Hovnanian Enterprises, Inc.
Annual Report 2020
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
25
5
8
1
6
8
2
5
-
-
44
4
-
116
20
136
11
13
6
11
-
2
5
31
9
-
8
33
18
2
149
-
149
Financial Highlights
REVENUES AND INCOME
(Dollars in Millions)
Total Revenues
Income (Loss) Before Income Taxes
Income Before Income Taxes Excluding Land-Related
Charges, Joint Venture Write-Downs and (Gain) Loss on
Extinguishment of Debt(1)
Net Income (Loss)
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 Income (Loss) Per Common Share
Weighted-Average Number of Common Shares Outstanding
Years Ended October 31,
2020
2019
2018
2017
2016
$2,343.9
$55.4
$2,016.9
$(39.7)
$1,991.2
$8.1
$2,451.7
$(45.2)
$2,752.2
$2.4
$50.9
$50.9
$9.9
$(42.1)
$20.4
$4.5
$10.2
$(332.2)
$39.0
$(2.8)
$1,827.3
$1,431.1
$(436.1)
$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)
$7.03
6,584
$(7.06)
5,968
$0.72
6,072
$(56.23)
5,908
$(0.48)
5,898
(1) Income Before Income Taxes Excluding Land-Related Charges, Joint Venture Write-Downs and (Gain) 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
2020
2019 % Change
2020
2019 % Change
2020
2019 % Change
Northeast
(NJ, PA)
Home
Dollars
Avg. Price
Mid-Atlantic
326
$171,181
$525,095
293
$172,950
$590,273
11.3%
(1.0)%
(11.0)%
348
$175,627
$504,675
192
$116,889
$608,797
81.3%
50.3%
(17.1)%
130
$82,111
$631,623
152
$86,557
$569,454
(14.5)%
(5.1)%
10.9%
(DE, MD, VA, WV)
Home
Dollars
Avg. Price
990
$510,229
$515,383
728
$385,862
$530,030
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
873
$272,170
$311,764
736
$219,266
$297,916
599
$270,277
$451,214
576
$233,645
$405,634
2,636
$872,630
$331,043
2,006
$677,244
$337,609
1,529
$717,973
$469,570
1,001
$411,577
$411,166
6,953
5,340
$2,814,460
$2,100,544
$404,784
$393,360
Unconsolidated Joint Ventures(3)
Home
Dollars
Avg. Price
Total
Home
Dollars
Avg. Price
1,629
$571,926
$351,090
840
$431,419
$513,594
8,582
6,180
$3,386,386
$2,531,963
$394,592
$409,703
DELIVERIES INCLUDE EXTRAS
36.0%
32.2%
(2.8)%
18.6%
24.1%
4.6%
4.0%
15.7%
11.2%
31.4%
28.9%
(1.9)%
52.7%
74.4%
14.2%
30.2%
34.0%
2.9%
93.9%
32.6%
(31.6)%
38.9%
33.7%
(3.7)%
755
$402,647
$533,307
652
$356,674
$547,046
727
$225,334
$309,950
680
$203,734
$299,609
548
$232,333
$423,965
545
$219,860
$403,413
15.8%
12.9%
(2.5)%
6.9%
10.6%
3.5%
0.6%
5.7%
5.1%
557
$291,115
$522,648
343
$193,387
$563,810
596
$169,517
$284,424
450
$122,681
$272,624
298
$146,971
$493,191
282
$121,921
$432,344
2,233
$743,301
$332,871
1,866
$627,201
$336,121
19.7%
18.5%
(1.0)%
1,066
$360,225
$337,922
663
$230,898
$348,261
1,075
$472,786
$439,801
1,011
$425,324
$420,696
5,686
4,946
$2,252,028
$1,949,682
$396,065
$394,194
728
$432,602
$594,234
774
$485,324
$627,034
6,414
$2,684,630
$418,558
5,720
$2,435,006
$425,700
6.3%
11.2%
4.5%
15.0%
15.5%
0.5%
(5.9)%
(10.9)%
(5.2)%
12.1%
10.3%
(1.7)%
755
$369,887
$489,917
3,402
$1,419,826
$417,350
1,418
$356,197
$251,197
301
$124,700
$414,286
2,191
$880,144
$401,709
461
$194,123
$421,091
4,820
$1,776,023
$368,470
2,652
$1,074,267
$405,078
62.4%
50.5%
(7.3)%
32.4%
38.2%
4.3%
5.7%
20.5%
14.1%
60.8%
56.0%
(3.0)%
150.8%
196.6%
18.3%
55.3%
61.3%
3.9%
207.6%
83.5%
(40.3)%
81.7%
65.3%
(9.0)%
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 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) the outbreak and spread of COVID-19 and the
measures that governments, agencies, law enforcement and/or health authorities implement to address it; (2) changes in general and local economic, industry and business conditions and impacts of a significant
homebuilding downturn; (3) adverse weather and other environmental conditions and natural disasters; (4) the seasonality of the Company’s business; (5) the availability and cost of suitable land and improved
lots and sufficient liquidity to invest in such land and lots; (6) shortages in, and price fluctuations of, raw materials and labor, including due to changes in trade policies and the imposition of tariffs and duties on
homebuilding materials and products and related trade disputes with, and retaliatory measures taken by, other countries; (7) reliance on, and the performance of, subcontractors; (8) 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; (9) increases in cancellations of
agreements of sale; (10) fluctuations in interest rates and the availability of mortgage financing; (11) changes in tax laws affecting the after-tax costs of owning a home; (12) legal claims brought against us and
not resolved in our favor, such as product liability litigation, warranty claims and claims made by mortgage investors; (13) levels of competition; (14) utility shortages and outages or rate fluctuations; (15)
information technology failures and data security breaches; (16) negative publicity; (17) high leverage and restrictions on the Company’s operations and activities imposed by the agreements governing the
Company’s outstanding indebtedness; (18) availability and terms of financing to the Company; (19) the Company’s sources of liquidity; (20) changes in credit ratings; (21) government regulation, including
regulations concerning development of land, the home building, sales and customer financing processes, tax laws and the environment; (22) operations through unconsolidated joint ventures with third parties;
(23) significant influence of the Company’s controlling stockholders; (24) availability of net operating loss carryforwards; (25) loss of key management personnel or failure to attract qualified personnel; and (26)
certain risks, uncertainties and other factors that are described in detail in the Company’s Annual Report on Form 10-K for the fiscal year ended October 31, 2020 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
Income (Loss) Before Income Taxes
Income Before Income Taxes Excluding Land-Related Charges, Joint
Venture Write-Downs and (Gain) Loss on Extinguishment of Debt (1)
Net Income (Loss)
Assuming Dilution:(2)
Net Income (Loss) 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 Provided by (Used in) 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
2020
2019
2018
2017
2016
Years Ended October 31,
$2,343,901
$8,813
$16,565
$55,403
$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
$50,879
$50,928
$7.03
6,584
$277,220
$1,195,775
$1,827,342
$1,431,110
$135,122
$(436,094)
$229,010
$234,314
$292,828
$176,457
1.33x
158.8%
1.9x
18.4%
10.0%
$9,910
$20,444
$10,186
$(42,117)
$4,520
$(332,193)
$(7.06)
5,968
$0.72
6,072
$(56.23)
5,908
$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)
$183,165
$186,321
$(66,822)
$161,048
1.16x
160.8%
1.8x
18.4%
9.4%
$493,742
$1,009,827
$1,900,898
$1,637,874
$77,524
$(460,371)
$193,263
$199,144
$301,578
$160,203
1.24x
125.4%
2.1x
17.2%
8.1%
$38,989
$(2,819)
$(0.48)
5,898
$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%
6,953
$2,814,460
5,686
$2,252,028
3,402
$1,419,826
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
(1) Income Before Income Taxes Excluding Land-Related Charges, Joint Venture Write-Downs and (Gain) Loss on Extinguishment of Debt is a non-GAAP financial measure. The most directly
comparable GAAP financial measure is Income (Loss) Before Income Taxes. The reconciliation of Income Before Income Taxes Excluding Land-Related Charges, Joint Venture Write-Downs and
(Gain) Loss on Extinguishment of Debt to Income (Loss) Before Income Taxes is presented on page 3 of this Annual Report. Income Before Income Taxes Excluding Land-Related Charges, Joint
Venture Write-Downs and (Gain) Loss on Extinguishment of Debt should be considered in addition to, but not as a substitute for, Income (Loss) Before Income Taxes, Net Income (Loss) 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 Before Income Taxes Excluding Land-Related Charges, Joint Venture Write-Downs and (Gain) 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 Income (Loss). The reconciliation of Adjusted EBIT and
Adjusted EBITDA to Net Income (Loss) 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, Income
(Loss) Before Income Taxes, Net Income (Loss) 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 Before Income Taxes Excluding Land-Related Charges, Joint Venture Write-Downs and (Gain) Loss on Extinguishment of Debt to Income
(Loss) Before Income Taxes:
(Dollars In Thousands)
Income (Loss) Before Income Taxes
Inventory Impairment Loss and Land Option Write-Offs
Unconsolidated Joint Venture Investment Write-Downs
(Gain) Loss on Extinguishment of Debt
Income Before Income Taxes Excluding Land-Related Charges,
Joint Venture Write-Downs and (Gain) Loss on
Extinguishment of Debt
Years Ended October 31,
2020
$55,403
8,813
–
(13,337)
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
$50,879
$9,910
$20,444
$10,186
$38,989
Reconciliation of Adjusted EBIT and Adjusted EBITDA to Net Income (Loss):
(Dollars In Thousands)
Net Income (Loss)
Income Tax Provision
Interest Expense
EBIT
Inventory Impairment Loss and Land Option Write-offs
(Gain) Loss on Extinguishment of Debt
Adjusted EBIT
EBIT
Depreciation
Amortization of Debt Costs
EBITDA
Inventory Impairment Loss and Land Option Write-offs
(Gain) Loss on Extinguishment of Debt
Adjusted EBITDA
2020
$50,928
4,475
178,131
233,534
8,813
(13,337)
$229,010
$233,534
5,304
–
238,838
8,813
(13,337)
$234,314
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
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
Homebuilding Gross Margin Percentage
Homebuilding Gross Margin Percentage, Before Cost of Sales Interest
Expense and Land Charges
Homebuilding Gross Margin Percentage, After Cost of Sales Interest
Expense, Before Land Charges
Years Ended October 31,
2020
$2,252,029
1,837,332
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
414,697
74,174
340,523
353,445
350,334
70,520
56,588
282,925
293,746
8,813
$331,710
6,288
$276,637
3,501
$290,245
14.7%
18.4%
15.1%
14.2%
18.1%
14.5%
15.2%
18.4%
15.4%
402,917
76,902
326,015
17,813
$308,202
13.2%
17.2%
13.9%
438,506
86,593
351,913
33,353
$318,560
12.2%
16.9%
13.5%
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)
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
10/31/2019
$1,499,071
19,081
130,976
$1,349,014
$1,499,071
(489,776)
$1,009,295
19,081
130,976
$859,238
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
As of
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
1/31/2020
$1,491,099
30,899
81,396
$1,378,804
$1,491,099
(499,079)
$992,020
30,899
81,396
$879,725
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
As of
4/30/2020
$1,619,959
36,452
232,801
$1,350,706
$1,619,959
(495,073)
$1,124,886
36,452
232,801
$855,633
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
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
7/31/2020
$1,482,403
50,328
198,098
$1,233,977
$1,482,403
(479,519)
$1,002,884
50,328
198,098
$754,458
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
10/31/2020
$1,466,673
35,563
262,489
$1,168,621
$1,466,673
(436,094)
$1,030,579
35,563
262,489
$732,527
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
Five
Quarter
Average
$1,296,224
$816,316
158.8%
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%
(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
1/31/2020
$396,355
For the Quarter Ended
4/30/2020
$428,027
7/31/2020
$499,695
Year
Ended
10/31/2020 10/31/2020
$1,848,486
$524,409
10/31/2019
$1,292,485
190,273
71,264
1/31/2020
$1,295,715
205,215
67,879
As of
4/30/2020
$1,288,497
198,229
67,744
7/31/2020
$1,213,503
194,760
63,998
10/31/2020
$1,195,775
182,224
65,010
$1,030,948
$1,022,621
$1,022,524
$954,745
$948,541
Five
Quarter
Average
$995,876
1.9x
Year
Ended
1/31/2019
$304,927
For the Quarter Ended
4/30/2019
$355,477
7/31/2019
$381,939
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
For the Quarter Ended
1.6x
Year
Ended
(Dollars In Thousands)
Cost of Sales, Excluding Interest
1/31/2018
$329,527
4/30/2018
$393,012
7/31/2018
$361,303
10/31/2018 10/31/2018
$1,566,555
$482,713
Total Inventories
Consolidated Inventory Not Owned
Capitalized Interest
Inventories less Consolidated Inventory Not
Owned and Capitalized Interest
Inventory Turnover
As of
10/31/2017
$1,009,827
124,784
71,051
1/31/2018
$1,053,514
93,875
70,793
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
1.9x
(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, 2020
☐ 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)
732-747-7800
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
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 ☐
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
Smaller Reporting Company ☐
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 has filed a report on and attestation to its management's assessment of the
effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the
registered public accounting firm that prepared or issued its audit report. ☒
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, 2020 (the last business
day of the registrant’s most recently completed second fiscal quarter) was $64,080,000.
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
5,520,359 shares of Class A Common Stock and 622,201 shares of Class B Common Stock were outstanding as of December 11, 2020.
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 30, 2021, 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
1
Business ................................................................................................................................................................... 1
1A Risk Factors ............................................................................................................................................................. 10
1B Unresolved Staff Comments .................................................................................................................................... 22
2
Properties ................................................................................................................................................................. 22
Legal Proceedings ................................................................................................................................................... 22
3
4 Mine Safety Disclosures .......................................................................................................................................... 22
Information About Our Executive Officers ............................................................................................................. 22
PART II .................................................................................................................................................................. 23
5 Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities ................................................................................................................................................................. 23
6
Selected Financial Data ........................................................................................................................................... 24
7 Management’s Discussion and Analysis of Financial Condition and Results of Operations .................................. 25
7A Quantitative and Qualitative Disclosures About Market Risk ................................................................................. 53
Financial Statements and Supplementary Data ....................................................................................................... 54
8
9
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure .................................. 54
9A Controls and Procedures .......................................................................................................................................... 54
9B Other Information .................................................................................................................................................... 54
PART III ................................................................................................................................................................ 55
10 Directors, Executive Officers and Corporate Governance ...................................................................................... 55
Executive Compensation ......................................................................................................................................... 56
11
12
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters ................ 56
13 Certain Relationships and Related Transactions, and Director Independence ........................................................ 56
Principal Accountant Fees and Services .................................................................................................................. 56
14
PART IV ................................................................................................................................................................. 56
15
16
Exhibits and Financial Statement Schedules ........................................................................................................... 56
Form 10-K Summary ............................................................................................................................................... 64
Signatures ................................................................................................................................................................ 65
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 349,000 homes, including 6,414 homes in fiscal 2020. 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 116 communities in
23 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 $2,072,000 with an average sales price, including options, of $396,000 nationwide in fiscal
2020.
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.
1
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.
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. During fiscal 2020, we began a wind down of our operations in the Chicago,
Illinois market.
Geographic Breakdown of Markets by Segment
The Company markets and builds homes that are constructed in 14 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 1,697 full-time employees (whom we refer to as associates) as of October 31, 2020.
Successful execution of our strategy is dependent on attracting, developing and retaining key employees and
members of our management team. The skills, experience and industry knowledge of our employees significantly benefit our
operations and performance. We continuously evaluate, modify, and enhance our internal processes and technologies to
increase employee engagement, productivity, and efficiency opportunities, skills, and resources they need to be successful.
For example, as discussed further below, we have a dedicated training department focused on providing offerings designed
to provide our associates with the knowledge, attitudes, skills and habits necessary to succeed in their jobs through online
and webinar training in sales, construction, administration and managerial skills.
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 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 2019 and fiscal 2020 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. This growth in lot control led to increased community count in fiscal 2019, which along with faster
absorption pace per community, allowed us to increase fiscal 2020 deliveries by 15.0% over fiscal 2019, and increased our
October 31, 2020 backlog by 55.3% over October 31, 2019. 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 2020, 2019 and
2018, rather than purchase additional lots in underperforming communities, we took advantage of this right
and walked away from 3,900 lots, 5,153 lots and 2,777 lots, respectively, out of 20,204 total lots, 23,157 total
lots and 20,387 total lots, respectively, under option, resulting in pretax charges of $6.8 million, $3.6 million
and $1.4 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. We cannot predict the extent to
which shortages in necessary materials or labor may occur in these or other markets in the future.
4
Marketing and Sales - Our homes in 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, Ohio and Virginia
markets, which offer a wide range of customer options to satisfy individual customer tastes.
In fiscal 2019, we established a national call center which is responsible for follow up generated by our web site
and our digital marketing efforts. This call center has become a critical sales tool since the start of the COVID-19 pandemic.
The call center supports our ability to swiftly respond to incoming customer leads, schedule and conduct virtual tours and
video chats, as well as set-up in person model home tours.
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 post-closing 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, 2020, for the markets in which our mortgage subsidiaries originated loans,
10.0% of our home buyers paid in cash and 69.3% of our noncash home buyers obtained mortgages from our mortgage
banking subsidiary. The loans we originated in fiscal 2020 were 69.1% prime and 29.8% Federal Housing
Administration/Veterans Affairs (“FHA/VA”). The remaining 1.1% of our loan originations represent loans which exceed
conforming conventions.
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, 2020, range from $153,000 to $838,000 in
the Northeast, from $209,000 to $2,072,000 in the Mid-Atlantic, from $155,000 to $671,000 in the Midwest, from
$220,000 to $1,138,000 in the Southeast, from $184,000 to $669,000 in the Southwest and from $263,000 to $845,000 in the
West. Closings generally occur and are typically reflected in revenues within six to nine months of when sales contracts are
signed.
5
Information on homes delivered by segment for the year ended October 31, 2020, is set forth below:
(Housing revenue in thousands)
Northeast
Mid-Atlantic
Midwest
Southeast
Southwest
West
Consolidated total
Unconsolidated joint ventures (1)
$
Housing
Revenues
175,627
402,647
225,334
232,333
743,301
472,786
$ 2,252,028
432,602
$
Homes
Delivered
348 $
755
727
548
2,233
1,075
5,686 $
728 $
Average
Price
504,675
533,307
309,950
423,965
332,871
439,801
396,065
594,234
(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 34.0% to $2.8 billion for
the year ended October 31, 2020 from $2.1 billion for the year ended October 31, 2019. The number of homes contracted
increased 30.2% to 6,953 in fiscal 2020 from 5,340 in fiscal 2019. The increase in the number of homes contracted occurred
along with a 6.6% decrease in the average number of open-for-sale communities from 137 for fiscal 2019 to 128 for fiscal
2020. We contracted an average of 54.3 homes per average active selling community in fiscal 2020 compared to 39.0 homes
per average active selling community in fiscal 2019, a 39.2% increase in sales pace per community as our performance per
community improved in fiscal 2020 as compared to fiscal 2019.
Information on the value of net sales contracts by segment for the years ended October 31, 2020 and 2019, is set
forth below:
(Value of net sales contracts in thousands)
Northeast
Mid-Atlantic
Midwest
Southeast
Southwest
West
Consolidated total
Unconsolidated joint ventures(1)
2020
171,181 $
510,229
272,170
270,277
872,630
717,973
2,814,460 $
571,926 $
$
$
$
2019
172,950
385,862
219,266
233,645
677,244
411,577
2,100,544
431,419
(1.0 )%
32.2 %
24.1 %
15.7 %
28.9 %
74.4 %
34.0 %
32.6 %
Percentage of
Change
(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, 2020. 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.”
6
Active Selling Communities
Northeast
Mid-Atlantic
Midwest
Southeast
Southwest
West
Total
Approved
Homes
Contracted Remaining
Homes
Not
Homes Delivered Delivered(1) Available(2)
294
1,607
671
1,301
3,385
1,245
8,503
733
4,025
2,329
2,596
7,987
2,939
20,609
130
557
596
298
1,066
755
3,402
309
1,861
1,062
997
3,536
939
8,704
Communities
2
17
11
9
52
25
116
(1) Includes 590 home sites under option.
(2) Of the total remaining homes available, 348 were under construction or completed (including 75 models and sales
offices), and 5,012 were under option.
Backlog
At October 31, 2020 and 2019, including unconsolidated joint ventures, we had a backlog of signed contracts for
4,820 homes and 2,652 homes, respectively, representing an 81.7% increase, with sales values aggregating $1.8 billion and
$1.1 billion, respectively. The majority of our backlog at October 31, 2020 is expected to be completed and closed within the
next six to nine months. At November 30, 2020 and 2019, our backlog of signed contracts, including unconsolidated joint
ventures, was 5,089 homes and 2,775 homes, respectively, with sales values aggregating $1.9 billion and $1.1 billion,
respectively. For information on our backlog excluding unconsolidated joint ventures, see the table on page 42 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.
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, 2020, 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 26,344 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 35.
7
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 Proposed
of Proposed Developable
Communities Home Sites
Total
Land
Option
Book
Price Value(1)
27
4
31
25
6
31
7
4
11
13
6
19
44
-
44
3
10
13
2,569 $
50
2,619
186,297 $
$
$
2,770 $
994
3,764
293,719 $
$
$
523 $
376
899
11,683 $
$
$
1,340 $
132
1,472
65,911 $
$
$
3,190 $
-
3,190
185,136 $
$
$
310 $
2,185
2,495
28,057 $
$
$
119
30
149
10,702 $
3,737
14,439
770,803 $
$
$
10,893
7,316
18,209
14,664
17,708
32,372
187
8,655
8,842
1,888
5,632
7,520
11,757
-
11,757
4,406
8,850
13,256
43,795
48,161
91,956
(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, 2020, option fees and deposits aggregated approximately $32.0 million. As
of October 31, 2020, we spent an additional $11.8 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.
