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, 2023
☐ 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
The Nasdaq Stock Market LLC
(1) Each share of Common Stock includes an associated Preferred Stock Purchase Right. Each Preferred Stock Purchase Right initially
represents the right, if such Preferred Stock Purchase Right becomes exercisable, to purchase from the Company one ten-thousandth of a
share of its Series B Junior Preferred Stock for each share of Common Stock. The Preferred Stock Purchase Rights currently cannot trade
separately from the underlying Common Stock.
Indicate by check mark 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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller
reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting
company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer ☐ Accelerated Filer ☒ Nonaccelerated Filer ☐ Smaller Reporting Company ☐ Emerging Growth Company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for
complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant 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. ☒
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the
registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based
compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to § 240.10D-1(b). ☐
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, 2023 (the last business
day of the registrant’s most recently completed second fiscal quarter) was $358,031,038.
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. 5,345,992
shares of Class A common stock and 749,081 shares of Class B common stock were outstanding as of December 12, 2023.
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 21, 2024, 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
1
1A
1B
2
3
4
5
6
7
7A
8
9
9A
9B
9C
10
11
12
13
14
15
16
PART I ............................................................................................................................................................... 1
Business .............................................................................................................................................................. 1
Risk Factors ........................................................................................................................................................ 10
Unresolved Staff Comments ............................................................................................................................... 22
Properties ............................................................................................................................................................ 22
Legal Proceedings ............................................................................................................................................... 23
Mine Safety Disclosures ..................................................................................................................................... 23
Information About Our Executive Officers ........................................................................................................ 23
PART II ............................................................................................................................................................. 24
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities ......................................................................................................................................................... 24
Reserved ............................................................................................................................................................. 24
Management’s Discussion and Analysis of Financial Condition and Results of Operations .............................. 25
Quantitative and Qualitative Disclosures About Market Risk ............................................................................ 45
Financial Statements and Supplementary Data ................................................................................................... 46
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ............................. 46
Controls and Procedures ..................................................................................................................................... 46
Other Information ............................................................................................................................................... 47
Disclosure Regarding Foreign Jurisdictions that Prevent Inspections ................................................................ 47
PART III ............................................................................................................................................................ 47
Directors, Executive Officers and Corporate Governance .................................................................................. 47
Executive Compensation .................................................................................................................................... 48
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters ........... 48
Certain Relationships and Related Transactions, and Director Independence .................................................... 48
Principal Accountant Fees and Services ............................................................................................................. 48
PART IV ............................................................................................................................................................ 48
Exhibits and Financial Statement Schedules ....................................................................................................... 48
Form 10-K Summary .......................................................................................................................................... 54
Signatures ........................................................................................................................................................... 55
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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 369,000 homes, including 7,649 homes in fiscal 2023. The Company has two distinct operations:
homebuilding and financial services. Our homebuilding operations consist of three reportable segments: Northeast, Southeast
and West. Our financial services operations provide mortgage loans and title services to the customers of our homebuilding
operations.
Excluding unconsolidated joint ventures, we are currently offering homes for sale in 113 communities in 27
markets in 13 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 $135,000 to $1,770,000 with an average sales price, including options, of $539,000 nationwide in fiscal
2023.
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 which was completed in fiscal 2023.
Geographic Breakdown of Markets by Segment
The Company markets and builds homes that are constructed in 18 of the nation’s top 50 housing markets. We
segregate our homebuilding operations geographically into the following three segments:
Northeast: Delaware, Maryland, New Jersey, Ohio, Pennsylvania, Virginia and West Virginia
Southeast: Florida, Georgia and South Carolina
West: Arizona, California and Texas
For financial information about our segments, see Item 7 “Management’s Discussion and Analysis of Financial
Condition and Results of Operations.”
Human Capital
As of October 31, 2023, we employed 1,715 full-time associates of whom 1,134 were involved in our
homebuilding operations, 143 were involved in our financial services operations and 438 were involved in our corporate
operations. We do not have collective bargaining agreements relating to any of our associates.
Successful execution of our strategy is dependent on attracting, developing and retaining key associates and
members of our management team. The skills, experience and industry knowledge of our team significantly benefit our
operations and performance. We continuously evaluate, modify, and enhance our internal processes and technologies to
increase engagement, productivity, efficiency and the skills our associates need to be successful.
We believe that talented associates are the Company’s greatest asset and play a key role in creating long-term
value for our stakeholders. As of October 31, 2023, 19.0% of our associates had been with the Company for more than 15
years, and the average tenure of all associates was approximately 7.5 years. We understand that our ultimate success and
ability to compete are significantly dependent on how well we identify, hire, train, and retain highly qualified personnel. We
realize that each associate has a unique vision and their own special talents. We are committed to being an employer that
fosters the growth of each associate, while building an inclusive and diverse workforce.
We believe that our focus on diversity and inclusion across the organization positions the Company to deliver
innovation and growth. We have a diverse associate base comprised of 25.6% non-white associates as of October 31, 2023.
Additionally, as of October 31, 2023, 44.3% of our associates were women, and women represent 38.9% of all associates in
manager and more senior positions.
Promoting a diverse and inclusive work environment is a major priority at Hovnanian. In 2020, the Company
formed a Diversity & Inclusion Committee that continues to be an important initiative. The committee is led by the CEO and
comprised of members of senior leadership and associates in different functions throughout the organization representing
various backgrounds. The objective of the committee is to advise on and evaluate the Company’s diversity and inclusion
initiatives and to offer suggestions and guidance. All associates are required to take a diversity and inclusion training course
on an annual basis. Associates in leadership positions (representing approximately 21.9% of all associates) are required to
participate in more extensive diversity and inclusion training sessions.
2
The Company is also a founding member of the Building Talent Foundation ("BTF") whose mission is to advance
the education, training and careers of people from underrepresented groups in the fields of skilled technical workers and as
business owners in the residential construction industry. The Company actively utilizes BTF’s residential construction careers
platform JobsToBuild to find new talent. In fiscal 2022, we extended our partnership and financial commitment with BTF
for another three years.
Over the last two years, our leadership team has conducted quarterly Town Halls. These events have become a
staple in the organization and serve as an opportunity for associates to hear from senior leadership candidly about our
Company and directly ask questions of our CEO, CFO, Executive Vice President and Group Presidents. This year, the
Company also introduced two new channels for engaging associates companywide, "Lunch & Learns" and "Coffee Chats".
The goal of these new platforms is to fuel our companywide objective to foster a culture of engagement and facilitate more
two-way communication.
Through a combination of competitive benefits and educational programs, we believe that we positively contribute
to the well-being of our associates and the communities in which they live and work. Our benefits packages include medical,
dental, and vision coverage, as well as paid parental leave, health savings accounts, life insurance, disability income, 401(k)
savings plan with a company match and other assistance and wellness programs. Together, these benefits help keep our
associates and their dependents healthy, while giving them tax-advantaged ways to save for retirement and establish long-
term financial security. This package of programs is routinely reevaluated in order to meet the changing needs of our
associates in our diverse organization.
In light of the Company’s experience managing the novel coronavirus ("COVID-19") pandemic and the
recognition of the associated environmental benefits, the Company previously introduced a hybrid work schedule and
continued its use throughout fiscal 2023, whereby most office associates may work two days a week from home. We believe
this change to a hybrid work model promotes a healthier work and home life balance for our associates while simultaneously
providing the environmental benefits of having fewer vehicles on the road. In addition to the weekly hybrid schedule,
associates can work remotely up to eight weeks a year.
We also have committed considerable resources to furthering our associates’ personal and professional growth.
We have a repository of over 500 training modules/courses to facilitate these learning sessions in both in-person and virtual
settings, including mandatory diversity, ethics, workplace harassment prevention and safety training courses.
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 also 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.
Business Strategies
As a result of the sharp increase in interest rates beginning in fiscal 2022, we shifted our focus to increasing the
availability of quick-move-in homes (“QMI homes”). The rationale behind this shift in focus is that QMI homes provide our
customers with more certainty on what their mortgage payments will be at closing. QMI homes also allow us to offer
customers mortgage rate buydowns that would be cost prohibitive on homes with a longer time until delivery. QMI homes
greatly reduce the complexity of choices for our customers and significantly increase efficiencies for our trades, construction
and purchasing teams. In fiscal 2023, we executed "Build-For-Rent" agreements to supplement our existing for sale business.
The Build-For-Rent sales channel added incremental sales volume during fiscal 2023 and allowed us to increase inventory
turnover.
We also remain focused on maintaining adequate liquidity and identifying investment opportunities that make
economic sense in light of our current sales prices and sales paces. Our excess liquidity in fiscal years 2023, 2022 and 2021
allowed us to repurchase $245.0 million, $100.0 million and $180.9 million in aggregate principal of senior secured notes,
3
respectively. In response to changing market conditions, we have been strategic in new land purchases at pricing that we
believe will generate appropriate investment returns needed to sustain profitability. In addition to our current focus on
liquidity and flexibility, 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 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, we remain focused on attracting and developing quality associates.
See "Human Capital" above for further discussion.
We focus on achieving high returns 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 also 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. Further, we are able to employ a range of pricing incentives through our mortgage
financing operations, including temporary and permanent mortgage rate buy downs, which are tools that provide buyers with
the opportunity to secure mortgage rates below market level.
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 in-person, 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.
● 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.
4
●
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 2023, 2022 and 2021, rather
than purchase additional lots in underperforming communities, we took advantage of this right and walked
away from 3,838 lots, 5,121 lots and 3,201 lots, respectively, out of 28,227 total lots, 27,617 total lots and
23,624 total lots, respectively, under option, resulting in charges to pre-tax income of $1.5 million, $5.7
million and $1.6 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. Historically, a
majority of our single-family detached homes were constructed after the signing of a sales contract and mortgage approval
was obtained, which limits the buildup of inventory of unsold homes and the costs of maintaining and carrying that inventory.
Beginning in fiscal 2022 and continuing in fiscal 2023, we increased our inventory of QMI homes in connection with our
current business strategy discussed above.
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. Since the COVID-19 pandemic began, we have experienced
construction delays due to shortages in the supply of materials, as well as labor shortages in all of our markets. The impact
and the particular materials associated with the delays is varied from market to market. We have improved our cycle times
since the beginning of fiscal 2023 by approximately 30 days but are still currently experiencing increased construction cycle
times of 45-60 days over our pre-pandemic average in many of our markets. We cannot predict the extent to which shortages
in necessary materials or labor will continue or re-occur in our markets in the future. However, as home sales slow nationally,
we expect pressure to alleviate on material suppliers and subcontractors, which over time should, absent other factors, allow
construction cycle times to revert back to historical norms.
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. Recently, we have started offering curated "Looks" packages for customers to select,
rather than a large number of a la carte options. This approach has continued to expand and provides customers with a more
streamlined selection process and allows us to be more efficient in purchasing, sales and construction.
We have a national call center which is responsible for follow up generated by our website and our digital
marketing efforts. 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
5
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, 2023, for the markets in which our mortgage subsidiaries originated loans,
19.8% of our home buyers paid in cash and 70.1% of our noncash home buyers obtained mortgages from our mortgage
banking subsidiary. The loans we originated in fiscal 2023 were 69.8% conforming conventional loans and 29.5% Federal
Housing Administration/Veterans Affairs (“FHA/VA”). The remaining 0.7% of our loan originations represented loans which
exceeded 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.
Information on housing revenues, homes delivered and average sales price by segment for the year ended October
31, 2023, is set forth below:
(Housing revenues in thousands)
Northeast
Southeast
West
Consolidated total
Domestic unconsolidated joint ventures(1)
$
Housing
Revenues
933,156
419,656
1,277,645
$ 2,630,457
424,335
$
Homes
Delivered
1,618 $
776
2,484
4,878 $
595 $
Average
Sales Price
576,734
540,794
514,350
539,249
713,168
(1) Represents housing revenues and home deliveries for our domestic 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
domestic unconsolidated joint ventures. In addition, during the fourth quarter of fiscal 2023, we delivered 2,176 homes
through our unconsolidated joint venture in the Kingdom of Saudi Arabia. See Note 20 to the Consolidated Financial
Statements included elsewhere in this Annual Report on Form 10-K for a further discussion of our unconsolidated joint
ventures.
Net Sales Contracts
The dollar value of our net sales contracts, excluding unconsolidated joint ventures, was $2.5 billion for both the
years ended October 31, 2023 and 2022 and the number of homes contracted increased 3.8% to 4,647 in fiscal 2023 from
4,477 in fiscal 2022.
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Information on the dollar value of net sales contracts by segment for the years ended October 31, 2023 and 2022,
is set forth below:
(In thousands)
Northeast
Southeast
West
Consolidated total
Domestic unconsolidated joint ventures(1)
2023
937,153 $
445,970
1,126,011
2,509,134 $
357,456 $
$
$
$
Percentage of
Change
2022
857,240
412,975
1,200,211
2,470,426
337,775
9.3%
8.0%
(6.2)%
1.6%
5.8%
(1) Represents net contract dollars for our domestic 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 domestic
unconsolidated joint ventures. In addition, during fiscal 2023 and 2022, we contracted 13 homes and 300 homes, respectively,
through our unconsolidated joint venture in the Kingdom of Saudi Arabia. See Note 20 to the Consolidated Financial
Statements included elsewhere in this Annual Report on Form 10-K for a further discussion of our unconsolidated joint
ventures.
Active Selling Communities
The average number of active selling communities increased from 113 for fiscal 2022 to 114 for fiscal 2023. We
ended fiscal 2023 with 113 active selling communities as compared to 121 active selling communities at October 31, 2022.
Information on our active selling communities by segment as of October 31, 2023, is set forth below. 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.”
Northeast
Southeast
West
Total
Communities
41
12
60
113
Approved
Homes
Contracted Remaining
Homes
Not
Homes Delivered Delivered(1) Available(2)
3,479
632
5,958
10,069
6,450
2,291
10,956
19,697
2,354
1,044
4,406
7,804
617
615
592
1,824
(1) Includes 354 home sites under option.
(2) Of the total remaining homes available, 909 were under construction or completed (including 81 models and sales
offices), and 5,397 were under option.
Backlog
At October 31, 2023 and 2022, including domestic unconsolidated joint ventures, we had a backlog of signed
contracts for 2,196 homes and 2,497 homes, respectively, representing a 12.1% decrease, with sales values aggregating $1.3
billion and $1.5 billion, respectively. Additionally at October 31, 2023 and 2022, we had a backlog of signed contracts for
50 homes and 2,213 homes, respectively, from our unconsolidated joint venture in the Kingdom of Saudi Arabia. The majority
of our backlog at October 31, 2023 is expected to be completed and closed within the next six to nine months.
Current base prices for our homes in contract backlog at October 31, 2023, range from $135,000 to $1,770,000 in
the Northeast, from $294,000 to $1,140,000 in the Southeast and from $269,000 to $884,000 in the West.
At November 30, 2023 and 2022, our backlog of signed contracts, including domestic unconsolidated joint
ventures, was 2,158 homes and 2,396 homes, respectively, with sales values aggregating $1.3 billion and $1.4 billion,
respectively. Additionally at November 30, 2023 and 2022, we had a backlog of signed contracts for 20 homes and 2,218
homes, respectively, from our unconsolidated joint venture in the Kingdom of Saudi Arabia. For information on our backlog
excluding unconsolidated joint ventures, see the contract table in Item 7 “Management’s Discussion and Analysis of Financial
Condition and Results of Operations – Homebuilding: Key Performance Indicators.”
7
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. Sales contracts require a nominal
customer deposit at the time of signing. In addition, in some Northeast locations, 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 mortgage rates increase or housing values decline in certain
markets, some customers cancel their contracts and forfeit their deposits. 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 control
is transferred to the buyer, which occurs when the buyer takes title to and possession of the home and there is no continuing
involvement. For further information on cancellation rates, see the contract cancellation rates table in Item 7 “Management’s
Discussion and Analysis of Financial Condition and Results of Operations – Homebuilding: Key Performance Indicators.”
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, 2023, exclusive of 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 31,754 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.”
Communities in Planning
(Dollars in thousands)
Northeast:
Under option
Owned
Total
Southeast:
Under option
Owned
Total
West:
Under option
Owned
Total
Totals:
Under option
Owned
Combined total
Number
of Proposed
Communities
Proposed
Developable
Home Sites
Total
Land
Option
Price
762,103 $
$
$
311,150 $
$
$
399,454 $
$
$
Book
Value (1)(2)
47,064
6,631
53,695
35,228
8,590
43,818
29,707
26,071
55,778
9,825 $
240
10,065
4,375 $
313
4,688
4,438 $
670
5,108
18,638 $
1,223
19,861
1,472,707 $
$
$
111,999
41,292
153,291
82
7
89
34
4
38
45
10
55
161
21
182
(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, 2023, option fees and deposits aggregated approximately $79.9 million. As
of October 31, 2023, we spent an additional $32.1 million in nonrefundable predevelopment costs on such properties,
including properties not under option but under evaluation.
(2) The book value for properties under option includes land banking arrangements of $27.7 million, which is included in
"Consolidated inventory not owned" on our Consolidated Balance Sheets.
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 a declining homebuilding
market, we typically decide to "mothball" (or stop development on) certain communities where we have determined that
current market conditions do not justify further investment at that time. When we decide to mothball a community, the
8
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 included
elsewhere in this Annual Report on Form 10-K for further discussion on mothballed communities.
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 other important raw materials has resulted in the past, and could result in
the future, in start or completion delays or increases to 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 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. During fiscal 2023, relative to the prior fiscal year, labor and material shortages that were initially due to the COVID-
19 pandemic continued to gradually improve. For example, we previously experienced a significant rise in lumber prices
caused by supply chain issues, but due to increased availability prices began to decrease during the second half of fiscal 2022
and into fiscal 2023. We cannot predict, however, the extent to which shortages in necessary raw materials or labor may occur
in the future.
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 20 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 private 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 and homebuilding, sales and customer financing processes and the
9
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 included elsewhere in this Annual Report on Form 10-K.
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.
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
The homebuilding industry is significantly affected by changes in general and local economic conditions and real estate
markets, 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:
●
●
●
●
●
●
●
●
●
●
●
●
Interest rates;
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;
Adverse changes in tax laws;
Regulatory changes;
Foreclosure rates;
Inflation;
Housing affordability, 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 can 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
10
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.
In addition, geopolitical events, acts of war or terrorism, threats to national security, civil unrest, any outbreak or
escalation of hostilities throughout the world, tariffs and international trade sanctions, and health pandemics may have a
substantial impact on the economy, consumer confidence, the housing market, our associates and our customers, and therefore
our business and financial results.
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 man-made 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 buyers may also cancel or not honor their home
sales contracts altogether.
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 previously 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 also experienced labor shortages, price fluctuations and increased labor costs, including as a result of inflation or wage
increases, particularly over the past two years due to historic inflation rates in the United States. 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. During fiscal 2023, although there was improvement each quarter, we continued to experience
construction delays due to shortages in the supply of certain materials, as well as labor and subcontractor shortages in our
markets. These delays impact the timing of our expected home closings and may also result in cost increases that we may not
be able to pass to our current or future customers. Sustained increases in construction costs may, over time, erode our margins,
and impact our total contract or delivery volumes.
Interest rates increased substantially in fiscal years 2022 and 2023 and may continue to increase. Because almost all of our
customers require mortgage financing, increases in interest rates or the decreased availability of mortgage financing could
considerably 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, up until recently, had been historically low, which made the homes we sell more affordable. However, mortgage rates
have more than doubled since early fiscal year 2022, as a result of the Federal Reserve raising interest rates in an effort to
curtail inflation. When interest rates increase, the cost to own a home increases, which reduces the number of potential
homebuyers who can obtain mortgage financing and can result in a decline in the demand for our homes. We cannot predict
whether interest rates will continue to rise, or the paces of the increases, but further increases would likely have a considerable
impact on housing demand.
Increases in interest rates (or the perception that interest rates will rise, including as a result of government
actions), have, and could continue to, increase the costs to obtain mortgages, decrease the availability of mortgage financing
have, and 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
11
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 or as a result of instability in the banking sector) 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.
Inflation may adversely affect us by increasing costs beyond what we can recover through price increases and by increasing
mortgage rates for homebuyers.
Inflation can adversely affect us by increasing costs of land, materials and labor, which we have experienced since
fiscal year 2022 due to historic inflation rates. In addition, as discussed above, recent elevated levels of inflation have been
accompanied by higher interest rates that could cause a slowdown in the housing market. In an inflationary environment,
such as the current economic environment, depending on the homebuilding industry and other economic conditions, we may
be unable to raise home prices enough to keep up with the rate of inflation. Moreover, in an inflationary environment, our
cost of capital, labor and materials can increase and the purchasing power of our cash resources can decline, which can have
an adverse impact on our business or financial results. In an effort to counteract such inflationary pressures and maintain sales
volumes in light of these challenges, we have offered increased sales incentives and have been using mortgage rate buydowns
for qualifying homebuyers, which reduces our profit margins. These measures may not be successful and continued
inflationary pressures could further impact our profitability.
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
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. In particular, during the second half of fiscal 2022 and into fiscal 2023, housing demand
weakened due to a sharp increase in mortgage rates, the substantial increase in home prices experienced over the past two
years, significant inflation in the broader economy, stock market volatility, and other macro-economic conditions, which have
adversely impacted buyer sentiment and behavior.
Public health issues such as a major epidemic or pandemic could adversely affect our business or financial results.
The U.S. and other countries have experienced, and may experience in the future, outbreaks of contagious diseases
that affect public health and public perception of health risk. The World Health Organization previously declared COVID-19
a pandemic, resulting in federal, state and local governments and private entities mandating various restrictions 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. We responded in various ways to the governmental
measures, including, among other measures, temporarily closing our sales offices, model homes and design studios to the
general public, limiting our construction operations, and reducing the municipal and private services we rely on, which
substantially tempered our sales pace. The effects of COVID-19 caused multiple disruptions in our supply chain and resulted
in shortages in certain building materials and tightness in the labor market, which has caused our construction cycle times to
lengthen compared to prior to the pandemic.
Future disruptions and governmental actions, due to COVID-19 or a different epidemic or pandemic, combined
with any associated economic and/or social instability or distress, may have an adverse impact on our results of operations,
financial condition and cash flows.
The homebuilding industry is significantly affected by changes in weather and other environmental conditions and resulting
governmental regulations and increased focus by stakeholders on sustainability issues.
12
Weather conditions and man-made or natural disasters such as hurricanes, tornadoes, earthquakes, floods or
prolonged precipitation, droughts, fires and other environmental conditions have harmed us in the past, and may harm us in
the future, the local homebuilding business. Additionally, the physical impacts of climate change may cause these occurrences
to increase in frequency, severity and duration, which can delay home construction, increase costs by damaging inventories,
reduce the availability of building materials, and adversely 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, increasing cost of operations and also
impacting our sales and construction activity in affected markets during the related time periods. Additionally, other coastal
areas where we operate face increased risks of adverse weather or natural disasters.
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 changes impacts could result in restrictions on land development in certain areas or
increased energy, transportation and raw material costs that may adversely affect our financial condition and results of
operations. These concerns have also resulted in increasing government, investor and societal attention to environmental,
social, and governance ("ESG") matters, including expanding mandatory and voluntary reporting, diligence, and disclosure
on topics such as climate change, waste production, water usage, human capital, labor, and risk oversight, and could expand
the nature, scope, and complexity of matters that we are required to control, assess, and report. These and other rapidly
changing laws, regulations, policies and related interpretations, as well as increased enforcement actions by various
governmental and regulatory agencies, may create challenges for the Company, including with respect to our compliance and
ethics programs, may alter the environment in which we do business, and may increase the ongoing costs of compliance,
which could adversely impact our results of operations and cash flows.
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 on 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.
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.
13
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, including the costs of holding
QMI homes, 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.”
We conduct a significant portion of our business in Arizona, California, Delaware, Florida, New Jersey, South Carolina,
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, Delaware, Florida, New Jersey,
South Carolina, 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 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 related to 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 their current home, or our inability to complete and deliver the new home within the specified time. At October
31, 2023, including unconsolidated joint ventures, we had a backlog of signed contracts for 2,246 homes with a sales value
aggregating $1.3 billion. If mortgage financing becomes less accessible, or if economic conditions deteriorate, more home
14
buyers may cancel their agreements of sale with us, which could have an adverse effect on our business and results of
operations.
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, through the end of 2025, 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.
Further, existing and prospective regulatory and societal focus on and responses to climate change intended to
reduce potential climate change impacts may increase the upfront costs of purchasing a home, costs to maintain the home and
its systems, energy and utility costs and the cost to obtain homeowner and various hazard and flood insurance, or limit
homeowners’ ability to obtain these insurance policies altogether. Although these items have not materially impacted our
business to date, they could adversely affect our business in the future.
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 caused,
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.
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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, or in our other markets.
