secured Notes:
10.0% Senior Secured Notes due July 15, 2022
10.5% Senior Secured Notes due July 15, 2024
7.75% Senior Secured 1.125 Lien Notes due February 15, 2026
10.5% Senior Secured 1.25 Lien Notes due February 15, 2026
11.25% Senior Secured 1.5 Lien Notes due February 15, 2026
Senior Notes:
13.5% Senior Notes due February 1, 2026
5.0% Senior Notes due February 1, 2040
Senior Unsecured Term Loan Credit Facility due February 1, 2027
Total fair value
$-
-
-
-
-
-
-
-
$-
$189,430
166,999
-
-
-
$-
-
350,000
282,322
103,141
$189,430
166,999
350,000
282,322
103,141
-
-
-
$356,429
80,254
31,993
106,499
80,254
31,993
106,499
$954,209 $1,310,638
Fair Value as of October 31, 2018
(In thousands)
Level 1
Level 2
Level 3
Total
Senior Secured Notes:
9.5% Senior Secured Notes due November 15, 2020
2.0% Senior Secured Notes due November 1, 2021
5.0% Senior Secured Notes due November 1, 2021
10.0% Senior Secured Notes due July 15, 2022
10.5% Senior Secured Notes due July 15, 2024
Senior Notes:
13.5% Senior Notes due February 1, 2026
5.0% Senior Notes due February 1, 2040
Senior Unsecured Term Loan Credit Facility due February 1, 2027
Total fair value
$-
-
-
-
-
$-
-
124,781
424,670
366,720
$74,250
40,434
-
-
-
$74,250
40,434
124,781
424,670
366,720
-
-
-
88,148
35,628
-
$- $1,039,947
88,148
-
35,628
-
114,328
114,328
$229,012 $1,268,959
The Senior Secured Revolving Credit Facility is not included in the above tables because there were no borrowings outstanding
thereunder as of October 31, 2019 and 2018.
22. Unaudited Summarized Consolidated Quarterly Information
Summarized quarterly financial information for the years ended October 31, 2019 and 2018 is as follows:
(In thousands, except per share data)
Revenues
Expenses
Inventory impairment loss and land option write-offs
Loss on extinguishment of debt
Income from unconsolidated joint ventures
(Loss) before income taxes
State and federal income tax provision
Net (loss)
Per share data:
Basic and assuming dilution:
October 31,
Three Months Ended
July 31,
April 30,
2019
$713,590
677,429
2,687
(42,436 )
8,376
(586 )
1,221
$(1,807 )
2019
$482,041
491,412
1,435
-
3,742
(7,064)
537
$(7,601)
2019
$440,691
461,393
1,462
-
7,252
(14,912 )
345
$(15,257 )
January 31,
2019
$380,594
406,558
704
-
9,562
(17,106 )
346
$(17,452 )
Net (loss) per common share
Weighted-average number of common shares outstanding
$(0.30 )
5,982
$(1.27)
5,971
$(2.56 )
5,962
$(2.93 )
5,958
95
(In thousands, except per share data)
Revenues
Expenses
Inventory impairment loss and land option write-offs
Loss on extinguishment of debt
Income (loss) from unconsolidated joint ventures
Income (loss) before income taxes
State and federal income tax provision (benefit)
Net income (loss)
Per share data:
Basic:
Net income (loss) per common share
Weighted-average number of common shares outstanding
Assuming dilution:
Net income (loss) per common share
Weighted-average number of common shares outstanding
23. Subsequent Events
October 31,
Three Months Ended
July 31,
April 30,
2018
$614,811
581,680
318
(1,830 )
17,134
48,117
1,939
$46,178
$7.75
5,957
$7.34
6,077
2018
$456,712
463,004
96
(4,266)
10,732
78
1,104
$(1,026)
$(0.18)
5,947
$(0.18)
5,947
2018
$502,544
509,352
2,673
(1,440 )
1,343
(9,578 )
245
$(9,823 )
$(1.65 )
5,937
$(1.65 )
5,937
January 31,
2018
$417,166
442,047
414
-
(5,176 )
(30,471 )
338
$(30,809 )
$(5.20 )
5,921
$(5.20 )
5,921
On November 5, 2019, K. Hovnanian commenced a private offer to exchange its 10.0% 2022 Notes and its 10.5% 2024 Notes
for its newly issued 10.0% 1.75 Lien Notes due 2025 (the “1.75 Lien Notes”). In conjunction with this exchange offer, K. Hovnanian
solicited consents to proposed amendments (the “ Proposed Amendments”) from the holders of such Notes to the indenture, dated as of
July 27, 2017, among HEI, K. Hovnanian and the other guarantors parties thereto and Wilmington Trust, National Association, as trustee
and collateral agent (the “Existing Indenture”), providing for, among other matters, the elimination of most of the restrictive covenants,
certain of the affirmative covenants and certain of the events of default contained in such indenture.