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
8
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.
9
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.
Risk Relating to Our Business and Industry
Our business has been, and could continue to be, materially and adversely disrupted by the present outbreak and worldwide
spread of COVID-19 and the measures that international, federal, state and local governments, agencies, law enforcement
and/or health authorities implement to address it.
There have been extraordinary and wide-ranging actions taken by international, federal, state and local public
health and governmental authorities to contain and combat the outbreak and worldwide spread of the novel coronavirus
(COVID-19) in the United States and across the world, including quarantines, curfews, “stay-at-home” or “shelter in place”
orders and similar mandates for many individuals to substantially restrict daily activities and for many businesses to curtail
or cease normal operations. Such measures undertaken by governmental authorities to address COVID-19 have, and could
continue to, significantly disrupt or prevent us from operating our business in the ordinary course for an extended period,
and thereby, and/or along with any associated economic and consumer uncertainty, have a material adverse impact on our
Consolidated Financial Statements.
Our response to the various governmental measures in mid-March and early April of 2020, including, among
other measures, temporarily closing our sales offices, model homes and design studios to the general public and limiting our
construction operations, and the response of municipal and private services we rely on, substantially tempered our sales pace.
Beginning in May and continuing through October 31, 2020 our sales pace has exceeded our pre-COVID sales pace. The
further spread of COVID-19 and a resurgence of the infection rate have led governmental authorities to once again tighten
restrictions. Although our sales pace and net contracts have continued to be reasonably strong, they have slowed some more
recently, and we remain uncertain regarding the full long-term magnitude or duration of the business and economic impacts
from the unprecedented COVID-19 pandemic. Further, it remains unknown whether recent, current or anticipated demand
will continue once the current COVID-19 pandemic subsides.
Our business could also be negatively impacted over the medium-to-longer term if the lasting disruptions related
to the COVID-19 pandemic decrease consumer confidence generally or more particularly with respect to purchasing a home;
cause civil unrest; or precipitate a prolonged economic downturn and/or an extended rise in unemployment or tempering of
wage growth, any of which could lower demand for our homes; impair our ability to sell and build homes in a typical manner
or at all, generate revenues and cash flows, and/or access our senior secured revolving credit facility or the capital or lending
markets (or significantly increase the costs of doing so), as may be necessary to sustain our business; increase the costs or
decrease the supply of building materials or the availability of subcontractors and other talent, including as a result of
infections or medically necessary or recommended self-quarantining, or governmental mandates to direct production
activities to support public health efforts; and/or result in our recognizing charges in future periods, which may be material,
for impairments, land option write-offs or restructuring. Such a circumstance could, among other things, exhaust our available
liquidity (and ability to access liquidity sources) and/or trigger an acceleration to pay a significant portion or all of our then-
outstanding debt obligations, which we may be unable to do. The impacts from COVID-19 may also further delay our ability
to reverse all or any portion of our valuation allowance for deferred taxes. The inherent uncertainties surrounding the COVID-
19 pandemic, due in part to the evolving and changing environment, infection levels and governmental directives, concerns
about the winter months, public health challenges and progress, and market reactions thereto, also make it more challenging
for our management to estimate the future performance of our business and develop strategies to generate growth or achieve
our objectives.
Should the adverse impacts described above (or others that are currently unknown) occur or intensify, whether
individually or collectively, we would expect to experience, among other things, decreases in our net contracts, homes
delivered, average selling prices, revenues and profitability, some of which we experienced in March and April of 2020, and
such impacts could be material to our Consolidated Financial Statements in future periods.
10
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;
Labor shortages and increasing labor and materials costs, including because of changes in immigration
laws and trends in labor migration;
Availability and affordability of financing for home buyers;
Interest rates;
Adverse changes in tax laws;
Regulatory changes;
Foreclosure rates;
Inflation;
Consumer confidence and spending;
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 demographic trends; 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 or
prolonged precipitation, droughts, fires and other environmental conditions can harm the local homebuilding business. Some
of our business is in areas that are particularly vulnerable to the physical impacts of climate change, such as from the increased
frequency and severity of such weather conditions, which can delay home construction, increase costs by damaging
inventories, reduce the availability of building materials, and negatively impact the demand for new homes in affected areas,
as well as slow down or otherwise impair the ability of utilities and local governmental authorities to provide approvals and
service to new housing communities. 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.
In addition, geopolitical events, acts of war or terrorism, threats to national security, civil unrest, any outbreak or
escalation of hostilities throughout the world and health pandemics may have a substantial impact on the economy, consumer
confidence, the housing market, our associates and our customers.
11
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.
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. If the
homebuilding industry experiences another significant or sustained downturn, it would materially adversely affect our
business and results of operations in future years.
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. Pricing for labor and raw materials can be affected by various national, regional, local, economic and political
factors. For example, the federal government has imposed new or increased tariffs or duties on an array of imported materials
and goods that are used in connection with the construction and delivery of our homes, including lumber, raising our costs
for these items (or products made with them). Such government imposed tariffs and trade regulations on imported building
supplies, and retaliatory measures by other countries, may in the future have significant impacts on the cost to construct our
homes and on our customers’ budgets, including by causing disruptions or shortages in our supply chain. We have
experienced some labor shortages, price fluctuations and increased labor costs, including as a result of inflation or wage
increases, over the past few years. The cost of labor may be adversely affected by changes in immigration laws and trends in
labor migration. In addition, increased demand could increase material and labor costs. Due to significantly increased demand
in June and July of 2020, we began increasing home prices. While we believe that these price increases could offset potential
material and labor cost increases, 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, or if products supplied to us by subcontractors are defective.
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, which, if widely used in our business, could result in the need to perform extensive
repairs to large numbers of homes. 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 complying with our warranty obligations may be significant if we are
unable to recover the cost of repairs from subcontractors, materials suppliers and insurers. In addition, 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, 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 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.
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.” If market conditions significantly 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 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
13
or at the same rate and the Company’s business, financial condition and results of operations could be materially adversely
affected.
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,
an inability to obtain mortgage financing at prevailing interest rates (including financing arranged or provided by us), an
inability to sell the current home, or our inability to complete and deliver the new home within the specified time. At October
31, 2020, including unconsolidated joint ventures, we had a backlog of signed contracts for 4,820 homes with a sales value
aggregating $1.8 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 low compared to most historical periods 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 generally remained low compared to most historical periods for the last several years, which has made the homes
we sell more affordable. 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
(including due to any failure of lawmakers to agree on a budget or appropriation legislation to fund relevant programs or
operations) 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, particularly in states with higher state income taxes or home prices, such as in California and New Jersey. 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.
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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, 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 our 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. We may have significant liabilities in respect of such claims in the future, which could exceed our reserves,
and the impact of such claims on our results of operations could 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: difficulty in acquiring suitable land at acceptable prices; 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.
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.
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 or 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.
15
Data protection and privacy laws have been enacted by the U.S. federal and state governments, including the
California Consumer Privacy Act, which became effective on January 1, 2020, and the regulatory regime continues to evolve
and is increasingly demanding. Many states are considering privacy and security legislation and there are ongoing
discussions regarding a national privacy law. Variations in requirements across other states could present compliance
challenges, as well as significant costs related to compliance.
We maintain cybersecurity insurance coverage and 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, our efforts to maintain the security and
integrity of our IT networks and related systems may not be effective and attempted security breaches or disruptions could
be successful or damaging.
Negative publicity could adversely affect our reputation and our business, financial results and stock price.
Our reputation and brand are critical to our success. 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.
Risks Related to Our Debt and Liquidity
Our high leverage may restrict our ability to operate, prevent us from fulfilling our obligations, and adversely affect our
financial condition.
We have a significant amount of debt.
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Our debt (excluding nonrecourse secured debt and debt of our financial subsidiaries), as of October 31,
2020, including the debt of the subsidiaries that guarantee our debt, was $1,435.7 million ($1,431.1 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, 2020.
Our debt service payments for the year ended October 31, 2020, were $349.3 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.
As of October 31, 2020, we had $11.3 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 $11.6 million
of cash. Our fees for these letters of credit for the year ended October 31, 2020, which are based on both the used and unused
portion of the facilities and agreements, were $0.4 million. We also had substantial contractual commitments and contingent
obligations, including $194.4 million of performance bonds as of October 31, 2020. See Item 7 “Management’s Discussion
and Analysis of Financial Condition and Results of Operations—Contractual Obligations.”
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Our significant amount of debt could have important consequences. For example, it could:
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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;
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
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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 provided by operating activities in fiscal 2020 was $292.8 million and cash used in operating activities in fiscal 2019
was $249.1 million. Depending on the levels of our land purchases, we could generate negative or positive cash flow in future
years. If the current improved market conditions in the homebuilding industry do not continue over the next several years,
our cash flows could be insufficient to fund our obligations and support land purchases, and 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.”
17
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.
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.
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 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, and we may be unable 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.
18
Regulatory and Legal Risks
Homebuilders are subject to a number of federal, local, state, and foreign laws and regulations concerning the development
of land and 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 laws and regulations relating to zoning, density,
accessibility, anti-discrimination, 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, as well as standards to improve the resiliency
of buildings to climate-related impacts such as flooding storm surges, severe winds, and other extreme weather-related stress
on buildings. In particular, new building code requirements that impose stricter energy efficiency standards could
significantly increase our 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. After a series of interim rulemakings, in April 2020 the EPA and the U.S. Army Corps of Engineers formally
published the Navigable Waters Protection Rule, which they characterize as more appropriate for determining the scope of
waters subject to federal permitting. The new rule took effect in June 2020 in all states except Colorado, where a federal
district court issued a preliminary injunction against application of the rule in that state. It is being challenged by 17 states in
one lawsuit and by a number of environmental advocacy groups in at least three other lawsuits, as well as in several lawsuits
by cattlemen and other rancher groups contending that the new rule still exercises permitting authority over too many
waters. 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.
19
In March 2013, we received a letter from the Environmental Protection Agency (“EPA”) requesting information
about our involvement in a housing redevelopment project in Newark, New Jersey that a Company entity undertook during
the 1990s. We understand that the development is in the vicinity of a former lead smelter and that tests on soil samples from
properties within the development conducted by the EPA showed elevated levels of lead. We also understand that the smelter
ceased operations many years before the Company entity involved acquired the properties in the area and carried out the re-
development project. We responded to the EPA’s request. In August 2013, we were notified that the EPA considers us a
potentially responsible party (or “PRP”) with respect to the site, that the EPA will clean up the site, and that the EPA is
proposing that we fund and/or contribute towards the cleanup of the contamination at the site. We began preliminary
discussions with the EPA concerning a possible resolution but do not know the scope or extent of the Company’s obligations,
if any, that may arise from the site and therefore cannot provide any assurance that this matter will not have a material impact
on the Company. The EPA requested additional information in April 2014 and again in March 2017 and the Company
responded to the information requests. On May 2, 2018 the EPA sent a letter to the Company entity demanding reimbursement
for 100% of the EPA’s costs to clean-up the site in the amount of $2.7 million. The Company responded to the EPA’s demand
letter on June 15, 2018 setting forth the Company’s defenses and expressing its willingness to enter into settlement
negotiations. Two other PRPs identified by the EPA are now also in negotiations with the EPA and in preliminary negotiations
with the Company regarding the site. In the course of negotiations, the EPA informed the Company that the New Jersey
Department of Environmental Protection has also incurred costs remediating part of the site. The EPA has since requested
that the three PRPs present a joint settlement offer to the EPA. The Company and the other two PRPs are parties to a series
of agreements tolling the statute of limitations on the EPA’s claims for reimbursement, most recently extending the date until
January 15, 2021. We believe that we have adequate reserves for this matter
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, 2020). 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.
Risks Related to Our Organization and Structure
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, 2020, we had invested an aggregate
of $103.2 million in these unconsolidated joint ventures, including net advances from these unconsolidated joint ventures of
20
$1.1 million. In addition, as part of our strategy, we 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. 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.
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 55% 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, 2020. 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 $1.4 billion through the fiscal year ended October 31, 2020, 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 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 specified purchase price (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
21
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).
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.
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 332,000 square feet of
space for our segments located in the Northeast, Mid-Atlantic, Midwest, Southeast, Southwest and West.
ITEM 3
LEGAL PROCEEDINGS
The information required with respect to this item can be found under "Commitments and Contingent Liabilities"
in Note 18 to our Consolidated Financial Statements found elsewhere in this annual report, which is incorporated by reference
into this Item 3.
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 322 stockholders of record at December 11, 2020. There is no established public trading market for our Class B Common
Stock, which was held by 190 stockholders of record at December 11, 2020. 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
None.
Issuer Purchases of Equity Securities
No shares of our Class A Common Stock or Class B Common Stock were purchased by or on behalf of the
Company or any affiliated purchaser during the fiscal fourth quarter of 2020. 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
Gain (loss) on extinguishment of debt
Income (loss) from unconsolidated joint ventures
Income (loss) before income taxes
State and federal income tax provision
Net income (loss)
Per share data:
Basic:
Net income (loss) per common share
Weighted-average number of common shares
outstanding
Assuming dilution:
Year Ended
October 31, October 31, October 31, October 31, October 31,
2016
$ 2,343,901 $ 2,016,916 $ 1,991,233 $ 2,451,665 $ 2,752,247
2018
2017
2019
2020
8,813
3,501
6,288
2,309,587 2,036,792 1,996,083 2,437,195 2,708,912
33,353
2,318,400 2,043,080 1,999,584 2,455,008 2,742,265
(3,200)
(4,346)
2,436
5,255
(2,819)
(34,854)
(7,047)
(45,244)
286,949
(332,193) $
(42,436)
28,932
(39,668)
2,449
(42,117) $
(7,536)
24,033
8,146
3,626
4,520 $
13,337
16,565
55,403
4,475
50,928 $
17,813
$
$
7.48 $
(7.06) $
0.73 $
(56.23) $
(0.48)
6,189
5,968
5,941
5,908
5,898
Net income (loss) per common share
$
7.03 $
(7.06) $
0.72 $
(56.23) $
(0.48)
Weighted-average number of common shares
outstanding
6,584
5,968
6,072
5,908
5,898
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 discounts and premiums)
Total equity deficit
2020
October 31, October 31, October 31, October 31, October 31,
2016
$ 1,827,342 $ 1,881,424 $ 1,662,042 $ 1,900,898 $ 2,354,956
294,015
$
222,322 $
244,088 $
208,733 $
343,862 $
2018
2017
2019
$ 1,431,110 $ 1,479,990 $ 1,439,238 $ 1,585,837 $ 1,573,333
(128,510)
$
(436,094) $
(460,371) $
(453,504) $
(489,776) $
(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 TEU senior subordinated amortizing
note (net of discounts and premiums)”.
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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).
Key Performance Indicators
The following key performance indicators are commonly used in the homebuilding industry and by management
as a means to better understand our operating performance, trends affecting our business and compare our performance with
the performance of other homebuilders. We believe these key performance indicators also provide useful information to
investors in analyzing our performance:
● Net contracts is a volume indicator which represents the number of new contracts executed during the period
for the purchase of homes, less cancellations of contracts in the same period. The dollar value of net contracts
represents the dollars associated with net contracts executed in the period. These values are an indicator of
potential future revenues;
● Contract backlog is a volume indicator which represents the number of homes that are under contract, but not
yet delivered as of the stated date. The dollar value of contract backlog represents the dollar amount of the
homes in contract backlog. These values are an indicator of potential future revenues;
● Active selling communities is a volume indicator which represents the number of communities which are open
for sale with ten or more home sites available as of the end of a period. We identify communities based on
product type; therefore at times there are multiple communities at one land site. These values are an indicator
of potential revenues;
● Net contracts per average active selling community is used to indicate the pace at which homes are being sold
(put into contract) in active selling communities and is calculated by dividing the number of net contracts in
a period by the average number of active selling communities in the same period. Sales pace is an indicator of
market strength and demand; and
● Contract cancellation rates is a volume indicator which represents the number of sales contracts cancelled in
the period divided by the number of gross sales contracts executed during the period. Contract cancellation
rates as a percentage of backlog is calculated by dividing the number of cancelled contracts in the period by
the contract backlog at the beginning of the period. Cancellation rates as compared to prior periods can be an
indicator of market strength or weakness.
Overview
Market Conditions and COVID-19 Impact and Strategy
The demand for new and existing homes is dependent on a variety of demographic and economic factors,
including job and wage growth, household formation, consumer confidence, mortgage financing, interest rates and overall
housing affordability. In general, at the start of our fiscal year, factors including rising levels of household formation, a
constrained supply of new and used homes, wage growth, strong employment conditions and mortgage rates that continue to
be low by historical standards were contributing to improving conditions for new home sales. However, this year, overall
economic conditions in the United States have been, and continue to be, impacted negatively by the COVID-19 pandemic,
which has resulted in, among other things, quarantines, "stay-at-home" or "shelter-in-place" orders, and similar mandates
from national, state and local governments that have substantially restricted daily activities and caused many businesses to
curtail or cease normal operations. Notwithstanding these developments, all of the state and local governments in the markets
in which we operate have deemed housing to be an essential business, which has allowed us to continue with construction
and sales of homes. Although most of the states in which we operate have begun to resume normal business operations, the
United States continues to struggle with rolling outbreaks of the virus. Accordingly, we cannot predict the magnitude of
either the near-term or long-term effects that the pandemic will have on our business.
25
Earlier this year, in response to the pandemic, we actively took steps to navigate through this extraordinary period
by placing our highest priority on helping to protect the health and safety of our associates, trade partners and customers.
Among other measures, we implemented appropriate health and safety protocols so that our community construction and
sales activities, wherever authorized, could continue operations.
During the second quarter of fiscal 2020 and the initial impact of COVID-19, we experienced adverse business
conditions, including a slowdown in customer traffic and sales pace and an increase in cancellations. To mitigate the adverse
impacts, we implemented initiatives to maximize positive cash flow, retain a strong liquidity position and optimize
our organization, which included focusing on closing homes in backlog and limiting cash expenditures, reducing or delaying
certain land purchases and land development activity and beginning work on unsold homes and electing to draw in full the
$125.0 million available under its Secured Credit Agreement (which was repaid in the third quarter of fiscal 2020). Further,
in May 2020, we announced certain operational optimization measures including streamlining the organizational structure
by: (1) transitioning from three homebuilding operational Groups to two; (2) consolidating several business units, resulting
in the reduction of three Divisional offices; and (3) gradually phasing out of the Chicago market as it sells through its existing
communities. In addition, we took measures to reduce overhead expenses through a combination of furloughs, layoffs and
other cost reduction measures, the implementation of which was completed in early fiscal 2021. We incurred costs of
$2.9 million for severance and other related expenses in the third quarter of fiscal 2020 as a result of this restructuring. We
expect the measures described above to reduce our annualized overhead expense by approximately $20 million beginning in
fiscal 2021. However, the recent improved conditions in the homebuilding market have led to increases in other selling,
general and administrative costs, including for example, stock compensation and bonuses based on profitability, which we
expect will more than offset these annualized savings.
While the broader economic recovery following the nationwide COVID-19 related shutdown is ongoing and there
continues to be uncertainty surrounding the virus and various re-opening strategies, the homebuilding industry generally was
only impacted from mid-March through April of 2020. Towards the end of April, economic conditions in our markets started
to improve, and this improvement continued throughout our fiscal third and fourth quarters, due to what we believe is a
combination of factors including low interest rates, low inventory levels of existing homes and a general desire for more
indoor and outdoor space. During the third quarter and continuing through the fourth quarter of fiscal 2020, we returned to
our normal activities with respect to land purchases, land development and resuming the construction of unsold homes. As a
result, our operating metrics improved significantly as compared to fiscal 2019, as described below.
Although many of our key metrics have improved since the end of the second quarter of fiscal 2020, the full
magnitude and duration of the COVID-19 pandemic is unknown. We may experience material declines in our net contracts,
deliveries, revenues, cash flow and/or profitability during fiscal 2021 and beyond, compared to the corresponding prior-year
periods, and compared to our expectations at the beginning of our 2020 fiscal year. In addition, if conditions in the overall
housing market or in a specific market worsen in the future beyond our current expectations, if future changes in our business
strategy significantly affect any key assumptions used in our projections of future cash flows, or if there are material changes
in any of the other items we consider in assessing recoverability, we may recognize charges in future periods for inventory
impairments related to our current inventory assets or other reorganization activities. Any such charges could be material to
our consolidated financial statements.
Operating Results
We experienced overall positive operating results for the year ended October 31, 2020 as follows:
Our cash position allowed us to spend $624.2 million on land purchases and land development during fiscal 2020,
and still have total liquidity of $399.1 million, including $262.5 million of homebuilding cash and cash equivalents as of
October 31, 2020 and $125.0 million of borrowing capacity under our senior secured revolving credit facility.
Additional results for the year ended October 31, 2020 were as follows:
● For the year ended October 31, 2020, sale of homes revenues increased 15.5% as compared to the prior
year, as a result of a 15.0% increase in deliveries, primarily due to our increased community count that
occurred during fiscal 2019 and our 39.2% increase in sales absorption pace in fiscal 2020 as compared to
fiscal 2019.