Information technology failures and data security breaches could harm our business.
We use information technology ("IT"), digital telecommunications and other computer resources to conduct
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 phishing attempts, data-theft and cyber-attack), ransomware attacks, usage
errors by our associates or other business partners or outside service providers, and catastrophic events, such as fires, floods,
hurricanes and tornadoes. Cyber-attacks and other security threats could originate from a wide variety of external sources,
including cyber-criminals, nation-state hackers, hacktivists and other outside parties. Cyber-attacks and other security threats
could also originate from the malicious or accidental acts of insiders, such as employees, and other business partners and
outside service providers.
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.
Data protection and privacy laws have been enacted by the U.S. federal and state governments, including the
California Privacy Rights Act and the Virginia Consumer Data Protection Act, and the regulatory regime continues to evolve
and is increasingly demanding. Many states have passed or are considering privacy and security legislation and there are
ongoing discussions regarding a federal privacy law. Variations in requirements across other states could present compliance
challenges, as well as increased costs related to compliance.
Privacy, security, and compliance concerns have continued to increase as technology has evolved. We maintain
cybersecurity insurance coverage, which may not fully cover the costs related to cyber or other security threats or disruptions,
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 as well as prevent the diversion or theft of company funds through various forms of social
engineering. 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 are continually evolving and have 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. In addition, cyber-attacks or other security breaches may persist undetected over
extended periods of time and may not be mitigated in a timely manner to minimize the impact of a cyber-attack or other
security breach. 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.
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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.
Global economic and political instability and conflicts could adversely affect our business, financial condition or results of
operations.
Our business could be adversely affected by unstable economic and political conditions within the United States,
instability in foreign jurisdictions and geopolitical conflicts. While we do not have any customer or direct supplier
relationships in any of the foreign countries or regions involved in the current military conflicts, any related sanctions, export
controls or actions that may be initiated by nations (e.g., potential cyberattacks, disruption of energy flows, etc.) and other
potential uncertainties could adversely affect our supply chain by causing shortages or increases in costs for materials
necessary to construct homes and/or increases to the price of gasoline and other fuels. In addition, such events could cause
higher interest rates, inflation or general economic uncertainty, which could negatively impact our business partners,
employees or customers, or otherwise adversely impact 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.
●
●
Our debt (excluding nonrecourse secured debt and debt of our financial subsidiaries), as of October 31,
2023, including the debt of the subsidiaries that guarantee our debt, was $1,070.3 million ($1,051.5 million
net of discounts, 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, 2023.
Our debt service payments for the year ended October 31, 2023, were $858.3 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 letters of credit and other
credit facilities and agreements.
As of October 31, 2023, we had an aggregate of $4.9 million outstanding under various letters of credit and other
credit facilities and agreements, certain of which were collateralized by $5.1 million of cash. Our fees for these letters of
credit for the year ended October 31, 2023, which are based on both the used and unused portion of the facilities and
agreements, were $0.1 million. We also had substantial contractual commitments and contingent obligations, including
$187.3 million of performance bonds as of October 31, 2023. See Item 7 “Management’s Discussion and Analysis of
Financial Condition and Results of Operations—Contractual Obligations.”
Our significant amount of debt could have important consequences. For example, it could:
●
●
●
Limit our ability to obtain future financing for working capital, capital expenditures, acquisitions, debt
service requirements, or other requirements;
Require us to dedicate a substantial portion of our cash flow from operations to the payment of our debt
and reduce our ability to use our cash flow for other purposes, including land investments;
Require us to pay higher interest rates upon refinancing debt if interest rates rise or due to the concentration
of debt maturities or our overall leverage levels;
●
Limit our flexibility in planning for, or reacting to, changes in our business;
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●
●
●
Place us at a competitive disadvantage because we have more debt than some of our competitors;
Limit our ability to implement our strategies and operational actions;
Require us to consider selling some of our assets or debt or equity securities, possibly on unfavorable terms,
to satisfy obligations; and
●
Make us more vulnerable to downturns in our business and general economic conditions.
Our ability to meet our debt service and other obligations will depend upon our future performance. We are
engaged in businesses that are substantially affected by changes in economic cycles. Our revenues and earnings vary with
the level of general economic activity in the markets we serve. Our businesses are also affected by customer sentiment and
financial, political, business and other factors, many of which are beyond our control. The factors that affect our ability to
generate cash can also affect our ability to raise additional funds for these purposes through the sale of equity or debt
securities, the refinancing of debt or the sale of assets. Changes in prevailing interest rates may affect our ability to meet our
debt service obligations to the extent we have any floating rate indebtedness. A higher interest rate on our debt service
obligations could result in lower earnings or increased losses.
Our sources of liquidity are limited and may not be sufficient to meet our needs.
We are largely dependent on our current cash balance and future cash flows from operations (which may not be
positive) to enable us to service our indebtedness, to cover our operating expenses and/or to fund our other liquidity needs.
Cash provided by operating activities in fiscal 2023 and 2022 was $435.3 million and $89.5 million, respectively. Depending
on the levels of our land purchases, we could generate positive or negative cash flow in future years. If there is a sustained
decline in market conditions in the homebuilding industry 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. If our cash flows and capital resources are insufficient to fund our debt
service obligations or we are unable to refinance our indebtedness, we may be forced to reduce or delay investments and
capital expenditures, sell assets, seek additional capital or restructure our indebtedness. These alternative measures may not
be successful or, if successful, made on desirable terms and may not permit us to meet our debt service obligations. We have
also entered into certain cash collateralized letters of credit agreements and facilities that require us to maintain specified
amounts of cash in segregated accounts as collateral to support our letters of credit issued thereunder. If our available cash
and capital resources are insufficient to meet our debt service and other obligations, we could face liquidity problems and
might be required to dispose of material assets or operations to meet our debt service and other obligations. We may not be
able to consummate those dispositions or the proceeds from the dispositions may not be permitted under the terms of our debt
instruments to be used to service indebtedness or may not be adequate to meet any debt service obligations then due. For
additional information about capital resources and liquidity, see Item 7 “Management’s Discussion and Analysis of Financial
Condition and Results of Operations—Capital Resources and Liquidity.”
Our cash flows, liquidity and consolidated financial statements could be materially and adversely affected if we are unable
to obtain letters of credit.
Our homebuilding operations often require us to obtain letters of credit. We have certain stand-alone letter of
credit facilities and agreements pursuant to which letters of credit are issued. However, letters of credit may not be issued
under our current senior secured revolving credit facility, and we may need additional letters of credit above the amounts
provided under these stand-alone facilities and agreements. If we are unable to obtain such additional letters of credit as
needed to operate our business, we would be adversely affected.
We may have difficulty in obtaining the additional financing required to operate and develop our business.
Our operations require significant amounts of cash, and we may be required to seek additional capital, whether
from sales of debt or equity securities or borrowing additional money, for the future growth and development of our business.
The terms and/or availability of additional capital is uncertain. Moreover, the agreements governing our outstanding debt
instruments contain provisions that restrict the debt we may incur in the future and our ability to pay dividends on equity. If
we are not successful in obtaining sufficient capital, it could reduce our sales and may hinder our future growth and results
of operations. In addition, pledging substantially all of our assets to support our senior secured revolving credit facility and
our senior secured notes may make it more difficult to raise additional financing in the future.
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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 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,
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 could be prohibited from paying dividends on our common and preferred stock.
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 instruments or negatively impact other debt-related
covenants. In any of these situations, we may be unable to amend the applicable debt 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.
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,
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impacts to wetlands and other sensitive environments, and the remediation of contamination at properties that we have owned
or developed or currently own or are developing (“environmental laws”). The particular environmental laws that apply to a
site may vary greatly according to the community site, for example, due to the community, the environmental conditions at
or near the site, and the present and former uses of the site. These environmental laws may result in delays, may cause us to
incur substantial compliance, remediation and/or other costs, and can prohibit or severely restrict development
and homebuilding activity. In addition, noncompliance with these laws and regulations could result in fines and penalties,
obligations to remediate or take corrective action, permit revocations or other sanctions; and contamination or other
environmental conditions at or in the vicinity of our developments may result in claims against us for personal injury, property
damage or other losses.
We anticipate that increasingly stringent requirements will continue to be imposed on developers and
homebuilders in the future. In addition, some of these laws and regulations that significantly affect how certain properties
may be developed are contentious, attract intense political attention, and may be subject to significant changes over time. For
example, regulations governing wetlands permitting under the federal Clean Water Act have been the subject of extensive
rulemakings for many years, resulting in several major joint rulemakings by the Environmental Protection Agency ("EPA")
and the U.S. Army Corps of Engineers that have expanded and contracted the scope of wetlands subject to regulation; and
such rulemakings have been the subject of many legal challenges, some of which remain pending. It is unclear how these and
related developments, including at the state or local level, ultimately may affect the scope of regulated wetlands where we
operate. Although we cannot reliably predict the extent of any effect these developments regarding wetlands, or any other
requirements that may take effect, may have on us, they could result in time-consuming and expensive compliance programs
and in substantial expenditures, which could cause delays and increase our cost of operations. In addition, our ability to obtain
or renew permits or approvals and the continued effectiveness of permits already granted or approvals already obtained is
dependent upon many factors, some of which are beyond our control, such as changes in policies, rules and regulations and
their interpretations and application.
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 homeowner 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.
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 Note 18 to the
Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K). 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.
Tax increases and changes in tax rules may adversely affect our financial results.
As a company conducting business with physical operations throughout North America, we are exposed, both
directly and indirectly, to the effects of changes in U.S., state and local tax rules. Taxes for financial reporting purposes and
cash tax liabilities in the future may be adversely affected by changes in such tax rules. Such changes may put us at a
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competitive disadvantage compared to some of our major competitors, to the extent we are unable to pass the tax costs through
to our customers.
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, 2023, we had invested an aggregate
of $97.9 million in these unconsolidated joint ventures, including outstanding net advances to these unconsolidated joint
ventures of $1.4 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.
The Hovnanian family is able to exercise significant influence over us.
The combined ownership of members of the Hovnanian family, including Ara K. Hovnanian, our Chairman of the
Board, President, and Chief Executive Officer, 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,
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. Such holdings represented approximately 59% 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, 2023. 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 financial performance in prior years, we generated a federal net operating loss
carryforward of $688.3 million through the year ended October 31, 2023, 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.
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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
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 U.S. 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 62,000 square feet of office space for our corporate headquarters and own 215,000 square
feet of office and warehouse space in the Northeast. We lease approximately 314,000 square feet of space for our segments
located in the Northeast, Southeast and West.
22
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 included elsewhere in this Annual report on Form 10-K, 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.
23
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 287 stockholders of record at December 12, 2023. There is no established public trading market for our Class B common
stock, which was held by 164 stockholders of record at December 12, 2023. If a stockholder 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
None.
Performance Graph
This performance graph shall not be deemed “soliciting material” or “filed” with the SEC for purposes of Section
18 of the Exchange Act, or otherwise subject to the liabilities under that Section, and shall not be deemed to be incorporated
by reference into any of our filings under the Securities Act or the Exchange Act.
The following graph compares the five-year cumulative total return of our Class A common stock with the
Standard & Poor's ("S&P") 500 Index and the S&P Homebuilding Index. The graph assumes $100 invested on October 31,
2018 in our Class A common stock, the S&P 500 Index and the S&P Homebuilding Index, and the reinvestment of all
dividends.
The stock price performance shown on the following graph is not necessarily indicative of future stock performance.
Source: Standard & Poor's Financial Services, LLC, a division of The McGraw-Hill Companies Inc.
10/18
10/19
10/20
10/21
10/22
10/23
Hovnanian Enterprises, Inc.
S&P 500
S&P Homebuilding
100.00
100.00
100.00
68.71
114.33
146.42
87.01
125.43
171.86
230.85
179.25
227.93
110.49
153.06
193.98
190.36
168.59
273.26
ITEM 6
RESERVED
24
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).
The following tables and related discussion set forth key operating and financial data for our homebuilding and
financial services operations as of and for the fiscal years ended October 31, 2023 and 2022. For similar operating and
financial data and discussion of our fiscal 2022 results compared to our fiscal 2021 results, refer to Part II, Item 7,
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our annual report on Form
10-K for the fiscal year ended October 31, 2022, which was filed with the SEC on December 19, 2022.
Key Performance Indicators
The following key performance indicators are commonly used in the homebuilding industry and by management
as a means to better understand our operating performance and trends affecting our business and compare our performance
with the performance of other homebuilders. We believe these key performance indicators also provide useful information to
investors in analyzing our performance:
● Net contracts is a volume indicator which represents the number of new contracts executed during the period
for the purchase of homes, less cancellations of contracts in the same period. The dollar value of net contracts
represents the dollars associated with net contracts executed in the period. These values are an indicator of
potential future revenues;
● Contract backlog is a volume indicator which represents the number of homes that are under contract, but not
yet delivered as of the stated date. The dollar value of contract backlog represents the dollar amount of the
homes in contract backlog. These values are an indicator of potential future revenues;
● Active selling communities is a volume indicator which represents the number of communities which are open
for sale with ten or more home sites available as of the end of a period. We identify communities based on
product type; therefore, at times there are multiple communities at one land site. These values are an indicator
of potential revenues;
● Net contracts per average active selling community is used to indicate the pace at which homes are being sold
(put into contract) in active selling communities and is calculated by dividing the number of net contracts in a
period by the average number of active selling communities in the same period. Sales pace is an indicator of
market strength and demand; and
● Contract cancellation rates is a volume indicator which represents the number of sales contracts cancelled in
the period divided by the number of gross sales contracts executed during the period. Contract cancellation
rates as a percentage of backlog is calculated by dividing the number of cancelled contracts in the period by
the contract backlog at the beginning of the period. Cancellation rates as compared to prior periods can be an
indicator of market strength or weakness.
Overview
Market Conditions and Operating Results
The demand for new and existing homes is dependent on a variety of demographic and economic factors,
including job and wage growth, household formation, consumer confidence, mortgage financing, interest rates, inflation and
overall housing affordability.
From early January 2022, 30-year mortgage rates more than doubled from 3.2% to 7.8% at the end of October
2023. The rapid and sharp increases in interest rates, persistently high levels of inflation and doubt about the stability of the
economy, negatively impacted housing demand beginning in the second half of fiscal 2022 and continued into early fiscal
2023.
25
During the first quarter of fiscal 2023, we were aggressive in our pricing, incentives and concessions in order to
increase affordability, which had a positive effect on our sales pace, but due to the general uncertainty about the stability of
the economy potential buyers still remained cautious about their decision to purchase a home. Beginning in the second quarter
and through the third quarter of fiscal 2023, as interest rates stabilized around 6.5%, we saw an increase in customer demand
and the housing market started to normalize. During the fourth quarter of fiscal 2023, interest rates increased by approximately
100 basis points from the end of July to the end of October, which slowed down our sequential sales pace. We were able to
use our increased inventory of QMI homes during the year to help meet buyers’ needs in the current uncertain interest rate
environment. The time between contract signing and closing is shorter with a QMI home as compared to a to be built home,
which provides customers with more certainty on their mortgage pricing. The availability of QMI homes also allows us to
offer mortgage interest rate buydown assistance, which is a tool we offer through our wholly-owned mortgage banking
subsidiary ("K. Hovnanian Mortgage"), to help ease the impact of higher monthly payments from rising interest rates. We
pay the cost of interest rate buydowns for customers that qualify through K. Hovnanian Mortgage and decide to use the
program. The level of interest rate based incentives utilized differs across our markets and is one of several available options
we use to drive sales and close homes.
The number of existing home sales listings are at all-time low levels, which limits the supply of homes available
for purchase, leading to increased demand for new homes, which leads to improved pricing power. During the fourth quarter
of fiscal 2023, there continued to be strong demand for our homes as compared to the prior year, which lead to a significant
increase in net contracts and net contracts per average active selling community, as compared to the fourth quarter of fiscal
2022 and the year ended October 31, 2022. We were able to increase net prices in approximately 54% of our communities
during the fourth quarter of fiscal 2023.
There still remains a great degree of uncertainty due to inflation, the continued possibility of an economic
recession, employment risk and the potential for further mortgage rate increases. While we continue to experience some
lingering supply chain issues, we remain focused on continuing to shorten our construction cycle times and building on our
national initiatives to drive down costs with our material providers and trade partners. The changing conditions in the housing
market, and in the general economy, make it difficult to predict how strongly our business will be impacted by these external
factors over fiscal 2024 and beyond.
Our cash position allowed us to spend $679.3 million on land purchases and land development, repurchase $245.0
million principal amount of senior secured notes prior to maturity during fiscal 2023, and still have total liquidity of $564.2
million, including $434.1 million of homebuilding cash and cash equivalents and $125.0 million of borrowing capacity under
our senior secured revolving credit facility as of October 31, 2023. Also, in the fourth quarter of fiscal 2023, we refinanced
$494.6 million of secured debt which extended our debt maturities to the fourth quarters of fiscal 2028 and 2029, and
subsequently in November 2023 we redeemed an additional $113.5 million of secured debt with proceeds from the
refinancing debt issued in the fourth quarter.
Additional information on our results for the year ended October 31, 2023 were as follows:
● For the year ended October 31, 2023, sale of homes revenues decreased 7.4% as compared to the prior
year, primarily due to a 11.9% decrease in homes delivered, partially offset by a 5.1% increase in average
sales price. The decrease in deliveries in fiscal 2023 was primarily the result of a 6.6% reduction in
community count as well as the slowdown in net contracts during the second half of fiscal 2022 due to
rising interest rates.
● Homebuilding gross margin percentage decreased from 21.5% for the year ended October 31, 2022 to
19.6% for the year ended October 31, 2023, and homebuilding gross margin percentage, before cost of
sales interest expense and land charges, decreased from 25.0% for the year ended October 31, 2022 to
22.7% for the year ended October 31, 2023. The decreases were primarily due to the increased use of
incentives and concessions to make our homes more affordable in a rising interest rate environment.
● Selling, general and administrative expenses (including corporate general and administrative) increased
$8.6 million for the year ended October 31, 2023 as compared to the prior year. The increase was primarily
due to an increase in selling overhead from higher advertising costs and fees incurred on unused builder
forward commitments we began offering in the second half of fiscal 2022 to lower mortgage rates for
our customers. As a percentage of total revenue, such costs increased to 11.1% for the year ended October
31, 2023 compared to 10.1% for the year ended October 31, 2022.
26
● Income before income taxes decreased to $256.0 million for the year ended October 31, 2023 from
$319.8 million for the year ended October 31, 2022. Net income decreased to $205.9 million for the year
ended October 31, 2023 from $225.5 million for the year ended October 31, 2022. Net income for the year
ended October 31, 2023, included a $19.1 million gain on the consolidation of a previously unconsolidated
joint venture, $9.4 million of income from our unconsolidated joint venture in the Kingdom of Saudi
Arabia, a $9.0 million tax benefit from energy efficient home credits and a $14.8 million tax benefit from
the release of state valuation allowances, partially offset by a $25.6 million loss on extinguishment of debt.
● Earnings per share, basic and diluted, decreased to $28.76 and $26.88, respectively, for the year
ended October 31, 2023, compared to earnings per share, basic and diluted of $30.31 and $29.00,
respectively, for the year ended October 31, 2022.
● Net contracts increased 3.8% to 4,647 for the year ended October 31, 2023, compared to 4,477 the prior
year, primarily due to an increase in customer demand, partially due to the availability of QMI homes.
During the year ended October 31, 2023, we also executed 438 build-for-rent contracts in three
communities in our Southeast segment.
● Net contracts per average active selling community increased to 40.8 for the year ended October 31, 2023
compared to 39.6 in the prior year. The increase was due to the increase in net contracts discussed above.
● Active selling communities decreased to 113 at October 31, 2023 compared to 121 at October 31, 2022,
however, our total lots controlled increased to 31,726 at October 31, 2023 compared to 31,518 at October
31, 2022. We expect our community count to grow in fiscal 2024.
● Contract backlog decreased from 2,186 homes at October 31, 2022 to 1,824 homes at October 31, 2023,
and the dollar value of contract backlog decreased to $1.1 billion, a 16.4% decrease in dollar value
compared to the prior year. The decreases were primarily attributed to lower sales in the second half of
fiscal 2022 and into the first quarter of fiscal 2023, as discussed above.
Results of Operations
Total Revenues
Compared to the prior year, revenues (decreased) increased as follows:
Years Ended October 31,
Variance
2023
Compared
to 2022
$
(209,997)
32,015
13,219
(1,452)
(166,215)
$
(5.7)%
2022
2,840,454
16,202
4,035
61,540
2,922,231
(Dollars in thousands)
Homebuilding:
Sale of homes
Land sales
Other revenues
Financial services
Total change
Total revenues percent change
2023
$
$
2,630,457 $
48,217
17,254
60,088
2,756,016 $
27
Homebuilding: Sale of Homes
Sale of homes revenues decreased $210.0 million, or 7.4%, for the year ended October 31, 2023, compared to the
prior year. The decreased revenues in fiscal 2023 were primarily due to a 11.9% decrease in homes delivered, partially offset
by the average sales price per home increasing to $539,249 in fiscal 2023 from $512,902 in fiscal 2022. The decrease in
deliveries in fiscal 2023 was primarily the result of a 6.6% reduction in community count. The increase in average sales price
in fiscal 2023 was primarily due to price increases in a majority of our markets since the beginning of fiscal 2022, along with
the geographic and community mix of our deliveries. For further detail on changes in segment revenues see “Homebuilding
Operations by Segment” below. Land sales are ancillary to our homebuilding operations and are expected to continue in the
future but may significantly fluctuate up or down. For further detail on land sales and other revenues, see the section titled
“Homebuilding: Land Sales and Other Revenues” below.
Information on the sale of homes is set forth in the table below:
(Dollars in thousands, except average sales price)
Consolidated total:
Housing revenues
Homes delivered
Average sales price
Unconsolidated joint ventures:(1)
Housing revenues
Homes delivered
Average sales price
Year Ended
October 31, October 31,
2022
2023
$
$
$
$
2,630,457 $
4,878
539,249 $
2,840,454
5,538
512,902
765,653 $
2,771
276,309 $
343,617
552
622,495
(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. During the fourth quarter of fiscal 2023, we delivered 2,176 homes in our unconsolidated joint venture in the
Kingdom of Saudi Arabia. See Note 20 to the Consolidated Financial Statements included elsewhere in this Annual Report
on Form 10-K for a further discussion of our joint ventures.
Homebuilding: Land Sales and Other Revenues
Land sales and other revenues increased $45.2 million for the year ended October 31, 2023, compared to the prior
year. Other revenues include interest income, which increased as a result of higher rates on cash and cash equivalent accounts
beginning in the first quarter of fiscal 2023 compared to the same period in the prior year. In addition, other revenues include
income from contract cancellations where customer deposits have been forfeited due to contract terminations, which increased
due to higher cancellation rates during fiscal 2023 compared to fiscal 2022. Revenue associated with land sales can vary
significantly due to the mix of land parcels sold. There were four land sales during the year ended October 31, 2023, compared
to five in the prior year. Contributing to the increase in land sales was a transaction during the fourth quarter of fiscal 2023
which resulted in $30.3 million of revenue for the Northeast.
Homebuilding: Cost of Sales
Cost of sales includes expenses for consolidated housing and land and lot sales, including inventory impairment
and land option write-offs (defined as “land charges” in the tables below). A breakout of such expenses for homebuilding and
land and lot sales and the gross margins for each is set forth below.
Homebuilding gross margin before cost of sales interest expense and land charges is a non-GAAP financial
measure. This measure should not be considered as an alternative to homebuilding gross margin determined in accordance
with U.S. GAAP as an indicator of operating performance.
Management believes this non-GAAP measure enables investors to better understand our operating performance.
This measure is also useful internally, helping management evaluate our operating results on a consolidated basis and relative
to other companies in our industry. In particular, the magnitude and volatility of land charges for the Company, and for other
homebuilders, have been significant and, as such, have made comparable financial analysis of our industry more difficult.
Homebuilding metrics excluding land charges, as well as interest amortized to cost of sales, and other similar presentations
prepared by analysts and other companies are frequently used to assist investors in understanding and comparing the operating
28
characteristics of homebuilding activities by eliminating many of the differences in companies’ respective level of
impairments and 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,
2022
2,840,454
2,131,208
709,246
85,198
624,048
14,076
609,972
21.5%
2023
2,630,457 $
2,032,136
598,321
79,894
518,427
1,536
516,891 $
19.6%
$
22.7%
19.7%
25.0%
22.0%
Cost of sales as a percentage of consolidated home sales revenues are presented below:
Sale of homes
Cost of sales, excluding interest expense and land charges:
Housing, land and development costs
Commissions
Financing concessions
Overheads
Total cost of sales, before interest expense and land charges
Cost of sales interest
Land charges
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
Year Ended
October 31, October 31,
2022
100%
2023
100 %
67.9 %
3.4 %
2.1 %
3.9 %
77.3 %
3.0 %
0.1 %
19.6 %
22.7 %
19.7 %
67.0%
3.4%
1.1%
3.5%
75.0%
3.0%
0.5%
21.5%
25.0%
22.0%
We sell a variety of home types in various communities, each yielding a different gross margin. As a result,
depending on the mix of communities delivering homes, consolidated gross margin may fluctuate up or down. Total
homebuilding gross margin percentage decreased to 19.6% for the year ended October 31, 2023 compared to 21.5% for the
prior year. Total homebuilding gross margin percentage, before cost of sales interest expense and land charges decreased to
22.7% for the year ended October 31, 2023 compared to 25.0% for the prior year. The decreases in gross margins
were primarily due to increases in our use of incentives and concessions to make our homes more affordable.