The Exchange Offers and the Consent Solicitations expired at 11:59 p.m., New York City time, on December 5, 2019. As of
the expiration date of the Exchange Offers, K. Hovnanian had received tenders from holders of $23.2 million in aggregate principal amount,
or 10.6%, of the 10.0% 2022 Notes and $141.7 million in aggregate principal amount, or 67.0%, of the 10.5% 2024 Notes, all of which
were accepted for exchange, and had received the requisite consents in connection with the Consent Solicitation for the 10.5% 2024 Notes.
K. Hovnanian did not receive the requisite consents in connection with the Consent Solicitation for the 10% 2022 Notes and therefore the
10.5% 2022 Notes will continue to be subject to the terms of the Existing Indenture without giving effect to the Proposed Amendments.
On December 6, 2019, K. Hovnanian, HEI, as guarantor, the other guarantors party thereto and Wilmington Trust, National Association,
as trustee and collateral agent, entered into the Tenth Supplemental Indenture, dated as of December 6, 2019, amending and supplementing
the Existing Indenture in respect of the Proposed Amendments, which amendments became operative on the settlement date of the
Exchange Offer.
On December 10, 2019, K. Hovnanian settled the exchange offer and issued $158.5 million aggregate principal amount of
1.75 Lien Notes and paid cash to exchanging holders in respect of accrued and unpaid interest on the 10.0% 2022 Notes and 10.5% 2024
Notes accepted for exchange to, but not including, the settlement date and, if applicable, amounts due in lieu of fractional amounts of 1.75
Lien Notes. The 1.75 Lien Notes were issued under an Indenture, dated as of December 10, 2019, among HEI, K. Hovnanian, the guarantors
party thereto and Wilmington Trust, National Association, as trustee and collateral agent (the “New 2025 Notes Indenture”). The 1.75
Lien Notes are guaranteed by HEI and the Notes Guarantors and the 1.75 Lien Notes and the guarantees thereof will be secured by
substantially all of the assets owned by K. Hovnanian and the Notes Guarantors, subject to permitted liens and certain exceptions. The
New 1.75 Lien Notes bear interest at 10.0% per annum and mature on November 15, 2025. Interest on the 1.75 Lien Notes is payable semi-
annually on May 15 and November 15 of each year, beginning on May 15, 2020, to holders of record at the close of business on May 1 or
November 1, as the case may be, immediately preceding each such interest payment date. The New 2025 Notes Indenture contains
restrictive covenants that are substantially similar to those contained in the indentures governing the New Secured Notes.
In addition, on December 10, 2019, K. Hovnanian, HEI, the other Notes Guarantors party thereto, Wilmington Trust, National
Association, as administrative agent, and affiliates of certain investment managers (the “Investors”), as lenders, entered into a credit
agreement (the “1.75 Lien Credit Agreement”) providing for $81.5 million of senior secured 1.75 lien term loans (the “1.75 Lien Term
Loans”), that were borrowed by K. Hovnanian and guaranteed by the Notes Guarantors in exchange for $163.0 million of K. Hovnanian’s
senior unsecured term loans due February 1, 2027 pursuant to an Exchange Agreement, dated December 10, 2019, by and among K.