26
● Gross margin percentage increased from 14.2% for the year ended October 31, 2019 to 14.7% for the
year ended October 31, 2020, and gross margin percentage, before cost of sales interest expense and land
charges, increased from 18.1% for the year ended October 31, 2019 to 18.4% for the year ended October
31, 2020. The increases were primarily due to the mix of communities delivering compared to the prior
year, along with increases in home prices in virtually all of our markets during the last half of fiscal 2020.
● Selling, general and administrative costs (including corporate general and administrative
expenses) increased $8.7 million for the year ended October 31, 2020 as compared to the prior year,
primarily as a result of our increased community count at the beginning of the year and our 15.0% increase
in deliveries, along with a lower adjustment to our warranty reserves (as a result of our annual actuarial
analysis) in fiscal 2020 as compared to fiscal 2019. However, as a percentage of total revenue, such costs
decreased to 10.3% for the year ended October 31, 2020 compared to 11.6% for the year ended October
31, 2019.
● Pre-tax income increased to $55.4 million for the year ended October 31, 2020 from a pre-tax loss of
$39.7 million for the year ended October 31, 2019. Net income increased to $50.9 million for the year
ended October 31, 2020 from a net loss of $42.1 million for the year ended October 31, 2019. Earnings per
share, basic and diluted, increased to $7.48 and $7.03, respectively, for the year ended October 31,
2020 compared to loss per share of $7.06, both basic and diluted, for the year ended October 31, 2019.
● Net contracts increased 30.2% for the year ended October 31, 2020, compared to the prior year.
● Net contracts per average active selling community increased to 54.3 for the year ended October 31,
2020 compared to 39.0 in the prior year. This increase represents our highest net contracts per average
active selling community in over a decade. This strong absorption pace resulted in our active selling
communities at October 31, 2020 decreasing by 17.7% compared to October 31, 2019.
● Contract backlog increased from 2,191 homes at October 31, 2019 to 3,402 homes at October 31, 2020,
with a dollar value of $1.4 billion, representing a 61.3% increase in dollar value compared to the prior year.
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.
27
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, 2020, the net book value associated with our
12 mothballed communities was $11.4 million, net of impairment charges recorded in prior periods of $122.2 million. We
regularly review communities to determine if mothballing is appropriate. During fiscal 2020, we did not mothball any
additional communities, or sell any previously mothballed communities, but we re-activated one previously mothballed
community and also re-activated a portion of one previously mothballed community.
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, 2020, inventory of $48.8 million was
recorded to “Consolidated inventory not owned,” with a corresponding amount of $47.2 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, 2020, inventory of $133.4 million was recorded as “Consolidated
inventory not owned,” with a corresponding amount of $84.0 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.
28
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 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, 2018 to October 31, 2020 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.
29
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 $2.0 million of our total inventories
at October 31, 2020, 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 2020, we did not write down any of our unconsolidated joint venture investments. During fiscal 2019, we
recorded a $0.9 million write down in our investment in one of our unconsolidated joint ventures in the West.
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 2020 and 2019, our deductible under our
general liability insurance was a $20 million aggregate for construction defect and warranty claims. For bodily injury claims,
our deductible per occurrence in fiscal 2020 and 2019 was $0.25 million, up to a $5 million limit. Our aggregate retention for
construction defect, warranty and bodily injury claims was $20 million for fiscal 2020 and 2019. 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.
30
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 total liquidity at October 31, 2020 was $399.1 million, including $262.5 million in homebuilding cash and
cash equivalents and $125.0 million of borrowing capacity under our senior secured revolving credit facility. This was above
our target liquidity range of $170.0 to $245.0 million. The unprecedented public health and governmental efforts to contain
the COVID-19 pandemic have created significant uncertainty as to general economic and housing market conditions
for fiscal 2021 and beyond. We believe that these sources of cash together with available borrowings on our senior secured
revolving credit facility will be sufficient through fiscal 2021 to finance our working capital requirements.
We spent $624.2 million on land and land development during fiscal 2020. After considering this land and land
development and all other operating activities, including revenue received from deliveries, we had $292.8 million in cash
provided from operations. During fiscal 2020, cash provided by investing activities was $2.1 million, primarily due to
distributions from existing unconsolidated joint ventures, partially offset by an investment in a new unconsolidated joint
venture. Cash used in financing activities was $167.8 million during fiscal 2020, which was primarily due to net payments
made on our mortgage warehouse lines of credit, along with net payments for nonrecourse mortgage financings and also debt
repurchases during the period. We intend to continue to use nonrecourse mortgage financings, model sale leaseback, joint
ventures, and, subject to covenant restrictions in our debt instruments, land banking programs as our business needs dictate.
Our cash uses during the years ended October 31, 2020 and 2019 were for operating expenses, land purchases,
land deposits, land development, construction spending, state income taxes, interest payments, financing transaction costs,
debt repurchases, litigation matters and investments in unconsolidated joint ventures. During these periods, we provided for
our cash requirements from available cash on hand, housing and land sales, financing transactions, model sale leasebacks,
land banking transactions, unconsolidated joint ventures, financial service revenues and other revenues.
Our net income (loss) historically does not approximate cash flow from operating activities. The difference
between net income (loss) and cash flow from operating activities is primarily caused by changes in inventory levels together
with changes in receivables, prepaid and other assets, mortgage loans held for sale, interest and other accrued liabilities,
deferred income taxes, accounts payable and other liabilities, noncash charges relating to depreciation and stock
compensation awards and impairment losses for inventory. When we are expanding our operations, inventory levels, prepaids
and other assets increase causing cash flow from operating activities to decrease. Certain liabilities also increase as operations
expand and partially offset the negative effect on cash flow from operations caused by the increase in inventory levels,
prepaids and other assets. Similarly, as our mortgage operations expand, net income from these operations increases, but for
cash flow purposes net income is partially offset by the net change in mortgage assets and liabilities. The opposite is true as
our investment in new land purchases and development of new communities decrease, causing us to generate positive cash
flow from operations.
See “Inventory Activities” below for a detailed discussion of our inventory position.
31
Debt Transactions
Senior notes and credit facilities balances as of October 31, 2020 and October 31, 2019, were as follows:
(In thousands)
Senior Secured Notes:
10.0% Senior Secured Notes due July 15, 2022
10.5% Senior Secured Notes due July 15, 2024
10.0% Senior Secured 1.75 Lien Notes due November 15, 2025
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, 2027 (1)
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 1.75 Lien Term Loan Credit Facility due January 31, 2028
Senior Secured Revolving Credit Facility (2)
Subtotal notes payable
Net discounts and premiums
Net debt issuance costs
Total notes payable, net of discounts, premiums and debt issuance costs
October 31, October 31,
2019
2020
$
111,214 $
69,683
158,502
350,000
282,322
162,269
218,994
211,391
-
350,000
282,322
103,141
$ 1,133,990 $ 1,165,848
$
-
- $
90,590
90,590
90,120
90,120
180,710
180,710 $
$
202,547
39,551 $
$
-
81,498 $
$
$
-
- $
$ 1,435,749 $ 1,549,105
(49,145)
$
$
(19,970)
$ 1,431,110 $ 1,479,990
17,521 $
(22,160) $
(1) $26.0 million of 8.0% Senior Notes due 2027 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.
(2) At October 31, 2020, provides for up to $125.0 million in aggregate amount of senior secured first lien revolving loans.
Availability thereunder will terminate on December 28, 2022.
Except for K. Hovnanian, the issuer of the notes and borrower under the Credit Facilities (as defined below), our
home mortgage subsidiaries, certain of our title insurance subsidiaries, joint ventures and subsidiaries holding interests in our
joint ventures, we and each of our subsidiaries are guarantors of the Credit Facilities, the senior secured notes (except that
certain of the Notes Guarantors (defined below) do not guarantee the 10.5% Senior Secured Notes due 2024 as discussed in
Note 9 to the Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K) and senior notes
outstanding at October 31, 2020 (collectively, the “Notes Guarantors”).
The credit agreements governing the Credit Facilities and the indentures governing the senior secured and senior
notes (together, the “Debt Instruments”) outstanding at October 31, 2020 do not contain any financial maintenance covenants,
but do contain restrictive covenants that limit, among other things, the ability of HEI and certain of its subsidiaries, including
K. Hovnanian, to incur additional indebtedness (other than non-recourse indebtedness, certain permitted indebtedness and
refinancing indebtedness), pay dividends and make distributions on common and preferred stock, repay certain indebtedness
prior to its respective stated maturity, repurchase common and preferred stock, make other restricted payments (including
investments), sell certain assets (including in certain land banking transactions), incur liens, consolidate, merge, sell or
otherwise dispose of all or substantially all of their assets and enter into certain transactions with affiliates. The Debt
Instruments also contain customary events of default which would permit the lenders or holders thereof to exercise remedies
with respect to the collateral (as applicable), declare the loans made under the Unsecured Term Loan Facility (defined below)
(the “Unsecured Term Loans”), loans made under the Secured Term Loan Facility (defined below) (the “Secured Term
Loans”) and loans made under the Secured Credit Agreement (as defined below) (the “Secured Revolving Loans”) or notes
to be immediately due and payable if not cured within applicable grace periods, including the failure to make timely payments
on the Unsecured Term Loans, Secured Term Loans, Secured Revolving Loans or notes or other material indebtedness, cross
default to other material indebtedness, the failure to comply with agreements and covenants and specified events of
bankruptcy and insolvency, with respect to the Unsecured Term Loans, Secured Term Loans and Secured Revolving Loans,
material inaccuracy of representations and warranties and with respect to the Unsecured Term Loans, Secured Term Loans
32
and Secured Revolving Loans, a change of control, and, with respect to the Secured Term Loans, Secured Revolving Loans
and senior secured notes, the failure of the documents granting security for the obligations under the secured Debt Instruments
to be in full force and effect, and the failure of the liens on any material portion of the collateral securing the obligations
under the secured Debt Instruments to be valid and perfected. As of October 31, 2020, 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.
Any liquidity-enhancing or other capital raising or refinancing transaction will depend on identifying
counterparties, negotiation of documentation and applicable closing conditions and any required approvals. Due to covenant
restrictions in our Debt Instruments, we are currently limited in the amount of debt we can incur that does not qualify as
refinancing indebtedness (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.
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 $135.1 million and $203.6 million (net of
debt issuance costs) at October 31, 2020 and October 31, 2019, respectively, which are secured by the related real property,
including any improvements, with an aggregate book value of $368.1 million and $410.2 million, respectively. The weighted-
average interest rate on these obligations was 6.4% and 8.3% at October 31, 2020 and October 31, 2019, 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, 2020 and 2019, we had an aggregate of $87.2 million and $140.2
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 2020 or 2019. As of
October 31, 2020, 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
33
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 2020, 2019 and 2018, 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, decreased $88.7 million during the year ended
October 31, 2020, from October 31, 2019. Total inventory, excluding consolidated inventory not owned, decreased in the
Northeast by $24.8 million, in the Midwest by $2.6 million, in the Southeast by $44.0 million, and in the West by
$33.5 million. These decreases were partially offset by increases in the Mid-Atlantic of $2.7 million and in the Southwest of
$13.5 million. These inventory fluctuations were primarily attributable to home deliveries and land sales during the period,
partially offset by new land purchases and land development. During the year ended October 31, 2020, we had aggregate
impairments in the amount of $2.0 million. We wrote-off costs in the aggregate amount of $6.8 million during the year ended
October 31, 2020 related to land options that expired or that we terminated, as the communities’ forecasted profitability was
not projected to produce adequate returns on investment commensurate with the risk. In the last few years, we have been able
to acquire new land parcels at prices that we believe will generate reasonable returns under current homebuilding market
conditions. This trend may not continue in either the near or the long term. Substantially all homes under construction or
completed and included in inventory at October 31, 2020 are expected to be closed during the next six to nine months.
Consolidated inventory not owned decreased $8.1 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 decrease from October 31, 2019 to October 31, 2020 was primarily due to a decrease in land banking
transactions along with a decrease in the sale and leaseback of certain model homes during the period. We have land banking
arrangements, whereby we sell land parcels to the land bankers and they provide us an option to purchase back finished lots
on a predetermined schedule. Because of our options to repurchase these parcels, for accounting purposes in accordance with
ASC 606-10-55-70, these transactions are considered a financing rather than a sale. For purposes of our Consolidated Balance
Sheet, at October 31, 2020, inventory of $133.4 million was recorded to “Consolidated inventory not owned,” with a
corresponding amount of $84.0 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, 2020, inventory of $48.8 million was recorded to “Consolidated inventory not owned,” with a corresponding
amount of $47.2 million (net of debt issuance costs) recorded to “Liabilities from inventory not owned” for the amount of net
cash received from the transactions.
When possible, we option property for development prior to acquisition. By optioning property, we are only
subject to the loss of the cost of the option and predevelopment costs if we choose not to exercise the option. As a result, our
commitment for major land acquisitions is reduced. The costs associated with optioned properties are included in “Land and
land options held for future development or sale” on the 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, 2020,
we had mothballed land in 12 communities. The book value associated with these communities at October 31, 2020 was
$11.4 million, which was net of impairment charges recorded in prior periods of $122.2 million. We continually review
communities to determine if mothballing is appropriate. During fiscal 2020, we did not mothball any additional communities,
or sell any previously mothballed communities, but we re-activated one previously mothballed community and also re-
activated a portion of one previously mothballed community.
34
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 $2.0 million of our total inventories held for sale at October 31, 2020 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.
The following tables summarize home sites included in our total residential real estate.
October 31, 2020:
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, 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
Remaining
Total Contracted
Home
Sites
Not
Home
Sites Delivered Available
3,043
5,928
2,166
3,071
7,641
4,495
26,344
4,724
9,745
16,304
295
26,344
4,724
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
130
557
596
298
1,066
755
3,402
1,418
2,517
590
295
3,402
1,418
152
343
450
282
663
301
2,191
461
1,658
278
255
2,191
461
2,913
5,371
1,570
2,773
6,575
3,740
22,942
3,306
7,228
15,714
-
22,942
3,306
3,145
4,954
3,448
4,411
6,525
4,959
27,442
3,765
9,716
17,726
-
27,442
3,765
35
The following table summarizes our started or completed unsold homes and models, excluding unconsolidated
joint ventures, in active and substantially completed communities. The decrease in the total homes from October 31, 2019 to
October 31, 2020 was primarily due to the increase in net contracts absorption pace during the latter half of fiscal 2020.
October 31, 2020
October 31, 2019
Northeast
Mid-Atlantic
Midwest
Southeast
Southwest
West
Total
Unsold
Unsold
Homes Models Total Homes Models Total
70
6
75
41
41
19
93
59
332
190
232
33
843
348
1
31
11
42
174
14
273
58
63
31
78
320
213
763
12
12
10
15
12
19
80
5
10
8
17
16
19
75
Started or completed unsold homes and models per
active selling communities(1)
2.4
0.6
3.0
5.4
0.6
6.0
(1) Active selling communities (which are communities that are open for sale with ten or more home sites available) were
116 and 141 at October 31, 2020 and 2019, respectively. This ratio does not include substantially completed
communities, which are communities with less than ten home sites available.
Other Balance Sheet Activities
Homebuilding – Restricted cash and cash equivalents decreased $6.2 million from October 31, 2019 to
$14.7 million at October 31, 2020. The decrease was primarily due to a reduction in cash collateral of our stand-alone letters
of credit during the period.
Investments in and advances to unconsolidated joint ventures decreased $23.9 million during the fiscal year ended
October 31, 2020 compared to October 31, 2019. The decrease was primarily due to unconsolidated joint venture partner
distributions during fiscal 2020, partially offset by new capital contributions for existing joint ventures and the formation of
a new joint venture during fiscal 2020. As of October 31, 2020 and October 31, 2019, we had investments in ten
unconsolidated homebuilding joint ventures 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 decreased $11.2 million from October 31, 2019 to $33.7 million at October
31, 2020. The decrease was primarily due to the timing of home closings, along with the receipt of a receivable during the
first quarter of fiscal 2020 related to the funding of the satisfaction and discharge of certain of our senior secured notes in the
fourth quarter of fiscal 2019.
Prepaid expenses and other assets were as follows as of:
(In thousands)
Prepaid insurance
Prepaid project costs
Other prepaids
Other assets
Lease right of use asset
Total
October 31,
2020
2,687 $
28,549
7,022
431
20,016
58,705 $
$
$
October 31,
2019 Dollar Change
626
2,061 $
(3,466)
32,015
(3,786)
10,808
(389)
820
20,016
-
13,001
45,704 $
Prepaid insurance increased 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. The decrease
in prepaid project costs is directly related to our decreased community count, resulting from delivering homes and closing
out of communities at a faster pace than opening new communities during the year. Other prepaids decreased primarily due
to the amortization of deferred financing costs and costs for certain software and related services during the period. Lease
right of use asset represents the net present value of our operating leases which, in connection with the Company’s adoption
36
of ASU 2016-02 on November 1, 2019, are now required to be recorded as an asset on our Consolidated Balance Sheets. See
Note 4 to the Consolidated Financial Statements for further information.
Financial services assets consist primarily of residential mortgages receivable held for sale of which
$101.8 million and $163.0 million at October 31, 2020 and 2019, respectively, were being temporarily warehoused and are
awaiting sale in the secondary mortgage market. The decrease in mortgage loans held for sale from October 31, 2019 was
primarily related to a decrease in the volume of loans originated during the fourth quarter of fiscal 2020 compared to the
fourth quarter of fiscal 2019, partially offset by an increase in the average loan value.
Nonrecourse mortgages secured by inventory decreased to $135.1 million at October 31, 2020, from
$203.6 million at October 31, 2019. The decrease was primarily due to the payment of existing mortgages, partially offset by
additional loan borrowings on existing mortgages along with new mortgages for communities in most of our segments
obtained during fiscal 2020.
Accounts payable and other liabilities are as follows as of:
(In thousands)
Accounts payable
Reserves
Lease liability
Accrued expenses
Accrued compensation
Other liabilities
Total
October 31,
2020
148,541 $
89,985
21,049
10,680
68,641
20,378
359,274 $
$
$
October 31,
2019 Dollar Change
6,874
(2,098)
21,049
(8,528)
15,484
6,300
39,081
141,667 $
92,083
-
19,208
53,157
14,078
320,193 $
The increase in accounts payable was primarily due to an increase in construction spending in the fourth quarter
of fiscal 2020 as compared to the fourth quarter of fiscal 2019, and a corresponding increase in backlog at October 31,
2020 from October 31, 2019. 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.
Lease liability represents the net present value of our minimum lease obligations, which as discussed above, are required to
be recorded on our Consolidated Balance Sheets as a result of the Company’s adoption of ASU 2016-02 on November 1,
2019. Accrued expenses decreased primarily due to accruals for legal fees associated with debt financing transactions accrued
at October 31, 2019 and paid in the first quarter of fiscal 2020. Accrued compensation increased primarily due to increased
bonuses related to increased profitability in fiscal 2020 as compared to fiscal 2019. Other liabilities increased primarily due
to deferred payroll tax withholdings, partially offset by the transfer of a municipal loan from a previously consolidated
community to a new unconsolidated joint venture formed in the first quarter of fiscal 2020.
Customers’ deposits increased $12.4 million from October 31, 2019 to $48.3 million at October 31, 2020. The
increase was primarily related to the increase in backlog during the year.
Liabilities from inventory not owned decreased $9.8 million to $131.2 million at October 31, 2020. The decrease
was due to a decrease in land banking transactions during the period, along with a decrease in the sale and leaseback of certain
model homes, both of which are accounted for as financing transactions as described above.
Accrued interest increased $16.5 million to $35.6 million at October 31, 2020. The increase was primarily due
to the timing of new accruals as a result of the financing transactions completed in October 2019, partially offset by payments
during the year, along with slightly higher interest rates on our new senior secured notes issued in our financing transactions
in fiscal 2020.
Financial Services (liabilities) decreased $50.1 million from $169.1 million at October 31, 2019, to $119.0 million
at October 31, 2020. The decrease was primarily due to a decrease in amounts outstanding under our mortgage warehouse
lines of credit, and directly correlated to the decrease in the volume of mortgage loans held for sale during the year.
37
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
Year Ended
October 31, October 31, October 31,
2018
2020
2019
$
$
302,347 $
7,694
(1,066)
18,010
326,985 $
16.2%
43,454 $
(15,066)
(3,502)
797
25,683 $
1.3%
(433,805)
(24,319)
3,080
(5,388)
(460,432)
(18.8)%
Sale of homes revenues increased $302.3 million, or 15.5%, for the year ended October 31, 2020, increased
$43.5 million, or 2.3%, for the year ended October 31, 2019, and decreased $433.8 million, or 18.5%, for the year ended
October 31, 2018 as compared to the same period of the prior year. The increased revenues in fiscal 2020 were primarily due
to the number of home deliveries increasing 15.0%, and the average price per home increasing to $396,065 in fiscal 2020
from $394,194 in fiscal 2019. The increase in deliveries in fiscal 2020 was primarily due to increased demand for new home
construction during the latter half of fiscal 2020. 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 was 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 decrease in fiscal 2018 deliveries was primarily the result of a reduction in community count of 5.4%. The
fluctuations in average prices for fiscal 2020, 2019, and 2018 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 further detail on changes in segment revenues see “Homebuilding Operations by Segment” below. During the
latter half of fiscal 2020, we saw an increase in demand for new home construction and, as a result, were able to increase
home prices in virtually all of our markets. For further detail on land sales and other revenue, see the section titled “Land
Sales and Other Revenues” below.