Land and lot sale expenses and gross margins are 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
29
$
Year Ended
October 31, October 31,
2022
16,202
5,855
10,347
42
10,305
2023
48,217 $
20,664
27,553
926
26,627 $
$
Land sales are ancillary to our residential homebuilding operations and are expected to continue in the future but
may significantly fluctuate up or down.
Homebuilding: Inventory Impairments and Land Option Write-offs
Inventory impairments and land option write-offs reflect certain inventories we have either written off or written
down to their estimated fair value totaling $1.5 million and $14.1 million in expense for the years ended October 31, 2023
and 2022, respectively. During the years ended October 31, 2023 and 2022, we wrote off residential land option, approval
and engineering costs totaling $1.5 million and $5.7 million, respectively. Land option, approval and engineering costs are
written off when a community’s pro forma profitability is not projected to produce an adequate return on investment
commensurate with the risk. If we determine an adequate return is not probable, we cancel the option, or when a community
is redesigned, we write off the engineering costs related to the initial design. Such write-offs occurred across each of our
segments in fiscal 2023 and 2022. We did not record any inventory impairments for the year ended October 31, 2023 and
inventory impairments were $8.4 million for the year ended October 31, 2022. It is difficult to predict future impairments,
but if conditions in the overall housing industry or a specific geographic market worsen in the future beyond our current
expectations, there are future changes in our business strategy that significantly affect the key assumptions used in our
projections of future cash flows, and/or there are material changes in any other items we consider in assessing recoverability,
we may need to recognize additional inventory impairments and any such charges could be material.
In fiscal 2023, we walked away from 13.6% of all the lots we controlled under option contracts. The remaining
86.4% 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, 2023:
(Dollars in millions)
Northeast
Southeast
West
Total
$
$
Amount
of Walk
Away
Dollar Number of
Walk-
Away
Lots
855
2,162
821
3,838
0.5
0.5
0.5
1.5
% of
Walk-
Away
Lots
22.3%
56.3%
21.4%
100.0%
Walk-
Away
Lots as a
Total % of Total
Option
Lots
Option
Lots(1)
13,337
6,985
7,905
28,227
6.4%
31.0%
10.4%
13.6%
(1) Includes lots optioned at October 31, 2023 and lots optioned that the Company walked away from in the year ended
October 31, 2023.
Homebuilding: Selling, General and Administrative
Homebuilding selling, general and administrative (“SGA”) expenses increased $8.0 million to $201.6 million for
the year ended October 31, 2023 compared to the year ended October 31, 2022. The increase was primarily due to an increase
in selling overhead from higher advertising costs and fees incurred on unused builder forward commitments we began offering
in the second half of fiscal 2022 to lower mortgage rates for our customers.
Homebuilding: Key Performance Indicators
Net Contracts Per Average Active Selling Community
Net contracts per average active selling community in fiscal 2023 were 40.8 compared to 39.6 in fiscal 2022, a
3.0% increase in sales pace per community. Our reported level of sales contracts (net of cancellations) was impacted by an
increase in customer demand partially due to the increased availability of QMI homes.
30
Contract Cancellation Rates
The following table provides historical quarterly cancellation rates, which represents the number of cancelled
contracts in the quarter divided by the number of gross sales contracts executed in the quarter, excluding unconsolidated joint
ventures:
Quarter
First
Second
Third
Fourth
2023
30%
18%
16%
25%
2022
14 %
17 %
27 %
41 %
2021
17%
16%
16%
15%
2020
19 %
23 %
18 %
18 %
2019
24%
19%
19%
21%
The following table provides quarterly contract cancellations as a percentage of the beginning backlog, excluding
unconsolidated joint ventures:
Quarter
First
Second
Third
Fourth
2023
16%
16%
12%
13%
2022
8 %
9 %
8 %
13 %
2021
11%
9%
6%
6%
2020
14 %
20 %
21 %
14 %
2019
16%
20%
16%
14%
Contract cancellations over the past several years have generally been within what we believe to be a normal
range, with fiscal 2021 and the first half of fiscal 2022 cancellation rates, in particular, being below historical norms as a
result of strong market conditions. However, during the third and fourth quarters of fiscal 2022 and the first quarter of fiscal
2023, due to the sharp decline in gross sales and an increase in cancellations, our cancellation rate as a percentage of gross
sales increased significantly to 27%, 41% and 30%, respectively, which is higher than our historical normal range. For the
second and third quarters of fiscal 2023 the cancellation rate returned to a more normalized level of 18% and 16%,
respectively. During the fourth quarter of fiscal 2023, the cancellation rate increased to 25% as mortgage rates increased 100
basis points during the quarter. Despite the increase in cancellations, due to our solid backlog position, our cancellation rate
as a percentage of beginning backlog for the fourth quarter of fiscal 2023 was 13%, which is in line with our historical normal
range. When sales pace is increasing, the cancellation rate as a percentage of beginning backlog tends to lag behind the
changes seen in our cancellation rate as a percentage of gross sales. Although market conditions improved during fiscal 2023
as compared to fiscal 2022, uncertainty remains and it is difficult to predict what cancellation rates will be in the future.
Contract Backlog
Our consolidated contract backlog, excluding unconsolidated joint ventures, by homebuilding segment is set forth
below:
(Dollars in thousands)
Northeast: (1)(2)
Total contract backlog
Number of homes
Southeast: (2)
Total contract backlog
Number of homes
West: (2)
Total contract backlog
Number of homes
Totals: (1)(2)
Total consolidated contract backlog
Number of homes
October 31, October 31,
2022
2023
$
$
$
$
420,100 $
617
304,251 $
615
336,263 $
592
464,173
850
310,889
502
493,617
834
1,060,614 $
1,824
1,268,679
2,186
(1) Reflects the reclassification of 38 homes and $32.3 million of contract backlog as of April 30, 2023 from an
unconsolidated joint venture to the consolidated Northeast segment. This is related to the assets and liabilities acquired
from a joint venture the Company closed out during the three months ended April 30, 2023.
(2) Reflects the reclassification of 90 homes and $73.7 million, 59 homes and $33.0 million, and 12 homes and $5.7 million
of contract backlog from the consolidated Northeast, Southeast and West segments, respectively, to an unconsolidated
joint venture as of July 31, 2023. This is related to the assets and liabilities contributed to a joint venture by the Company
during the three months ended July 31, 2023.
31
Contract backlog dollars decreased 16.4% as of October 31, 2023 compared to October 31, 2022, and the number
of homes in backlog decreased 16.6% for the same period. The decrease in backlog dollars and number of homes for the year
ended October 31, 2023 compared to the prior fiscal year was driven by the slower sales environment beginning in the second
half of fiscal 2022 and continuing through the first half of fiscal 2023.
Homebuilding Operations by Segment
Financial information relating to our homebuilding operations by segment was as follows:
(Dollars in thousands, except average sales price)
Northeast
Homebuilding revenue
Income before income taxes
Homes delivered
Average sales price
Southeast
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
Years Ended October 31,
Variance
2023
Compared
to 2022
(116,230 ) $
1,110 $
(277 )
13,094 $
96,335 $
17,572 $
126
43,085 $
2023
968,851 $
178,516 $
1,618
576,734 $
420,296 $
77,750 $
776
540,794 $
2022
1,085,081
177,406
1,895
563,640
323,961
60,178
650
497,709
1,295,992 $
114,084 $
2,484
514,350 $
(154,640 ) $
(93,435 ) $
(509 )
30,272 $
1,450,632
207,519
2,993
484,078
$
$
$
$
$
$
$
$
$
Northeast – Homebuilding revenues decreased 10.7% in fiscal 2023 compared to fiscal 2022, primarily due to a
14.6% decrease in homes delivered, partially offset by a 2.3% increase in average sales price. The increase in average sales
price was mainly the result of price increases in certain communities.
Income before income taxes increased $1.1 million to $178.5 million in fiscal 2023 compared to fiscal 2022,
primarily due to a $14.6 million increase in income from unconsolidated joint ventures and a $5.6 million decrease in SGA,
while gross margin percentage, before cost of sales interest expense was relatively flat.
Southeast – Homebuilding revenues increased 29.7% in fiscal 2023 compared to fiscal 2022, primarily due to an
19.4% increase in homes delivered and an 8.7% increase in average sales price. The increase in average sales price was the
result of price increases in certain communities.
Income before income taxes increased $17.6 million to $77.8 million in fiscal 2023 compared to fiscal 2022,
primarily due to the increase in homebuilding revenue discussed above and a slight increase in gross margin percentage,
before cost of sales interest expense.
West – Homebuilding revenues decreased 10.7% in fiscal 2023 compared to fiscal 2022, primarily due to a 17.0%
decrease in homes delivered, partially offset by a 6.3% increase in average sales price. The increase in average sales price
was mainly the result of price increases in certain communities.
Income before income taxes decreased $93.4 million to $114.1 million in fiscal 2023 compared to fiscal 2022,
primarily due to the decrease in homebuilding revenue discussed above and a decrease in gross margin percentage, before
cost of sales interest expense.
32
Financial Services
Financial services consists primarily of originating mortgages for our home buyers, selling such mortgages in the
secondary market, and title insurance activities. We use mandatory investor commitments and forward sales of mortgage-
backed securities ("MBS") to hedge our mortgage-related interest rate exposure on agency and government loans. These
instruments involve, to varying degrees, elements of credit and interest rate risk. Credit risk associated with MBS forward
commitments and loan sales transactions is managed by limiting our counterparties to investment banks, federally regulated
bank affiliates and other investors meeting our credit standards. Our risk, in the event of default by the purchaser, is the
difference between the contract price and fair value of the MBS forward commitments. For the years ended October 31, 2023
and 2022, our conforming conventional loan originations as a percentage of our total loans were 69.8% and 74.8%,
respectively. FHA/VA loans represented 29.5% and 24.1%, respectively, of our total loans. The remaining 0.7% and 1.1%
of our loan originations represent loans which exceed conforming conventions. Realized gains and losses relating to the sale
of mortgage loans are recognized when control passes to the buyer of the mortgage.
During the years ended October 31, 2023 and 2022, financial services provided $19.4 million and $19.1 million
of income before income taxes, respectively. In fiscal 2023, financial services income before income taxes increased $0.3
million from the prior year primarily due to a decrease in compensation expense as a result of a workforce reduction. In the
markets served by our wholly owned mortgage banking subsidiaries, 70.1% and 58.8% of our noncash home buyers obtained
mortgages originated by these subsidiaries during the years ended October 31, 2023 and 2022, 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, facility costs and rent and other costs associated with our executive offices,
legal expenses, information services, human resources, corporate accounting, training, treasury, process redesign, internal
audit, national and digital marketing, construction services and administration of insurance, quality and safety. Corporate
general and administrative expenses was relatively flat with a $0.6 million increase for the year ended October 31, 2023
compared to the year ended October 31, 2022. The slight increase in expense for fiscal 2023 was primarily due to a $1.7
million increase in the net cost for self-insured medical claims, which fluctuate based on actual claims, partially offset by a
decrease in compensation expense for bonuses as a result of reduced profitability in fiscal 2023.
Other Interest
Other interest increased $6.7 million to $54.1 million for the year ended October 31, 2023 compared to the year
ended October 31, 2022. Our assets that qualify for interest capitalization (inventory under development) are less than our
debt, and therefore the portion of interest not covered by qualifying assets is directly expensed. In fiscal 2023, other interest
increased primarily due to additional inventory financing resulting from an increase in average inventory not owned.
(Loss) Gain on Extinguishment of Debt, Net
On May 30, 2023, we redeemed $100.0 million aggregate principal amount of our 7.75% Senior Secured 1.125
Lien Notes due 2026 (the "Existing 1.125 Lien Notes"). The aggregate purchase price for this redemption was $104.2 million,
which included accrued and unpaid interest and was funded with cash on hand. This redemption resulted in a loss on
extinguishment of debt of $4.1 million, including the write-off of unamortized debt issuance costs and fees.
On August 29, 2023, we redeemed an additional $100.0 million aggregate principal amount of our Existing 1.125
Lien Notes. The aggregate purchase price for this redemption was $102.2 million, which included accrued and unpaid interest
and was funded with cash on hand. This redemption resulted in a loss on extinguishment of debt of $3.8 million, including
the write-off of unamortized debt issuance costs and fees.
On September 7, 2023, we repurchased in the open market $45.0 million aggregate principal amount of our 10.0%
Senior Secured 1.75 Lien Notes due 2025. The aggregate purchase price for this repurchase was $46.7 million, which included
accrued and unpaid interest and which was funded with cash on hand. This repurchase resulted in a gain on extinguishment
of debt of $0.2 million, including the write-off of unamortized debt issuance costs and fees.
On October 5, 2023, we issued new 8.0% Senior Secured 1.125 Lien Notes due 2028 (the "New 1.125 Lien Notes")
and new 11.75% Senior Secured 1.25 Lien Notes due 2029 (the "New 1.25 Lien Notes") and redeemed with the proceeds
from the issuances of the New 1.125 Lien Notes and New 1.25 Lien Notes all of the remaining (i) $50.0 million aggregate
principal amount of our Existing 1.125 Lien Notes for a redemption price of $51.5 million, which included accrued and
33
unpaid interest, (ii) $282.3 million aggregate principal amount of our 10.5% Senior Secured 1.25 Lien Notes due 2026 for a
redemption price of $293.9 million, which included accrued and unpaid interest, and (iii) $162.3 million aggregate principal
amount of our 11.25% Senior Secured 1.5 Lien Notes due 2026 for a redemption price of $164.8 million, which included
accrued and unpaid interest. These redemptions resulted in a loss on extinguishment of debt of $17.9 million, including the
write-off of unamortized debt issuance costs and fees.
On April 29, 2022, we redeemed $100.0 million aggregate principal amount of the Existing 1.125 Lien Notes.
The aggregate purchase price for this redemption was $105.5 million, which included accrued and unpaid interest and which
was funded with cash on hand. This redemption resulted in a loss on extinguishment of debt of $6.8 million for the year ended
October 31, 2022, including the write-off of unamortized debt issuance costs and fees.
Income from Unconsolidated Joint Ventures
Income from unconsolidated joint ventures consists of our share of the earnings or losses of our joint ventures.
Income from unconsolidated joint ventures increased to $43.2 million for the year ended October 31, 2023 from income of
$29.0 million for the year ended October 31, 2022. The increase of $14.2 million in fiscal 2023 was primarily due to
recognizing our share of income from the delivery of a majority of the backlog in the unconsolidated joint venture we have
in the Kingdom of Saudi Arabia. The increase in fiscal 2023 was also due to the recognition of our share of income from
one of our unconsolidated joint ventures based on the joint venture partner achieving certain return hurdles, and as a result,
we were able to recognize a higher share of the unconsolidated joint venture’s income.
Income Taxes
Income tax expense of $50.1 million and $94.3 million for the years ended October 31, 2023 and 2022,
respectively, was primarily due to federal and state tax expense recorded as a result of our income before income taxes.
Income tax expense for fiscal 2023 was partially offset by the benefit of releasing state tax valuation allowances and
qualifying for energy efficient home tax credits. The federal tax expense is not paid in cash as it is offset by the use of our
existing net operating loss (“NOL”) carryforwards.
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 subsequent 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. We 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, 2023, we considered the weight of all available positive and negative evidence to determine the
valuation allowance for DTAs of $71.9 million. See Note 11 to the Consolidated Financial Statements included elsewhere in
this Annual Report on Form 10-K for further information.
Deferred tax assets, net, of $302.8 million at October 31, 2023 decreased $42.0 million from October 31, 2022,
due to the utilization of our DTAs to offset tax expense on taxable income during fiscal 2023.
Contractual Obligations
The following summarizes our aggregate contractual commitments at October 31, 2023:
(In thousands)
Long term debt (1)(2)(3)
Operating leases (4)
Total
Payments Due by Period
Less than
Total
1,623,150 $
34,029
1,657,179 $
1 year
106,738 $
8,491
115,229 $
1-3 years
397,992 $
14,566
412,558 $
$
$
3-5 years
More than
5 years
617,127
4,871
621,998
501,293 $
6,101
507,394 $
(1) Represents our senior secured and unsecured term loan credit facilities, senior secured and senior notes and other notes
payable and $552.9 million of related interest payments for the life of such debt, including the 10% Senior Secured 1.75
Lien Notes due 2025 which were subsequently redeemed in full on November 15, 2023.
34
(2) Does not include $91.5 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.
(3) Does not include the mortgage warehouse lines of credit made under our Master Repurchase Agreements. See “Capital
Resources and Liquidity” for further discussion. Also, does not include our $125.0 million Secured Credit Facility under
which there were no borrowings outstanding as of October 31, 2023.
(4) Lease payments exclude $3.2 million of legally binding minimum lease payments for office leases signed but not yet
commenced as of October 31, 2023.
We had outstanding letters of credit and performance bonds of $4.9 million and $187.3 million, respectively, at
October 31, 2023, related primarily 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 performance bonds are likely to be drawn upon.
Capital Resources and Liquidity
Overview
Our total liquidity at October 31, 2023 was $564.2 million, including $434.1 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. We believe that our cash on hand together with available borrowings
on our senior secured revolving credit facility will be sufficient through fiscal 2024 to finance our working capital
requirements.
We have historically funded our homebuilding and financial services operations with cash flows from operating
activities, borrowings under our credit facilities, the issuance of new debt and equity securities and other financing activities.
We may not be able to obtain desired financing even if market conditions, including then-current market available interest
rates (in recent years, we have not been able to access the traditional capital and bank lending markets at competitive interest
rates due to our highly leveraged capital structure), would otherwise be favorable, which could also impact our ability to grow
our business.
Operating, Investing and Financing Cash Flow Activities
We spent $679.3 million on land and land development during fiscal 2023, along with $206.4 million for the
$200.0 million principal amount for the partial redemption of our 7.75% Senior Secured 1.125 Lien Notes due 2026, and
$46.7 million for the $45.0 million principal amount in open market repurchases of our 10.0% 1.75 Lien Notes due 2025.
After considering this land and land development spending, debt payments and all other operating activities, including
revenue received from deliveries, we had $435.3 million in cash provided by operations. During fiscal 2023, cash used in
investing activities was $78.2 million, primarily due to new unconsolidated joint ventures entered into during the period,
along with the acquisition of certain fixed assets. Cash used in financing activities was $261.7 million during fiscal 2023,
which in addition to the $245.0 million principal amount of debt reductions mentioned above, was due primarily to net
payments from nonrecourse mortgage financings, land banking and model sale leaseback financings, repurchases of common
stock and the payment of preferred dividends, partially offset by net payments related to our mortgage warehouse lines of
credit. We intend to continue to use nonrecourse mortgages, model sale leasebacks, joint ventures, and, subject to covenant
restrictions in our debt instruments, land banking programs as our business needs dictate.
Our cash uses during the years ended October 31, 2023 and 2022 were for operating expenses, land purchases,
land deposits, land development, construction spending, debt payments, model sale leasebacks, land banking transactions,
state income taxes, interest payments, preferred dividend payments, financing transaction costs, debt and equity 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, income from unconsolidated joint
ventures, financial service revenues and other revenues.
35
Our net income historically does not approximate cash flow from operating activities. The difference between net
income and cash flow from operating activities is primarily caused by changes in inventory levels together with changes in
receivables, prepaid expenses and other assets, mortgage loans held for sale, accrued interest, deferred income taxes, accounts
payable and other liabilities, and noncash charges relating to depreciation, stock compensation and impairments. When we
are expanding our operations, inventory levels, prepaid expenses and other assets increase causing cash flow from operating
activities to decrease. Certain liabilities also increase as operations expand and partially offset the negative effect on cash
flow from operations caused by the increase in inventory, prepaid expenses and other assets. Similarly, as our mortgage
operations expand, net income from these operations increases, but for cash flow purposes, net income is partially offset by
the net change in mortgage assets and liabilities. The opposite is true as our investment in new land purchases and
development of new communities decrease, causing us to generate positive cash flow from operations.
See “Inventories” below for a detailed discussion of our inventory position.
Debt Transactions
Senior secured notes, senior notes and credit facilities balances as of October 31, 2023 and October 31, 2022, were
as follows:
(In thousands)
Senior Secured Notes:
10.0% Senior Secured 1.75 Lien Notes due November 15, 2025 (1)
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
8.0% Senior Secured 1.125 Lien Notes due September 30, 2028
11.75% Senior Secured 1.25 Lien Notes due September 30, 2029
Total Senior Secured Notes
Senior Notes:
8.0% Senior Notes due November 1, 2027 (2)
13.5% Senior Notes due February 1, 2026
5.0% Senior Notes due February 1, 2040
Total Senior Notes
Senior Unsecured Term Loan Credit Facility due February 1, 2027
Senior Secured 1.75 Lien Term Loan Credit Facility due January 31, 2028
Senior Secured Revolving Credit Facility (3)
Subtotal senior notes and credit facilities
Net (discounts) premiums
Unamortized debt issuance costs
Total senior notes and credit facilities, net of discounts, premiums and unamortized
October 31, October 31,
2022
2023
$
$
$
$
$
$
$
$
$
$
113,502 $
-
-
-
225,000
430,000
768,502 $
- $
90,590
90,120
180,710 $
39,551 $
81,498 $
- $
1,070,261 $
(14,563) $
(4,207) $
158,502
250,000
282,322
162,269
-
-
853,093
-
90,590
90,120
180,710
39,551
81,498
-
1,154,852
4,079
(12,384 )
debt issuance costs
$
1,051,491 $
1,146,547
(1) On November 15, 2023, K. Hovnanian redeemed all of its $113.5 million aggregate principal amount of 10.0% Senior
Secured 1.75 Lien Notes due November 15, 2025.
(2) At October 31, 2022, $26.0 million of 8.0% Senior Notes due 2027 (the “8.0% 2027 Notes”) were owned by a wholly
owned consolidated subsidiary of HEI. Therefore, in accordance with U.S. GAAP, such notes were not reflected on the
Consolidated Balance Sheets of HEI. On October 31, 2023, K. Hovnanian redeemed all of the $26.0 million aggregate
principal amount of its 8.0% 2027 Notes.
(3) At October 31, 2023, provides for up to $125.0 million in aggregate amount of senior secured first lien revolving loans.
The revolving loans thereunder have a maturity of June 30, 2026 and borrowings bear interest, at K. Hovnanian’s option, at
either (i) a term secured overnight financing rate (subject to a floor of 3.00%) plus an applicable margin of 4.50% or (ii) an
alternate base rate (subject to a floor of 4.00%) plus an applicable margin of 3.50%. In addition, K. Hovnanian will pay an
unused commitment fee on the undrawn revolving commitments at a rate of 1.00% per annum.