Hovnanian, HEI, the other Notes Guarantors party thereto and the Investors. The 1.75 Lien Term Loans and the guarantees thereof will be
secured on a pari passu basis with the 1.75 Lien Notes by the same assets that will secure the 1.75 Lien Notes, subject to permitted liens
and certain exceptions. The 1.75 Lien Term Loans will bear interest at a rate equal to 10.0% per annum and will mature on January 31,
2028. The 1.75 Lien Credit Agreement contains representations and warranties and covenants that are substantially similar to those
contained in the Secured Credit Agreement.
96
Comparison of Five-Year Cumulative Total Return*
Among Hovnanian Enterprises, Inc., the S&P 500 Index and the S&P Homebuilding Index
The following graph compares on a cumulative basis the yearly percentage change over the five-year period ended October
31, 2019 in (1) the total shareholder return on the Company’s Class A Common Stock with (2) the total return of the
Standard & Poor’s (S&P) 500 Index and with (3) the total return on the S&P Homebuilding Index. Such yearly percentage
change has been measured by dividing (1) the sum of (a) the cumulative amount of dividends for the measurement period,
assuming dividend reinvestment, and (b) the price per share at the end of the measurement period less the price per share at
the beginning of the measurement period, by (2) the price per share at the beginning of the measurement period. The price of
each share has been set at $100 on October 31, 2014 for the preparation of the five-year graph.
Note: The stock price performance shown on the following graph is not necessarily indicative of future stock performance.
$250
$200
$150
$100
$50
$0
10/14
10/15
10/16
10/17
10/18
10/19
Hovnanian Enterprises, Inc.
S&P 500
S&P Homebuilding
*$100 invested on 10/31/14 in stock or index, assuming reinvestment of dividends.
Fiscal year ending October 31.
Source: Standard & Poor’s Financial Services, LLC, a division of The McGraw-Hill Companies Inc.
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Board of Directors and
Corporate Officers
Corporate Information
INDEPENDENT
REGISTERED PUBLIC
ACCOUNTING FIRM
Deloitte & Touche LLP
30 Rockefeller Plaza
New York, NY 10112-0015
TRANSFER AGENT AND
REGISTRAR
Computershare
Investor Services
P.O. Box 505000
Louisville, KY 40233-5000
For additional information on the
Direct Registration System please
visit the “IR Contacts” page in the
Investor Relations section of our
website at khov.com
BOARD OF
DIRECTORS
Ara K. Hovnanian
Chairman of the Board,
President, Chief Executive
Officer and Director
Robert B. Coutts
Director
Edward A. Kangas
Director
Joseph A. Marengi
Director
Vincent Pagano Jr.
Director
Robin Stone Sellers
Director
J. Larry Sorsby
Executive Vice President,
Chief Financial Officer
and Director
Stephen D. Weinroth
Director
CHIEF OPERATING
OFFICER
Lucian T. Smith III
ANNUAL MEETING
March 24, 2020, 10:30 a.m., PT
Montage Beverly Hills
225 North Canon Drive
Beverly Hills, CA 90210
VICE PRESIDENTS
David L. Bachstetter
Michael Discafani
Brad G. O’Connor
Marcia Wines
STOCK LISTING
Hovnanian Enterprises, Inc.
Class A common stock is traded on
the New York Stock Exchange
under the symbol HOV.
FORM 10-K
A copy of the Form 10-K, as filed
with the SEC, is included herein.
Additional copies are available
free of charge upon request to
the:
Office of the Controller
Hovnanian Enterprises, Inc.
90 Matawan Road
Fifth Floor
Matawan, New Jersey 07747
732-383-2200
INVESTOR RELATIONS
CONTACTS
J. Larry Sorsby
Executive Vice President, Chief
Financial Officer
732-383-2200
Jeffrey T. O’Keefe
Vice President, Investor Relations
732-383-2200
E-mail: ir@khov.com
Hovnanian Enterprises, Inc.
90 Matawan Road
Fifth Floor
Matawan, New Jersey 07747
732-383-2200
For additional information visit our website at khov.com