38
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, October 31, October 31,
2018
2019
2020
$
$
$
$
$
$
$
$
$
$
$
$
175,627 $
348
504,675 $
116,889 $
192
608,797 $
96,012
178
539,393
402,647 $
755
533,307 $
356,674 $
652
547,046 $
354,153
672
527,013
225,334 $
727
309,950 $
203,734 $
680
299,609 $
196,307
662
296,536
232,333 $
548
423,965 $
219,860 $
545
403,413 $
237,948
596
399,242
743,301 $
2,233
332,871 $
627,201 $
1,866
336,121 $
637,568
1,873
340,399
472,786 $
1,075
439,801 $
425,324 $
1,011
420,696 $
384,240
866
443,695
$ 2,252,028 $ 1,949,682 $ 1,906,228
4,847
393,280
4,946
394,194 $
5,686
396,065 $
$
$
$
432,602 $
728
594,234 $
485,324 $
774
627,034 $
599,979
984
609,735
(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.
39
The increase in housing revenues during the year ended October 31, 2020, as compared to the year ended October
31, 2019, was primarily attributed to our increased deliveries, from the strong homebuilding market and high demand for
new home construction, and by the increase in average sales price. Housing revenues in fiscal 2020 increased 15.5% on a
combined basis across all of our homebuilding segments, and average sales price increased by 0.5% in all such segments
combined, excluding unconsolidated joint ventures. In our homebuilding segments, homes delivered increased in fiscal 2020
as compared to fiscal 2019 by 81.3%, 15.8%, 6.9%, 0.6%, 19.7% and 6.3% in the Northeast, Mid-Atlantic, Midwest,
Southeast, Southwest and West, respectively. Overall in fiscal 2020 as compared to fiscal 2019, homes delivered increased
15.0% across all our segments, excluding unconsolidated joint ventures.
The increase in housing revenues during the year ended October 31, 2019, as compared to the year ended October
31, 2018, was primarily attributed to our increased deliveries, as our community count increased year over year, and due
to the increase in average sales price. Housing revenues in fiscal 2019 increased 2.3% on a combined basis across all of our
homebuilding segments, 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.
Quarterly housing revenues and net sales contracts by segment, excluding unconsolidated joint ventures, for the
years ended October 31, 2020, 2019 and 2018 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
October 31,
2020
July 31,
2020
April 30,
2020
January 31,
2020
Quarter Ended
$
$
$
$
42,218 $
114,221
59,498
73,741
194,505
159,332
643,515 $
63,326 $
135,364
79,999
74,765
245,813
229,656
828,923 $
41,354 $
111,160
62,901
65,595
214,608
110,315
605,933 $
51,586 $
152,511
79,394
79,846
260,891
258,067
882,295 $
46,791 $
89,677
56,543
56,317
170,485
103,534
523,347 $
23,266 $
128,652
54,501
48,508
187,493
139,418
581,838 $
45,264
87,589
46,392
36,680
163,703
99,605
479,233
33,003
93,702
58,276
67,158
178,433
90,832
521,404
40
(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
October 31,
2019
July 31,
2019
April 30,
2019
January 31,
2019
Quarter Ended
$
$
$
$
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
October 31,
2018
July 31,
2018
April 30,
2018
January 31,
2018
Quarter Ended
$
$
$
$
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
Contracts per average active selling community in fiscal 2020 were 54.3 compared to 39.0 in fiscal 2019. Our
reported level of sales contracts (net of cancellations) was positively impacted by an increase in the pace of sales in all of the
Company’s segments during fiscal 2020. Cancellation rates represent the number of cancelled contracts in the quarter divided
by the number of gross sales contracts executed in the quarter. For comparison, the following are historical cancellation rates,
excluding unconsolidated joint ventures:
Quarter
First
Second
Third
Fourth
2020
19%
23%
18%
18%
2019
24 %
19 %
19 %
21 %
2018
18%
17%
19%
23%
2017
19 %
18 %
19 %
22 %
2016
20%
19%
21%
20%
41
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
2020
14%
20%
21%
14%
2019
16 %
20 %
16 %
14 %
2018
12%
15%
14%
13%
2017
12 %
16 %
13 %
12 %
2016
13%
14%
12%
11%
Most cancellations occur within the legal rescission period, which varies by state but is generally less than two
weeks after the signing of the contract. Cancellations also occur as a result of a buyer's failure to qualify for a mortgage,
which generally occurs during the first few weeks after signing. As shown in the tables above, contract cancellations over the
past several years have been within what we believe to be a normal range, although in the second quarter of fiscal 2020 the
number of contract cancellations increased and gross sales contracts decreased due to the COVID-19 pandemic. However, in
the third quarter of fiscal 2020, contract cancellations as a percentage of gross sales contracts decreased as gross sales
rebounded and were very strong during the period. In the third quarter of fiscal 2020, contract cancellations as a percentage
of beginning backlog increased further, primarily due to a lower beginning backlog as a result of lower gross sales contracts
in the second quarter of fiscal 2020. In the fourth quarter of fiscal 2020, contract cancellations decreased back to more
normalized levels due to the increase in beginning backlog in the third quarter as a result of strong gross sales during the
period. Market conditions and further impacts from COVID-19 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, October 31,
2018
2019
2020
$
$
$
$
$
$
82,111 $
130
86,557 $
152
30,496
51
291,115 $
557
193,387 $
343
180,546
296
169,517 $
596
122,681 $
450
107,149
394
146,971 $
298
121,921 $
282
108,137
251
360,225 $
1,066
230,898 $
663
180,854
523
369,887 $
755
124,700 $
301
138,448
311
$ 1,419,826 $
3,402
880,144 $
2,191
745,630
1,826
(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 61.3% as of October 31, 2020 compared to October 31, 2019, and the number
of homes in backlog increased 55.3% for the same period. The increase in backlog was driven by a 30.2% increase in net
contracts, despite a decrease in community count for the year ended October 31, 2020 compared to the prior fiscal year. In
the second half of fiscal 2020, we experienced an increase in our sales pace due to high demand for new home construction,
which has resulted in our highest sales pace in over a decade. In the month of November 2020, excluding unconsolidated
joint ventures, we signed an additional 493 net contracts amounting to $216.7 million in contract value.
42
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.
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
Homebuilding gross margin percentage
Homebuilding gross margin percentage, before cost of sales interest
expense and land charges
Homebuilding gross margin percentage, after cost of sales interest
expense, before land charges
Year Ended
October 31, October 31, October 31,
2018
$ 2,252,029 $ 1,949,682 $ 1,906,228
1,837,332 1,596,237 1,555,894
2019
2020
414,697
74,174
353,445
70,520
350,334
56,588
340,523
8,813
331,710 $
14.7%
282,925
6,288
276,637 $
14.2%
293,746
3,501
290,245
15.2%
$
18.4%
18.1%
18.4%
15.1%
14.5%
15.4%
Cost of sales expenses as a percentage of consolidated home sales revenues are presented below:
Year Ended
October 31, October 31, October 31,
2018
100%
2020
100%
2019
100%
72.1%
3.7%
1.4%
4.4%
81.6%
3.3%
0.4%
14.7%
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%
18.4%
18.1%
18.4%
15.1%
14.5%
15.4%
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
Homebuilding gross margin percentage
Homebuilding gross margin percentage, before cost of sales interest
expense and land charges
Homebuilding gross margin percentage, after cost of sales interest expense
and before land charges
43
We sell a variety of home types in various communities, each yielding a different gross margin. As a result,
depending on the mix of communities delivering homes, consolidated gross margin may fluctuate up or down. Total
homebuilding gross margin percentage increased to 14.7% for the year ended October 31, 2020 compared to 14.2% for the
prior year. This increase was primarily due to the mix of communities delivering compared to the prior year, along with
increases in home prices in virtually all of our markets. Due to significantly increased demand in June and July of 2020, we
began increasing home prices. We believe that these price increases should offset potential material and labor cost increases
related to increased demand and could also result in improved gross margin as a percentage of revenues in future
quarters. Total homebuilding gross margin percentage decreased to 14.2% for the year ended October 31, 2019 compared to
15.2% for the prior year. 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. 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.
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 $8.8 million, $6.3 million and $3.5 million during the years ended October
31, 2020, 2019 and 2018, respectively, to their estimated fair value. See Note 12 to the Consolidated Financial Statements
for an additional discussion. During the years ended October 31, 2020, 2019 and 2018, we wrote off residential land options
and approval and engineering costs totaling $6.8 million, $3.6 million and $1.4 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 2020, 2019 and 2018. The inventory impairments
amounted to $2.0 million, $2.7 million and $2.1 million for the years ended October 31, 2020, 2019 and 2018, 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 2020. In fiscal 2020,
we walked away from 19.3% of all the lots we controlled under option contracts. The remaining 80.7% 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, 2020:
(Dollars in millions)
Northeast
Mid-Atlantic
Midwest
Southeast
Southwest
West
Total
Dollar Number of
Walk-
Away
Lots
Amount
of Walk
Away
% of
Walk-
Away
Lots
Walk-
Away
Lots as a
Total % of Total
Option
Lots
Option
Lots(1)
$
$
1.5
-
3.5
0.8
0.6
0.4
6.8
261
102
1,807
968
458
304
3,900
6.7%
2.6%
46.3%
24.8%
11.8%
7.8%
100.0%
2,934
3,994
2,634
3,049
5,984
1,609
20,204
8.9%
2.6%
68.6%
31.7%
7.7%
18.9%
19.3%
(1) Includes lots optioned at October 31, 2020 and lots optioned that the Company walked away from in the year ended
October 31, 2020.
44
The following table represents impairments by segment for the year ended October 31, 2020:
(In millions)
Northeast
Mid-Atlantic
Midwest
Southeast
Southwest
West
Total
Dollar
Amount of
Impairment Impairments
$
-
-
2.0
-
-
-
2.0
$
Pre- % of Pre-
% of Impairment Impairment
Value(1)
Value
-
-
4.8
-
-
-
4.8
-% $
-%
100.0%
-%
-%
-%
100.0% $
-%
-%
41.7%
-%
-%
-%
41.7%
(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, October 31,
2018
24,277
10,661
13,616
4,097
9,519
2020
16,905 $
11,154
5,751
156
5,595 $
2019
9,211 $
8,540
671
205
466 $
$
Land sales are ancillary to our residential homebuilding operations and are expected to continue in the future but
may significantly fluctuate up or down. Although we budget land sales, they are often dependent upon receiving approvals
and entitlements, the timing of which can be uncertain. As a result, projecting the amount and timing of land sales is difficult.
There were seven land sales during the year ended October 31, 2020, compared to six in the prior year, resulting in a
$7.7 million increase in land sales revenue. There were six land sales in the year ended October 31, 2019, compared to four
in the prior year. 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 a $15.1 million decrease in land sales revenue during fiscal 2019.
Land sales and other revenues increased $6.6 million for the year ended October 31, 2020 and decreased
$18.6 million for the year ended October 31, 2019 compared to the prior year. Other revenues include income from contract
cancellations where the deposit has been forfeited due to contract terminations, interest income, cash discounts and
miscellaneous one-time receipts. The increase from fiscal 2019 to fiscal 2020 and the decrease from fiscal 2018 to fiscal 2019
was mainly due to the fluctuations in land sales revenue noted above.
Homebuilding Selling, General and Administrative
Homebuilding selling, general and administrative (“SGA”) expenses decreased $5.5 million to $161.3 million for
the year ended October 31, 2020 as compared to the year ended October 31, 2019. The decrease was primarily attributed
to lower selling overhead and advertising costs, as a result of the reduction of our community count and a reduced need
for advertising as home sales have improved. 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
unconsolidated 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.
45
Homebuilding Operations by Segment
Financial information relating to the Company’s operations was as follows:
Segment Analysis (Dollars in thousands, except average sales price)
Year Ended October 31,
Variance
2020
Compared
to 2019
2020
Variance
2019
Compared
to 2018
2019
2018
$ 192,069 $
$ 30,371 $
348
$ 504,675 $
67,697 $ 124,372 $
9,417 $ 20,954 $
192
(104,122) $ 608,797 $
156
8,076 $ 116,296
85 $ 20,869
178
14
69,404 $ 539,393
$ 403,669 $
$ 34,570 $
755
$ 533,307 $
46,422 $ 357,247 $
20,243 $ 14,327 $
652
(13,739) $ 547,046 $
103
2,557 $ 354,690
(4,430) $ 18,757
672
20,033 $ 527,013
(20)
$ 225,718 $
(1,805) $
$
727
$ 309,950 $
21,257 $ 204,461 $
(649) $
(1,156) $
680
47
10,341 $ 299,609 $
7,862 $ 196,599
1,528
(2,177) $
662
18
3,073 $ 296,536
$ 232,730 $
1,355 $
$
548
$ 423,965 $
12,648 $ 220,082 $
11,415 $ (10,060) $
545
20,552 $ 403,413 $
3
(21,538) $ 241,620
(9,914 )
596
4,171 $ 399,242
(146) $
(51)
$ 744,197 $
$ 68,184 $
2,233
$ 332,871 $
114,853 $ 629,344 $
34,725 $ 33,459 $
1,866
(3,250) $ 336,121 $
367
(8,938) $ 638,282
(16,393) $ 49,852
1,873
(4,278) $ 340,399
(7)
$ 472,889 $
$ 16,415 $
1,075
$ 439,801 $
47,373 $ 425,516 $
(23,603) $ 40,018 $
1,011
19,105 $ 420,696 $
64
40,889 $ 384,627
(7,969) $ 47,987
866
(22,999) $ 443,695
145
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
Income (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
Homebuilding Results by Segment
Northeast – Homebuilding revenues increased 54.4% in fiscal 2020 compared to fiscal 2019 primarily due to an
81.3% increase in homes delivered and a $9.0 million increase in land sales and other revenue, partially offset by a 17.1%
decrease in average selling price. The decrease in average sales price was the result of new communities delivering smaller
single family homes, townhomes and affordable-housing homes in mid to higher-end submarkets of the segment in fiscal
2020 compared to some communities delivering in fiscal 2019 that had higher priced, single family homes in higher-end
submarkets of the segment that are no longer delivering. Also impacting the decrease in average sales price was an increase
in pricing concessions and a decrease in location premiums in certain communities.
Income before income taxes increased $9.4 million to $30.4 million, which was mainly due to the increase in
homebuilding revenues discussed above, a $0.5 million decrease in selling, general and administrative costs and a slight
increase in gross margin percentage before interest expense for fiscal 2020 compared to fiscal 2019. This increase
was partially offset by a $8.2 million decrease in income from unconsolidated joint ventures for fiscal 2020 compared to
fiscal 2019.
46
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.
Mid-Atlantic – Homebuilding revenues increased 13.0% in fiscal 2020 compared to fiscal 2019 primarily due to
a 15.8% increase in homes delivered, partially offset by a 2.5% decrease in average sales price. The decrease in average sales
price was the result of new communities delivering lower priced, smaller single family homes and townhomes in lower-end
submarkets of the segment in fiscal 2020 compared to some communities delivering in fiscal 2019 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 increased $20.2 million to $34.6 million, mainly due to the increase in homebuilding
revenues discussed above, a $2.0 million decrease in selling, general and administrative costs, a $0.8 million decrease in
inventory impairment loss and land option write-offs and an increase in gross margin percentage before interest expense for
fiscal 2020 compared to fiscal 2019.
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.
Midwest – Homebuilding revenues increased 10.4% in fiscal 2020 compared to fiscal 2019 primarily due to a
6.9% increase in homes delivered and a 3.5% increase in average sales price. The increase in average sales price was the
result of new communities delivering higher priced, larger single family homes and townhomes in higher-end submarkets of
the segment in fiscal 2020 compared to some communities delivering in fiscal 2019 that had lower priced, smaller single
family homes in lower-end submarkets of the segment that are no longer delivering.
Loss before income taxes increased $1.2 million to a loss of $1.8 million in fiscal 2020 compared to fiscal
2019. The increase was primarily due to a $3.2 million increase in inventory impairment loss and land option write-offs,
while gross margin percentage before interest expense was flat for fiscal 2020 compared to fiscal 2019.
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 income taxes decreased $2.2 million to a loss of $0.6 million in fiscal 2019 compared to fiscal
2018. 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.
Southeast – Homebuilding revenues increased 5.7% in fiscal 2020 compared to fiscal 2019 primarily due to
a 0.6% increase in homes delivered and a 5.1% increase in average sales price. The increase in average sales price was the
result of new communities delivering higher priced, larger single family homes in higher-end submarkets of the segment in
fiscal 2020 compared to some communities delivering in fiscal 2019 that had lower priced, smaller single family homes in
47
lower-end submarkets of the segment that are no longer delivering. Also impacting the increase in average sales price was
price increases and higher location premium revenue in certain communities.
Income before income taxes of $1.4 million in fiscal 2020 represented an $11.4 million improvement from the
prior year due to the increase in homebuilding revenue discussed above, a $3.9 million decrease in selling, general and
administrative costs and an increase in gross margin percentage before interest expense for fiscal 2020 compared to fiscal
2019.
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.
Southwest – Homebuilding revenues increased 18.2% in fiscal 2020 compared to fiscal 2019 primarily due to a
19.7% increase in homes delivered, while average sales price was essentially flat with a 1.0% decrease in fiscal 2020.
Income before income taxes increased $34.7 million to $68.2 million in fiscal 2020 mainly due to the increase in
homebuilding revenues discussed above and an increase in gross margin percentage before interest expense for fiscal 2020
compared to fiscal 2019.
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.
West – Homebuilding revenues increased 11.1% in fiscal 2020 compared to fiscal 2019 primarily due to a 6.3%
increase in homes delivered and a 4.5% 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
2020 compared to some communities delivering in fiscal 2019 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 price
increases in certain communities.
Income before income taxes decreased $23.6 million to $16.4 million in fiscal 2020 compared to the prior year
due mainly to a significant decrease in gross margin percentage before interest expense, partly as a result of increases in
estimated land development costs in some of our communities in the segment.
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 compared to the prior year 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.
48
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, 2020, 2019 and 2018, our conforming conventional
loan originations as a percentage of our total loans were 69.1%, 65.8% and 69.8%, respectively. FHA/VA loans represented
29.8%, 29.8%, and 24.6%, respectively, of our total loans. The remaining 1.1%, 4.4% and 5.6% of our loan originations
represent loans which exceed conforming conventions. 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, 2020, 2019 and 2018, financial services provided a $32.1 million,
$17.6 million and $18.2 million pretax profit, respectively. In fiscal 2020, financial services pretax profit increased
$14.5 million from the prior year primarily due to the increase in homebuilding deliveries and an increase in the average price
of the loans settled. Also impacting the increase in fiscal 2020 was the increase in the basis point spread between the loans
originated and the implied rate from the sale of the loans. In fiscal 2019, financial services pretax profit decreased $0.6 million
from the prior year primarily due to the geographic mix of title company activity within each period. In the market areas
served by our wholly owned mortgage banking subsidiaries, 69.3%, 70.9%, and 72.4% of our noncash home buyers obtained
mortgages originated by these subsidiaries during the years ended October 31, 2020, 2019 and 2018, 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 increased $14.2 million for the year ended October 31, 2020 compared to the year ended
October 31, 2019 and decreased $3.3 million for the year ended October 31, 2019 compared to the year ended October 31,
2018. The increase in expense for fiscal 2020 was mainly due to an increase in stock compensation expense, primarily
attributed to our long-term incentive plans achieving above target metrics for the plan years 2018 and 2019 as a result of
current year profit. Also contributing to the increase in expense for fiscal 2020 were additional costs pertaining to software
licenses and support fees for cybersecurity and monitoring services. 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 was an increase in the adjustment to reserves for self-insured medical claims, which
were reduced based on claim estimates.
Other Interest
Other interest increased $13.7 million to $103.8 million for the year ended October 31, 2020 compared to October
31, 2019, and decreased $13.2 million to $90.1 million for the year ended October 31, 2019 compared to October 31, 2018.
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 2020, the increase was because we incurred
more interest from our third-party inventory financing during fiscal 2020, and as a result of the financing transactions we
completed in the fourth quarter of fiscal 2019 and first quarter of fiscal 2020. 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.
49
Gain (Loss) on Extinguishment of Debt
On December 10, 2019, K. Hovnanian entered into a credit agreement providing for $81.5 million of senior
secured 1.75 lien term loans in exchange for $163.0 million of senior unsecured term loans. On December 10, 2019, K.
Hovnanian also issued $158.5 million of 10.0% Senior Secured 1.75 Lien Notes due 2025 in exchange for $23.2 million of
10.0% Senior Secured Notes due 2022 and $141.7 million 10.5% Senior Secured Notes due 2024. These transactions were
accounted for in accordance with ASC 470-60, resulting in a net gain on extinguishment of debt of $9.2 million. During the
year ended October 31, 2020, the Company repurchased in open market transactions $25.5 million aggregate principal amount
of 10.0% Senior Secured Notes due 2022. The aggregate purchase price for these repurchases was $21.4 million, which
included accrued and unpaid interest. These repurchases resulted in a gain on extinguishment of debt of $4.1 million for the
year ended October 31, 2020, net of the write-off of unamortized financing costs and fees. The gains from the repurchases
are included in the Consolidated Statement of Operations as "Gain (loss) on extinguishment of debt".
As a result of the financing transactions we consummated on October 31, 2019 and discussed 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.
Income from Unconsolidated Joint Ventures
Income from unconsolidated joint ventures consists of our share of the earnings or losses of our joint ventures.
Income from unconsolidated joint ventures decreased $12.3 million for the year ended October 31, 2020 from income of
$28.9 million for the year ended October 31, 2019 to income of $16.6 million. The decrease was primarily due to the
recognition of our share of income from certain of our joint ventures delivering fewer homes in fiscal 2020 as compared to
the prior year. Also impacting the decrease was income recorded in the first quarter of fiscal 2019 related to the return of
capital from an unconsolidated joint venture for which we had previously written-off our investment. Income 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.