36
Except for K. Hovnanian, the issuer of the notes and borrower under the credit agreements governing our term
loans and revolving credit facilities (collectively, the "Credit Facilities"), our home mortgage subsidiaries, certain of our title
insurance subsidiaries, joint ventures and subsidiaries holding interests in our joint ventures, we and each of our subsidiaries
are guarantors of the Credit Facilities, the senior secured notes and senior notes outstanding at October 31, 2023 (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, 2023 do not contain any financial maintenance covenants,
but do contain restrictive covenants that limit, among other things, the ability of HEI and certain of its subsidiaries, including
K. Hovnanian, to incur additional indebtedness, pay dividends and make distributions on common and preferred stock,
repay/repurchase certain indebtedness prior to its respective stated maturity, repurchase (including through exchanges)
common and preferred stock, make other restricted payments (including investments), sell certain assets (including in certain
land banking transactions), incur liens, consolidate, merge, sell or otherwise dispose of all or substantially all of their assets
and enter into certain transactions with affiliates. The Debt Instruments also contain customary events of default which would
permit the lenders or holders thereof to exercise remedies with respect to the collateral (as applicable), declare the loans (the
"Unsecured Term Loans") made under the Senior Unsecured Term Loan Credit Facility due February 1, 2027, loans (the
"Secured Term Loans") made under the Senior Secured 1.75 Lien Term Loan Credit Facility due January 31, 2028, and loans
(the "Secured Revolving Loans") made under the Senior Secured Revolving Credit Agreement due June 30, 2026, or notes
to be immediately due and payable if not cured within applicable grace periods, including the failure to make timely payments
on the Unsecured Term Loans, Secured Term Loans, Secured Revolving Loans or notes or other material indebtedness, cross
default to other material indebtedness, the failure to comply with agreements and covenants and specified events of
bankruptcy and insolvency, with respect to the Unsecured Term Loans, Secured Term Loans and Secured Revolving Loans,
material inaccuracy of representations and warranties and with respect to the Unsecured Term Loans, Secured Term Loans
and Secured Revolving Loans, a change of control, and, with respect to the Secured Term Loans, Secured Revolving Loans
and senior secured notes, the failure of the documents granting security for the obligations under the secured Debt Instruments
to be in full force and effect, and the failure of the liens on any material portion of the collateral securing the obligations
under the secured Debt Instruments to be valid and perfected. As of October 31, 2023, 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 (in the case of such payment, our secured debt leverage
ratio must also be less than 4.0 to 1.0), and from incurring indebtedness other than certain permitted indebtedness and
nonrecourse indebtedness. Beginning as of October 31, 2021, as a result of our improved operating results, our fixed coverage
ratio was above 2.0 to 1.0 and our secured debt leverage ratio was below 4.0 to 1.0, therefore we were no longer restricted
from paying dividends. As such, we made dividend payments of $2.7 million to preferred shareholders in every quarter since
the first quarter of fiscal 2022. As discussed above, our sales pace improved during fiscal 2023 and assuming the improved
current market conditions and our operating results continue, we currently believe our ratios will permit us to continue to
make dividend payments on our preferred stock. However, with general economic uncertainty, it is difficult to predict long-
term market conditions and the effects on our business and if and when we may be restricted under our Debt Instruments
from continuing to pay dividends on our Series A preferred stock. Dividends on the Series A preferred stock are not
cumulative and, accordingly, if for any reason we do not declare a dividend on the Series A preferred stock for a quarterly
dividend period (regardless of our availability of funds), holders of the Series A Preferred Stock will have no right to receive
a dividend for that period, and we will have no obligation to pay a dividend for that period.
Under the terms of our Debt Instruments, we have the right to make certain redemptions and prepayments and,
depending on market conditions, our strategic priorities and covenant restrictions, may do so from time to time. We also
continue to actively analyze and evaluate our capital structure and explore transactions to simplify our capital structure and
to strengthen our balance sheet, including those that reduce leverage, interest rates and/or extend maturities, and will seek to
do so with the right opportunity. We may also continue to make debt or equity purchases and/or exchanges from time to time
through tender offers, exchange offers, redemptions, open market purchases, private transactions, or otherwise, or seek to
raise additional debt or equity capital, depending on market conditions and covenant restrictions.
Any liquidity-enhancing or other capital raising or refinancing transaction will depend on identifying
counterparties, negotiation of documentation and applicable closing conditions and any required approvals. Due to covenant
restrictions in our Debt Instruments, we are currently limited in the amount of debt we can incur, even if market conditions,
including then-current market available interest rates (in recent years, we have not been able to access the traditional capital
and bank lending markets at competitive interest rates due to our highly leveraged capital structure), would otherwise be
favorable, which could also impact our ability to grow our business.
37
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, including information with
respect to the collateral securing our Debt Instruments.
Mortgages and Notes Payable
We have nonrecourse mortgage loans for certain communities totaling $91.5 million and $144.8 million, net of
debt issuance costs, at October 31, 2023 and October 31, 2022, respectively, which are secured by the related real property,
including any improvements, with an aggregate book value of $331.6 million and $418.9 million, respectively. The weighted-
average interest rate on these obligations was 8.5% and 6.7% at October 31, 2023 and October 31, 2022, 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 generally 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. The loans
are secured by the mortgages held for sale and are repaid when we sell the underlying mortgage loans to permanent
investors. As of October 31, 2023 and 2022, we had an aggregate of $110.8 million and $94.3 million, respectively,
outstanding under several of K. Hovnanian Mortgage’s short-term borrowing facilities.
See Note 8 to the Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K for
a further discussion of these agreements and facilities.
Equity
On September 1, 2022, our Board of Directors terminated our prior repurchase program and authorized a new
program for the repurchase of up to $50.0 million of our Class A common stock. Under the new repurchase program,
repurchases may be made from time to time in open market transactions, in privately negotiated transactions or otherwise.
The timing and the actual dollar amount repurchased will depend on a variety of factors, including legal requirements, price,
future tax implications and economic and market conditions. The repurchase program may be changed, suspended or
discontinued at any time and does not have a specified expiration date. During the year ended October 31, 2023, we
repurchased 118,478 shares in the first quarter, with a market value of $4.8 million, or $40.51 per share, which were added
to treasury stock. During the year ended October 31, 2022, we repurchased 312,471 shares, with a market value of
$12.2 million, or $39.12 per share, which were added to treasury stock. As of October 31, 2023, $33.0 million of our Class
A common stock is available for repurchase under our share repurchase program. See Part II, Item 5 for information on equity
purchases.
On July 12, 2005, we issued 5,600 shares of 7.625% Series A preferred stock, with a liquidation preference of
$25,000 per share. Dividends on the Series A preferred stock are not cumulative and are payable at an annual rate of 7.625%.
The Series A preferred stock is not convertible into the Company’s common stock and is redeemable in whole or in part at
our option at the liquidation preference of the shares. The Series A preferred stock is traded as depositary shares, with each
depositary share representing 1/1000th of a share of Series A preferred stock. The depositary shares are listed on the
NASDAQ Global Market under the symbol “HOVNP.” In both fiscal 2023 and 2022 we paid dividends of $10.7 million,
respectively, in the aggregate on the Series A preferred stock.
Unconsolidated Joint Ventures
We have investments in unconsolidated joint ventures in various markets where our homebuilding operations are
located. As of October 31, 2023 and 2022, we had investments in seven and six unconsolidated homebuilding joint ventures,
respectively, and one unconsolidated land development joint venture for both periods. Our unconsolidated joint ventures had
total combined assets of $884.4 million and $615.2 million at October 31, 2023 and 2022, respectively. Our investments in
unconsolidated joint ventures totaled $97.9 million and $74.9 million at October 31, 2023 and 2022, respectively. The
increase in investments of $23.0 million was primarily due to two new joint ventures formed during the year, along with
income recognized in an existing joint venture. The increase in our investments was partially offset by the consolidation of a
previously unconsolidated joint venture, and the net impact of consolidation and subsequent recapitalization of another joint
venture.
38
As of October 31, 2023 and 2022, our unconsolidated joint ventures had outstanding debt totaling $101.1 and
$34.9 million, respectively, under separate construction loan agreements with different third-party lenders and affiliates of
certain investment partners to finance land development activities. The outstanding debt is secured by the underlying property
and related project assets and is non-recourse to us. Although 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 the outstanding debt or
to support the value of the collateral underlying the outstanding debt. Our guarantees are limited to performance and
completion of development activities, environmental indemnification and standard warranty and representation against fraud,
misrepresentation and similar actions, including voluntary bankruptcy. We do not believe that our existing exposure under
our guaranty and indemnity obligations related to the outstanding debt is material.
We determined that none of our joint ventures 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. See Notes 19 and 20 to
the Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K for further discussion of joint
ventures and variable interest entities.
Inventories
Total inventory, excluding consolidated inventory not owned, decreased $86.2 million during the year ended
October 31, 2023, from October 31, 2022. Total inventory, excluding consolidated inventory not owned, decreased in the
Northeast by $51.5 million, in the Southeast by $26.1 million and in the West by $8.6 million. The decreases were primarily
attributable to home deliveries and land sales during the period, partially offset by new land purchases and land development.
In the previous 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, 2023 are expected to
be closed during the next six to nine months.
Consolidated inventory not owned, which consists of options related to land banking and model financing,
decreased $83.8 million during fiscal 2023. The decrease 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 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, these transactions are considered a financing rather than a sale.
Our Consolidated Balance Sheet, at October 31, 2023, included inventory of $183.1 million recorded to “Consolidated
inventory not owned,” with a corresponding amount of $82.3 million (net of debt issuance costs) recorded to “Liabilities from
inventory not owned” for the amount of net cash received from the transactions. In addition, we sell and lease back certain
of our model homes with the right to participate in the potential profit when each home is sold to a third-party at the end of
the respective lease. As a result of our continued involvement, these sale and leaseback transactions are considered a financing
rather than a sale. Therefore, our Consolidated Balance Sheet, at October 31, 2023, included inventory of $41.7 million
recorded to “Consolidated inventory not owned,” with a corresponding amount of $42.0 million (net of debt issuance costs)
recorded to “Liabilities from inventory not owned” for the amount of net cash received from sale and leaseback transactions.
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, 2023, we had
total cash deposits of $192.3 million to purchase land and lots with a total purchase price of $2.2 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.
39
The following tables summarize home sites included in our total residential real estate:
October 31, 2023:
Northeast
Southeast
West
Consolidated total
Unconsolidated joint ventures (1)
Owned
Optioned
Construction to permanent financing lots
Consolidated total
October 31, 2022:
Northeast
Southeast
West
Consolidated total
Unconsolidated joint ventures (1)
Owned
Optioned
Construction to permanent financing lots
Consolidated total
Total Contracted
Not
Home
Remaining
Home
Sites
Sites Delivered Available
14,161
5,935
11,658
31,754
5,406
7,337
24,389
28
31,754
15,022
4,721
12,057
31,800
3,355
9,022
22,496
282
31,800
617
615
592
1,824
422
1,442
354
28
1,824
850
502
834
2,186
2,524
1,525
379
282
2,186
13,544
5,320
11,066
29,930
4,984
5,895
24,035
-
29,930
14,172
4,219
11,223
29,614
831
7,497
22,117
-
29,614
(1) Represents active communities and home sites for our unconsolidated homebuilding joint ventures for the period. We
provide this data as a supplement to our consolidated results as an indicator of the volume managed in our
unconsolidated joint ventures. See Note 20 to the Consolidated Financial Statements included elsewhere in this Annual
Report on Form 10-K for a further discussion of our unconsolidated joint ventures.
The following table summarizes our started or completed unsold homes and models, excluding unconsolidated
joint ventures, in active communities. The increase in unsold homes was primarily due to a conscious effort to increase the
number of QMI homes per community to provide buyers the opportunity to close quickly, and to lock in a lower mortgage
rate, thereby making our homes more affordable and creating certainty as mortgage rates continued to rise through fiscal
2023.
October 31, 2023
October 31, 2022
Northeast
Southeast
West
Total
Unsold
Unsold
Homes Models Total Homes Models Total
124
200
77
115
538
594
739
909
159
99
570
828
92
72
516
680
32
5
22
59
41
16
24
81
Started or completed unsold homes and models per
active selling communities(1)
7.3
0.7
8.0
5.6
0.5
6.1
(1) Active selling communities (which are communities that are open for sale with ten or more home sites available) were
113 and 121 at October 31, 2023 and 2022, respectively. This ratio does not include substantially completed communities,
which are communities with less than ten home sites available.
40
Financial Services Assets and Liabilities
Financial services assets consist primarily of residential mortgage receivables held for sale of which $127.6
million and $108.6 million at October 31, 2023 and 2022, respectively, were being temporarily warehoused and are awaiting
sale in the secondary mortgage market. The increase in mortgage loans held for sale from October 31, 2022 was primarily
related to an increase in the volume of loans originated during the fourth quarter of fiscal 2023 compared to the fourth quarter
of fiscal 2022, along with an increase in the average loan value.
Financial Services liabilities increased $12.6 million from $135.6 million at October 31, 2022, to $148.2 million
at October 31, 2023. The increase was primarily due to the increase in amounts outstanding under our mortgage warehouse
lines of credit, and directly correlated to the increase in the volume of mortgage loans held for sale.
Inflation
The annual rate of inflation in the United States was 3.2% in October 2023, as measured by the Consumer Price
Index ("CPI"), which is much improved from its peak of 9.1% in June 2022. Inflation has a long-term effect, because of
higher costs of land, materials and labor results in increasing the sale prices of our homes. Historically, these price increases
have been commensurate with the general rate of inflation in our housing markets and have not had a significant adverse
effect on the sale of our homes. A significant risk faced by the housing industry generally is that rising house construction
costs, including land and interest costs, could substantially outpace increases in the income of potential purchasers and
therefore limit our ability to raise home sale prices, which may result in lower gross margins.
Inflation has a lesser short-term effect, because we generally negotiate fixed-price contracts with many, but not
all, of our subcontractors and material suppliers for the construction of our homes. These prices usually are applicable for a
specified number of residential buildings or for a time period of between three to 12 months. Construction costs for residential
buildings represented approximately 60% of our homebuilding cost of sales for fiscal year 2023.
For fiscal 2022, elevated inflation created economic uncertainty and had a significant impact on interest rates,
which in turn adversely impacted our home sales. During fiscal 2023, inflation started to moderate and interest rates have
become less volatile, which has given homebuyers time to adjust to the current higher rate environment.
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:
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 the specific identification method. 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 on 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 consists of model homes financed with an investor
and inventory related to land banking arrangements accounted for as financings.
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 “Revenue From Contracts with Customers,” these sale and leaseback transactions are
considered a financing rather than a sale.
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 basis, or quarterly schedule. Because of our options to repurchase
these parcels, for accounting purposes in accordance with ASC 606, these transactions are considered financings rather than
sales.
41
The recoverability of inventories and other long-lived assets is assessed in accordance with ASC 360, “Property,
Plant and Equipment.” ASC 360 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. We evaluate impairment at the individual community level, which is the lowest level of discrete cash flows that are
available.
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), and/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 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, sales absorption pace and selling strategies, could materially impact future cash flow and fair-value
42
estimates. Due to the number of 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 is recorded. 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 calculating 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. 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, 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.
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 the land. Land held for sale is recorded at the lower of carrying amount or fair
value less costs to sell. 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 third parties.
Unconsolidated Homebuilding and Land Development Joint Ventures - Investments in unconsolidated entities in
which the Company has significant influence over the operating and financial decisions of the entity, but holds less than a
controlling financial interest, are accounted for by the equity method. Our investments in unconsolidated homebuilding and
land development joint ventures are accounted for under the equity method. Under the equity method, we recognize our
proportionate share of income and loss earned by the joint venture upon the delivery of lots or homes to third parties. Our
ownership interests in joint ventures vary but our voting equity interests held are generally 20% to 50%. 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 joint venture can require significant judgment. In accordance with ASC 323,
“Investments - Equity Method and Joint Ventures” 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.
Warranty Costs and Construction Defect Reserves - We accrue 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. Our insurance coverage generally includes deductibles either in the aggregate or
on a per-claim basis, with the exception of workers’ compensation insurance, which does not have a deductible. Reserves for
estimated losses for construction defects, warranty and bodily injury claims have been established using the assistance of a
third-party actuary. The third-party actuary uses our historical warranty and construction defect data to assist 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 consider 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. As a high degree of judgment is 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
43
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.
Deferred Income Taxes - Deferred income taxes are provided for temporary differences between amounts recorded
for financial reporting and 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 forward to future years to recover the DTAs.
We evaluate all available positive and negative evidence, including the existence of losses in recent years and forecasts of
future taxable income, in assessing the need for a valuation allowance. The underlying assumptions we use in forecasting
future taxable income require significant judgment. The ultimate realization of DTAs is dependent on the generation of future
taxable income during the periods in which temporary differences or carry-forwards are deductible or creditable. A valuation
allowance is provided to offset DTAs if, based upon the available evidence, it is more likely than not that some or all of the
DTAs will not be realized.
In evaluating the exposures associated with our various tax filing positions, we recognize tax liabilities in
accordance with ASC 740, “Income Taxes” 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 the income tax provision in the period in which an uncertain tax position is effectively settled, 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.
Recent Accounting Pronouncements
See Note 3 to the Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K.
Safe Harbor Statement
All statements in this Annual Report on Form 10-K that are not historical facts should be considered as “Forward-
Looking Statements” within the meaning of the “Safe Harbor” provisions of the Private Securities Litigation Reform Act of
1995. Such statements involve known and unknown risks, uncertainties and other factors that may cause actual results,
performance or achievements of the Company to be materially different from any future results, performance or achievements
expressed or implied by the forward-looking statements. Such forward-looking statements include but are not limited to
statements related to the Company's goals and expectations with respect to its financial results for future financial periods.
Although we believe that our plans, intentions and expectations reflected in, or suggested by, such forward-looking statements
are reasonable, we can give no assurance that such plans, intentions or expectations will be achieved. By their nature, forward-
looking statements: (i) speak only as of the date they are made, (ii) are not guarantees of future performance or results and
(iii) are subject to risks, uncertainties and assumptions that are difficult to predict or quantify. Therefore, actual results could
differ materially and adversely from those forward-looking statements as result of a variety of factors. Such risks,
uncertainties and other factors include, but are not limited to:
●
●
●
●
●
●
●
●
Changes in general and local economic, industry and business conditions and impacts of a significant
homebuilding downturn;
Shortages in, and price fluctuations of, raw materials and labor, including due to geopolitical events, changes
in trade policies, including the imposition of tariffs and duties on homebuilding materials and products, and
related trade disputes with, and retaliatory measures taken by other countries;
Fluctuations in interest rates and the availability of mortgage financing, including as a result of instability in
the banking sector;
Adverse weather and other environmental conditions and natural disasters;
The seasonality of the Company’s business;
The availability and cost of suitable land and improved lots and sufficient liquidity to invest in such land and
lots;
Reliance on, and the performance of subcontractors;
Regional and local economic factors, including dependency on certain sectors of the economy, and
employment levels affecting home prices and sales activity in the markets where the Company builds homes;
44
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
Increases in cancellations of agreements of sale;
Increases in inflation;
Changes in tax laws affecting the after-tax costs of owning a home;
Legal claims brought against us and not resolved in our favor, such as product liability litigation, warranty
claims and claims made by mortgage investors;
Levels of competition;
Utility shortages and outages or rate fluctuations;
Information technology failures and data security breaches;
Negative publicity;
High leverage and restrictions on the Company’s operations and activities imposed by the agreements
governing the Company’s outstanding indebtedness;
Availability and terms of financing to the Company;
The Company’s sources of liquidity;
Changes in credit ratings;
Government regulation, including regulations concerning development of land, the home building, sales and
customer financing processes, tax laws and the environment;
Operations through unconsolidated joint ventures with third parties;
Significant influence of the Company’s controlling stockholders;
Availability of net operating loss carryforwards;
Loss of key management personnel or failure to attract qualified personnel; and
Public health issues such as a major epidemic or pandemic.
Certain risks, uncertainties and other factors are described in detail in Part I, Item 1 “Business” and Part I, Item
1A “Risk Factors” in 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
Substantially all of our long term-debt requires fixed interest payments and we have limited exposure to variable
rates. In connection with our mortgage operations, mortgage loans held for sale and the associated mortgage warehouse lines
of credit under our Master Repurchase Agreements are subject to interest rate risk; however, such obligations reprice
frequently and are short-term in duration. In addition, we hedge the interest rate risk on mortgage loans by obtaining forward
commitments from private investors. Accordingly, the interest rate risk from mortgage loans is not significant. We do not use
financial instruments to hedge interest rate risk except with respect to mortgage loans. The following table sets forth as of
October 31, 2023, our long-term debt obligations, principal cash flows by scheduled maturity, weighted-average interest rates
and estimated fair value (“FV”).
(Dollars in thousands)
Long term
Long-Term Debt as of October 31, 2023 by Fiscal Year of Debt Maturity
2024
2025
2026
2027
2028 Thereafter
FV at
Total 10/31/2023
debt(1)(2)(3):
Fixed rate
Weighted-average
interest rate
$
- $
- $204,092 $ 39,551 $ 306,498 $ 520,120 $ 1,070,261 $ 1,077,869
-%
-% 11.55%
5.00 %
8.53%
10.58%
9.97%
(1) Includes the 10% Senior Secured 1.75 Lien Notes due November 15, 2025, which were subsequently redeemed in full
on November 15, 2023.
(2) Does not include the mortgage warehouse lines of credit made under our Master Repurchase Agreements.
(3) Does not include $91.5 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. In addition, does not include our $125.0
million Secured Credit Facility under which there were no borrowings outstanding as of October 31, 2023. The revolving
loans thereunder have a maturity of June 30, 2026 and borrowings bear interest, at K. Hovnanian’s option, at either (i) a
45
term secured overnight financing rate (subject to a floor of 3.00%) plus an applicable margin of 4.50% or (ii) an alternate
base rate (subject to a floor of 4.00%) plus an applicable margin of 3.50%. In addition, K. Hovnanian will pay an unused
commitment fee on the undrawn revolving commitments at a rate of 1.00% per annum.
ITEM 8
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial statements of Hovnanian Enterprises, Inc. and its consolidated subsidiaries are set forth herein beginning
on page 59.
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, 2023. 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, 2023 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, 2023.
The effectiveness of the Company’s internal control over financial reporting as of October 31, 2023 has been
audited by Deloitte & Touche LLP, the Company’s independent registered public accounting firm, as stated in their report
below.
46
ITEM 9B
OTHER INFORMATION
None.
ITEM 9C
DISCLOSURE REGARDING FOREIGN JURISDITIONS THAT PREVENT INSPECTIONS
None.
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 21, 2024, 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
66
Position
Chairman of the Board, Chief Executive Officer, President and
Brad G. O’Connor
53
Chief Financial Officer and Treasurer
Director of the Company
Year
Started
With
Company
1979
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. O’Connor was appointed Chief Financial Officer in November 2023 and Senior Vice President and Treasurer
in April 2020. He held the position of Chief Accounting Officer from May 2011 until October 2023. He joined the Company
as Vice President, Associate Corporate Controller in May 2004, and was promoted to Corporate Controller in December
2007. Prior to joining the Company, Mr. O’Connor was the Corporate Controller for Amershem Biosciences, a global biotech
company, and was 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, principal 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.
47
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.” We will post amendments to or waivers from our Code of Ethics that are required to be
disclosed by the rules of either the SEC or the New York Stock Exchange (the “NYSE”) on our web site at www.khov.com
under “Investor Relations/Corporate Governance.”
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.”
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 21, 2024.
ITEM 12
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
EQUITY COMPENSATION PLAN INFORMATION
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 21, 2024.
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 21, 2024.
ITEM 14
PRINCIPAL ACCOUNTANT FEES AND SERVICES
Our independent registered public accounting firm is Deloitte & Touche LLP (PCAOB ID No. 34).
Further 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 21, 2024.
PART IV
ITEM 15
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as part of this report:
(1) Consolidated Financial Statements
See the "Index" to the Consolidated Financial Statements commencing on page 56 of this Form 10-K.
(2) Financial Statement Schedules
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.
(3) Exhibits
See the "Exhibit Index" beginning on page 49 of this Form 10-K.
48
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)
10(a)
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 Quarterly Report on
Form 10-Q for the quarter ended July 31, 2021 of the Registrant).
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).
Amendment No. 2 to Rights Agreement, dated as of January 18, 2021, 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
19, 2021).
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 October 5, 2023, relating to the 8.0% Senior Secured 1.125 Lien Notes due 2028, 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 8.0% Senior Secured 1.125 Lien
Notes due 2028 (Incorporated by reference to Exhibits to Current Report on Form 8-K of the Registrant filed on
September 25, 2023).
Indenture, dated as of October 5, 2023, relating to the 11.75% Senior Secured 1.25 Lien Notes due 2029, 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 11.75% Senior Secured 1.25
Lien Notes due 2029 (Incorporated by reference to Exhibits to Current Report on Form 8-K of the Registrant filed
on September 25, 2023).
Description of the Registrant’s securities.
Third Amendment, dated as of September 25, 2023, to the Credit Agreement, dated as of October 31, 2019, 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 on September 25, 2023).
49
10(b)
10(c)
10(d)
10(e)
10(f)
10(g)
10(h)*
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).
$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 and Wilmington Trust, National Association, as administrative
thereto,
agent (Incorporated by reference to Exhibits to Annual Report on Form 10-K for the year ended October 31, 2019
of the Registrant).
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).
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).
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).
lenders party
the
10(i)* 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).
10(o)*
10(n)*
10(m)*
10(k)*
10(l)*
10(j)* 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, 2022.
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 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 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 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).
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).
10(q)*
10(p)*
10(u)*
10(s)*
10(r)*
10(t)*
50
10(v)*
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).
10(w)* Director Restricted Share Unit Agreement Class A (2016 grants and thereafter) (Incorporated by reference to
10(x)*
10(y)*
10(z)*
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 (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).
10(aa)* Non-Qualified Stock Option Agreement Class B (2018 grants and thereafter) (Incorporated by reference to
10(bb)
10(cc)
10(dd)
10(ee)
10(ff)
10(gg)
10(hh)
10(ii)
10(jj)
10(kk)
10(ll)
Quarterly Report on Form 10-Q for the quarter ended July 31, 2018 of the Registrant).