Total Taxes
The total income tax expense of $4.5 million, $2.4 million, and $3.6 million for the years ending October 31,
2020, 2019 and 2018, respectively, was primarily related to state tax expense from income generated in states where we do
not have net operating loss ("NOL") carryforwards to offset the current year income. In addition, the expense for the
year ended October 31, 2020 was primarily related to state tax expense from the impact of a cancellation of debt income
recorded for tax purposes but not for GAAP purposes, creating a permanent difference.
Deferred federal and state income tax assets 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
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, 2020, 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 $577.5 million as of October
31, 2020, which fully reserves for our DTAs, is appropriate.
50
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, 2020, we had
$88.9 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 $540.2 million at October 31, 2020 and
$539.7 million at October 31, 2019. Our investments in unconsolidated joint ventures totaled $103.2 million at October 31,
2020 and $127.0 million at October 31, 2019. As of October 31, 2020 and 2019, our unconsolidated joint ventures had
outstanding debt totaling $117.2 and $186.9 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. See also Note 19 – Variable Interest Entities in the Notes
to Consolidated Financial Statements. We determined that none of our joint ventures at October 31, 2020 and 2019 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.
Contractual Obligations
The following summarizes our aggregate contractual commitments at October 31, 2020.
Payments Due by Period (1)
(In thousands)
Long term debt (2)(3)(4)
Operating leases
Total
Total
Less than
More than
5 years
$ 2,185,741 $ 136,175 $ 369,663 $ 310,645 $ 1,369,258
1,107
$ 2,210,529 $ 145,055 $ 381,467 $ 313,642 $ 1,370,365
1 year 1-3 years 3-5 years
24,788
11,804
2,997
8,880
(1) Total contractual obligations exclude our accrual for uncertain tax positions of $1.0 million recorded for financial
reporting purposes as of October 31, 2020 because we were unable to make reasonable estimates as to the period of
cash settlement with the respective taxing authorities.
(2) Represents our senior secured and unsecured term loan credit facilities, senior secured and senior notes and other notes
payable and $750.0 million of related interest payments for the life of such debt.
(3) Does not include $135.1 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, 2020.
We had outstanding letters of credit and performance bonds of $11.3 million and $194.4 million, respectively, at
October 31, 2020, 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.
51
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 52.4% of our homebuilding cost of sales for fiscal 2020.
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:
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
The outbreak and spread of COVID-19 and the measures that governments, agencies, law enforcement and/or
health authorities implement to address it;
Changes in general and local economic, industry and business conditions and impacts of a significant
homebuilding downturn;
Adverse weather and other environmental conditions and natural disasters;
The seasonality of the Company’s business;
The availability and cost of suitable land and improved lots and sufficient liquidity to invest in such land and
lots;
Shortages in, and price fluctuations of, raw materials and labor, including due to changes in trade policies,
including the imposition of tariffs and duties on homebuilding materials and products and related trade
disputes with and retaliatory measures taken by other countries;
Reliance on, and the performance of, subcontractors;
Regional and local economic factors, including dependency on certain sectors of the economy, and
employment levels affecting home prices and sales activity in the markets where the Company builds homes;
Increases in cancellations of agreements of sale;
Fluctuations in interest rates and the availability of mortgage financing;
Changes in tax laws affecting the after-tax costs of owning a home;
Legal claims brought against us and not resolved in our favor, such as product liability litigation, warranty
claims and claims made by mortgage investors;
Levels of competition;
Utility shortages and outages or rate fluctuations;
Information technology failures and data security breaches;
Negative publicity;
High leverage and restrictions on the Company’s operations and activities imposed by the agreements
governing the Company’s outstanding indebtedness;
Availability and terms of financing to the Company;
The Company’s sources of liquidity;
Changes in credit ratings;
Government regulation, including regulations concerning development of land, the home building, sales and
customer financing processes, tax laws and the environment;
Operations through unconsolidated joint ventures with third parties;
52
●
●
●
Significant influence of the Company’s controlling stockholders;
Availability of net operating loss carryforwards; and
Loss of key management personnel or failure to attract qualified personnel.
Certain risks, uncertainties and other factors are described in detail in Part I, Item 1 “Business” and Part I, Item
1A “Risk Factors” in 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, 2020 and 2019, 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, 2020 by Fiscal Year of Debt Maturity
2021
2022 2023
2024 2025 Thereafter
FV at
Total 10/31/2020
$
- $111,214 $
- $69,683 $
- $ 1,254,852 $1,435,749 $ 1,241,570
Weighted-average interest rate
-%
10.0%
-% 10.50%
-%
9.38%
9.48%
(1) Does not include the mortgage warehouse lines of credit made under our Master Repurchase Agreements. Also does not
include our $125.0 million Secured Credit Facility under which there were no borrowings outstanding as of October 31,
2020.
(2) Does not include $135.1 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.
(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
FV at
Total 10/31/2019
$
- $
- $218,994 $
- $211,391 $ 1,118,720 $ 1,549,105 $ 1,310,638
Weighted-average interest rate
-%
-%
10.0%
-% 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.
53
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, 2020. 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, 2020 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, 2020.
The effectiveness of the Company’s internal control over financial reporting as of October 31, 2020 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.
54
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 30, 2021, 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
Age
63
J. Larry Sorsby
Brad G. O’Connor
65
50
Position
Chairman of the Board, Chief Executive Officer, President and Director
of the Company
Executive Vice President, Chief Financial Officer and Director of the
Company
Senior Vice President, Treasurer and Chief Accounting Officer
Year
Started
With
Company
1979
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. 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 in May 2011, he also became Vice President,
Chief Accounting Officer. In April 2020, Mr. O'Connor was promoted to Senior Vice President and Treasurer and continues
in his role of 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 60 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
55
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.”
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 30, 2021.
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 30, 2021.
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 30, 2021.
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 30, 2021.
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, 2020 and 2019 ..........................................................................................
Consolidated Statements of Operations for the years ended October 31, 2020, 2019 and 2018 .....................................
Consolidated Statements of Changes in Equity Deficit for the years ended October 31, 2020, 2019 and 2018 .............
Consolidated Statements of Cash Flows for the years ended October 31, 2020, 2019 and 2018 ....................................
Notes to Consolidated Financial Statements ...................................................................................................................
Page
66
67
68
69
70
71
73
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.
56
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)
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
57
4(o)
4(p)
4(q)
4(r)
4(s)
4(t)
4(u)
4(v)
4(w)
4(x)
4(y)
4(z)
10(a)
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).
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.(Incorporated by reference to Exhibits to Annual Report on Form
10-K for the year ended October 31, 2019 of the Registrant).
Fourth Supplemental Indenture, dated as of March 25, 2020, relating to the additional 11.25% Senior Secured
1.5 Lien Notes due 2026, among K. Hovnanian Enterprises, Inc., Hovnanian Enterprises, Inc., the subsidiary
guarantors named therein and Wilmington Trust, National Association, as Trustee and Collateral Agent,
including the form of the additional 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 field on March 26, 2020).
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).
58
10(b)
10(c)
10(d)
10(e)
10(f)
10(g)
10(h)
10(i)
10(j)
10(k)
10(l)
10(m)
10(n)*
10(o)*
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 (Incorporated by reference to Exhibits to Annual Report on Form 10-K for the year
ended October 31, 2019 of the Registrant).
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).
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).
59
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)*
10(hh)*
10(ii)*
10(jj)*
10(kk)*
10(ll)*
10(mm)*
10(nn)*
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 Letter Agreement entered into with Lucian Theon Smith III (Incorporated by reference to Annual
Report on Form 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).
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).
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).
Form of 2020 Long-Term Incentive Program Award Agreement (Incorporated by reference to Exhibits to
Quarterly Report on Form 10-Q of the Registrant for the quarter ended July 31, 2020 of the Registrant).
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).
Market 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 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).
60
10(oo)*
10(pp)*
10(qq)*
10(rr)*
10(ss)*
10(tt)*
10(uu)*
10(vv)*
10(ww)*
10(xx)*
10(yy)*
10(zz)*
10(aaa)*
10(bbb)*
10(ccc)*
10(ddd)*
10(eee)*
10(fff)*
10(ggg)*
10(hhh)*
10(iii)*
10(jjj)*
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).
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).
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).
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).
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).
Market Share Unit Agreement Class B (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).
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).
Market Share Unit Agreement Class B (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).
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).
61
10(kkk)*
10(lll)*
10(mmm)*
10(nnn)*
10(ooo)
10(ppp)
10(qqq)
10(rrr)
10(sss)
10(ttt)
10(uuu)
10(vvv)
10(www)
10(xxx)
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).
Retirement Agreement, dated as of May 18, 2020, between Hovnanian Enterprises, Inc. and Lucian T. Smith
III (Incorporated by reference to Exhibits to Quarterly Report on Form 10-Q of the Registrant for the quarter
ended April 30, 2020 of the Registrant).
2020 Hovnanian Enterprises, Inc. Stock Incentive Plan (Incorporated by reference to Exhibits to Current
Report on Form 8-K of the Registrant filed on March 25, 2020).
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).
62
10(yyy)
10(zzz)
10(aaaa)
10(bbbb)
10(cccc)
10(dddd)
10(eeee)
10(ffff)
10(gggg)
10(hhhh)*
10(iiii)*
10(jjjj)*
10(kkkk)*
10(llll)*
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).
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).
Form of 2020 Performance Share Unit Agreement (Class A) (Incorporated by reference to Exhibits to
Quarterly Report on Form 10-Q of the Registrant for the quarter ended July 31, 2020 of the Registrant).
Form of 2020 Performance Share Unit Agreement (Class B) (Incorporated by reference to Exhibits to
Quarterly Report on Form 10-Q of the Registrant for the quarter ended July 31, 2020 of the Registrant).
Form of 2020 Associate Restricted Share Unit Agreement (Class A) (Incorporated by reference to Exhibits
to Quarterly Report on Form 10-Q of the Registrant for the quarter ended July 31, 2020 of the Registrant).
Form of 2020 Associate Restricted Share Unit Agreement (Class B) (Incorporated by reference to Exhibits
to Quarterly Report on Form 10-Q of the Registrant for the quarter ended July 31, 2020 of the Registrant).
Form of Director Restricted Share Unit Agreement (Class A) (Incorporated by reference to Exhibits to
Quarterly Report on Form 10-Q of the Registrant for the quarter ended July 31, 2020 of the Registrant).
63
21
23(a)
23(b)
23(c)
31(a)
31(b)
32(a)
32(b)
99(a)
99(b)
101
104
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,
2020, formatted in inline Extensible Business Reporting Language (Inline XBRL): (i) the Consolidated
Balance Sheets at October 31, 2020 and October 31, 2019, (ii) the Consolidated Statements of Operations for
the years ended October 31, 2020, 2019 and 2018, (iii) the Consolidated Statements of Changes in
Equity Deficit for years ended October 31, 2020, 2019 and 2018 (iv) the Consolidated Statements of Cash
Flows for the years ended October 31, 2020, 2019 and 2018, and (v) the Notes to Consolidated Financial
Statements.
Cover page from our Annual Report on Form 10-K for the year ended October 31, 2020, formatted in Inline
XBRL (and contained in Exhibit 101).
* Management contracts or compensatory plans or arrangements.
The agreements and other documents filed as exhibits to this report are not intended to provide factual information
or other disclosure other than the terms of the agreements or other documents themselves, and you should not rely on them
for that purpose. In particular, any representations and warranties made by the Company in these agreements or other
documents were made solely within the specific context of the relevant agreement or document and may not describe the
actual state of affairs at the date they were made or at any other time.
ITEM 16
Form 10-K Summary
None.
64
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 22, 2020
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 22, 2020, and in the capacities indicated.
/s/ ARA K. HOVNANIAN
Ara K. Hovnanian
/s/ J. LARRY SORSBY
J. Larry Sorsby
/s/ BRAD G. O’CONNOR
Brad G. O’Connor
/s/ EDWARD A. KANGAS
Edward A. Kangas
/s/ JOSEPH A. MARENGI
Joseph A. Marengi
/s/ VINCENT PAGANO JR.
Vincent Pagano Jr.
Chairman of the Board, Chief Executive Officer, President and Director
(Principal Executive Officer)
Executive Vice President, Chief Financial Officer and Director
(Principal Financial Officer)
Senior Vice President, Treasurer and Chief Accounting Officer
(Principal Accounting Officer)
Chairman of Audit Committee and Director
Chairman of Compensation Committee and Director
Chairman of Corporate Governance and Nominating Committee and Director
65
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Financial Statements:
Page
Report of Independent Registered Public Accounting Firm ............................................................................................
Consolidated Balance Sheets at October 31, 2020 and 2019 ..........................................................................................
Consolidated Statements of Operations for the years ended October 31, 2020, 2019 and 2018 .....................................
Consolidated Statements of Changes in Equity Deficit for the years ended October 31, 2020, 2019 and 2018 .............
Consolidated Statements of Cash Flows for the years ended October 31, 2020, 2019 and 2018 ....................................
Notes to Consolidated Financial Statements ...................................................................................................................
67
68
69
70
71
73
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.
66
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, 2020 and 2019, the related consolidated statements of operations, equity deficit, and cash flows, for each of the three years in
the period ended October 31, 2020, 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, 2020, 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, 2020 and 2019, and the results of their operations and their cash flows for each of the three years in the period ended October
31, 2020, 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, 2020, 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 22, 2020
We have served as the Company's auditor since 2009.
67
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
Senior notes and credit facilities (net of discounts, premiums and debt issuance costs)
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, 2020
and 2019
Common stock, Class A, $0.01 par value - authorized 16,000,000 shares; issued
5,990,310 shares at October 31, 2020 and 5,973,727 shares at October 31, 2019
Common stock, Class B, $0.01 par value (convertible to Class A at time of sale) -
authorized 2,400,000 shares; issued 649,886 shares at October 31, 2020 and
650,363 shares at October 31, 2019
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, 2020 and 2019
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.
68
October 31, October 31,
2019
2020
$
262,489 $
14,731
130,976
20,905
921,594
91,957
182,224
993,647
108,565
190,273
1,195,775 1,292,485
127,038
44,914
20,127
45,704
1,686,735 1,682,149
103,164
33,686
18,185
58,705
140,607
199,275
$ 1,827,342 $ 1,881,424
$
135,122 $
359,274
48,286
131,204
203,585
320,193
35,872
141,033
1,431,110 1,479,990
19,081
2,140,559 2,199,754
35,563
119,045
3,832
169,145
2,301
2,263,436 2,371,200
135,299
135,299
60
60
7
718,110
7
715,504
(1,175,045) (1,225,973)
(115,360)
(436,929)
835
(436,094)
(115,360)
(490,463)
687
(489,776)
$ 1,827,342 $ 1,881,424
Year Ended
October 31, October 31, October 31,
2018
2019
2020
19,710
$ 2,252,029 $ 1,949,682 $ 1,906,228
31,650
2,271,739 1,962,764 1,937,878
53,355
2,343,901 2,016,916 1,991,233
72,162
54,152
13,082
74,330
8,813
1,848,486 1,604,777 1,566,555
60,685
3,501
1,931,629 1,681,790 1,630,741
159,202
2,092,890 1,848,574 1,789,943
70,725
6,288
166,784
161,261
36,525
66,364
90,056
1,561
40,060
80,553
103,801
1,096
35,128
69,632
103,297
1,584
2,318,400 2,043,080 1,999,584
(7,536)
24,033
8,146
(42,436)
28,932
(39,668)
13,337
16,565
55,403
4,475
-
4,475
50,928 $
2,449
-
2,449
(42,117) $
7.48 $
6,189
7.03 $
6,584
(7.06) $
5,968
(7.06) $
5,968
3,626
-
3,626
4,520
0.73
5,941
0.72
6,072
$
$
$
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
Gain (loss) on extinguishment of debt
Income from unconsolidated joint ventures
Income (loss) before income taxes
State and federal income tax provision:
State
Federal
Total income taxes
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
See notes to consolidated financial statements.
69
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY DEFICIT
A Common Stock
B Common Stock
Preferred Stock
(Dollars In
thousands)
Shares
Issued and
Shares
Issued and
Shares
Issued and
Outstanding Amount Outstanding Amount Outstanding Amount Capital
Paid-In Accumulated Treasury Noncontrolling
Interest
Deficit
Stock
Total
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
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 income
Balance,
October 31,
2020
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 )
14,310
1,796
2,273
(2,273)
387
2,219
387
2,219
-
-
5,519,880 $
60
622,217 $
7
5,600 $ 135,299 $ 718,110 $
(1,175,045) $ (115,360) $
835 $ (436,094 )
50,928
148
148
50,928
See notes to consolidated financial statements.
70
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Cash flows from operating activities:
Net income (loss)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating
Year Ended
October 31,
2020
October 31,
2019
October 31,
2018
$
50,928 $
(42,117) $
4,520
activities:
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 from unconsolidated joint ventures
Distributions of earnings from unconsolidated joint venture
(Gain) loss on extinguishment of debt
Noncontrolling interest in consolidated joint ventures
Inventory impairment and land option write-offs
(Increase) decrease in assets:
Origination of mortgage loans
Sale of mortgage loans
Receivables, prepaids, deposits and other assets
Inventories
Increase (decrease) in liabilities:
State and federal income tax payable
Customers’ deposits
Accounts payable, accrued interest and other accrued liabilities
Net cash provided by (used in) 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 provided by (used in) 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 (payments) proceeds 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
Borrowings from senior secured credit facility
Payments related to senior secured credit 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 (used in) provided by financing activities
Net increase (decrease) 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
$
5,304
2,779
1,891
(81)
(16,565)
35,387
(13,337)
148
8,813
4,172
721
8,128
(25)
(28,932)
29,919
42,436
4
6,288
3,156
3,669
8,822
(3,619)
(24,033)
-
7,536
-
3,501
(1,306,279)
1,367,903
20,519
87,897
(1,089,825)
1,054,535
(15,911)
(220,608)
(1,069,519)
1,071,250
20,669
(58,801)
1,531
12,414
33,576
292,828
112
(3,380)
(19,924)
25,332
2,140
278,577
(348,371)
19,200
(23,646)
68,060
(73,999)
-
(53,077)
-
-
-
125,000
(125,000)
-
(21,240)
(13,278)
(167,774)
127,194
182,266
309,460 $
(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 $
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
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
89,484 $
3,013 $
109,107 $
3,483 $
112,016
2,520
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
$
262,489 $
14,731
4,854
27,386
309,460 $
130,976 $
20,905
5,578
24,807
182,266 $
187,871
12,808
6,948
25,365
232,992
See notes to consolidated financial statements.
71
Supplemental disclosure of noncash investing and financing activities:
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.
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.
In accordance with the adoption of ASU 2016-02, in the first quarter of fiscal 2020, we recorded a beginning right-
of-use asset of $23.3 million and a right-of-use lease liability of $24.4 million.
In the first quarter of fiscal 2020, K. Hovnanian, the issuer of our notes, completed a debt for debt exchange
whereby it issued $158.5 million aggregate principal amount of 10.0% 1.75 Lien Notes due 2025 in exchange for $23.2
million in aggregate principal amount of its outstanding 10.0% Senior Secured Notes due 2022 and $141.7 million in
aggregate principal amount of its outstanding 10.5% Senior Secured Notes due 2024. K. Hovnanian also exchanged $163.0
million in aggregate principal amount of its unsecured term loans for $81.5 million in aggregate principal amount of 1.75
Lien secured term loans made under a new Senior Secured 1.75 Lien Term Loan Credit Facility due January 31, 2028. See
Note 9 for further information.
In the second quarter of fiscal 2020, K. Hovnanian, the issuer of the notes, completed a debt for debt exchange
whereby it issued $59.1 million aggregate principal amount of additional 11.25% 1.5 Lien Notes due 2026 in exchange for
$59.1 million aggregate principal amount of 10.0% Senior Secured Notes due 2022 Notes. See Note 9 for further information.
72
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.
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 each of the years ended October 31, 2020, 2019 and 2018. HEI is a Delaware corporation,
which through its subsidiaries, was building and selling homes in Arizona, California, Delaware, Florida, Georgia, Illinois,
Maryland, New Jersey, Ohio, Pennsylvania, South Carolina, Texas, Virginia, Washington, D.C. and West Virginia,
including in 116 consolidated active selling communities at October 31, 2020. 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.
73
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, 2020 and 2019,
$15.5 million and $143.1 million, respectively, of the total cash and cash equivalents was in cash equivalents and restricted
cash equivalents, the book value of which approximates fair value.
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 secured term loan, senior unsecured term loan credit facility, senior secured notes
and senior notes. The fair value of the senior secured credit facility, senior secured term loan, 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 2020, we did not mothball any additional communities, or
sell any previously mothballed communities, but we re-activated one previously mothballed community and also re-activated
a portion of one previously mothballed community. As of October 31, 2020 and 2019, the net book value associated with our
12 and 13 total mothballed communities was $11.4 million and $13.8 million, respectively, which was net of impairment
charges recorded in prior periods of $122.2 million and $138.1 million, respectively.
74
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, 2020 and 2019, inventory of $48.8 million
and $54.2 million, respectively, was recorded to “Consolidated inventory not owned,” with a corresponding amount of
$47.2 million and $51.2 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, 2020 and 2019, inventory of $133.4 million and
$136.1 million, respectively, was recorded to “Consolidated inventory not owned,” with a corresponding amount of
$84.0 million and $89.8 million, respectively, 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 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.
75
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, 2018 to October 31, 2020 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 $2.0 million of our total inventories
at October 31, 2020 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 2020 and 2019, our deductible under our
general liability insurance was a $20 million aggregate for construction defect and warranty claims. For bodily injury claims,
our deductible per occurrence in fiscal 2020 and 2019 was $0.25 million, up to a $5 million limit. Our aggregate retention for
construction defect, warranty and bodily injury claims was $20 million for fiscal 2020 and 2019. 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
76
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, October 31,
2018
71,051
161,048
60,685
103,297
-
68,117
2019
68,117 $
165,906
70,725
90,056
1,978
71,264 $
2020
71,264 $
176,457
74,330
103,801
4,580
65,010 $
$
(1)
(2)
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
$61.9 million, $56.9 million and $76.2 million for the years ended October 31, 2020, 2019 and 2018, 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 $41.9 million, $33.2 million and $27.1 million for the years ended October 31, 2020, 2019 and 2018,
respectively.
(3)
Cash paid for interest, net of capitalized interest, is the sum of other interest expensed, as defined above, and interest
paid by our mortgage and finance subsidiaries adjusted for the change in accrued interest on notes payable, which
is calculated as follows:
(In thousands)
Other interest expensed
Interest paid by our mortgage and finance subsidiaries
(Increase) decrease in accrued interest
Cash paid for interest, net of capitalized interest
Year Ended
October 31, October 31, October 31,
2018
103,297
2,478
6,241
112,016
2019
90,056 $
2,536
16,515
109,107 $
2020
103,801 $
2,165
(16,482)
89,484 $
$
$
(4)
Represents capitalized interest which was included as part of the assets contributed to the joint ventures the
Company entered into in December 2019 and June 2019 during the years ended October 31, 2020 and 2019,
respectively, as discussed in Note 20. There was no impact to the Consolidated Statement of Operations as a result
of these transactions.
(5)
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. 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.” 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,
77
then we record the option on the Consolidated Balance Sheets under “Consolidated inventory not owned” with an offset
under “Liabilities from inventory not owned.”
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, we wrote down certain unconsolidated joint venture investments by $0.9 million. There were no write-
downs in fiscal 2020 or fiscal 2018.
Deferred Bond Issuance Costs - Costs associated with borrowings under our credit facilities and terms loans 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, 2020, 2019
and 2018, advertising costs expensed totaled $12.9 million, $17.1 million and $16.4 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.
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.
78
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 $12.0 million and $12.2 million at October 31, 2020 and
2019, respectively, which primarily related to allowances for receivables from municipalities and an allowance for a
receivable for a prior year land sale. During fiscal 2020 and 2019, we recorded $0.2 million and $0.5 million, respectively,
in recoveries. During fiscal 2019, we recorded $1.3 million of additional reserves. There were no write-offs in fiscal 2020 or
fiscal 2019.
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 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 was effective for the Company on November 1, 2019, and we applied the modified retrospective
method of adoption, resulting in no restatement of prior period financial statements. We elected the practical expedient
package which allows us to carry forward our original assessment of whether contracts contained leases, lease classification
and the initial direct costs. We also elected the practical expedient that allows lessees the option to account for lease and non-
lease components together as a single component for all classes of underlying assets. The adoption of ASU 2016-02 resulted
in a gross up on our Condensed Consolidated Balance Sheets for right of use ("ROU") assets and lease liabilities of $23.3
million and $24.4 million, respectively, as of November 1, 2019. Existing prepaid rent and accrued rent were recorded as an
offset to the gross operating ROU assets. Our ROU assets are included in “Prepaid expenses and other assets” and the
corresponding lease liabilities are included in “Accounts payable and other liabilities” line items on our Consolidated Balance
Sheets. The adoption of ASU 2016-02 had no impact on our consolidated statements of operations or cash flows, nor did it
have a significant impact on our business processes, systems or internal controls.
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. We do not expect the adoption of this guidance to have a material impact on
our Consolidated Financial Statements.
79
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. We do not expect the
adoption of this guidance to have a material impact on our Consolidated Financial Statements.
In March 2020, the FASB issued ASU 2020-04, “Facilitation of the Effects of Reference Rate Reform on Financial
Reporting” (“ASU 2020-04”). ASU 2020-04 provides companies with optional guidance to ease the potential accounting
burden associated with reference rate reform on financial reporting. This guidance was effective for the Company beginning
on March 12, 2020, and we may elect to apply the amendments prospectively from now through December 31, 2022. The
Company has not yet adopted this guidance and is currently evaluating the potential impact of adoption on our Consolidated
Financial Statements.
4. Leases
We lease certain office space for use in our operations. We assess each of these contracts to determine whether
the arrangement contains a lease as defined by ASC 842 “Leases” ("ASC 842"). In order to meet the definition of a lease
under ASC 842, the contractual arrangement must convey to us the right to control the use of an identifiable asset for a period
of time in exchange for consideration. We recognize lease expense for these leases on a straight-line basis over the lease term
and combine lease and non-lease components for all leases. Our office lease terms are generally from three to five years and
generally contain renewal options. In accordance with ASC 842, our lease terms include those renewals only to the extent
that they are reasonably certain to be exercised. The exercise of these lease renewal options is generally at our discretion. In
accordance with ASC 842, the lease liability is equal to the present value of the remaining lease payments while the ROU asset
is based on the lease liability, subject to adjustment, such as for lease incentives. Our leases do not provide a readily
determinable implicit interest rate and therefore, we must estimate our incremental borrowing rate. In determining
the incremental borrowing rate, we consider the lease period and our collateralized borrowing rates.
Our lease population at October 31, 2020 is comprised of operating leases where we are the lessee and these leases
are primarily real estate for office space for our corporate office, division offices and design centers. As allowed by ASC 842,
we adopted an accounting policy election to not record leases with lease terms of twelve months or less on our Consolidated
Balance Sheets.
Lease cost included in our Consolidated Statements of Operations in Selling, general and administrative expenses
and payments on our lease liabilities are presented in the table below. Our short-term lease costs and sublease income are de
minimis.
(In thousands)
Operating lease cost
Cash payments on lease liabilities
Year Ended
October 31,
2020
$
$
10,507
9,257
ROU assets are classified within Prepaids and other assets on our Consolidated Balance Sheets, while lease
liabilities are classified within Accounts payable and other liabilities on our Consolidated Balance Sheets. The Company
recorded a net increase to both its ROU assets and lease liabilities of $2.8 million as a result of lease renewals that commenced
during the year ended October 31, 2020. The following table contains additional information about our leases:
(In thousands)
ROU assets
Lease liabilities
Weighted-average remaining lease term (in years)
Weighted-average discount rate (incremental borrowing rate)
At October 31,
2020
$
$
20,016
21,049
3.5
9.6%
80
Maturities of our operating lease liabilities as of October 31, 2020 are as follows:
Year ending October 31,
2021
2022
2023
2024
2025
Thereafter
Total payments
Less: imputed interest
Present value of lease liabilities
(in thousands)
8,880
$
7,506
4,298
1,673
1,324
1,107
24,788
(3,739)
21,049
$
Under ASC 840, Leases (ASC 840), the Company’s total net rental expense for the years ended October 31, 2019
and 2018 was $14.8 million and $14.4 million, respectively.
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, 2020 and 2019 were as follows:
(In thousands)
Land and land improvements
Buildings
Building improvements
Furniture
Equipment, including capitalized software
Total
Less accumulated depreciation
Total
6. Restricted Cash and Deposits
October 31,
2020
2019
$
$
1,639 $
9,497
13,281
4,363
35,763
64,543
46,358
18,185 $
1,639
9,155
11,552
4,338
35,423
62,107
41,980
20,127
Homebuilding - Restricted cash and cash equivalents on the Consolidated Balance Sheets totaled $14.7 million
and $20.9 million as of October 31, 2020 and 2019, 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 $27.4 million and $24.8 million as of October 31, 2020 and 2019, respectively.
Included in these balances were (1) financial services customers’ deposits of $25.4 million at October 31, 2020 and
$22.8 million as of October 31, 2019, which are subject to restrictions on our use, and (2) $2.0 million at both October 31,
2020 and 2019 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.
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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, 2020 and 2019, $87.9 million and $143.2 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” balances on the Consolidated Balance Sheets. As of October 31, 2020 and 2019, we had reserves specifically for
15 and 20 identified mortgage loans, respectively, as well as reserves for an estimate for future losses on mortgages sold but
not yet identified to us.
The activity in our loan origination reserves in fiscal 2020 and 2019 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,
2020
2019
$
$
1,268 $
196
(6)
-
1,458 $
2,563
198
(143)
(1,350)
1,268
Nonrecourse. We have nonrecourse mortgage loans for certain communities totaling $135.1 million and $203.6
million (net of debt issuance costs) at October 31, 2020 and 2019, respectively, which are secured by the related real property,
including any improvements, with an aggregate book value of $368.1 million and $410.2 million, respectively. The weighted-
average interest rate on these obligations was 6.4% and 8.3% at October 31, 2020 and 2019, 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.
Our secured Master Repurchase Agreement with JPMorgan Chase Bank, N.A. (“Chase Master Repurchase
Agreement”), which was amended on December 11, 2020, is a short-term borrowing facility that provides up to $50.0 million
through its maturity on December 10, 2021. The loan is secured by the mortgages held for sale and is repaid when we sell the
underlying mortgage loans to permanent investors. Interest is payable monthly on outstanding advances at an adjusted LIBOR
rate, which was 0.14% at October 31, 2020, plus the applicable margin of 2.5%. As of October 31, 2020 and 2019, the
aggregate principal amount of all borrowings outstanding under the Chase Master Repurchase Agreement was $23.5 million
and $47.1 million, respectively.
82
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 12, 2021. The loan is secured by the mortgages held for sale and is repaid when we sell the underlying
mortgage loans to permanent investors. Interest is payable daily or as loans are sold to permanent investors on outstanding
advances at the current LIBOR rate, plus the applicable margin ranging from 2.125% to 4.75% based on the type of loan and
the number of days outstanding on the warehouse line. As of October 31, 2020 and 2019, the aggregate principal amount of
all borrowings outstanding under the Customers Master Repurchase Agreement was $31.1 million and $47.6 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 through its maturity on June 18, 2021. The
Comerica Master Repurchase Agreement provides up to $60.0 million on the 15th day of the last month of the Company's
fiscal quarters, and reverts back to up to $50.0 million 30 days thereafter. The loan is secured by the mortgages held for sale
and is repaid when we sell the underlying mortgage loans to permanent investors. Interest is payable monthly at the current
LIBOR rate, subject to a floor of 0.25%, plus the applicable margin of 1.875% or 3.25% based upon the type of loan. As of
October 31, 2020 and 2019, the aggregate principal amount of all borrowings outstanding under the Comerica Master
Repurchase Agreement was $32.6 million and $45.5 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, 2020, we believe we
were in compliance with the covenants under the Master Repurchase Agreements.
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9. Senior Notes and Credit Facilities
Senior notes and credit facilities balances as of October 31, 2020 and October 31, 2019, were as follows:
(In thousands)
Senior Secured Notes:
10.0% Senior Secured Notes due July 15, 2022
10.5% Senior Secured Notes due July 15, 2024
10.0% Senior Secured 1.75 Lien Notes due November 15, 2025
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, 2027 (1)
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 1.75 Lien Term Loan Credit Facility due January 31, 2028
Senior Secured Revolving Credit Facility (2)
Subtotal notes payable
Net (discounts) premiums
Net debt issuance costs
Total notes payable, net of discounts, premiums and debt issuance costs
October 31, October 31,
2019
2020
$
111,214 $
69,683
158,502
350,000
282,322
162,269
218,994
211,391
-
350,000
282,322
103,141
$ 1,133,990 $ 1,165,848
$
-
- $
90,590
90,590
90,120
90,120
180,710
180,710 $
$
202,547
39,551 $
$
-
81,498 $
$
$
-
- $
$ 1,435,749 $ 1,549,105
(49,145)
$
$
(19,970)
$ 1,431,110 $ 1,479,990
17,521 $
(22,160) $
(1) $26.0 million of 8.0% Senior Notes due 2027 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.
(2) At October 31, 2020, 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.
As of October 31, 2020, future maturities of our borrowings were as follows (in thousands):
Fiscal Year Ended October 31, (1)
2021
2022
2023
2024
2025
Thereafter
Total
$
-
111,214
-
69,683
-
1,254,852
$ 1,435,749
(1) Does not include our $125.0 million Senior Secured Revolving Credit Facility under which there were no borrowings
outstanding as of October 31, 2020.
General
Except for K. Hovnanian, the issuer of the notes and borrower under the Credit Facilities (as defined below), our
home mortgage subsidiaries, certain of our title insurance subsidiaries, joint ventures and subsidiaries holding interests in our
joint ventures, we and each of our subsidiaries are guarantors of the Credit Facilities, the senior secured notes (subject in the
case of the 10.5% 2024 Notes (as defined below), to the 10.5% 2024 Notes Supplemental Indenture (as defined below)) and
senior notes outstanding at October 31, 2020 (collectively, the “Notes Guarantors”).
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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, 2020 do not contain any financial maintenance covenants,
but do contain restrictive covenants that limit, among other things, the ability of HEI and certain of its subsidiaries, including
K. Hovnanian, to incur additional indebtedness (other than non-recourse indebtedness, certain permitted indebtedness and
refinancing indebtedness), pay dividends and make distributions on common and preferred stock, repay certain indebtedness
prior to its respective stated maturity, repurchase common and preferred stock, make other restricted payments (including
investments), sell certain assets (including in certain land banking transactions), incur liens, consolidate, merge, sell or
otherwise dispose of all or substantially all of their assets and enter into certain transactions with affiliates. The Debt
Instruments also contain customary events of default which would permit the lenders or holders thereof to exercise remedies
with respect to the collateral (as applicable), declare the loans made under the Unsecured Term Loan Facility (defined below)
(the “Unsecured Term Loans”), loans made under the Secured Term Loan Facility (defined below) (the “Secured Term
Loans”) and loans made under the Secured Credit Agreement (as defined below) (the “Secured Revolving Loans”) or notes
to be immediately due and payable if not cured within applicable grace periods, including the failure to make timely payments
on the Unsecured Term Loans, Secured Term Loans, Secured Revolving Loans or notes or other material indebtedness, cross
default to other material indebtedness, the failure to comply with agreements and covenants and specified events of
bankruptcy and insolvency, with respect to the Unsecured Term Loans, Secured Term Loans and Secured Revolving Loans,
material inaccuracy of representations and warranties and with respect to the Unsecured Term Loans, Secured Term Loans
and Secured Revolving Loans, a change of control, and, with respect to the Secured Term Loans, Secured Revolving Loans
and senior secured notes, the failure of the documents granting security for the obligations under the secured Debt Instruments
to be in full force and effect, and the failure of the liens on any material portion of the collateral securing the obligations
under the secured Debt Instruments to be valid and perfected. As of October 31, 2020, 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.
Fiscal 2020
On December 10, 2019, K. Hovnanian consummated an exchange offer (the "1.75 Lien Exchange Offer") pursuant
to which it issued $158.5 million aggregate principal amount of 10.0% 1.75 Lien Notes due 2025 (the “1.75 Lien Notes”) in
exchange for $23.2 million in aggregate principal amount of its outstanding 10.0% Senior Secured Notes due 2022 (the
“10.0% 2022 Notes”) and $141.7 million in aggregate principal amount of its outstanding 10.5% Senior Secured Notes due
2024 (the “10.5% 2024 Notes” and, together with the 10.0% 2022 Notes, the “Second Lien Notes”). K. Hovnanian also
exchanged $163.0 million in aggregate principal amount of its Unsecured Term Loans for $81.5 million in aggregate principal
amount of Secured Term Loans made under a new Senior Secured 1.75 Lien Term Loan Credit Facility due January 31, 2028
(the “Secured Term Loan Facility”). There was no cash consideration in these exchanges. These secured notes and term loan
exchanges were accounted for in accordance with ASC 470-60, resulting in a carrying value of $164.9 million and $148.8
million, respectively, for the $158.5 million of 1.75 Lien Notes and $81.5 million of Secured Term Loans, respectively, and
a net gain on extinguishment of debt of $9.2 million, which is included in “Gain on extinguishment of debt” on
the Consolidated Statement of Operations. The effect of this gain on a per share basis, assuming dilution, for the year ended
October 31, 2020 was $1.40, excluding the impact of taxes, as our deferred tax assets are fully reserved by a valuation
allowance.
In connection with the 1.75 Lien Exchange Offer, K. Hovnanian obtained consents from a majority of the holders
of the 10.5% 2024 Notes to amendments to the indenture under which such 10.5% 2024 Notes were issued and entered into
the Tenth Supplemental Indenture dated as of December 6, 2019 among HEI, K. Hovnanian, the guarantors party thereto and
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Wilmington Trust, National Association, as trustee and collateral agent (the “10.5% 2024 Notes Supplemental Indenture”) to
provide for such amendments, which became operative on December 10, 2019. The amendments eliminate most of the
restrictive covenants, certain of the affirmative covenants and certain events of default, including eliminating the obligations
of subsidiaries that are formed after December 10, 2019 to become guarantors of the 10.5% 2024 Notes and to provide
collateral in respect of their assets. As a result, the 10.5% 2024 Notes do not have the same guarantors or collateral as K.
Hovnanian’s other secured debt obligations.
The 1.75 Lien Notes were issued under an Indenture, dated as of December 10, 2019, among HEI, K. Hovnanian,
the guarantors party thereto and Wilmington Trust, National Association, as trustee and collateral agent. The 1.75 Lien Notes
are guaranteed by HEI and the Notes Guarantors and are secured by substantially all of the assets owned by K. Hovnanian
and the Notes Guarantors, subject to permitted liens and certain exceptions. Interest on the 1.75 Lien Notes is payable semi-
annually on May 15 and November 15 of each year, 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 1.75 Lien Notes
have a maturity of November 15, 2025.
The 1.75 Lien Notes are redeemable in whole or in part at K. Hovnanian’s option at any time prior to November
15, 2021 at a redemption price equal to 100.0% of their principal amount plus an applicable “Make-Whole Amount”. At any
time and from time to time on or after November 15, 2021 and prior to November 15, 2022, K. Hovnanian may redeem some
or all of the 1.75 Lien Notes at a redemption price equal to 105.00% of their principal amount, at any time and from time to
time after November 15, 2022 and prior to November 15, 2023, K. Hovnanian may redeem some or all of the 1.75 Lien Notes
at a redemption price equal to 102.50% of their principal amount and at any time and from time to time after November 15,
2023, K. Hovnanian may redeem some or all of the 1.75 Lien Notes at a redemption price equal to 100.0% of their principal
amount. In addition, K. Hovnanian may also redeem up to 35.0% of the aggregate principal amount of the 1.75 Lien Notes
prior to November 15, 2021 with the net cash proceeds from certain equity offerings at 110.00% of principal.
The Secured Term Loans and the guarantees thereof are secured on a pari passu basis with the 1.75 Lien Notes by
the same assets that secure the 1.75 Lien Notes, subject to permitted liens and certain exceptions. The Secured Term Loans
bear interest at a rate equal to 10.0% per annum and will mature on January 31, 2028. The Secured Term Loans bear interest
at a rate equal to 10.0% per annum and interest is payable in arrears, on the last business day of each fiscal quarter. The
Secured Term Loans may be voluntarily prepaid in whole or in part at K. Hovnanian’s option at any time prior to November
15, 2021 at a prepayment price equal to 100.0% of their principal amount plus any applicable “Make-Whole Amount”. At
any time and from time to time on or after November 15, 2021 and prior to November 15, 2022, K. Hovnanian may voluntarily
prepay some or all of the Secured Term Loans at a prepayment price equal to 105.00% of their principal amount, at any time
and from time to time after November 15, 2022 and prior to November 15, 2023, K. Hovnanian may voluntarily prepay some
or all of the Secured Term Loans at a prepayment price equal to 102.50% of their principal amount and at any time and from
time to time after November 15, 2023, K. Hovnanian may voluntarily prepay some or all of the Secured Term Loans at a
prepayment price equal to 100.0% of their principal amount.
On March 25, 2020, K. Hovnanian consummated a private exchange (the “Exchange”) pursuant to which it issued
$59.1 million aggregate principal amount of additional 1.5 Lien Notes (defined below) (the “Additional 1.5 Lien Notes”) in
exchange for of $59.1 million aggregate principal amount of 10.0% 2022 Notes held by certain participating bondholders
(the “Exchange Holders”) pursuant to an Exchange Agreement, dated March 25, 2020 (the “Exchange Agreement”), among
the K. Hovnanian, the Notes Guarantors, the Exchanging Holders and certain holders of the Initial 1.5 Lien Notes (defined
below) (the “Consenting Holders”). In connection therewith, the Consenting Holders provided their consents (the “Consents”)
under the Indenture under which the 1.5 Lien Notes were issued to permit the issuance of the Additional 1.5 Lien Notes.
The Additional 1.5 Lien Notes were issued as additional notes of the same series as the $103.1 million aggregate
principal amount of K. Hovnanian’s 11.25% Senior Secured 1.5 Lien Notes due 2026 issued on October 31, 2019 (the “Initial
1.5 Lien Notes” and, together with the Additional 1.5 Lien Notes, the “1.5 Lien Notes”). In connection with the issuance of
the Additional 1.5 Lien Notes in the Exchange, K. Hovnanian, the Notes Guarantors and Wilmington Trust, National
Association, as trustee (the “Trustee”) and collateral agent (the “Collateral Agent”), entered into the Fourth Supplemental
Indenture, dated as of March 25, 2020 (the “Supplemental Indenture”), to the Indenture, dated as of October 31, 2019 (as
amended and supplemented prior to the Supplemental Indenture, the “Indenture”), among the K. Hovnanian, the Notes
Guarantors, the Trustee and the Collateral Agent. The Supplemental Indenture also amends the Indenture in accordance with
the Consents to permit K. Hovnanian and the Notes Guarantors to secure up to $162.3 million of 1.5 Lien Obligations (as
defined in the Indenture). As of March 25, 2020, after giving effect to the issuance of the Additional 1.5 Lien Notes, $162.3
million aggregate principal amount of 1.5 Lien Obligations, which consist of the 1.5 Lien Notes, were outstanding. For a
discussion of the 1.5 Lien Notes see “—Secured Obligations” below.