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).
Trademark Security Agreement, dated as of October 5, 2023, by K. HOV IP, II, Inc., in favor of Wilmington
Trust, National Association, as Administrative Agent and as Joint First Lien Collateral Agent.
Copyright Security Agreement, dated as of October 5, 2023, by K. HOV IP, II, Inc., in favor of Wilmington Trust,
National Association, as Administrative Agent and as Joint First Lien Collateral Agent.
1.125 Lien Security Agreement, dated as of October 5, 2023, relating to the 8.0% Senior Secured 1.125 Lien
Notes due 2028, 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 as Joint First
Lien Collateral Agent.
1.125 Lien Pledge Agreement, dated as of October 5, 2023, relating to the 8.0% Senior Secured 1.125 Lien Notes
due 2028, given 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 as Joint First Lien
Collateral Agent.
1.125 Lien Trademark Security Agreement, dated as of October 5, 2023, by K. HOV IP, II, Inc., in favor of
Wilmington Trust, National Association, as 1.125 Lien Collateral Agent and as Joint First Lien Collateral Agent.
1.125 Lien Copyright Security Agreement, dated as of October 5, 2023, by K. HOV IP, II, Inc., in favor of
Wilmington Trust, National Association, as 1.125 Lien Collateral Agent and as Joint First Lien Collateral Agent.
1.25 Lien Security Agreement, dated as of October 5, 2023, relating to the 11.75% Senior Secured 1.25 Lien Notes
due 2029, 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 as Joint First Lien
Collateral Agent.
1.25 Lien Pledge Agreement, dated as of October 5, 2023, relating to the 11.75% Senior Secured 1.25 Lien Notes
due 2029, given 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 as Joint First Lien
Collateral Agent.
1.25 Lien Trademark Security Agreement, dated as of October 5, 2023, by K. HOV IP, II, Inc., in favor of
Wilmington Trust, National Association, as 1.25 Lien Collateral Agent and as Joint First Lien Collateral Agent.
1.25 Lien Copyright Security Agreement, dated as of October 5, 2023, by K. HOV IP, II, Inc., in favor of
Wilmington Trust, National Association, as 1.25 Lien Collateral Agent and as Joint First Lien Collateral Agent.
10(mm) 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).
10(nn)
51
10(oo)
10(pp)
10(qq)
10(rr)
10(ss)*
10(tt)*
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).
Joinder No. 3, dated as of October 5, 2023, 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 1.125
Lien Trustee and 1.125 Lien Collateral Agent, with acknowledged receipt by the Senior Credit Agreement
Collateral Agent, 1.25 Lien Trustee, 1.25 Lien Collateral Agent, 1.75 Lien Trustee, 1.75 Lien Collateral Agent
and Joint First Lien Collateral Agent.
Joinder No. 4, dated as of October 5, 2023, 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 1.25
Lien Trustee and 1.25 Lien Collateral Agent, with acknowledged receipt by the Senior Credit Agreement
Collateral Agent, 1.125 Lien Trustee, 1.125 Lien Collateral Agent, 1.75 Lien Trustee, 1.75 Lien Collateral Agent
and Joint First Lien Collateral Agent.
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).
10(uu)* 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).
10(vv)* 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).
10(ww)* 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).
10(xx)* Form of 2021 Performance Share Unit Agreement - EBIT (Class A) (Incorporated by reference to Exhibits to
Quarterly Report on Form 10-Q of the Registrant for the quarter ended July 31, 2021 of the Registrant).
10(yy)* Form of 2021 Performance Share Unit Agreement - EBIT (Class B) (Incorporated by reference to Exhibits to
Quarterly Report on Form 10-Q of the Registrant for the quarter ended July 31, 2021 of the Registrant).
10(zz)* Form of 2021 Performance Share Unit Agreement - Relative EBIT ROI (Class A) (Incorporated by reference to
Exhibits to Quarterly Report on Form 10-Q of the Registrant for the quarter ended July 31, 2021 of the Registrant).
10(aaa)* Form of 2021 Performance Share Unit Agreement - Relative EBIT ROI (Class B) (Incorporated by reference to
Exhibits to Quarterly Report on Form 10-Q of the Registrant for the quarter ended July 31, 2021 of the Registrant).
10(bbb)* 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, 2021 of the Registrant).
10(ccc)* Form of 2021 Long-Term Incentive Program Award Agreement (Class A) (Incorporated by reference to Exhibits
to Quarterly Report on Form 10-Q of the Registrant for the quarter ended July 31, 2021 of the Registrant).
10(ddd)* Form of 2021 Long-Term Incentive Program Award Agreement (Class B) (Incorporated by reference to Exhibits
to Quarterly Report on Form 10-Q of the Registrant for the quarter ended July 31, 2021 of the Registrant).
52
10(eee)* Form of 2022 Long-Term Incentive Program Award Agreement (Class A) (Incorporated by reference to Exhibits
10(fff)*
to Quarterly Report on Form 10-Q for the quarter ended January 31, 2022 of the Registrant).
Form of 2022 Long-Term Incentive Program Award Agreement (Class B) (Incorporated by reference to Exhibits
to Quarterly Report on Form 10-Q for the quarter ended January 31, 2022 of the Registrant).
10(ggg)* Second Amended and Restated 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 29, 2022).
10(hhh)* Form of 2022 Performance Share Unit Agreement – EBIT (Class A) (Incorporated by reference to Exhibits to
10(iii)*
10(jjj)*
Quarterly Report on Form 10-Q for the quarter ended July 31, 2022 of the Registrant).
Form of 2022 Performance Share Unit Agreement – EBIT (Class B) (Incorporated by reference to Exhibits to
Quarterly Report on Form 10-Q for the quarter ended July 31, 2022 of the Registrant).
Form of 2022 Performance Share Unit Agreement – EBIT ROI (Class A) (Incorporated by reference to Exhibits
to Quarterly Report on Form 10-Q for the quarter ended July 31, 2022 of the Registrant).
10(kkk)* Form of 2022 Performance Share Unit Agreement – EBIT ROI (Class B) (Incorporated by reference to Exhibits
10(lll)*
to Quarterly Report on Form 10-Q for the quarter ended July 31, 2022 of the Registrant).
Form of 2022 Performance Share Unit Agreement – Land Light Performance Vesting (Class A) (Incorporated
by reference to Exhibits to Quarterly Report on Form 10-Q for the quarter ended July 31, 2022 of the Registrant).
10(mmm)* Form of 2022 Performance Share Unit Agreement – National Contracts Savings Performance Vesting (Class A)
(Incorporated by reference to Exhibits to Quarterly Report on Form 10-Q for the quarter ended July 31, 2022 of
the Registrant).
10(nnn)* Form of 2022 Performance Share Unit Agreement – KHDS Savings Performance Vesting (Class
A) (Incorporated by reference to Exhibits to Quarterly Report on Form 10-Q for the quarter ended July 31, 2022
of the Registrant).
10(ooo)* Restricted Share Unit Agreement Class A (2022 grants and thereafter) (Incorporated by reference to Exhibits to
Quarterly Report on Form 10-Q for the quarter ended July 31, 2022 of the Registrant).
10(ppp)* Director Restricted Share Unit Agreement Class A (2022 grants and thereafter) (Incorporated by reference to
Exhibits to Quarterly Report on Form 10-Q for the quarter ended July 31, 2022 of the Registrant).
10(qqq)* Form of 2019 Associate Market Share Unit Agreement (Class A) (Incorporated by reference to Exhibits to
Annual Report on Form 10-K of the Registrant for the year ended October 31, 2022 of the Registrant).
Form of 2019 Associate Market Share Unit Agreement (Class B) (Incorporated by reference to Exhibits to Annual
Report on Form 10-K of the Registrant for the year ended October 31, 2022 of the Registrant).
10(rrr)*
10(sss)* Form of 2019 Associate Market Share Unit Agreement - Pre-tax Profit Performance Vesting (Class A)
(Incorporated by reference to Exhibits to Annual Report on Form 10-K of the Registrant for the year ended
October 31, 2022 of the Registrant).
Form of 2019 Associate Market Share Unit Agreement - Pre-tax Profit Performance Vesting (Class B)
(Incorporated by reference to Exhibits to Annual Report on Form 10-K of the Registrant for the year ended
October 31, 2022 of the Registrant).
10(ttt)*
10(uuu)* Form of 2019 Associate Market Share Unit Agreement – Community Count Performance Vesting (Class A)
(Incorporated by reference to Exhibits to Annual Report on Form 10-K of the Registrant for the year ended
October 31, 2022 of the Registrant).
10(vvv)* Form of 2019 Associate Market Share Unit Agreement – Community Count Performance Vesting (Class B)
(Incorporated by reference to Exhibits to Annual Report on Form 10-K of the Registrant for the year ended
October 31, 2022 of the Registrant).
10(www)* Form of 2019 Associate Incentive Stock Option Agreement – Premium Priced (Class A) (Incorporated by
reference to Exhibits to Annual Report on Form 10-K of the Registrant for the year ended October 31, 2022 of
the Registrant).
10(xxx)* Form of 2019 Associate Non-Qualified Stock Option Agreement – Premium Priced (Class B) (Incorporated by
reference to Exhibits to Annual Report on Form 10-K of the Registrant for the year ended October 31, 2022 of
the Registrant).
10(yyy)* Form of 2019 Associate Incentive Stock Option Agreement (Class A) (Incorporated by reference to Exhibits to
Annual Report on Form 10-K of the Registrant for the year ended October 31, 2022 of the Registrant).
10(zzz)* Form of 2019 Associate Non-Qualified Stock Option Agreement (Class B) (Incorporated by reference to Exhibits
to Annual Report on Form 10-K of the Registrant for the year ended October 31, 2022 of the Registrant).
10(aaaa)* Form of 2019 Restricted Share Unit Agreement (Class A) (Incorporated by reference to Exhibits to Annual
Report on Form 10-K of the Registrant for the year ended October 31, 2022 of the Registrant).
10(bbbb)* Form of 2019 Director Restricted Share Unit Agreement (Class A) (Incorporated by reference to Exhibits to
Annual Report on Form 10-K of the Registrant for the year ended October 31, 2022 of the Registrant).
10(cccc)* Form of 2016 Non-Qualified Stock Option Agreement (Class B) (Incorporated by reference to Exhibits to Annual
Report on Form 10-K of the Registrant for the year ended October 31, 2022 of the Registrant).
53
10(dddd)* Form of 2021 Associate Restricted Share Unit Agreement (Class A) (Incorporated by reference to Exhibits to
Annual Report on Form 10-K of the Registrant for the year ended October 31, 2022 of the Registrant).
10(eeee)* Form of 2023 Long-Term Incentive Program Award Agreement (Class A) (Incorporated by reference to Exhibits
to Quarterly Report on Form 10-Q of the Registrant for the quarter ended January 31, 2023 of the Registrant).
10(ffff)* Form of 2023 Long-Term Incentive Program Award Agreement (Class B) (Incorporated by reference to Exhibits
to Quarterly Report on Form 10-Q of the Registrant for the quarter ended January 31, 2023 of the Registrant).
10(gggg)* Form of 2023 Long-Term Incentive Program Phantom Share Agreement (Incorporated by reference to Exhibits
to Quarterly Report on Form 10-Q of the Registrant for the quarter ended January 31, 2023 of the Registrant).
10(hhhh)* Form of 2023 Performance Share Unit Agreement EBIT Class A (Incorporated by reference to Exhibits to
Quarterly Report on Form 10-Q of the Registrant for the quarter ended July 31, 2023 of the Registrant).
10(iiii)* Form of 2023 Performance Share Unit Agreement EBIT Class B (Incorporated by reference to Exhibits to
Quarterly Report on Form 10-Q of the Registrant for the quarter ended July 31, 2023 of the Registrant).
10(jjjj)* Form of 2023 Performance Share Unit Agreement EBIT ROI Class A (Incorporated by reference to Exhibits to
Quarterly Report on Form 10-Q of the Registrant for the quarter ended July 31, 2023 of the Registrant).
10(kkkk)* Form of 2023 Performance Share Unit Agreement EBIT ROI Class A (Incorporated by reference to Exhibits to
Quarterly Report on Form 10-Q of the Registrant for the quarter ended July 31, 2023 of the Registrant).
Subsidiaries of the Registrant.
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 (furnished herewith).
Section 1350 Certification of Chief Financial Officer (furnished herewith).
Incentive Compensation Clawback Policy.
The following financial information from our Annual Report on Form 10-K for the year ended October 31, 2023,
formatted in inline Extensible Business Reporting Language (Inline XBRL): (i) the Consolidated Balance Sheets
at October 31, 2023 and October 31, 2022, (ii) the Consolidated Statements of Operations for the years ended
October 31, 2023, 2022 and 2021, (iii) the Consolidated Statements of Changes in Equity Deficit for years ended
October 31, 2023, 2022 and 2021 (iv) the Consolidated Statements of Cash Flows for the years ended October
31, 2023, 2022 and 2021, and (v) the Notes to Consolidated Financial Statements.
Cover page from our Annual Report on Form 10-K for the year ended October 31, 2023, formatted in Inline
XBRL (and contained in Exhibit 101).
* Management contracts or compensatory plans or arrangements.
21
23(a)
31(a)
31(b)
32(a)
32(b)
97(a)
101
104
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.
54
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 18, 2023
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 18, 2023, and in the capacities indicated.
/s/ ARA K. HOVNANIAN
Ara K. Hovnanian
Chairman of the Board, Chief Executive Officer, President
and Director (Principal Executive Officer)
/s/ BRAD G. O’CONNOR
Brad G. O’Connor
/s/ EDWARD A. KANGAS
Edward A. Kangas
/s/ JOSEPH A. MARENGI
Joseph A. Marengi
Chief Financial Officer and Treasurer
(Principal Financial Officer and Principal Accounting
Officer)
Chairman of Audit Committee and Director
Chairman of Compensation Committee and Director
/s/ VINCENT PAGANO JR.
Vincent Pagano Jr.
Chairman of Corporate Governance and Nominating
Committee and Director
/s/ J. LARRY SORSBY
J. Larry Sorsby
Director
55
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Financial Statements:
Report of Independent Registered Public Accounting Firm ............................................................................................
Consolidated Balance Sheets at October 31, 2023 and 2022 ..........................................................................................
Consolidated Statements of Operations for the years ended October 31, 2023, 2022 and 2021 .....................................
Consolidated Statements of Changes in Equity (Deficit) for the years ended October 31, 2023, 2022 and 2021 ...........
Consolidated Statements of Cash Flows for the years ended October 31, 2023, 2022 and 2021 ....................................
Notes to Consolidated Financial Statements ...................................................................................................................
Page
57
59
60
61
62
64
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
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, 2023, and 2022, the related consolidated statements of operations, equity, and cash flows for
each of the three years in the period ended October 31, 2023, 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, 2023, 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, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in
the period ended October 31, 2023, 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, 2023, 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.
57
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that
was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that
are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The
communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole,
and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or
on the accounts or disclosures to which it relates.
Warranty Costs and Construction Defect Reserves – Refer to Notes 3 and Note 16 to the financial statements
Critical Audit Matter Description
The Company accrues for warranty costs that are covered under its general liability and construction defect policy as part of
its general liability insurance deductible. Reserves for estimated losses for construction defects, warranty and bodily injury
claims are established using the assistance of a third-party actuary. The third-party actuary uses the Company’s historical
warranty and construction defect data to assist management in estimating the unpaid claims, claim adjustment expenses and
incurred but not reported claims reserves for the risks that the Company is assuming under the general liability and
construction defect programs.
We identified the estimation of the reserves for warranty costs and construction defects as a critical audit matter because of
the complexity and judgment involved in the determination of the estimated liability amount. This liability requires the
Company to make significant assumptions about trends in construction defect claims, claim settlement patterns, insurance
industry practices and legal interpretations with respect to homes built by the Company. Auditing the reserves for estimated
losses for construction defects required a high degree of auditor judgment and increased effort, including the need to involve
our actuarial specialists.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the construction defect reserves, included the following, among others:
● We tested the operating effectiveness of controls over the Company’s process for estimating the reserve for
warranty and construction defects, including those over the projection of settlement value of reported and
unreported claims.
● We evaluated the methods and assumptions used by management to estimate the warranty and construction
defects by:
- Reading the Company’s insurance policies and comparing the coverage and terms to the assumptions used by
management.
- Testing the underlying data that served as the basis for the actuarial analysis, including historical claims, to test
that the inputs to the actuarial estimate were accurate and complete.
- Comparing management’s prior-year assumptions of expected development and ultimate loss to actuals
incurred during the current year to identify potential bias in the determination of the self-insurance reserves.
● With the assistance of our actuarial specialists, we evaluated the reasonableness of the actuarial methodology
applied in estimating the warranty and construction defect reserves and developed independent estimates of the
warranty and construction defect reserve, including loss data and industry claim development factors, and
compared those to the reserve estimate recorded by management.
/s/ DELOITTE & TOUCHE LLP
New York, New York
December 18, 2023
We have served as the Company's auditor since 2009.
58
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
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 and equipment, net
Prepaid expenses and other assets
Total homebuilding
Financial services
Deferred tax assets, net
Total assets
LIABILITIES AND EQUITY
Homebuilding:
October 31, October 31,
2022
2023
$
434,119 $
8,431
326,198
13,382
998,841
125,587
224,758
1,349,186
97,886
27,982
33,946
69,886
2,021,436
1,058,183
152,406
308,595
1,519,184
74,940
37,837
25,819
63,884
2,061,244
168,671
155,993
302,833
2,492,940 $
344,793
2,562,030
$
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:
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, 2023 and
October 31, 2022
Common stock, Class A, $0.01 par value - authorized 16,000,000 shares; issued
6,247,308 shares at October 31, 2023 and 6,159,886 shares at October 31, 2022
Common stock, Class B, $0.01 par value (convertible to Class A at time of sale) -
authorized 2,400,000 shares; issued 776,750 shares at October 31, 2023 and 733,374
shares at October 31, 2022
Paid in capital - common stock
Accumulated deficit
Treasury stock - at cost – 901,379 shares of Class A common stock at October 31, 2023 and
782,901 shares at October 31, 2022; 27,669 shares of Class B common stock at October 31,
2023 and October 31, 2022
Total Hovnanian Enterprises, Inc. stockholders’ equity
Noncontrolling interest in consolidated joint ventures
Total equity
Total liabilities and equity
See notes to consolidated financial statements.
59
$
91,539 $
415,480
51,419
124,254
1,051,491
26,926
1,761,109
144,805
439,952
74,020
202,492
1,146,547
32,415
2,040,231
148,181
135,581
1,861
1,911,151
3,167
2,178,979
135,299
135,299
62
62
8
735,946
(157,197)
7
727,663
(352,413)
(132,382)
581,736
53
581,789
2,492,940 $
(127,582)
383,036
15
383,051
2,562,030
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 impairments 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 (income) expenses, net (1)
Total expenses
Loss on extinguishment of debt, net
Income from unconsolidated joint ventures
Income before income taxes
State and federal income tax provision (benefit):
State
Federal
Total income taxes
Net income
Less: preferred stock dividends
Net income available to common stockholders
Per share data:
Basic:
Net income per common share
Weighted-average number of common shares outstanding
Assuming dilution:
Net income per common share
Weighted-average number of common shares outstanding
Year Ended
October 31, October 31, October 31,
2021
2022
2023
65,471
$ 2,630,457 $ 2,840,454 $ 2,673,710
27,455
2,695,928 2,860,691 2,701,165
81,692
2,756,016 2,922,231 2,782,857
60,088
20,237
61,540
80,820
1,536
2,052,800 2,137,063 2,110,196
84,100
3,630
2,135,156 2,236,379 2,197,926
169,892
2,336,734 2,429,915 2,367,818
85,240
14,076
193,536
201,578
40,723
103,196
54,082
(17,148)
42,419
102,618
47,343
2,421
44,129
106,694
77,716
1,740
2,517,587 2,624,716 2,598,097
(3,748)
8,849
189,861
(6,795)
29,033
319,753
(25,638)
43,160
255,951
3,239
46,821
50,060
205,891 $
10,675
195,216 $
34,199
60,064
94,263
225,490 $
10,675
214,815 $
(82,348)
(335,608)
(417,956)
607,817
-
607,817
28.76 $
6,230
26.88 $
6,666
30.31 $
6,437
29.00 $
6,728
87.50
6,287
85.86
6,395
$
$
$
$
(1) Includes gain on consolidation of a joint venture of $19.1 million for the year ended October 31, 2023 (see Note 20).
See notes to consolidated financial statements.
60
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (DEFICIT)
A Common Stock
B Common Stock
Preferred Stock
(In thousands, except
share data)
Balance, October 31,
Shares
Issued and
Outstanding Amount Outstanding Amount Outstanding Amount Capital
Shares
Issued and
Shares
Issued and
Paid-In Accumulated Treasury Noncontrolling
Interest
Deficit
Stock
Total
2020
5,519,880 $
60
622,217 $
7
5,600 $ 135,299 $ 718,110 $ (1,175,045 ) $ (115,360 ) $
835 $ (436,094 )
Stock options,
amortization and
issuances
Restricted stock
amortization, issuances
and forfeitures
Conversion of Class B to
Class A common stock
Changes in noncontrolling
interest in consolidated
joint ventures
Net income
Balance, October 31,
42,204
5,368
33,564
1
31,708
86
(86 )
(41 )
4,049
(41 )
4,050
-
607,817
(348 )
(348 )
607,817
2021
5,595,734 $
61
659,207 $
7
5,600 $ 135,299 $ 722,118 $
(567,228 ) $ (115,360 ) $
487 $ 175,384
Stock options,
amortization and
issuances
Preferred dividend
declared ($476.56 per
share)
Restricted stock
amortization, issuances
and forfeitures
Conversion of Class B to
Class A common stock
Changes in noncontrolling
interest in consolidated
joint ventures
Share repurchases
Net income
Balance, October 31,
2022
Stock options,
amortization and
issuances
Preferred dividend
declared ($476.56 per
share)
Restricted stock
amortization, issuances
and forfeitures
Conversion of Class B to
Class A common stock
Changes in noncontrolling
interest in consolidated
joint ventures
Share repurchases
Net income
Balance, October 31,
2,316
-
120
(10,675 )
91,263
1
46,641
5,425
143
(143 )
120
(10,675 )
5,426
-
(312,471 )
(12,222 )
225,490
(472 )
(472 )
(12,222 )
225,490
5,376,985 $
62
705,705 $
7
5,600 $ 135,299 $ 727,663 $
(352,413 ) $ (127,582 ) $
15 $ 383,051
3,563
92
43,575
1
8,191
(199)
(10,675 )
92
(10,675)
8,192
-
83,660
199
(118,478)
(4,800)
205,891
38
38
(4,800)
205,891
2023
5,345,929 $
62
749,081 $
8
5,600 $ 135,299 $ 735,946 $
(157,197 ) $ (132,382 ) $
53 $ 581,789
See notes to consolidated financial statements.
61
HOVNANIAN ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation
Stock-based compensation
Amortization of debt discounts, premiums and deferred financing costs
(Gain) loss on sale of property and assets
Gain on consolidation of joint venture
Income from unconsolidated joint ventures
Distributions of earnings from unconsolidated joint ventures
Loss on extinguishment of debt
Noncontrolling interest in consolidated joint ventures
Inventory impairments and land option write-offs
Decrease (increase) in assets:
Inventories
Receivables, deposits and notes
Origination of mortgage loans
Sale of mortgage loans
Deferred tax assets
(Decrease) increase in liabilities:
Accounts payable, accrued interest and other liabilities
Customers’ deposits
State income tax payable
Net cash provided by operating activities
Cash flows from investing activities:
Proceeds from sale of property and assets
Purchase of property, equipment, and other fixed assets
Investment in and advances to unconsolidated joint ventures, net of reimbursements
Distributions of capital from unconsolidated joint ventures
Net cash (used in) provided by investing activities
Cash flows from financing activities:
Proceeds from mortgages and notes
Payments related to mortgages and notes
Proceeds from model sale leaseback financing programs
Payments related to model sale leaseback financing programs
Proceeds from land bank financing programs
Payments related to land bank financing programs
Proceeds from partner distributions to consolidated joint venture
Payments for partner distributions to consolidated joint venture
Net proceeds (payments) related to mortgage warehouse lines of credit
Net borrowings from senior secured notes
Payments related to senior secured notes
Preferred dividends paid
Treasury stock purchases
Deferred financing costs from note issuances and land banking financing programs
Net cash used in financing activities
Year Ended
October 31,
2023
October 31,
2022
October 31,
2021
$
205,891 $
225,490 $
607,817
8,798
14,227
1,645
(1,106)
(19,102)
(43,160)
18,650
25,638
38
1,536
5,457
10,276
376
(34)
-
(29,033)
3,990
6,795
270
14,076
5,280
7,668
242
92
-
(8,849)
9,709
3,748
430
3,630
278,672
11,296
(1,216,923)
1,197,988
41,960
(279,000)
(2,632)
(1,205,604)
1,245,408
80,885
(35,514)
(3,016)
(1,490,099)
1,443,355
(425,678)
(59,554)
(29,913)
(1,306)
435,275
1,961
(18,821)
(77,822)
16,447
(78,235)
324,849
(382,933)
12,412
(21,875)
53,115
(123,109)
-
-
16,432
640,925
(752,182)
(10,675)
(4,800)
(13,870)
(261,711)
95,329
7,705
5,725
(684)
89,466
63
(12,592)
35
10,342
(2,152)
438,883
(418,383)
35,030
(14,857)
189,952
(68,746)
40
(782)
(40,618)
-
(103,875)
(10,675)
(12,222)
(10,267)
(16,520)
70,794
71,370
20,009
19
210,213
32
(5,942)
(16,550)
31,456
8,996
252,930
(262,609)
7,606
(23,677)
35,282
(88,458)
40
(818)
47,744
-
(182,726)
-
-
(2,587)
(217,273)
1,936
382,190
477,519 $
311,396
382,190 $
309,460
311,396
Net increase in cash and cash equivalents, and restricted cash and cash equivalents
Cash and cash equivalents, and restricted cash and cash equivalents balance, beginning of
period
Cash and cash equivalents, and restricted cash and cash equivalents balance, end of period
$
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
62,576 $
9,407 $
44,872 $
14,062 $
87,227
7,669
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 statements of cash flows
$
434,119 $
8,431
4,519
30,450
477,519 $
326,198 $
13,382
6,468
36,142
382,190 $
245,970
16,089
5,819
43,518
311,396
See notes to consolidated financial statements.