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During the year ended October 31, 2020, the Company repurchased in open market transactions $25.5 million
aggregate principal amount of the 10.0% 2022 Notes. The aggregate purchase price for these repurchases was $21.4 million,
which included accrued and unpaid interest. These repurchases resulted in a gain on extinguishment of debt of $4.1 million
for the year ended October 31, 2020, net of the write-off of unamortized financing costs and fees. The gains from the
repurchases are included in the Consolidated Statement of Operations as "Gain on extinguishment of debt".
Fiscal 2019
On January 15, 2019, K. Hovnanian issued $25.0 million in aggregate principal amount of additional 10.5% 2024
Notes to GSO Capital Partners LP (“GSO”) or one or more funds managed, advised or sub-advised by GSO (collectively, the
“GSO Entities”) 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, HEI, the Notes Guarantors, Wilmington Trust, National Association, as
administrative agent, and affiliates of certain investment managers (the “Investors”), as lenders, entered into a credit
agreement (the “Secured Credit Agreement” and, together with the Unsecured Term Loan Facility and the Secured Term
Loan Facility, the “Credit Facilities”) providing for up to $125.0 million in aggregate amount of Secured Revolving Loans
to be used for general corporate purposes, upon the terms and subject to the conditions set forth therein. Secured Revolving
Loans are to be borrowed by K. Hovnanian and guaranteed by the Notes Guarantors. Availability under the Secured Credit
Agreement will terminate on December 28, 2022. The Secured Revolving Loans bear interest at a rate per annum equal to
7.75%, and interest is payable in arrears, on the last business day of each fiscal quarter. In connection with the entering into
of the Secured Credit Agreement, K. Hovnanian terminated the 2018 Secured Credit Facility (as defined 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% 2022 Notes and approximately $114.0 million aggregate principal amount of its
10.5% 2024 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 1.5 Lien Notes (the 1.5 Lien Notes 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.
87
HEI 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. HEI, K. Hovnanian and the guarantors also amended such debt
instruments to add certain subsidiaries as guarantors thereunder and, in the case of the Second Lien Notes, to add such new
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 of 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.
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 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 “Unsecured 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 “Unsecured 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 “Unsecured 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, 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 Unsecured 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 Unsecured
Delayed Draw Term Loans under the Unsecured Term Loan Facility (with the completion of this redemption, the remaining
committed amounts under the Unsecured 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 Unsecured Term Loans bear interest
at a rate equal to 5.0% per annum and interest is payable in arrears, on the last business day of each fiscal quarter. The 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 2018 Secured Credit Facility, which provided for
a $125.0 million secured revolving credit facility. This 2018 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,
88
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.
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 redeem some or all of the 2040 Notes at a redemption price
equal to 100.0% of their principal amount.
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 redeem some or all of the 10.0%
2022 Notes 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. K. Hovnanian may redeem some or all of the 10.5%
2024 Notes at 105.25% of principal commencing July 15, 2020, at 102.625% of principal commencing July 15, 2021 and at
100.0% of principal commencing July 15, 2022.
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.
89
See “—Fiscal 2020” for a discussion of the 1.75 Lien Notes and the Secured Term Loans and “—Fiscal 2019”
for a discussion of the Secured Credit Agreement.
Each series of secured notes (subject in the case of the 10.5% 2024 Notes, to the 10.5% 2024 Notes Supplemental
Indenture) and the guarantees thereof, the Secured Term Loans and the guarantees thereof and the Secured Credit Agreement
and the guarantees thereof are secured by the same assets. Among the secured debt, the liens securing the Secured Credit
Agreement are senior to the liens securing all of K. Hovnanian’s other secured notes and the Secured Term Loan. The liens
securing the 1.125 Lien Notes are senior to the liens securing the 1.25 Lien Notes, 1.5 Lien Notes, the 1.75 Lien Notes, the
Secured Term Loans, the Second Lien Notes and any other future secured obligations that are junior in priority with respect
to the assets securing the 1.125 Lien Notes, the liens securing the 1.25 Lien Notes are senior to the liens securing the 1.5 Lien
Notes, the 1.75 Lien Notes, the Secured Term Loans, the Second Lien Notes and any other future secured obligations that are
junior in priority with respect to the assets securing the 1.25 Lien Notes, the liens securing the 1.5 Lien Notes are senior to
the liens securing the 1.75 Lien Notes, the Secured Term Loans, the Second Lien Notes and any other future secured
obligations that are junior in priority with respect to the assets securing the 1.5 Lien Notes, the liens securing the 1.75 Lien
Notes and the Secured Term Loans (which are secured on a pari passu basis with each other) are senior to the liens securing
the Second Lien Notes and any other future secured obligations that are junior in priority with respect to the assets securing
the 1.75 Lien Notes and the Secured Term Loans, in each case, with respect to the assets securing such debt.
As of October 31, 2020, the collateral securing the Secured Credit Agreement, the Secured Term Loan Facility
and the secured notes (subject in the case of the 10.5% 2024 Notes, to the 10.5% 2024 Notes Supplemental Indenture)
included (1) $258.9 million of cash and cash equivalents, which included $11.6 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) $435.5 million aggregate book value
of real property, which does not include the impact of inventory investments, home deliveries or impairments thereafter and
which may differ from the value if it were appraised; and (3) equity interests in joint venture holding companies with an
aggregate book value of $185.5 million.
Other
We have certain stand-alone cash collateralized letter of credit agreements and facilities under which there was a
total of $11.3 million and $19.2 million letters of credit outstanding at October 31, 2020 and October 31, 2019, 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, 2020 and October 31, 2019, the amount of cash collateral in these segregated accounts was $11.6 million and
$19.9 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)
(5)
(6) West (California)
Southeast (Florida, Georgia and South Carolina)
Southwest (Arizona and Texas)
90
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,
2020
2019
2018
$
192,069 $
403,669
225,718
232,730
744,197
472,889
124,372 $
357,247
204,461
220,082
629,344
425,516
116,296
354,690
196,599
241,620
638,282
384,627
2,271,272 1,961,022 1,932,114
53,355
5,764
$ 2,343,901 $ 2,016,916 $ 1,991,233
54,152
1,742
72,162
467
$
$
30,371 $
34,570
(1,805)
1,355
68,184
16,415
149,090
32,102
(125,789)
55,403 $
20,954 $
14,327
(649)
(10,060)
33,459
40,018
98,049
17,627
(155,344)
(39,668) $
20,869
18,757
1,528
(9,914)
49,852
47,987
129,079
18,227
(139,160)
8,146
(1) Corporate and unallocated for the year ended October 31, 2020 included corporate general and administrative costs of
$80.5 million, interest expense of $61.9 million (a component of Other interest on our Consolidated Statements of
Operations), gain on extinguishment of debt of $13.3 million, and $3.3 million of other income and expenses, along with the
adjustment to our insurance reserves. 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
91
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, $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.
(In thousands)
Assets:
Northeast
Mid-Atlantic
Midwest
Southeast
Southwest
West
Total homebuilding
Financial services
Corporate and unallocated
Total assets
October 31,
2020
2019
$
107,748 $
271,867
106,774
248,506
357,444
278,811
163,342
264,894
117,242
281,654
357,052
311,919
1,371,150 1,496,103
199,275
186,046
$ 1,827,342 $ 1,881,424
140,607
315,585
(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,
2020
2019
$
$
14,646 $
11,055
498
66,234
9,965
64
102,462
702
103,164 $
49,340
9,166
4,382
52,983
10,019
(33)
125,857
1,181
127,038
Year Ended October 31,
2020
2019
2018
$
$
13,636 $
16,076
9,377
17,005
29,898
30,222
116,214
61,917
(35)
178,096 $
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
(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.
92
(In thousands)
Depreciation:
Northeast
Mid-Atlantic
Midwest
Southeast
Southwest
West
Total homebuilding
Financial services
Corporate and unallocated
Total depreciation
(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 from unconsolidated joint ventures
Year Ended October 31,
2020
2019
2018
229 $
264
1,112
327
699
801
3,432
13
1,859
5,304 $
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
Year Ended October 31,
2020
2019
2018
43 $
165
861
102
776
846
2,793
-
587
3,380 $
107 $
168
237
221
741
921
2,395
-
1,610
4,005 $
142
318
621
701
23
55
1,860
-
3,333
5,193
Year Ended October 31,
2020
2019
2018
11,039 $
(292)
(103)
820
5,111
(10)
16,565 $
19,242 $
3,404
(432)
1,310
7,951
(2,543)
28,932 $
20,231
799
(775)
(2,032)
5,165
645
24,033
$
$
$
$
$
$
11. Income Taxes
Income taxes payable, including deferred benefits, consists of the following:
(In thousands)
State income taxes:
Current
Deferred
Federal income taxes:
Current
Deferred
Total
Year Ended October 31,
2020
2019
$
$
3,832 $
-
-
-
3,832 $
2,301
-
-
-
2,301
93
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,
2020
2019
2018
- $
4,475
4,475
-
-
-
4,475 $
- $
2,449
2,449
-
-
-
2,449 $
-
3,626
3,626
-
-
-
3,626
$
$
(1)
(2)
The current federal income tax expense is net of the use of federal net operating losses totaling $183.0 million
(tax effected $38.4 million) and $4.0 million (tax effected $0.8 million) for the years ended October 31, 2020 and
2019, respectively. The current federal income tax expense did not include the use of federal net operating losses
for the year ended October 31, 2018.
The current state income tax expense is net of the use of state net operating losses totaling $72.5 million,
$1.3 million and $4.4 million for the years ended October 31, 2020, 2019 and 2018, respectively.
The total income tax expense of $4.5 million, $2.4 million, and $3.6 million for the periods ending October 31,
2020, 2019 and 2018, respectively, was primarily related to state tax expense from income generated in states where we do
not have net operating loss carryforwards to offset the current year income. In addition, the expense for the year ended October
31, 2020 was primarily related to state tax expense from the impact of a cancellation of debt income recorded for tax purposes
but not for GAAP purposes, creating a permanent difference.
Our federal net operating losses of $1.4 billion expire between 2028 and 2038, and $15.7 million have an indefinite
carryforward period. Of our $2.4 billion of state NOLs, $232.6 million expire between 2021 through 2025; $1.3 billion expire
between 2026 through 2030; $587.9 million expire between 2031 through 2035; $239.2 million expire between 2036 through
2040; and $48.8 million have an indefinite carryforward period.
On March 27, 2020, the Coronavirus Aid, Relief and Economic Security (CARES) Act was enacted and signed
into U.S. law to provide economic relief to individuals and businesses facing economic hardship as a result of the COVID-19
pandemic. The CARES Act did not have a material impact on the Company's consolidated financial condition or results of
operations as of and for the year ended October 31, 2020. The Company deferred the timing of estimated payments and payroll
taxes as permitted by federal and state legislation, including under the CARES Act. We will continue to monitor additional
guidance issued by the U.S. Treasury Department, the Internal Revenue Service and various state agencies.
Deferred federal and state income tax assets ("DTAs") primarily represent the deferred tax benefits arising from
NOL carryforwards and temporary differences between book and tax income which will be recognized in future years as an
offset against future taxable income. If the combination of future years’ income (or loss) and the reversal of the timing
differences results in a loss, such losses can be carried forward to future years. In accordance with ASC 740, we evaluate our
DTAs quarterly to determine if valuation allowances are required. ASC 740 requires that companies assess whether valuation
allowances should be established based on the consideration of all available evidence using a “more likely than not” standard.
As of October 31, 2020, 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 $577.5 million as of October 31, 2020, which fully reserves for our
DTAs, is appropriate.
94
1.
2.
As of October 31, 2020, on a tax basis, the Company had pre-tax income when adjusted for permanent
differences on a three-year cumulative basis. However, on a U.S. GAAP basis, the Company has generated
only $23.8 million of cumulative pre-tax income in the three years ended October 31, 2020. That cumulative
profit was generated over those three years as follows: $8.1 million in fiscal 2018, $39.7 million loss in fiscal
2019 and $55.4 million of income in fiscal 2020. As noted, we had a significant loss in fiscal 2019 and
generated a low level of profit in fiscal 2018. While the fiscal 2020 profit is a positive for the Company, it
benefited greatly from the extremely strong housing market in the last half of the year. This strong market,
as a result of low interest rates and lack of available supply from resale, resulted in contract pace per average
active selling community of 17.8 and 16.4 for the third and fourth quarters of fiscal 2020, respectively, both
of which are higher than any quarterly sales per community ever recorded by the Company. This increase in
sales pace resulted in a 61.3% increase in dollar value of our backlog from October 31, 2019 to October 31,
2020. The Company believes that it is premature to conclude that this pace is sustainable, and in fact the
pace has slowed somewhat in November 2020. We remain uncertain regarding the full long-term magnitude
or duration of the business and economic impacts from the unprecedented COVID-19 pandemic. Further, it
remains unknown whether recent, current or anticipated demand will continue once the current COVID-19
pandemic subsides. These uncertainties bring into doubt the Company’s ability to generate substantive
positive income prospectively. Per ASC 740, cumulative losses are one of the most objectively verifiable
forms of negative evidence. (Negative Objective Evidence)
Over the last several years, we have completed a number of debt refinancing/restructuring transactions which,
by extending our debt maturities, will enable us to allocate cash to invest in new communities and grow our
community count to get back to sustained profitability. (Positive Objective Evidence)
3. We incurred pre-tax losses during the housing market decline and the slower than expected housing market
recovery. Given our current highly leveraged balance sheet, a downturn in the housing market, perhaps as a
result of a prolonged pandemic, would be significantly more damaging to the Company than to other better
capitalized homebuilders and make it very difficult for the Company to avoid future losses, given our high
interest burden. (Negative Objective Evidence)
5.
4. We exited several geographic markets over the last few years that have historically had losses. By exiting
these underperforming markets, the Company has been able to redeploy capital to better performing markets,
which over time should improve our profitability. (Positive Subjective Evidence)
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, and impacts of the COVID 19 pandemic, all or any of which
could continue to hamper a sustained, stronger recovery of the housing market. (Negative Subjective
Evidence)
The 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
95
Year Ended October 31,
2020
2019
$
$
42,120 $
3,870
4,848
-
9,554
3,793
3,930
1,644
4,026
16,566
3,020
299,854
181,050
3,259
577,534
-
(577,534)
- $
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)
-
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 2020, 2019 and 2018 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,
2020
21.0%
10.6
53.2
(83.3)
(0.5)
7.0
8.0%
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%
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.
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,
$
$
2020
0.9 $
-
(0.2)
0.7 $
2019
1.2
-
(0.3)
0.9
Related to the unrecognized tax benefits noted above, as of October 31, 2020 and 2019, we recognized a liability
for interest and penalties of $0.3 and $0.4 million, respectively. For the year ended October 31, 2020, we recognized
$60 thousand of interest and penalties in net income tax benefit. 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.
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 $0.7 million and $0.9 million for the years ended October 31, 2020 and 2019.
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, 2019 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
96
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 2016 –
2019.
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 year ended October 31, 2020, our discount rate used for the impairments recorded was
17.3%, and for the years ended October 31, 2019 and 2018, our discount rates used for the impairments recorded ranged from
17.3% to 18.3% and 16.8% 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, 2020 and 2019, we evaluated inventories of all 354 and 393 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, 2020 and 2019 for three and nine of those communities (i.e., those with a
projected operating loss or other impairment indicators), respectively, with an aggregate carrying value of $5.4 million and
$58.9 million, respectively. As a result of our undiscounted future cash flow analyses, we performed discounted cash flow
analyses for two of those communities for the fiscal year ended October 31, 2020, resulting in aggregate impairment losses
of $2.0 million. The one community, with an aggregate carrying value of $0.6 million, that did not require a discounted cash
flow analysis to be performed during the year ended October 31, 2020 did not have undiscounted future cash flows that
exceeded the carrying amount by less than 20%. During the year ended October 31, 2019, six communities that required
discounted cash flow analyses were impaired, which resulted in recording aggregate impairment losses of $2.7 million. 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%. 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. Our aggregate impairment losses 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.
The following table represents impairments by segment for fiscal 2020, 2019 and 2018:
(Dollars in millions)
Year Ended October 31, 2020
Dollar
Pre-
Number of Amount of Impairment
Value (1)
Communities Impairment
-
- $
-
-
4.8
2
-
-
-
-
-
-
4.8
2 $
- $
-
2.0
-
-
-
2.0 $
Northeast
Mid-Atlantic
Midwest
Southeast
Southwest
West
Total
97
(Dollars in millions)
Year Ended October 31, 2019
Northeast
Mid-Atlantic
Midwest
Southeast
Southwest
West
Total
Dollar
Pre-
Number of Amount of Impairment
Value (1)
Communities Impairment
7.8
2 $
1.7
1
4.6
1
2.2
1
1.2
1
-
-
17.5
6 $
0.2 $
0.3
1.4
0.7
0.1
-
2.7 $
(Dollars in millions)
Year Ended October 31, 2018
Northeast
Mid-Atlantic
Midwest
Southeast
Southwest
West
Total
Dollar
Pre-
Number of Amount of Impairment
Value (1)
Communities Impairment
1.0
1 $
-
-
0.5
1
9.7
3
-
-
-
-
11.2
5 $
0.4 $
-
0.1
1.6
-
-
2.1 $
(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 $6.8 million, $3.6 million and $1.4 million for the
years ended October 31, 2020, 2019 and 2018, 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 2020, 2019 and 2018:
(In millions)
Northeast
Mid-Atlantic
Midwest
Southeast
Southwest
West
Total
Year Ended October 31,
2020
2019
1.5 $
-
3.5
0.8
0.6
0.4
6.8 $
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
$
$
98
13. 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 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 earnings (loss) attributable to Hovnanian
Less: undistributed earnings allocated to nonvested shares
Numerator for basic earnings (loss) per share
Plus: undistributed earnings allocated to nonvested shares
Less: undistributed earnings reallocated to nonvested shares
Numerator for diluted earnings (loss) 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
Year Ended October 31,
2019
2020
2018
$
$
$
$
$
50,928 $
(4,652)
46,276 $
4,652
(4,652)
46,276 $
(42,117) $
-
(42,117) $
-
-
(42,117) $
4,520
(159)
4,361
159
(159)
4,361
6,189
5,968
5,941
395
-
131
6,584
7.48 $
7.03 $
5,968
(7.06) $
(7.06) $
6,072
0.73
0.72
Incremental shares attributed to nonvested stock and outstanding options to purchase common stock of 0.3 million
for the year ended October 31, 2019, 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.
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, 2020, 2019 and 2018, 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.
99
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, 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, 2020. As of October
31, 2020, 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 2020, 2019 and 2018, 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.
100
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 $7.4 million,
$7.3 million and $7.0 million for the years ended October 31, 2020, 2019 and 2018, respectively.
15. Stock Plans
There were no stock option grants during the year ended October 31, 2020. 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 and 2018: risk free interest rate of 1.99% and 2.80%, respectively; dividend yield of
zero; historical volatility factor of the expected market price of our common stock of 0.56 and 0.50, respectively; a weighted-
average expected life of the option of 7.98 years and 8.0 years, respectively; and an estimated forfeiture rate of 7.84% and
9.90%, respectively.
For the years ended October 31, 2020, 2019 and 2018, total stock-based compensation expense was $2.8 million,
($2.6 million post tax), $0.7 million and $3.7 million ($2.0 million post tax), respectively. Included in this total stock-based
compensation expense was expense from stock options of $0.4 million, $0.8 million and $0.7 million for the years ended
October 31, 2020, 2019 and 2018, respectively. The expense for the years ended October 31, 2020, 2019 and 2018 includes
income of $2.4 million, $2.6 million and $0.8 million, respectively, from previously recognized expense of certain time and
performance based restricted stock grants for which the performance metrics were not or are no longer expected to be
satisfied.
We have a stock incentive plan for certain officers and key employees and directors. Beginning in fiscal 2020,
restricted share units are granted by a committee appointed by the Board of Directors or its delegate in accordance with the
stock incentive plan. At the time of our annual stock grant in the third quarter of fiscal 2020, each of the five of our existing
non-employee directors of the Company were granted a number of shares of restricted stock units subject to a two-year post-
vesting holding period, based on the fair market value on the date of grant. Prior to fiscal 2020, options were 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. 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:
Weighted-
Weighted-
October 31,
Average October 31,
Average October 31,
2020 Exercise Price
2019 Exercise Price
Weighted-
Average
2018 Exercise Price
Options
outstanding at
beginning of
period
Granted
Exercised
Forfeited
Expired
Options
outstanding at
end of period
Options
exercisable at
end of period
331,481 $
- $
- $
6,560 $
35,530 $
53.93
-
-
26.24
115.28
278,569 $
110,975 $
- $
2,038 $
56,025 $
73.76
9.44
-
53.96
64.41
274,423 $
37,825 $
1,210 $
2,000 $
30,469 $
85.22
56.30
49.91
64.25
156.95
289,391 $
47.02
331,481 $
53.93
278,569 $
73.76
145,553
147,019
191,748
There were no options exercised in fiscal 2020 or fiscal 2019. Exercise prices for options outstanding at October
31, 2020 ranged from $7.85 to $157.00. The total intrinsic value of options exercised during fiscal 2018 was $26 thousand.
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.
101
The weighted-average fair value of grants made in fiscal 2019 and 2018 was $4.46 and $27.09 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 and 2018 was $36.07 and $69.56 per share, respectively.
The following table summarizes the exercise price range and related number of options outstanding at October
31, 2020:
Range of Exercise Prices
$7.85 – $38.50
$38.75 – $58.13
$61.00 – $90.38
$118.25 – $157.00
Weighted-
Outstanding Exercise Price
Number
108,150 $
96,995 $
57,300 $
26,946 $
289,391 $
Weighted-
Average
Remaining
Average Contractual
Life
8.58
3.76
4.11
2.76
5.54
9.65
50.07
67.66
142.17
47.02
The following table summarizes the exercise price range and related number of exercisable options at October 31,
2020:
Range of Exercise Prices
$7.85 – $38.50
$38.75 – $58.13
$61.00 – $90.38
$118.25 – $157.00
Weighted-
Exercisable Exercise Price
Number
850 $
82,557 $
35,200 $
26,946 $
145,553 $
Weighted-
Average
Remaining
Average Contractual
Life
3.25
3.2
1.95
2.76
2.81
24.08
50.31
71.46
142.17
72.28
Officers and key associates who are eligible to receive equity grants are granted shares of restricted stock units.
Prior to fiscal 2020, officers and key associates who were eligible to receive equity grants could 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, 2020, 2019 and
2018, we granted 142,231 (including 36,731 units to certain of our non-employee directors), 107,650 (including
103,612 units to certain of our non-employee directors) and 20,292 (including 15,904 units to certain of our non-employee
directors) restricted stock units, respectively, and also issued 11,503, 8,380 and 5,936 units, relating to awards granted in
prior fiscal years, respectively. During the years ended October 31, 2020 and 2019, 5,567 and 656 restricted stock units were
forfeited, respectively.
For the years ended October 31, 2020 and 2018 total compensation cost recognized in the Consolidated Statement
of Operations for the annual restricted stock unit grants, market share unit grants and performance share units (both discussed
below), and the stock portion of the long-term incentive plan (also discussed below) was $2.4 million and $2.8 million,
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. In addition to nonvested share awards
summarized in the following tables, there were 60,446, 33,643 and 21,609 vested share awards at October 31, 2020, 2019
and 2018, respectively, which were deferred at the participants' election.
102
A summary of the Company’s nonvested Time-Based share awards for the years ended October 31, 2020, 2019,
and 2018 are as follows:
Weighted-
Average
Weighted-
Average
October 31,
2020
Grant Date October 31,
2019
Fair Value
Grant Date October 31,
2018
Fair Value
Weighted-
Average
Grant Date
Fair Value
Nonvested Time-
Based at
beginning of
period
Granted
Vested
Forfeited
Nonvested Time-
Based at end of
period
231,210 $
142,231 $
62,309 $
22,267 $
23.01
19.48
17.04
57.81
105,594 $
164,050 $
21,329 $
17,106 $
61.77
7.66
45.52
86.96
96,091 $
37,888 $
22,821 $
5,564 $
60.50
54.95
55.19
20.87
288,865 $
19.88
231,210 $
23.01
105,594 $
61.77
A summary of the Company’s nonvested Performance-Based share awards for the years ended October 31,
2020, 2019, and 2018 are as follows:
Weighted-
Average
Weighted-
Average
October 31,
2020
Grant Date October 31,
2019
Fair Value
Grant Date October 31,
2018
Fair Value
Weighted-
Average
Grant Date
Fair Value
Nonvested
Performance-
Based at
beginning of
period
Granted
Vested
Forfeited
Nonvested
Performance-
Based at end of
period
136,316 $
183,825 $
4,284 $
21,385 $
44.22
15.11
57.22
70.44
101,407 $
56,400 $
8,655 $
12,836 $
69.28
10.10
42.69
93.31
150,881 $
47,277 $
5,390 $
91,361 $
50.26
70.41
72.52
38.27
294,472 $
24.64
136,316 $
44.22
101,407 $
69.28
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. These amounts include adjustments for performance outcomes
during the LTIP period. 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 142,500 target Performance-based Performance Share Units (“PSUs”), which
were granted to certain officers in fiscal 2020. The PSUs vest in four equal installments commencing on the second, third,
fourth and fifth anniversary of the grant date, except that no portion of the award will vest unless the Committee determines
that the Company achieved specified revenue goals.
The fair value of the PSU grants is determined using the Finnerty model, which uses an arithmetic average strike,
put option. The strike price is based on the predetermined period average value of the underlying asset. The following
assumptions were used for 2020 PSU grants: historical volatility factor of the expected market price of our common stock
of 108.15% for the two-year period ending on the valuation date, and the concluded risk free rate assumption of 0.19% equals
the continuously compounded two-year yield, and dividend yield of zero.
Also included in the tables above are 81,850 target Time-based and 81,250 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.
There were no MSUs granted in fiscal 2020. MSU grants from fiscal years 2015 through 2018 were reduced by 16,700 Time-
based and 20,350 Performance-based MSUs in fiscal 2020, as certain performance conditions at measurement periods were
not met and only a portion of the shares were vested, resulting in the reversal of $2.4 million of expense during the period.
103
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 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 2019), (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 2020 compared to fiscal 2018).
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.
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, 2020, we had 0.2 million shares authorized and remaining for future issuance under
our equity compensation plans. In addition, as of October 31, 2020, there were $6.2 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, 2020 and 2019, we received $4.4 million and $4.8 million, respectively, from subcontractors related to the owner
controlled insurance program, which we accounted for as reductions to inventory.
104
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 2020 and 2019, our deductible under our general liability insurance was a $20 million aggregate for
construction defect and warranty claims. For bodily injury claims, our deductible per occurrence in fiscal 2020 and 2019 was
$0.25 million, up to a $5 million limit. Our aggregate retention for construction defect, warranty and bodily injury claims was
$20 million for fiscal 2020 and 2019. 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, 2020 and 2019 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,
2020
2019
$
$
89,371 $
9,587
10,273
(20,163)
(2,651)
86,417 $
95,064
8,408
6,260
(18,757)
(1,604)
89,371
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. 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 $2.5 million in the fourth quarter of fiscal 2020 and $6.9 million
in the fourth quarter of fiscal 2019. 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 less than $0.1 million
and $0.1 million for the fiscal years ended October 31, 2020 and 2019, respectively, for prior year deliveries.
17. Transactions with Related Parties
During the years ended October 31, 2020, 2019 and 2018, 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 $0.7 million, $0.9 million and $0.7 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, was employed by
the Company’s mortgage subsidiary. Mr. Carson Sorsby resigned in August 2020. His total commissions from the Company’s
mortgage affiliate totaled approximately $265,000, $223,000 and $148,000 in fiscal 2020, 2019 and 2018, 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. In fiscal 2020, Mr. Hovnanian was Division President of the Northeast
Division and in March 2020 he became the Executive Vice President - National Homebuilding Operations. His total
compensation was approximately $1,152,000, $609,000 and $514,000 in fiscal 2020, 2019 and 2018, 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.
105
We also are subject to a variety of local, state, federal and foreign laws and regulations concerning protection of
health and the environment, including those regulating the emission or discharge of materials into the environment, the
management of storm water runoff at construction sites, the handling, use, storage and disposal of hazardous substances,
impacts to wetlands and other sensitive environments, and the remediation of contamination at properties that we have owned
or developed or currently own or are developing (“environmental laws”). The particular environmental laws that apply to a
site may vary greatly according to the community site, for example, due to the community, the environmental conditions at
or near the site, and the present and former uses of the site. These environmental laws may result in delays, may cause us to
incur substantial compliance, remediation and/or other costs, and can prohibit or severely restrict development and
homebuilding activity. In addition, noncompliance with these laws and regulations could result in fines and penalties,
obligations to remediate, permit revocations or other sanctions; and contamination or other environmental conditions at or in
the vicinity of our developments may result in claims against us for personal injury, property damage or other losses.
We anticipate that increasingly stringent requirements will continue to be imposed on developers and
homebuilders in the future. 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. After a series of interim rulemakings, in April 2020 the EPA and the U.S. Army Corps of Engineers formally
published the Navigable Waters Protection Rule, which they characterize as more appropriate for determining the scope of
waters subject to federal permitting. The new rule took effect in June 2020 in all states except Colorado, where a federal
district court issued a preliminary injunction against application of the rule in that state. It is being challenged by 17 states in
one lawsuit and by a number of environmental advocacy groups in at least three other lawsuits, as well as in several lawsuits
by cattlemen and other rancher groups contending that the new rule still exercises permitting authority over too many waters.
It is unclear how these and related developments, including at the state or local level, ultimately may affect the scope of
regulated wetlands where we operate. Although we cannot reliably predict the extent of any effect these developments
regarding wetlands, or any other requirements that may take effect may have on us, they could result in time-consuming and
expensive compliance programs and in substantial expenditures, which could cause delays and increase our cost of operations.
In addition, our ability to obtain or renew permits or approvals and the continued effectiveness of permits already granted or
approvals already obtained is dependent upon many factors, some of which are beyond our control, such as changes in
policies, rules and regulations and their interpretations and application.
In March 2013, we received a letter from the Environmental Protection Agency (“EPA”) requesting information
about our involvement in a housing redevelopment project in Newark, New Jersey that a Company entity undertook during
the 1990s. We understand that the development is in the vicinity of a former lead smelter and that tests on soil samples from
properties within the development conducted by the EPA showed elevated levels of lead. We also understand that the smelter
ceased operations many years before the Company entity involved acquired the properties in the area and carried out the re-
development project. We responded to the EPA’s request. In August 2013, we were notified that the EPA considers us a
potentially responsible party (or “PRP”) with respect to the site, that the EPA will clean up the site, and that the EPA is
proposing that we fund and/or contribute towards the cleanup of the contamination at the site. We began preliminary
discussions with the EPA concerning a possible resolution but do not know the scope or extent of the Company’s obligations,
if any, that may arise from the site and therefore cannot provide any assurance that this matter will not have a material impact
on the Company. The EPA requested additional information in April 2014 and again in March 2017 and the Company
responded to the information requests. On May 2, 2018 the EPA sent a letter to the Company entity demanding reimbursement
for 100% of the EPA’s costs to clean-up the site in the amount of $2.7 million. The Company responded to the EPA’s demand
letter on June 15, 2018 setting forth the Company’s defenses and expressing its willingness to enter into settlement
negotiations. Two other PRPs identified by the EPA are now also in negotiations with the EPA and in preliminary negotiations
with the Company regarding the site. In the course of negotiations, the EPA informed the Company that the New Jersey
Department of Environmental Protection has also incurred costs remediating part of the site. The EPA has since requested
that the three PRPs present a joint settlement offer to the EPA. The Company and the other two PRPs are parties to a series
of agreements tolling the statute of limitations on the EPA's claims for reimbursement, most recently extending the date until
January 15, 2021. 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
106
amount immaterial to the Company. On its remaining claims against the Hovnanian-affiliated defendants, the Great Notch
Plaintiff has asserted damages of approximately $119.5 million, which amount is potentially subject to treble damages
pursuant to the Great Notch Plaintiff’s claim under the New Jersey Consumer Fraud Act. The trial is currently scheduled for
June 21, 2021. Mediation was held in September 2020 with further mediation sessions anticipated in the future. The
Hovnanian-affiliated defendants intend to defend these claims vigorously.
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.
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, 2020 and 2019, 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, 2020, we had total cash and letters of credit deposits amounting to $88.9 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 2018, we acquired the remaining assets of one of our unconsolidated joint
ventures, resulting in a $13.0 million reduction in our investment in the unconsolidated joint venture and a corresponding
increase to inventory. During the third quarter of fiscal 2019, we contributed one community we owned to an existing
unconsolidated joint venture, resulting in our receiving $15.9 million of net cash. During the first quarter of fiscal 2020, we
contributed eight communities we owned, including four active communities, to a new joint venture for $29.8 million of net
cash.
107
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
(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
October 31, 2020
Land
Homebuilding Development Total
$
$
$
$
120,107 $
389,001
27,062
536,170 $
207,277 $
117,179
324,456
102,908
108,806
211,714
536,170 $
36%
3,454 $ 123,561
91 389,092
488 27,550
4,033 $ 540,203
2,152 $ 209,429
- 117,179
2,152 326,608
1,340 104,248
541 109,347
1,881 213,595
4,033 $ 540,203
0%
35%
October 31, 2019
Land
Homebuilding Development Total
$
$
$
$
108,520 $
397,804
24,896
531,220 $
71,297 $
186,882
258,179
120,891
152,150
273,041
531,220 $
41%
2,203 $ 110,723
6,038 403,842
233 25,129
8,474 $ 539,694
592 $ 71,889
- 186,882
592 258,771
4,747 125,638
3,135 155,285
7,882 280,923
8,474 $ 539,694
0%
40%
As of October 31, 2020 and 2019, respectively, we had payables outstanding of $1.1 million and advances
outstanding of $1.4 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 $103.2 million and $127.0 million at October 31, 2020 and 2019, respectively.
In some cases, our net investment in these unconsolidated joint ventures is less than our proportionate share of the equity
reflected in the table above because of the differences between asset impairments recorded against our unconsolidated joint
venture investments and any impairments recorded in the applicable unconsolidated joint venture. Impairments of
unconsolidated joint venture investments are recorded at fair value while impairments recorded in the unconsolidated joint
venture are recorded when undiscounted cash flows trigger the impairment. During the year ended October 31, 2019, we
recorded a $0.9 million write down in our investment in one of our unconsolidated joint ventures in the West. During the year
ended October 31, 2020 we did not write-down any of our unconsolidated joint venture investments.
108
(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 income
Our share of net income
For The Year Ended October 31, 2020
Land
Homebuilding Development Total
$
435,077 $
(420,977)
14,100 $
16,904 $
13,024 $
(11,225)
1,799 $
17 $
448,101
(432,202 )
15,899
16,921
For The Year Ended October 31, 2019
Land
Homebuilding Development Total
$
488,914 $
(456,563)
32,351 $
28,761 $
8,704 $
(7,948)
756 $
378 $
497,618
(464,511 )
33,107
29,139
For The Year Ended October 31, 2018
Land
Homebuilding Development Total
$
602,681 $
(577,106)
25,575 $
23,904 $
6,418 $
(5,173)
1,245 $
623 $
609,099
(582,279 )
26,820
24,527
$
$
$
$
$
$
“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 unconsolidated joint ventures and
the deferral of income for lots purchased by us from certain unconsolidated joint ventures. To compensate us for the
administrative services we provide as the manager of certain unconsolidated joint ventures, we receive a management fee
based on a percentage of the applicable unconsolidated joint venture’s revenues. These management fees, which totaled
$16.0 million, $16.9 million and $21.1 million for the years ended October 31, 2020, 2019 and 2018, 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
unconsolidated joint ventures, obtaining financing was challenging, therefore, some of our unconsolidated joint ventures are
capitalized only with equity. The total debt to capitalization ratio of all our unconsolidated joint ventures was 35% as of
October 31, 2020. Any unconsolidated joint venture financing is on a nonrecourse basis, with guarantees from us limited only
to performance and completion of development, environmental warranties and indemnification, standard indemnification for
fraud, misrepresentation and other similar actions, including a voluntary bankruptcy filing. In some instances, the
unconsolidated joint venture entity is considered a VIE under ASC 810-10 “Consolidation – Overall” due to the returns being
capped to the equity holders; however, in these instances, we have determined that we are not the primary beneficiary, and
therefore we do not consolidate these entities.
109
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 at Fair Value at
Fair Value October 31, October 31,
2019
Hierarchy
2020
Level 2 $
Level 2
$
Level 3
$
104,378 $
(28)
104,350 $
11 $
104,361 $
166,007
(64 )
165,943
42
165,985
(1) The aggregate unpaid principal balance was $100.4 million and $161.1 million at October 31, 2020 and 2019,
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 $890.8 million at October 31,
2020. Loans in process for which interest rates were committed to the borrowers totaled $57.2 million as of October 31, 2020.
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, 2020, the segment had open commitments amounting to
$20.0 million to sell MBS with varying settlement dates through November 19, 2020.
110
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:
Year Ended October 31, 2020
(In thousands)
Mortgage Interest Rate
Loans Held
for Sale
Lock
Commitments Contracts
Forward
Fair value included in net income all reflected in financial services
revenues
$
3,928 $
11 $
(28)
Year Ended October 31, 2019
(In thousands)
Mortgage Interest Rate
Loans Held
for Sale
Lock
Commitments Contracts
Forward
Fair value included in net loss all reflected in financial services revenues
$
4,869 $
42 $
(64)
Year Ended October 31, 2018
(In thousands)
Mortgage Interest Rate
Loans Held
for Sale
Lock
Commitments Contracts
Forward
Fair value included in net income all reflected in financial services
revenues
$
3,115 $
(28) $
13
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, 2020 and 2019. 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, 2020
Fair
Value
Pre-
Impairment
Hierarchy Amount
Total Losses Fair Value
Sold and unsold homes and lots under development
Level 3
Land and land options held for future development or sale Level 3
$
$
691 $
4,089 $
(276) $
(1,741) $
415
2,348
(In thousands)
Year Ended
October 31, 2019
Fair
Value
Pre-
Impairment
Hierarchy Amount
Total Losses Fair Value
Level 3
Sold and unsold homes and lots under development
Land and land options held for future development or sale Level 3
$
$
9,670 $
7,801 $
(2,494) $
(185) $
7,176
7,616
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
111
impairments, which are included in the Consolidated Statements of Operations as “Inventory impairment loss and land option
write-offs” and deducted from inventory, of $2.0 million, $2.7 million and $2.1 million for the years ended October 31, 2020,
2019 and 2018, 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.
The fair value of each series of our Notes and Credit Facilities are listed below. Level 2 measurements are
estimated based on recent trades or quoted market prices for the same issues or based on recent trades or quoted market prices
for our debt of similar security and maturity to achieve comparable yields. Level 3 measurements are estimated based on
third-party broker quotes or management’s estimate of the fair value based on available trades for similar debt instruments.
Fair Value as of October 31, 2020
(In thousands)
Level 1 Level 2 Level 3
Total
Senior Secured Notes:
10.0% Senior Secured Notes due July 15, 2022
10.5% Senior Secured Notes due July 15, 2024
10.0% Senior Secured 1.75 Lien Notes due November 15, 2025
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 Credit Facilities:
Senior Unsecured Term Loan Credit Facility due February 1, 2027
Senior Secured 1.75 Lien Term Loan Credit Facility due January 31,
2028
Total fair value
$
$
Fair Value as of October 31, 2019
67,941
- $ 107,878
- $ 107,878 $
-
-
67,941
- 132,246 132,246
-
- 353,500 353,500
-
- 274,558 274,558
-
- 162,723 162,723
-
- 54,354
- 10,814
-
-
54,354
10,814
-
-
13,091
13,091
-
64,465
- $ 173,046 $1,068,524 $ 1,241,570
64,465
-
(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
-
-
-
- $ 189,430
- 166,999
- 350,000 350,000
- 282,322 282,322
- 103,141 103,141
80,254
80,254
- 31,993
31,993
-
-
- 106,499 106,499
- $ 356,429 $ 954,209 $ 1,310,638
The Senior Secured Revolving Credit Facility is not included in the above tables because there were no borrowings
outstanding thereunder as of October 31, 2020 and 2019.
112
22. Unaudited Summarized Consolidated Quarterly Information
Summarized quarterly financial information for the years ended October 31, 2020 and 2019 is as follows:
(In thousands, except per share data)
Revenues
Expenses
Inventory impairment loss and land option write-offs
Gain (loss) on extinguishment of debt
Income from unconsolidated joint ventures
Income (loss) before income taxes
State and federal income tax provision
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
(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:
Net (loss) per common share
Weighted-average number of common shares
outstanding
$
October 31,
2020
683,358 $
641,449
2,611
-
3,146
42,444
1,810
40,634 $
$
Three Months Ended
July 31,
2020
628,136 $
619,269
2,364
4,055
5,658
16,216
853
15,363 $
April 30, January 31,
2020
494,056
509,660
2,828
9,456
1,540
(7,436)
1,712
(9,148)
2020
538,351 $
539,209
1,010
(174)
6,221
4,179
100
4,079 $
$
5.97 $
2.27 $
0.63 $
(1.49)
6,221
6,201
6,172
6,161
$
5.54 $
2.16 $
0.60 $
(1.49)
6,699
6,518
6,432
6,161
$
October 31,
2019
713,590 $
677,429
2,687
(42,436)
8,376
(586)
1,221
(1,807) $
$
Three Months Ended
July 31,
2019
482,041 $
491,412
1,435
-
3,742
(7,064)
537
(7,601) $
April 30, January 31,
2019
380,594
406,558
704
-
9,562
(17,106)
346
(17,452)
2019
440,691 $
461,393
1,462
-
7,252
(14,912)
345
(15,257) $
$
(0.30) $
(1.27) $
(2.56) $
(2.93)
5,982
5,971
5,962
5,958
113
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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, 2020 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, 2015 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
10/15
10/16
10/17
10/18
10/19
10/20
Hovnanian Enterprises, Inc.
S&P 500
S&P Homebuilding
*$100 invested on 10/31/15 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
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
Brad G. O’Connor
Senior Vice President, Chief
Accounting Officer and Treasurer
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
ANNUAL MEETING
March 30, 2021, 10:30 a.m., ET
Offices of Bilzin Sumberg Baena Price
& Axelrod LLP
1450 Brickell Avenue, 23rd Floor
Miami, FL 33131
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