62
Supplemental disclosure of noncash investing and financing activities:
In the second quarter of fiscal 2023, we consolidated the remaining assets of one of our unconsolidated joint
ventures, resulting in a $10.8 million reduction in our investment in the joint venture, and increases of $14.9 million and $5.3
million to inventory and accounts payable, respectively.
In the third quarter of fiscal 2023, we consolidated the remaining assets of one of our unconsolidated joint
ventures, resulting in a $53.4 million reduction in our investment in the joint venture, and increases of $95.3 million to
inventory, $3.8 million to other assets, $14.5 million to accounts payable, $7.3 million to customer deposits and $4.8 million
to nonrecourse mortgages and notes.
In the third and fourth quarters of fiscal 2021, we acquired the remaining assets of certain of our unconsolidated
joint ventures, resulting in a $26.6 million reduction in our investment in the joint ventures and a corresponding increase to
inventory.
63
HOVNANIAN ENTERPRISES, INC.
Notes to Consolidated Financial Statements
1. Basis of Presentation
The accompanying Consolidated Financial Statements have been prepared in accordance with generally accepted
accounting principles in the United States of America (“U.S. 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 on October 31. Noncontrolling interest represents the proportionate equity interest in a consolidated joint
venture that is not 100% owned by HEI, directly or indirectly.
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 three reportable segments defined as Northeast, Southeast and West. Homebuilding
operations comprise the substantial part of our business, representing approximately 98% of consolidated revenues for both
the years ended October 31, 2023 and 2022, and 97% for the year ended October 31, 2021. HEI is a Delaware corporation,
which through its subsidiaries, was building and selling homes in Arizona, California, Delaware, Florida, Georgia, Maryland,
New Jersey, Ohio, Pennsylvania, South Carolina, Texas, Virginia and West Virginia, across 113 consolidated active
selling communities at October 31, 2023. 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 U.S. GAAP requires management
to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates and these differences could have a significant impact on the
Consolidated 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 ASC 606, “Revenue from Contracts with Customers,” revenue is recognized
when control is transferred to the buyer, which occurs when the buyer takes title to and possession of the home and there is
no continuing involvement. From time to time, as market conditions warrant, we offer sales incentives which enable
customers to reduce the base price of a home or to reduce the price of options. These incentives are recorded as a reduction
of revenue in accordance with ASC 606.
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 because it mitigates volatility in reported earnings and
by measuring the fair value of loans and the derivative instruments used to economically hedge them, we do not have to apply
complex hedge accounting provisions.
64
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.
Cash and Cash Equivalents - Cash equivalents include certificates of deposit, U.S. Treasury bills and government
money–market funds with maturities of 90 days or less when purchased. Our cash balances are held at a few financial
institutions and may, at times, exceed insurable amounts. We believe we help to mitigate this risk by depositing our cash in
major financial institutions. At October 31, 2023 and 2022, $11.4 million and $13.4 million, respectively, of the total cash
and cash equivalents was in cash equivalents and restricted cash equivalents.
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, customers'
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 revolving 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 the specific identification method. 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 for each product type.
We record inventories on 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 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 consists of model homes financed with an investor and
inventory related to land banking arrangements accounted for as financings.
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, these sale and leaseback transactions are considered a financing rather than a sale.
Our Consolidated Balance Sheets, at October 31, 2023 and 2022, included inventory of $41.7 million and $48.5 million,
respectively, recorded to “Consolidated inventory not owned” with a corresponding amount of $42.0 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 a land banker and they provide us an
option to purchase back finished lots on a predetermined schedule. Because of our options to repurchase these parcels, for
accounting purposes, in accordance with ASC 606, these transactions are considered a financing rather than a sale. Our
Consolidated Balance Sheets, at October 31, 2023 and 2022, included inventory of $183.1 million and $260.1 million,
respectively, recorded to “Consolidated inventory not owned” with a corresponding amount of $82.3 million (net of debt
issuance costs) and $151.3 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 ASC 360, “Property,
Plant and Equipment.” ASC 360 requires long-lived assets, including inventories, held for development to be evaluated for
impairment based on the undiscounted future cash flows of the assets at the lowest level for which there are identifiable cash
flows. We evaluate impairment at the individual community level, which is the lowest level of discrete cash flows that are
available.
65
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 each quarter, these estimates are subject
to change in future reporting periods as facts and circumstances change. Local market-specific conditions that may impact
our estimates for a community include:
●
●
●
●
●
●
●
the intensity of competition within a market, including available home sales prices and home sales
incentives offered by our competitors;
the current sales absorption pace for both our communities and competitor communities;
community-specific attributes, such as location, availability of lots in the market, desirability and
uniqueness of our community, and the size and style of homes currently being offered;
potential for alternative product offerings to respond to local market conditions;
changes by management in the sales strategy of the community;
current local market economic and demographic conditions and related trends and forecasts; and
existing home inventory supplies, including foreclosures and short sales.
These and other local market-specific conditions that may be present are considered by management in preparing
projection assumptions for each community. The sales objectives can differ between our communities, even within a given
market. For example, facts and circumstances in a given community may lead us to price our homes with the objective of
yielding a higher sales absorption pace, while facts and circumstances in another community may lead us to price our homes
to minimize deterioration in our gross margins, although it may result in a slower sales absorption pace. In addition, the key
assumptions included in our estimate of future undiscounted cash flows may be interrelated. For example, a decrease in
estimated base sales price or an increase in homes sales incentives may result in a corresponding increase in sales absorption
pace. Additionally, a decrease in the average sales price of homes to be sold and closed in future reporting periods for one
community that has not been generating what management believes to be an adequate sales absorption pace may impact the
estimated cash flow assumptions of a nearby community. Changes in our key assumptions, including estimated construction
and development costs, sales 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 is recorded. 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 calculating 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 third parties. 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
66
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, 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.
Warranty Costs and Construction Defect Reserves - We accrue 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 2023 and previously delivered in 2022, our
deductible under our general liability insurance was $25.0 million in aggregate for construction defect and warranty
claims. For bodily injury claims, our deductible per occurrence in fiscal 2023 and 2022 was $0.5 million, up to a $5.0 million
limit in California and $0.25 million, up to a $5.0 million limit in all other states. Our aggregate retention for construction
defect, warranty and bodily injury claims was $25.0 million for fiscal 2023 and 2022. 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. The third-party actuary uses our historical warranty and
construction defect data to assist 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 consider 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 liabilities, 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
control is transferred to the buyer.
Interest - Interest attributable to properties under development during the land development and home construction
period is capitalized and then expensed to cost of sales as the related inventories are sold. Interest that does not qualify for
capitalization is expensed as incurred in “Other interest.”
Interest costs incurred, expensed and capitalized were as follows:
(In thousands)
Interest capitalized at beginning of year
Plus interest incurred(1)
Less cost of sales interest expensed
Less other interest expensed(2)
Less interest contributed to unconsolidated joint ventures(3)
Plus interest acquired from unconsolidated joint ventures(4)
Interest capitalized at end of year(5)
$
Year Ended
October 31, October 31, October 31,
2021
65,010
155,514
(84,100)
(77,716)
(3,667)
3,118
58,159
2022
58,159 $
134,024
(85,240)
(47,343)
-
-
59,600 $
2023
59,600 $
136,535
(80,820)
(54,082)
(9,456)
283
52,060 $
$
(1)
(2)
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 $17.7
million, $28.6 million and $57.1 million for the years ended October 31, 2023, 2022 and 2021, 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 as incurred. This component of
other interest was $36.4 million, $18.8 million and $20.6 million for the years ended October 31, 2023, 2022 and
2021, respectively.
67
(3)
(4)
(5)
Represents capitalized interest which was included as part of the assets contributed to joint ventures, as discussed
in Note 20. There was no impact to the Consolidated Statement of Operations as a result of these transactions.
Represents capitalized interest which was included as part of the assets purchased from joint ventures, as discussed
in Note 20. There was no impact to the Consolidated Statement of Operations as a result of these transactions.
Capitalized interest amounts are shown gross before allocating any portion of impairments, if any, to capitalized
interest.
Land Options - We have access to land and lots through option contracts. 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 and land option write-offs” if we determine we will not exercise
the option. We record costs associated with options on the Consolidated Balance Sheets under “Land and land options held
for future development or sale.”
In accordance with ASC 810, “Consolidation,” we evaluate option contracts for land to determine whether they
are with variable interest entities ("VIEs") and, if so, whether we are the primary beneficiary. A VIE is an entity in which
either (i) the equity investors as a group, if any, lack the power through voting or similar rights to direct the activities of such
entity that most significantly impact such entity’s economic performance or (ii) the equity investment at risk is insufficient
to finance that entity’s activities without additional subordinated financial support. VIEs are consolidated when we have a
controlling financial interest. A controlling financial interest will have both of the following characteristics: (a) the power to
direct the activities of a VIE that most significantly impact the VIE’s economic performance and (b) the obligation to absorb
losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could
potentially be significant to the VIE. If land and lot options are determined to be with VIEs and we are the primary beneficiary
or the options have terms that require us to record it as financing, then we record the land and lots under option on the
Consolidated Balance Sheets under “Consolidated inventory not owned” with an offset under “Liabilities from inventory not
owned.” We perform on-going re-assessments of VIEs based on subsequent events, such as the modification of contracts or
other changes in facts and circumstances, which could cause our consolidation conclusions to change.
Unconsolidated Homebuilding and Land Development Joint Ventures - Investments in unconsolidated entities in
which the Company has significant influence over the operating and financial decisions of the entity, but holds less than a
controlling financial interest, are accounted for by the equity method. Our investments in unconsolidated homebuilding and
land development joint ventures are accounted for under the equity method. Under the equity method, we recognize our
proportionate share of income and loss earned by the joint venture upon the delivery of lots or homes to third parties. Our
ownership interests in joint ventures vary but our voting equity interests held are generally 20% to 50%. 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 joint venture can require significant judgment.
In accordance with ASC 323, “Investments - Equity Method and Joint Ventures,” we assess our investments in
unconsolidated joint ventures for recoverability quarterly, 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. There were no write-downs for any periods presented.
Debt Issuance Costs - Costs associated with borrowings under our credit facilities and term loans and the issuance
of senior secured and senior notes are capitalized and amortized over the term of each note’s issuance. The capitalized costs
are recorded as a contra liability within our debt balances, except for the revolving credit facility costs, which are recorded
as a prepaid expense.
Debt Issued at a Discount/Premium - Debt issued at a discount or premium to the face amount is amortized
utilizing the effective interest method over the term of the note and recorded as a component of "Other interest" in the
Consolidated Statements of Operations.
68
Advertising Costs - Advertising costs are expensed as incurred, primarily to "Selling, general and administrative"
homebuilding expense in the Consolidated Statements of Operations. During the years ended October 31, 2023, 2022 and
2021, advertising expenses totaled $15.4 million, $10.6 million and $9.8 million, respectively.
Deferred Income Taxes - Deferred income taxes are provided for temporary differences between amounts recorded
for financial reporting and 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 forward to future years to recover deferred tax
assets. In accordance with ASC 740, “Income Taxes,” we evaluate our deferred tax assets quarterly to determine if valuation
allowances are required. We 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 for more-
likely-than-not exposures 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 expense in the period in which an uncertain tax position is effectively settled, 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 taxes"
in the Consolidated Statement of Operations for the period in which they are determined. In addition, we record interest and
penalties related to unrecognized tax benefits as a component of income tax expense. Accrued interest and penalties are
included within "Income taxes payable" on the Consolidated Balance Sheets.
Prepaid Expenses - Prepaid expenses that relate to specific housing communities (model setup, architectural fees,
homeowner warranty program fees, interest rate buydowns, etc.) are amortized to cost of sales as the applicable inventories
are sold. All other prepaid expenses are amortized over a specific time period or as used and charged to overhead expense.
Allowance for Credit Losses – We regularly review our receivable balances, which are included in "Receivables,
deposits and notes, net" on the Consolidated Balance Sheets, for collectability. These receivables include receivables from
our insurance carriers, receivables from municipalities related to the development of utilities or other infrastructure, and other
miscellaneous receivables. Allowances are maintained for potential credit losses based on historical experience, present
economic conditions and other factors considered relevant. The allowance for credit losses were $12.8 million and
$12.7 million at October 31, 2023 and 2022, respectively, which primarily related to allowances for receivables from
municipalities and an allowance for a receivable for a prior year land sale. During fiscal 2023 and 2022, we recorded $0.4
million and $2.5 million of additional reserves. During fiscal 2023 and 2022, we recorded $0.2 million and $0.3 million,
respectively, in recoveries. During fiscal 2023 we recorded $0.1 million in write-offs and there were no write-offs in fiscal
2022.
Property and Equipment - Property and equipment are recorded at cost. Maintenance and repair costs are expensed
as incurred. Depreciation is computed by the straight-line method based upon estimated useful lives, generally as follows:
Building and building improvements - 39 years or life of the lease; Furniture - 5-7 years; Equipment - 5-7 years; Capitalized
Software - 3-5 years.
Stock-Based Compensation - We account for our stock-based awards under ASC 718, “Compensation - Stock
Compensation” which requires a fair-value based method to determine the estimated cost of an award. Compensation cost
for stock-based awards is measured on the grant date. We recognize compensation cost for time-based awards ratably over
the vesting period and performance-based awards ratably over the vesting period when it is probable that the stated
performance target will be achieved. Forfeitures of stock-based awards are recognized as they occur.
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 participating securities (the "denominator") for the
period. Contingently issuable shares are included in basic earnings per share as of the date that all necessary vesting conditions
have been satisfied. 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 stock options and nonvested shares of restricted stock units
("RSUs"). Any stock 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.
69
All shares that contain non-forfeitable rights to dividends or dividend equivalents that participate in undistributed
earnings with common stock are considered participating securities and are included in 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.
Recent Accounting Pronouncements - In March 2020, the Financial Accounting Standards Board ("FASB") issued
Accounting Standards Update ("ASU") 2020-04, “Facilitation of the Effects of Reference Rate Reform on Financial
Reporting” (“ASU 2020-04”). ASU 2020-04 provides companies with optional expedients to ease the potential accounting
burden on contracts affected by the discontinuation of the London Interbank Offered Rate ("LIBOR") or another reference
rate expected to be discontinued. This guidance was effective for the Company beginning on March 12, 2020, and we may
elect to apply the amendments prospectively. In December 2022, the FASB issued ASU 2022-06, “Reference Rate Reform
(Topic 848): Deferral of the Sunset Date of Topic 848”, to extend the temporary accounting rules under ASC 848 from
December 31, 2022 to December 31, 2024. We are applying this guidance as we enter into transactions that are within the
scope of the optional expedients allowed, and the application has not had a material impact on our Consolidated Financial
Statements.
the FASB
In August 2023,
Joint Venture
Formations” (“ASU 2023-05”), which addresses the accounting for contributions made to a joint venture. ASU 2023-
05 requires joint ventures to measure all assets and liabilities upon formation at fair value. This guidance will be applied
prospectively to all joint venture formations with a formation date on or after January 1, 2025. We are currently evaluating
the potential impact, but we do not expect the adoption of this guidance to have a material impact on our Consolidated
Financial Statements.
issued ASU 2023-05, “Business Combinations
-
the FASB
In November 2023,
to Reportable Segment
Disclosures” (“ASU 2023-07”). ASU 2023-07 requires disclosure of significant segment expenses that are regularly provided
to the chief operating decision maker and included within the segment measure of profit or loss. This guidance will be applied
retrospectively and is effective for annual reporting periods in fiscal years beginning after December 15, 2023, and interim
reporting periods in fiscal years beginning after December 31, 2024. We are currently evaluating the potential impact, but we
do not expect the adoption of this guidance to have a material impact on our Consolidated Financial Statements.
issued ASU 2023-07, “Improvements
4. Leases
We rent 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. 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 on a straight-line basis over the lease term and combine lease and non-lease
components for all leases. Our office lease terms are typically from three to five years and generally contain renewal options.
In accordance with ASC 842, our lease terms include 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, 2023 is comprised of operating leases where we are the lessee, primarily for
our corporate office and division offices. As allowed by ASC 842, we made an accounting policy election to not record leases
with an initial term of 12 months or less on our Consolidated Balance Sheets.
Lease costs are included in our Consolidated Statements of Operations, primarily in "Selling, general and
administrative" homebuilding expenses and payments on our lease liabilities are presented in the table below.
(In thousands)
Operating lease costs
Cash payments on lease liabilities
Year Ended October 31,
2022
2023
2021
$
$
11,059 $
9,293 $
10,483 $
9,605 $
10,521
9,598
70
ROU assets are classified within "Prepaid expenses and other assets" on our Consolidated Balance Sheets, while
lease liabilities are classified within "Accounts payable and other liabilities." We recorded a net increase to both ROU assets
and lease liabilities of $19.8 million as a result of new leases and lease renewals that commenced during the year ended
October 31, 2023. 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
$
$
2023
2022
25,745 $
26,470 $
5.1
10.0%
17,899
18,862
3.5
9.5%
Maturities of our operating lease liabilities as of October 31, 2023 are as follows:
Fiscal Year Ending October 31,
2024
2025
2026
2027
2028
Thereafter
Total operating lease payments (1)
Less: imputed interest
Present value of operating lease liabilities
(In thousands)
8,491
$
8,028
6,538
4,317
1,784
4,871
34,029
(7,559)
26,470
$
(1) Lease payments exclude $3.2 million of legally binding minimum lease payments for office leases signed but
not yet commenced as of October 31, 2023. The related ROU asset and operating lease liability are not reflected on the
Company's Consolidated Balance Sheet as of October 31, 2023.
5. Property and Equipment
Homebuilding property and equipment consists of land and land improvements, buildings, building
improvements, furniture and equipment used to conduct day-to-day business and are recorded at cost less accumulated
depreciation.
Property and equipment balances as of October 31, 2023 and 2022 were as follows:
(In thousands)
Land and land improvements
Buildings
Building improvements
Furniture
Equipment
Capitalized software
Property and equipment
Less: accumulated depreciation
Property and equipment, net
October 31,
2023
2022
$
$
1,563 $
7,828
16,061
2,793
10,124
50,630
88,999
(55,053)
33,946 $
1,639
9,497
22,220
4,363
10,739
29,263
77,721
(51,902)
25,819
6. Restricted Cash and Customers' Deposits
Homebuilding "Restricted cash and cash equivalents" on the Consolidated Balance Sheets totaled $8.4 million
and $13.4 million as of October 31, 2023 and 2022, respectively, which primarily consists of cash collateralizing our letter
of credit agreements and facilities (see Note 9).
71
Financial services restricted cash and cash equivalents, which are included in "Financial services" assets on the
Consolidated Balance Sheets, totaled $30.5 million and $36.1 million as of October 31, 2023 and 2022, respectively. Included
in these balances were (1) financial services customers’ deposits of $28.1 million and $29.7 million as of October 31, 2023
and 2022, respectively, which are subject to restrictions on our use, and (2) restricted cash under the terms of our mortgage
warehouse lines of credit of $2.4 million and $6.4 million as of October 31, 2023 and 2022, respectively.
Homebuilding "Customers’ deposits" are shown as a liability on the Consolidated Balance Sheets. These liabilities
are significantly more than the applicable periods’ restricted cash balances because in some states the deposits are not
restricted from use and, in other states, we are able to release the majority of these customer deposits to cash by pledging
letters of credit and surety bonds.
7. Mortgage Loans Held for Sale
Our wholly owned mortgage banking subsidiary, K. Hovnanian American Mortgage, LLC (“K. Hovnanian
Mortgage”) originates mortgage loans, primarily from the sale of our homes. Such mortgage loans are sold in the secondary
mortgage market within a short period of time of origination. Mortgage loans held for sale consist primarily of single-family
residential loans collateralized by the underlying property. Loans held for sale are recorded at fair value with the changes in
the value recognized in the Consolidated Statements of Operations in “Financial services” revenue. We currently use forward
sales of 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 do not require any
payments to be made to the counterparty or purchaser in connection with the execution of the commitments.
At October 31, 2023 and 2022, $127.7 million and $92.5 million, respectively, of mortgage loans 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 the resale value of the home. The reserves for these estimated losses are included in
“Financial services” liabilities on the Consolidated Balance Sheets. At October 31, 2023 and 2022, we had reserves
specifically for 10 and 14 identified mortgage loans, respectively, as well as reserves for an estimate of future losses on
mortgages sold but not yet identified to us.
The activity in our loan origination reserves in fiscal 2023 and 2022 was as follows:
(In thousands)
Year Ended
October 31,
2023
2022
Loan origination reserves, beginning of period
Provisions for losses during the period
Adjustments to pre-existing provisions for losses from changes in estimates
Loan origination reserves, end of period
$
$
1,795 $
187
31
2,013 $
1,632
181
(18)
1,795
8. Mortgages
Nonrecourse
We have nonrecourse mortgage loans for certain communities totaling $91.5 million and $144.8 million, net of
debt issuance costs, at October 31, 2023 and 2022, respectively, which are secured by the related real property, including any
improvements, with an aggregate book value of $331.6 million and $418.9 million, respectively. The weighted-average
interest rate on these obligations was 8.5% and 6.7% at October 31, 2023 and 2022, respectively, and the mortgage loan
payments on each community primarily correspond to home deliveries.
Mortgage Loans
K. Hovnanian Mortgage originates mortgage loans primarily from the sale of our homes. Such mortgage loans
and related servicing rights are generally sold in the secondary mortgage market within a short period of time. K. Hovnanian
Mortgage finances the origination of mortgage loans through various master repurchase agreements, which are recorded in
"Financial services" liabilities on the Consolidated Balance Sheets.
72
Our secured Master Repurchase Agreement with JPMorgan Chase Bank, N.A. (“Chase Master Repurchase
Agreement”) is a short-term borrowing facility that provides up to $75.0 million through its maturity on July 31, 2024. The
loan is secured by the mortgages held for sale and is repaid when we sell the underlying mortgage loans to permanent
investors. Interest is payable monthly on outstanding advances at an adjusted Secured Overnight Financing Rate ("SOFR
rate"), plus the applicable margin of 2.125% to 2.375%. As of October 31, 2023 and 2022, the aggregate principal amount of
all borrowings outstanding under the Chase Master Repurchase Agreement was $31.4 million and $14.1 million, respectively.
K. Hovnanian Mortgage has another secured Master Repurchase Agreement with Customers Bank (“Customers
Master Repurchase Agreement”) which is a short-term borrowing facility that provides up to $50.0 million through
its maturity on March 6, 2024. The loan is secured by the mortgages held for sale and is repaid when we sell the underlying
mortgage loans to permanent investors. Interest is payable daily or as loans are sold to permanent investors on outstanding
advances at the current Bloomberg Short Term Bank Yield Index ("BSBY") rate, plus the applicable margin ranging from
2.125% to 4.5% based on the type of loan and the number of days outstanding on the warehouse line. As of October 31, 2023
and 2022, the aggregate principal amount of all borrowings outstanding under the Customers Master Repurchase Agreement
was $41.1 million and $43.1 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 January 10, 2024. 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 daily
adjusting BSBY rate, subject to a floor of 0.50%, plus the applicable margin of 1.75% or 3.25% based upon the type of loan.
As of October 31, 2023 and 2022, the aggregate principal amount of all borrowings outstanding under the Comerica Master
Repurchase Agreement was $38.3 million and $37.1 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, 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, 2023, 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 secured notes, senior notes and credit facilities balances as of October 31, 2023 and October 31, 2022, were
as follows:
(In thousands)
Senior Secured Notes:
10.0% Senior Secured 1.75 Lien Notes due November 15, 2025 (1)
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
8.0% Senior Secured 1.125 Lien Notes due September 30, 2028
11.75% Senior Secured 1.25 Lien Notes due September 30, 2029
Total Senior Secured Notes
Senior Notes:
8.0% Senior Notes due November 1, 2027 (2)
13.5% Senior Notes due February 1, 2026
5.0% Senior Notes due February 1, 2040
Total Senior Notes
Senior Unsecured Term Loan Credit Facility due February 1, 2027
Senior Secured 1.75 Lien Term Loan Credit Facility due January 31, 2028
Senior Secured Revolving Credit Facility (3)
Subtotal senior notes and credit facilities
Net (discounts) premiums
Unamortized debt issuance costs
Total senior notes and credit facilities, net of discounts, premiums and unamortized debt
October 31, October 31,
2022
2023
$
$
113,502 $
-
-
-
225,000
430,000
768,502 $
158,502
250,000
282,322
162,269
-
-
853,093
$
-
- $
90,590
90,590
90,120
90,120
180,710
180,710 $
$
39,551
39,551 $
$
81,498
81,498 $
$
$
-
- $
$ 1,070,261 $ 1,154,852
4,079
$
(12,384)
$
(14,563) $
(4,207) $
issuance costs
$ 1,051,491 $ 1,146,547
(1) On November 15, 2023, K. Hovnanian redeemed all of its $113.5 million aggregate principal amount of 10.0% Senior
Secured 1.75 Lien Notes due November 15, 2025.
(2) At October 31, 2022, $26.0 million of 8.0% Senior Notes due 2027 (the “8.0% 2027 Notes”) were owned by a wholly
owned consolidated subsidiary of HEI. Therefore, in accordance with U.S. GAAP, such notes were not reflected on the
Consolidated Balance Sheets of HEI. On October 31, 2023, K. Hovnanian redeemed all of the $26.0 million aggregate
principal amount of its 8.0% 2027 Notes.
(3) At October 31, 2023, provides for up to $125.0 million in aggregate amount of senior secured first lien revolving loans.
The revolving loans thereunder have a maturity of June 30, 2026 and borrowings bear interest, at K. Hovnanian’s option, at
either (i) a term secured overnight financing rate (subject to a floor of 3.00%) plus an applicable margin of 4.50% or (ii) an
alternate base rate (subject to a floor of 4.00%) plus an applicable margin of 3.50%. In addition, K. Hovnanian will pay an
unused commitment fee on the undrawn revolving commitments at a rate of 1.00% per annum.
As of October 31, 2023, future maturities of our borrowings were as follows (in thousands):
Fiscal Year Ending October 31, (1)
2024
2025
2026 (2)
2027
2028
Thereafter
Total
$
-
-
204,092
39,551
306,498
520,120
$ 1,070,261
(1) Does not include our $125.0 million Senior Secured Revolving Credit Facility under which there were no borrowings
outstanding as of October 31, 2023.
(2) On November 15, 2023, K. Hovnanian redeemed all of its $113.5 million aggregate principal amount of 10.0% Senior
Secured 1.75 Lien Notes due November 15, 2025.
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General
Except for K. Hovnanian, the issuer of the notes and borrower under the Credit Facilities (as defined below),
our home mortgage subsidiaries, certain of our title insurance subsidiaries, joint ventures and subsidiaries holding interests
in our joint ventures, we and each of our subsidiaries are guarantors of the Credit Facilities, the senior secured notes and
senior notes outstanding at October 31, 2023 (collectively, the “Notes Guarantors”).
The credit agreements governing the term loans and revolving credit facilities (collectively, the “Credit
Facilities”) and the indentures governing the senior secured and senior notes (together, the “Debt Instruments”) outstanding
at October 31, 2023 do not contain any financial maintenance covenants, but do contain restrictive covenants that limit,
among other things, the ability of HEI and certain of its subsidiaries, including K. Hovnanian, to incur additional indebtedness,
pay dividends and make distributions on common and preferred stock, repay/repurchase certain indebtedness prior to its
respective stated maturity, repurchase (including through exchanges) common and preferred stock, make other restricted
payments (including investments), sell certain assets (including in certain land banking transactions), incur liens, consolidate,
merge, sell or otherwise dispose of all or substantially all of their assets and enter into certain transactions with affiliates. The
Debt Instruments also contain customary events of default which would permit the lenders or holders thereof to exercise
remedies with respect to the collateral (as applicable), declare the loans (the “Unsecured Term Loans”) made under the Senior
Unsecured Term Loan Credit Facility due February 1, 2027 (the “Unsecured Term Loan Facility”), loans (the “Secured Term
Loans”) made under the Senior Secured 1.75 Lien Term Loan Credit Facility due January 31, 2028 (the “Secured Term Loan
Facility”) and loans (the “Secured Revolving Loans”) made under the Senior Secured Revolving Credit Agreement due June
30, 2026 (the “Secured Credit Agreement”) or notes to be immediately due and payable if not cured within applicable grace
periods, including the failure to make timely payments on the Unsecured Term Loans, Secured Term Loans, Secured
Revolving Loans or notes or other material indebtedness, cross default to other material indebtedness, the failure to comply
with agreements and covenants and specified events of bankruptcy and insolvency, with respect to the Unsecured Term
Loans, Secured Term Loans and Secured Revolving Loans, material inaccuracy of representations and warranties and with
respect to the Unsecured Term Loans, Secured Term Loans and Secured Revolving Loans, a change of control, and, with
respect to the Secured Term Loans, Secured Revolving Loans and senior secured notes, the failure of the documents granting
security for the obligations under the secured Debt Instruments to be in full force and effect, and the failure of the liens on
any material portion of the collateral securing the obligations under the secured Debt Instruments to be valid and perfected.
As of October 31, 2023, 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 (in the case of each such payment, our
secured debt leverage ratio must also be less than 4.0 to 1.0), and from incurring indebtedness other than certain permitted
indebtedness and nonrecourse indebtedness. Beginning as of October 31, 2021, as a result of our improved operating results,
our fixed coverage ratio was above 2.0 to 1.0 and our secured debt leverage ratio was below 4.0 to 1.0, therefore we were no
longer restricted from paying dividends. As such, we made dividend payments of $2.7 million to preferred shareholders in
every quarter since the first quarter of fiscal 2022. Dividends on the Series A preferred stock are not cumulative and,
accordingly, if for any reason we do not declare a dividend on the Series A preferred stock for a quarterly dividend period
(regardless of our availability of funds), holders of the Series A Preferred Stock will have no right to receive a dividend for
that period, and we will have no obligation to pay a dividend for that period.
Under the terms of our Debt Instruments, we have the right to make certain redemptions and prepayments and,
depending on market conditions, our strategic priorities and covenant restrictions, may do so from time to time. We also
continue to actively analyze and evaluate our capital structure and explore transactions to simplify our capital structure and
to strengthen our balance sheet, including those that reduce leverage, interest rates and/or extend maturities, and will seek to
do so with the right opportunity. We may also continue to make debt or equity purchases and/or exchanges from time to time
through tender offers, exchange offers, redemptions, open market purchases, private transactions, or otherwise, or seek to
raise additional debt or equity capital, depending on market conditions and covenant restrictions.
Fiscal 2023
On May 30, 2023, K. Hovnanian redeemed $100.0 million aggregate principal amount of its 7.75% Senior
Secured 1.125 Lien Notes due 2026 (the “Existing 1.125 Lien Notes”). The aggregate purchase price for this redemption was
$104.2 million, which included accrued and unpaid interest and which was funded with cash on hand. This
redemption resulted in a loss on extinguishment of debt of $4.1 million for the fiscal year ended October 31, 2023, including
the write-off of unamortized debt issuance costs and fees. The loss from the redemption is included in the Consolidated
Statement of Operations as “Loss on extinguishment of debt, net.”
75
On August 29, 2023, K. Hovnanian redeemed an additional $100.0 million aggregate principal amount of the
Existing 1.125 Lien Notes. The aggregate purchase price for this redemption was $102.2 million, which included accrued
and unpaid interest and which was funded with cash on hand. This redemption resulted in a loss on extinguishment of debt
of $3.8 million for the fiscal year ended October 31, 2023, including the write-off of unamortized debt issuance costs and
fees. The loss from the redemption is included in the Consolidated Statement of Operations as “Loss on extinguishment of
debt, net”.
On September 7, 2023, K. Hovnanian repurchased in the open market $45.0 million aggregate principal amount
of its 10.0% 1.75 Lien Notes due 2025 (the “1.75 Lien Notes”). The aggregate purchase price for this repurchase was $46.7
million, which included accrued and unpaid interest and which was funded with cash on hand. This repurchase resulted in a
gain on extinguishment of debt of $0.2 million for the fiscal year ended October 31, 2023, including the write-off of
unamortized debt issuance costs and fees. The gain from the repurchase is included in the Consolidated Statement of
Operations as “Loss on extinguishment of debt, net”.
On September 25, 2023, HEI, K. Hovnanian and the Notes Guarantors entered into the Third Amendment (the
“Third Amendment”) to the Secured Credit Agreement, dated as of October 31, 2019 (as amended by the First Amendment
to the Credit Agreement, dated as of November 27, 2019, and by the Second Amendment to the Credit Agreement, dated as
of August 19, 2022), by and among K. Hovnanian, the Company, the other guarantors party thereto, Wilmington Trust,
National Association, as administrative agent, and the lenders party thereto, which provides for up to $125.0 million in
aggregate amount of senior secured first lien revolving loans. The Third Amendment (i) extended the final scheduled maturity
of the Revolving Credit Facility from June 30, 2024 to June 30, 2026, (ii) increased the interest rate floor applicable to term
secured overnight financing loans from 1.0% to 3.0% and (iii) provided for certain other amendments. Borrowings under the
Revolving Credit Facility bear interest, at K. Hovnanian’s option, at either (a) a term secured overnight financing rate (subject
to a floor of 3.0%) plus an applicable margin of 4.5% or (b) an alternate base rate (subject to a floor of 4.0%) plus an applicable
margin of 3.5%. In addition, K. Hovnanian pays an unused commitment fee on the undrawn revolving commitments at a rate
of 1.0% per annum. The foregoing amendments took effect on October 5, 2023.
On October 5, 2023, K. Hovnanian issued and sold to investment funds, separate accounts and/or other entities
owned (in whole or in part), controlled, managed and/or advised by Angelo, Gordon & Co., L.P. (collectively, "Angelo
Gordon"), investment funds, separate accounts and/or other entities owned (in whole or in part), controlled, managed and/or
advised by Apollo Capital Management, L.P. (collectively, "Apollo" and, together with Angelo Gordon, the "Specified
Persons"), and certain other institutional purchasers , in a private placement, $225.0 million aggregate principal amount of
8.0% Senior Secured 1.125 Lien Notes due 2028 (the “New 1.125 Lien Notes”) and $430.0 million aggregate principal
amount of 11.75% Senior Secured 1.25 Lien Notes due 2029 (the “New 1.25 Lien Notes”). Under the terms of the indentures
governing the New 1.125 Lien Notes and the 1.25 Lien Notes, K. Hovnanian will have the ability to issue additional notes
under the indenture that governs the New 1.25 Lien Notes (the “Additional 1.25 Lien Notes”) in exchange for Specified
Junior Debt (as defined below) or to purchase certain Specified Junior Debt. K. Hovnanian has agreed that the Specified
Persons may, at their option from time to time, exchange junior lien and/or unsecured indebtedness of K. Hovnanian (the
“Specified Junior Debt”) into a principal amount of Additional 1.25 Lien Notes not to exceed $150.0 million in the aggregate.
In any such exchange, K. Hovnanian will be required to issue a principal amount of Additional 1.25 Lien Notes equal to (i)
the price at which the Specified Persons acquired such Specified Junior Debt (the “Specified Person Purchase Price”) plus
(ii) 20% of the difference between the principal amount of such Specified Junior Debt and the Specified Person Purchase
Price (such sum, the “Company Acquisition Price”), provided that, the Company Acquisition Price shall be reduced, if
applicable, such that the per annum interest expense on the applicable issuance of Additional 1.25 Lien Notes does not exceed
the per annum interest expense on the applicable Specified Junior Debt being exchanged. In addition, K. Hovnanian will have
the option to purchase such Specified Junior Debt in cash at the Company Acquisition Price in lieu of consummating any
such exchange.
On October 5, 2023, K. Hovnanian redeemed with the proceeds from the issuances of the New 1.125 Lien Notes
and the New 1.25 Lien Notes all of the remaining (i) $50.0 million aggregate principal amount of its Existing 1.125 Lien
Notes for a redemption price of $51.5 million, which included accrued and unpaid interest, (ii) $282.3 million aggregate
principal amount of its 10.5% Senior Secured 1.25 Lien Notes due 2026 (the “Existing 1.25 Lien Notes”) for a redemption
price of $293.9 million, which included accrued and unpaid interest, and (iii) $162.3 million aggregate principal amount of its
11.25% Senior Secured 1.5 Lien Notes due 2026 (the “1.5 Lien Notes”) for a redemption price of $164.8 million, which
included accrued and unpaid interest. These redemptions resulted in a loss on extinguishment of debt of $17.9 million for the
fiscal year ended October 31, 2023, including the write-off of unamortized debt issuance costs and fees. The loss from the
redemptions is included in the Consolidated Statement of Operations as “Loss on extinguishment of debt, net”.
76
On October 31, 2023, K. Hovnanian redeemed in full all of the $26.0 million aggregate principal amount of its
8.0% 2027 Notes for a redemption price of 100% of the principal amount thereof, plus accrued and unpaid interest.
Fiscal 2022
On April 29, 2022, K. Hovnanian redeemed $100.0 million aggregate principal amount of its Existing 1.125 Lien
Notes. The aggregate purchase price for this redemption was $105.5 million, which included accrued and unpaid interest and
which was funded with cash on hand. This redemption resulted in a loss on extinguishment of debt of $6.8 million for the
fiscal year ended October 31, 2022, including the write-off of unamortized debt issuance costs and fees. The loss from the
redemption is included in the Consolidated Statement of Operations as “Loss on extinguishment of debt, net”.
Secured Obligations
The Secured Credit Agreement provides for up to $125.0 million in aggregate amount of Secured Revolving Loans
to be used for general corporate purposes, upon the terms and subject to the conditions set forth therein. Secured Revolving
Loans are to be borrowed by K. Hovnanian and guaranteed by the Notes Guarantors. The revolving loans under the Secured
Credit Agreement have a maturity of June 30, 2026 and borrowings bear interest, at K. Hovnanian’s option, at either (i) SOFR
rate (subject to a floor of 3.00%) plus an applicable margin of 4.5% or (ii) an alternate base rate (subject to a floor of 4.0%)
plus an applicable margin of 3.5%. In addition, K. Hovnanian pays an unused commitment fee on the undrawn revolving
commitments at a rate of 1.0% per annum
The New 1.125 Lien Notes have a maturity of September 30, 2028 and bear interest at a rate of 8.0% per annum
payable semi-annually on March 30 and September 30 of each year to holders of record at the close of business on March 15
and September 15, as the case may be, immediately preceding such interest payment dates. The New 1.125 Lien Notes are
redeemable in whole or in part at K. Hovnanian’s option at any time prior to September 30, 2025 at a redemption price equal
to 100% of their principal amount plus an applicable “Make Whole Amount”. K. Hovnanian may also redeem some or all of
the New 1.125 Lien Notes at 104.0% of their principal amount commencing on September 30, 2025, at 102.0% of their
principal amount commencing on September 30, 2026 and at 100.0% of their principal amount commencing September 30,
2027. In addition, K. Hovnanian may also redeem up to 35.0% of the aggregate principal amount of New 1.125 Lien Notes
prior to September 30, 2025 with the net cash proceeds from certain equity offerings at 108.0% of their principal amount.
The New 1.25 Lien Notes have a maturity of September 30, 2029 and bear interest at a rate of 11.75% per annum
payable semi-annually on March 30 and September 30 of each year to holders of record at the close of business on March 15
and September 15, as the case may be, immediately preceding such interest payment dates. The New 1.25 Lien Notes are
redeemable in whole or in part at K. Hovnanian’s option at any time prior to March 30, 2026 at a redemption price equal to
100% of their principal amount plus an applicable “Make Whole Amount”. K. Hovnanian may also redeem some or all of
the New 1.25 Lien Notes at 105.875% of their principal amount commencing on March 30, 2026, at 102.9375% of their
principal amount commencing on September 30, 2027 and at 100.0% of their principal amount commencing on September
30, 2028. In addition, K. Hovnanian may also redeem up to 35.0% of the aggregate principal amount of New 1.25 Lien Notes
prior to March 30, 2026 with the net cash proceeds from certain equity offerings at 111.75% of their principal amount.
The 1.75 Lien Notes have a maturity of November 15, 2025 and bear interest at a rate of 10.0% per annum payable
semi-annually on May 15 and November 15 of each year to holders of record at the close of business on May 1 or November
1, as the case may be, immediately preceding each such interest payment date. At any time and from time to time prior to
November 15, 2023, K. Hovnanian may redeem some or all of the 1.75 Lien Notes at a redemption price equal to 102.50%
of their principal amount and at any time and from time to time after November 15, 2023, K. Hovnanian may redeem some
or all of the 1.75 Lien Notes at a redemption price equal to 100.0% of their principal amount. On November 15, 2023, K.
Hovnanian redeemed in full all of its $113.5 million aggregate principal amount of 10.0% Senior Secured 1.75 Lien Notes
due November 15, 2025.
On December 10, 2019, K. Hovnanian entered into the Secured Term Loan Facility. The secured term loans under
the Secured Term Loan Facility (the “Secured Term Loans”) bear interest at a rate equal to 10.0% per annum and will mature
on January 31, 2028, with interest payable in arrears on the last business day of each fiscal quarter. At any time and from
time to time prior to November 15, 2023, K. Hovnanian may voluntarily prepay some or all of the Secured Term Loans at a
prepayment price equal to 102.5% of their principal amount and at any time and from time to time after November 15, 2023,
K. Hovnanian may voluntarily prepay some or all of the Secured Term Loans at a prepayment price equal to 100.0% of their
principal amount.
77
Each series of secured notes and the guarantees thereof, the Secured Term Loans and the guarantees thereof and
the Secured Credit Agreement and the guarantees thereof are secured by the same assets. Among the secured debt, the liens
securing the Secured Credit Agreement are senior to the liens securing all of K. Hovnanian’s other secured notes and the
Secured Term Loan. The liens securing the New 1.125 Lien Notes are senior to the liens securing the New 1.25 Lien Notes,
the 1.75 Lien Notes, the Secured Term Loans and any other future secured obligations that are junior in priority with respect
to the assets securing the New 1.125 Lien Notes, the liens securing the New 1.25 Lien Notes are senior to the liens securing
the 1.75 Lien Notes, the Secured Term Loans and any other future secured obligations that are junior in priority with respect
to the assets securing the New 1.25 Lien Notes and the liens securing the 1.75 Lien Notes and the Secured Term Loans (which
are secured on a pari passu basis with each other) are senior to any other future secured obligations that are junior in priority
with respect to the assets securing the 1.75 Lien Notes and the Secured Term Loans, in each case, with respect to the assets
securing such debt.
As of October 31, 2023, the collateral securing the Secured Credit Agreement, the Secured Term Loan Facility
and the senior secured notes included (1) $441.2 million of cash and cash equivalents, which included $5.1 million of
restricted cash collateralizing certain letters of credit (subsequent to such date, fluctuations as a result of cash uses include
general business operations and real estate and other investments along with cash inflow primarily from deliveries); (2) $470.0
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 $96.3 million.
Unsecured Obligations
The 13.5% Senior Notes due 2026 (the “13.5% 2026 Notes”) bear interest at 13.5% per annum and mature on
February 1, 2026. Interest on the 13.5% 2026 Notes is payable semi-annually on February 1 and August 1 of each year to
holders of record at the close of business on January 15 or July 15, as the case may be, immediately preceding each such
interest payment date. The 13.5% 2026 Notes are redeemable in whole or in part at K. Hovnanian’s option at any time prior
to February 1, 2025 at a redemption price equal to 100% of their principal amount plus an applicable “Make Whole Amount”.
At any time and from time to time on or after February 1, 2025, K. Hovnanian may also redeem some or all of the 13.5%
2026 Notes at a redemption price equal to 100.0% of their principal amount.
The 5.0% Senior Notes due 2040 (the “5.0% 2040 Notes”) bear interest at 5.0% per annum and mature on February
1, 2040. Interest on the 5.0% 2040 Notes is payable semi-annually on February 1 and August 1 of each year to holders of
record at the close of business on January 15 or July 15, as the case may be, immediately preceding each such interest payment
date. At any time and from time to time, K. Hovnanian may redeem some or all of the 5.0% 2040 Notes at a redemption price
equal to 100.0% of their principal amount.
The Unsecured Term Loans bear interest at a rate equal to 5.0% per annum and interest is payable in arrears on
the last business day of each fiscal quarter. The Unsecured Term Loans will mature on February 1, 2027 .
Other
We have certain stand-alone cash collateralized letter of credit agreements and facilities under which there was a
total of $4.9 million and $6.0 million letters of credit outstanding at October 31, 2023 and October 31, 2022, 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, 2023 and October 31, 2022, the amount of cash collateral in these segregated accounts was $5.1 million and $6.1
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 resource allocations.
We currently have homebuilding operations in 13 states that are aggregated into reportable segments based
primarily upon geographic proximity.
78
HEI’s reportable segments consist of the following three homebuilding segments and a financial services segment.
Homebuilding:
(1) Northeast (Delaware, Maryland, New Jersey, Ohio, Pennsylvania, Virginia and West Virginia)
(2) Southeast (Florida, Georgia and South Carolina)
(3) West (Arizona, California and Texas)
Operations of the homebuilding segments primarily include the sale and construction of single-family attached
and detached homes, attached townhomes and condominiums, urban infill and active lifestyle homes in planned residential
developments. In addition, from time to time, operations of the homebuilding segments include sales of land. Operations of
the financial services segment include mortgage banking and title services provided to the homebuilding operations’
customers. Our financial services subsidiaries do not typically retain or service mortgages that we originate but sell the
mortgages and related servicing rights to investors.
Corporate and unallocated primarily represents operations at our headquarters in New Jersey. This includes our
executive offices, information services, human resources, corporate accounting, training, treasury, process redesign, internal
audit, construction services, administration of insurance, quality and safety. It also includes interest income and interest
expense resulting from interest incurred that cannot be capitalized in inventory in the homebuilding segments, as well as the
gains or losses on extinguishment of debt from any debt repurchases or exchanges.
Evaluation of segment performance is based primarily on income (loss) before income taxes. Income (loss) before
income taxes for the homebuilding segments consist of revenues generated from the sales of homes and land, income (loss)
from unconsolidated entities, management fees and other income, less the cost of homes and land sold, selling, general and
administrative expenses and interest expense. Income (loss) before income taxes for the financial services segment consist of
revenues generated from mortgage financing, title insurance and closing services, less the cost of such services and corporate
general and administrative expenses.
Operational results of each segment are not necessarily indicative of the results that would have occurred had the
segment been an independent stand-alone entity during the periods presented.
Financial information relating to our reportable segments are as follows:
(In thousands)
Revenues:
Northeast
Southeast
West
Total homebuilding
Financial services
Corporate and unallocated
Total revenues
Income before income taxes:
Northeast
Southeast
West
Total homebuilding
Financial services
Corporate and unallocated (1)
Income before income taxes
Year Ended October 31,
2023
2022
2021
$
968,851 $ 1,085,081 $
323,961
420,296
871,091
285,658
1,295,992 1,450,632 1,544,397
2,685,139 2,859,674 2,701,146
81,692
19
$ 2,756,016 $ 2,922,231 $ 2,782,857
61,540
1,017
60,088
10,789
$
$
178,516 $
77,750
114,084
370,350
19,365
(133,764)
255,951 $
177,406 $
60,178
207,519
445,103
19,121
(144,471)
319,753 $
102,896
17,764
198,343
319,003
37,563
(166,705)
189,861
(1) Corporate and unallocated for the year ended October 31, 2023 included corporate general and administrative expenses
of $103.2 million, interest expense of $17.7 million (a component of Other interest in our Consolidated Statements of
Operations), loss on extinguishment of debt of $25.6 million and $(12.7) million of other (income) expenses, net. Corporate
and unallocated for the year ended October 31, 2022 included corporate general and administrative expenses of
$102.6 million, interest expense of $28.6 million, loss on extinguishment of debt of $6.8 million and $6.5 million of other
(income) expenses, net. Corporate and unallocated for the year ended October 31, 2021 included corporate general and
79
administrative expenses of $106.7 million, interest expense of $57.1 million, loss on extinguishment of debt of $3.7 million
and $(0.8) million of other (income) expenses, net.
(In thousands)
Assets:
Northeast
Southeast
West
Total homebuilding
Financial services
Corporate and unallocated
Total assets
October 31,
2023
2022
$
483,784 $
286,701
733,318
530,884
330,894
802,704
1,503,803 1,664,482
155,993
741,555
$ 2,492,940 $ 2,562,030
168,671
820,466
(In thousands)
Investments in and advances to unconsolidated joint ventures:
Northeast
Southeast
West
Total homebuilding
Corporate and unallocated
Total investments in and advances to unconsolidated joint ventures
(In thousands)
Homebuilding interest expense:
Northeast
Southeast
West
Total homebuilding
Corporate and unallocated
Financial services interest expense (income) (1)
Total interest expense, net
October 31,
2023
$
$
56,758 $
35,262
4,503
96,523
1,363
97,886 $
2022
20,241
52,651
174
73,066
1,874
74,940
Year Ended October 31,
2023
2022
2021
$
$
32,071 $
20,055
65,068
117,194
17,707
1
134,902 $
31,552 $
17,403
55,056
104,011
28,572
(213)
132,370 $
30,212
19,490
55,029
104,731
57,085
(35)
161,781
(1) Financial services interest expense (income) is included in Financial services revenue or expense in the
Consolidated Statements of Operations.
(In thousands)
Depreciation:
Northeast
Southeast
West
Total homebuilding
Financial services
Corporate and unallocated
Total depreciation
Year Ended October 31,
2023
2022
2021
$
$
4,352 $
444
1,325
6,121
-
2,677
8,798 $
1,542 $
291
1,298
3,131
5
2,321
5,457 $
1,459
214
1,811
3,484
13
1,783
5,280
80
(In thousands)
Net additions to property and equipment:
Northeast
Southeast
West
Total homebuilding
Financial services
Corporate and unallocated
Total net additions to property and equipment
(In thousands)
Equity in earnings from unconsolidated joint ventures:
Northeast
Southeast
West
Total equity in earnings from unconsolidated joint ventures
11. Income Taxes
Year Ended October 31,
2023
2022
2021
1,678 $
263
1,599
3,540
1,040
14,241
18,821 $
1,848 $
229
1,841
3,918
28
8,646
12,592 $
1,271
256
1,174
2,701
-
3,241
5,942
Year Ended October 31,
2023
2022
2021
27,253 $
15,696
211
43,160 $
12,674 $
16,359
-
29,033 $
2,958
2,061
3,830
8,849
$
$
$
$
Income taxes (receivable) payable, including deferred benefits, consists of the following:
(In thousands)
State income taxes:
Current
Deferred
Federal income taxes:
Current
Deferred
Total
October 31,
2023
2022
$
1,861 $
(74,110)
3,167
(69,248)
-
(228,723)
(300,972) $
-
(275,545)
(341,626)
$
The (benefit) provision for income taxes is composed of the following:
(In thousands)
Current income tax expense:
Federal (1)
State (2)
Total current income tax expense:
Federal
State
Total deferred income tax expense (benefit):
Total
Year Ended October 31,
2023
2022
2021
$
$
- $
8,101
8,101
46,821
(4,862)
41,959
50,060 $
- $
13,377
13,377
60,064
20,822
80,886
94,263 $
-
7,722
7,722
(335,608)
(90,070)
(425,678)
(417,956)
(1) The current federal income tax expense is net of the use of federal net operating losses totaling $221.2 million (tax
effected $46.4 million), $306.0 million (tax effected $64.3 million) and $173.8 million (tax effected $36.5 million) for
the years ended October 31, 2023, 2022 and 2021, respectively.
(2) The current state income tax expense is net of the use of state net operating losses totaling $113.3 million (tax effected
$8.3 million), $80.1 million (tax effected $5.8 million) and $55.7 million (tax effected $3.9 million) for the years ended
October 31, 2023, 2022 and 2021, respectively.
81
The total income tax expense of $50.1 million and $94.3 million for the years ended October 31, 2023 and 2022,
respectively, was primarily due to federal and state tax expense recorded as a result of our income before income taxes.
Income tax expense for fiscal 2023 was partially offset by the benefits of releasing state valuation allowances and qualifying
for energy efficient home tax credits. The federal tax expense is not paid in cash as it is offset by the use of our existing net
operating loss (“NOL”) carryforwards. The total income tax benefit for the year ended October 31, 2021 was $418.0 million,
primarily due to the reversal of a substantial portion of our valuation allowance previously recorded against our deferred tax
assets (“DTAs”).
We have remaining federal NOL carryforwards of $688.3 million that expire between 2030 and 2038, and $15.7
million have an indefinite carryforward period. Our total remaining state NOL carryforwards are $2.1 billion: $586.1 million
that expire between 2024 through 2028; $1.1 billion that expire between 2029 through 2033; $348.8 million that expire
between 2034 through 2038; $8.7 million that expire between 2039 through 2043; and $52.1 million that have an indefinite
carryforward period.
We recognize deferred tax assets, net of deferred tax liabilities, related to NOL carryforwards, tax credits and
temporary differences between book and tax income which will be recognized in future years as an offset against future
taxable income. Our deferred tax assets, net as of October 31, 2023 were $302.8 million compared to $344.8 million at
October 31, 2022. A valuation allowance is provided to offset DTAs if, based upon available evidence, it is more-likely-than-
not that some or all of the DTAs will not be realized. We had a valuation allowance of $71.9 million as of October 31, 2023
compared to $95.7 million as of October 31, 2022 related to DTAs for tax credits and state NOL carryforwards that are
expected to expire before they can be used.
We considered all available positive and negative evidence to determine whether, based on the weight of that
evidence, the valuation allowance for our DTAs was appropriate. Overall, the positive evidence, both objective and subjective,
outweighed the negative evidence. The significant improvement in our profitability over the last three years, coupled with
our current contract backlog, provided positive evidence to support the conclusion that sufficient taxable income will be
generated in the future and a full valuation allowance is not necessary.
Deferred tax assets and liabilities have been recognized on the Consolidated Balance Sheets as follows:
(In thousands)
Deferred tax assets:
Inventory impairments
Uniform capitalization of overhead
Warranty and legal reserves
Compensation
Deferred income
Interest expense
Restricted stock units
Stock options
Provision for losses
Federal net operating losses
State net operating losses
Tax credit carryforwards
Other
Total deferred tax assets
Deferred tax liabilities:
Joint venture income
Total deferred tax liabilities
Valuation allowance
Deferred tax assets, net
82
October 31,
2023
2022
$
$
26,168 $
3,692
4,439
11,377
1,167
4,939
2,069
209
18,349
147,841
136,257
21,260
3,688
381,455
(6,743)
(6,743)
(71,879)
302,833 $
30,772
4,285
5,668
13,746
2,425
3,646
1,628
818
17,700
194,306
150,832
12,254
5,005
443,085
(2,565)
(2,565)
(95,727)
344,793
Our 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 DTAs. The sources of these
factors were as follows:
Federal statutory income tax rate
State income taxes, net of federal income tax benefit
Permanent differences, net
Deferred tax asset valuation allowance impact
Tax contingencies
Tax credits
Adjustments to prior years’ tax accruals
Effective tax rate
Year Ended October 31,
2023
21.0%
6.2
0.9
(6.3)
(0.1)
(2.2)
0.1
19.6%
2022
21.0%
9.8
0.8
0.0
(0.1)
0.0
(2.0)
29.5%
2021
21.0%
4.0
3.6
(248.5)
(0.2)
0.0
0.0
(220.1)%
The following is a tabular reconciliation of the total amount of unrecognized tax benefits, excluding interest and
penalties:
(In millions)
Unrecognized tax benefit—November 1,
Gross increases—tax positions in current period
Lapse of statute of limitations
Unrecognized tax benefit—October 31,
$
$
2023
0.2 $
-
(0.2)
- $
2022
0.5
-
(0.3)
0.2
Related to the unrecognized tax benefits noted above, there was no liability for interest and penalties as of October
31, 2023. As of October 31, 2022, we recognized a liability for interest and penalties of $0.1 million. For the years ended
October 31, 2023, 2022 and 2021, we recognized $131 thousand, $128 thousand and $84 thousand, respectively, of interest
and penalties in income taxes provision (benefit).
The consolidated federal tax returns have been audited through October 31, 2022 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 recorded in the period determined. To provide for potential exposures, tax reserves
are recorded, if applicable, based on reasonable estimates of potential audit results. However, if the reserves are insufficient
upon completion of an audit, there could be an adverse impact on our financial position and results of operations. The statute
of limitations for our major tax jurisdictions remains open for examination for tax years 2019 - 2022.
12. Reduction of Inventory to Fair Value
We had 380 communities under development and held for future development or sale at October 31, 2023 and
374 communities under development and held for future development or sale at both October 31, 2022 and 2021, which we
evaluated for impairment indicators (i.e., those with a projected operating loss). We performed an undiscounted future cash
flow analysis for one community during the year ended October 31, 2023, which we had recorded an impairment for in the
prior year. As a result of such analysis, we did not identify any additional impairment for the community. During the year
ended October 31, 2022, one community, with a carrying value of $10.6 million, had an impairment indicator. The impairment
analysis on the community included increased land development costs from previous projections, along with a downturn in
the local market, resulting in an impairment of $8.4 million. During the year ended October 31, 2021, we performed
undiscounted future cash flow analyses for three communities with an aggregate carrying value of $11.5 million. Based on
the results of our undiscounted future cash flow analyses, we performed discounted cash flow analyses on all three
communities, resulting in impairments of $2.0 million. Our aggregate impairment charges are included within "Inventory
impairments and land option write-offs" in the Consolidated Statement of Operations and deducted from inventory.
83
The following table represents impairments by segment for fiscal 2022 and 2021:
(Dollars in millions)
Year Ended October 31, 2022
Northeast
Southeast
West
Total
Dollar
Pre-
Number of Amount of Impairment
Value (1)
Communities Impairment
-
- $
-
-
10.6
1
10.6
1 $
- $
-
8.4
8.4 $
(Dollars in millions)
Year Ended October 31, 2021
Northeast
Southeast
West
Total
Dollar
Pre-
Number of Amount of Impairment
Value (1)
Communities Impairment
-
- $
9.2
2
2.3
1
11.5
3 $
- $
1.2
0.8
2.0 $
(1)
Represents carrying value, net of prior period impairments, if any, at the time of recording the applicable period’s
impairments.
Write-offs of options, engineering and capitalized interest costs are also recorded in "Inventory impairments and
land option write-offs" when we redesign communities, abandon certain engineering costs or do not exercise options in
various locations because the pro forma profitability is not projected to produce adequate returns on investment commensurate
with the risk. The total aggregate write-offs related to these items were $1.5 million, $5.7 million and $1.6 million for the
years ended October 31, 2023, 2022 and 2021, respectively. Occasionally, these write-offs are offset by recovered deposits,
sometimes through legal action, which 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 2023, 2022 and 2021:
(In millions)
Northeast
Southeast
West
Total
Year Ended October 31,
2023
2022
0.5 $
0.5
0.5
1.5 $
0.4 $
0.9
4.4
5.7 $
2021
0.3
0.2
1.1
1.6
$
$
84
13. Per Share Calculations
Basic and diluted earnings per share for the periods presented below were calculated as follows:
(In thousands, except per share data)
Numerator:
Net income
Less: preferred stock dividends
Less: undistributed earnings allocated to participating securities
Numerator for basic earnings per share
Plus: undistributed earnings allocated to participating securities
Less: undistributed earnings reallocated to participating securities
Numerator for diluted earnings per share
Denominator:
Denominator for basic earnings per share – weighted average shares
outstanding
Effect of dilutive securities:
Stock-based payments
Denominator for diluted earnings per share – weighted-average shares
outstanding
Basic earnings per share
Diluted earnings per share
Year Ended October 31,
2022
2023
2021
$
$
$
$
$
205,891 $
(10,675)
(16,027)
179,189 $
16,027
(16,058)
179,158 $
225,490 $
(10,675)
(19,702)
195,113 $
19,702
(19,717)
195,098 $
607,817
-
(57,676)
550,141
57,676
(58,687)
549,130
6,230
6,437
6,287
436
291
108
6,666
28.76 $
26.88 $
6,728
30.31 $
29.00 $
6,395
87.50
85.86
In addition, 6 thousand, 26 thousand and 25 thousand shares related to out-of-the money stock options, which
could potentially dilute basic earnings per share in the future, were not included in the computation of diluted earnings per
share for the years ended October 31, 2023, 2022 and 2021, respectively, because to do so would have been anti-dilutive for
each period.
14. Capital Stock
Common Stock
Each share of Class A common stock entitles its holder to one vote per share, and each share of Class B common
stock generally entitles its holder to ten votes per share. The amount of any regular cash dividend payable on a share of
Class A common stock will be an amount equal to 110% of the corresponding regular cash dividend payable on a share of
Class B common stock. If a shareholder desires to sell shares of Class B common stock, such stock must be converted into
shares of Class A common stock at a one-to-one conversion rate.
On August 4, 2008, the Board of Directors (the "Board") adopted a shareholder rights plan (the “Rights Plan”),
which was amended on January 11, 2018 and January 18, 2021, designed to preserve shareholder value and the value of
certain tax assets primarily associated with NOLs and built-in losses under Section 382 of the Internal Revenue Code. Our
ability to use NOLs and built-in losses would be limited if there was an “ownership change” under Section 382. This would
occur if shareholders owning (or deemed under Section 382 to own) 5% or more of our stock increase their collective
ownership of the aggregate amount of our outstanding shares by more than 50 percentage points over a defined period of
time. The Rights Plan was adopted to reduce the likelihood of an “ownership change” occurring as defined by Section 382.
Under the Rights Plan, one right was distributed for each share of Class A common stock and Class B common stock
outstanding as of the close of business on August 15, 2008. Effective August 15, 2008, if any person or group acquires 4.9%
or more of the outstanding shares of Class A common stock without the approval of the Board, there would be a triggering
event causing significant dilution in the voting power of such person or group. However, existing 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's decision to adopt the
Rights Plan may be terminated by the Board at any time prior to the Rights being triggered. The Rights Plan will continue in
effect until August 14, 2024, unless it expires earlier in accordance with its terms. The approval of the Board's decision to
initially adopt the Rights Plan and the amendments thereto were approved by shareholders. Our shareholders also approved
an amendment to our Certificate of Incorporation to restrict certain transfers of Class A common stock in order to preserve
the tax treatment of our NOLs and built-in losses under Section 382 of the Internal Revenue Code. Subject to certain
85
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 U.S. Treasury regulations).
Transfers included under the transfer restrictions include sales to persons (or public groups) whose resulting percentage
ownership (direct or indirect) of common stock would exceed the 5% thresholds discussed above, or to persons whose direct
or indirect ownership of common stock would by attribution cause another person (or public group) to exceed such threshold.
On July 3, 2001, the Board authorized a stock repurchase program to purchase up to 0.2 million shares of Class
A common stock. On September 1, 2022, the Board terminated our prior repurchase program and authorized a new program
for the repurchase of up to $50.0 million of our Class A common stock. Under the new repurchase program, repurchases may
be made from time to time in open market transactions, in privately negotiated transactions or otherwise. The timing and the
actual dollar amount repurchased will depend on a variety of factors, including legal requirements, price, future tax
implications and economic and market conditions. The repurchase program may be changed, suspended or discontinued at
any time and does not have a specified expiration date. As of October 31, 2023, $33.0 million of our Class A common stock
is available for repurchase under the stock repurchase program.
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 both fiscal 2023 and 2022 we paid dividends of $10.7 million on
the Series A preferred stock. In fiscal 2021, we did not pay any dividends on the Series A preferred stock due to covenant
restrictions in our debt instruments.
Retirement Plan
We have established a tax-qualified, defined contribution savings and investment retirement plan ("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. 401(k) plan expenses were $8.2 million, $8.3 million and $7.0 million
for the years ended October 31, 2023, 2022 and 2021, respectively.
Treasury Stock
During the year ended October 31, 2023, we repurchased 118,478 shares under the new stock repurchase program,
with a market value of $4.8 million, or $40.51 per share, which were added to "Treasury stock" on our Consolidated Balance
Sheets as of October 31, 2023. During the year ended October 31, 2022, we repurchased 312,471 shares under the new stock
repurchase program, with a market value of $12.2 million, or $39.12 per share, which were added to "Treasury stock" on our
Consolidated Balance Sheets as of October 31, 2022. There were no shares repurchased during the year ended October 31,
2021.
15. Stock-Based Compensation Plans
We have stock incentive plans for certain officers, key employees and directors that are approved by a committee
appointed by the Board or its delegate. As of October 31, 2023, we had 0.3 million shares authorized and remaining for future
issuance under our stock incentive plans. Based on the terms of our stock incentive plans, awards that are forfeited become
available to us for future grants.
Stock Options
Prior to fiscal 2021, stock options were granted. There have been no stock option grants during fiscal years 2023,
2022 or 2021. The exercise price of all stock options is at least equal to the fair market value of an underlying share of our
Class A common stock on the date of the grant. The fair value of each stock option is estimated using the Black-Scholes
86
option-pricing model. 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. Non-employee directors’ stock options vest in three equal
installments on the first, second and third anniversaries of the date of the grant. All stock options expire on the tenth
anniversary from the date of grant.
The following table summarizes stock option activity at October 31, 2023:
Weighted-
Weighted-
Average
Remaining
Average Contractual
October 31,
Aggregate
2023 Exercise Price Life (Years) Intrinsic Value
Stock options outstanding at beginning of period
Granted
Exercised
Forfeited
Expired
Stock options outstanding at end of period
Stock options exercisable at end of period
166,559 $
- $
(4,363) $
(250) $
(18,399) $
143,547 $
132,903 $
48.02
-
31.14
7.85
157.00
34.63
36.66
4.4 $
4.3 $
5,231,933
4,590,643
The total intrinsic value of stock options exercised during both fiscal 2023 and 2022 was $0.2 million, and in
fiscal 2021 was $4.8 million. The intrinsic value of a stock option is the amount by which the market value of the underlying
stock exceeds the exercise price.
Based on the fair value at the time of grant, the per share weighted-average fair value of stock options vested in
fiscal 2023, 2022 and 2021 was $6.29, $16.46 and $8.82, respectively.
RSUs and Performance Units
RSUs are measured based upon the fair value of a share of our Class A common stock on the date of grant. Shares
underlying RSUs granted to officers and associates generally vest in four equal installments on the first, second, third, and
fourth anniversaries of the grant date. During fiscal year 2023, each of our six existing non-employee directors were granted
RSUs subject to a two-year post-vesting holding period. Generally, participants aged 60 years or older, or aged 58 with
15 years of service, are eligible to vest in their awards on an accelerated basis upon their retirement.
Grants of market share units ("MSUs"), performance share units ("PSUs") and the stock portion of the long-term
incentive plans ("LTIPs") (each discussed below), are also awarded as compensation.
The following table summarizes nonvested time-based RSU and MSU share activity as of October 31, 2023:
Nonvested time-based at beginning of period
Granted
Vested (1)
Forfeited
Nonvested time-based at end of period
October 31,
2023
175,637 $
63,275 $
(97,183 ) $
(9,586 ) $
132,143 $
Weighted-
Average Grant
Date
Fair Value
33.43
87.92
29.89
43.90
52.79
87
The following table summarizes nonvested performance-based LTIP, PSU and MSU share activity as
of October 31, 2023:
Nonvested performance-based at beginning of period
Granted
Vested (1)
Forfeited
Nonvested performance-based at end of period
October 31,
2023
507,157 $
272,567 $
(184,911 ) $
(13,313 ) $
581,500 $
Weighted-
Average Grant
Date
Fair Value
41.14
56.09
42.79
51.39
73.90
(1) Includes 27,686 time-based vested share awards and 149,693 performance-based vested share awards which were
deferred and not yet issued at October 31, 2023.
LTIP awards include share adjustments for the difference between target performance metrics at the time of grant
and the final performance outcome. Share adjustments are reflected in the “Granted” line above at the time the performance
is finalized. For LTIP awards granted prior to fiscal 2023, shares vest on the third, fourth and fifth anniversary of the grant
date, subject to performance achievement. The 2023 LTIP is subject to cliff vesting at the end of the performance period.
The fair value of LTIP and PSUs (discussed below) 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 the 2023 LTIP grants: historical volatility factor of 75.29% based on the
expected market price of our Class A common stock for the two-year period ending on the valuation date, concluded stock
price assumption of 4.19% equal to the continuously compounded two-year yield and a dividend yield of zero. The following
assumptions were used for the 2022 LTIP grants: historical volatility factor of 104.16% based on the expected market price
of our Class A common stock for the two-year period ending on the valuation date, concluded stock price assumption of
0.67% equal to the continuously compounded two-year yield and a dividend yield of zero. The following assumptions were
used for the 2021 LTIP grants: historical volatility factor of 112.92% based on the expected market price of our Class A
common stock for the two-year period ending on the valuation date, concluded stock price assumption of 0.16% equal to the
continuously compounded two-year yield and a dividend yield of zero.
PSUs granted in fiscal 2020 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 Board determines that the Company
achieved specified earnings goals. Fiscal 2023, 2022 and 2021 PSUs are subject to cliff vesting on the third year after the
grant date. The following assumptions were used for the 2023 PSU grants: historical volatility factor of 66.66% based on the
expected market price of our Class A common stock for the two-year period ending on the valuation date, concluded stock
price assumption of 4.54% equal to the continuously compounded two-year yield and a dividend yield of zero. The following
assumptions were used for the 2022 PSU grants: historical volatility factor of 78.82% based on the expected market price of
our Class A common stock for the two-year period ending on the valuation date, concluded stock price assumption of 3.04%
equal to the continuously compounded two-year yield and a dividend yield of zero. The following assumptions were used for
2021 PSU grants: historical volatility factor of the expected market price of our common stock of 112.44% for the two-year
period ending on the valuation date, and the concluded risk-free rate assumption of 0.16% equals the continuously
compounded two-year yield, and dividend yield of zero.
There were no MSUs granted in fiscal 2023, 2022 and 2021. The fair value of MSUs is determined using the
Monte-Carlo simulation model. The first 50% of an MSU grant vests in four equal annual installments, commencing on the
second anniversary from the date of grant, 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 under each MSU
award, 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 50% of an MSU grant is subject to financial performance
conditions in addition to the stock price performance conditions. These remaining MSUs vest in four equal installments with
the first installment vesting on the third January 1st after the grant date, and the remaining annual installments commencing
on the third anniversary from the date of grant, except that no portion of the award will vest unless the Board determines the
Company achieved certain specified performance goals.
88
The total grant date fair value of RSU and performance unit awards granted during fiscal 2023, 2022 and 2021
was $10.4 million, $9.6 million and $9.2 million, respectively. The total fair value of these awards vested during fiscal 2023,
2022 and 2021 was $25.2 million, $15.6 million and $13.7 million, respectively.
During the year-ended October 31, 2023 we issued 51,296 RSUs, 43,268 MSUs and 32,671 LTIP shares. As of
October 31, 2023, there was $16.2 million of unrecognized stock-based compensation, which is primarily comprised of
unrecognized expenses for RSUs, MSUs, PSUs, and the stock portion of LTIPs. The cost is expected to be recognized over
a weighted-average period of 1.6 years.
Stock-Based Compensation Expense
For the years ended October 31, 2023, 2022 and 2021, stock-based compensation expense was $14.2 million
($11.4 million post tax), $10.3 million ($7.3 million post tax) and $7.7 million ($5.2 million post tax), respectively. Stock-
based compensation for RSUs, MSUs, PSUs, and the stock portion of LTIPs was $14.2 million, $10.2 million and
$7.4 million for fiscal 2023, 2022 and 2021, respectively. In addition, stock option compensation expense was $27 thousand,
$0.1 million and $0.2 million for the years ended October 31, 2023, 2022 and 2021, respectively.
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 years ended October
31, 2023 and 2022, we received $4.3 million and $6.0 million, respectively, from subcontractors related to the owner
controlled-insurance program, which we accounted for as reductions to inventory.
Additions and charges in the warranty reserve and general liability reserve for the years ended October 31, 2023
and 2022 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,
2023
2022
$
$
97,719 $
7,140
6,807
(22,080)
9,333
98,919 $
94,916
8,495
9,054
(18,271)
3,525
97,719
Warranty accruals are based upon historical experience. In fiscal 2023, we recorded an increase of $10.1 million
to our construction defect reserves as a result of our claims history. This increase is reflected in the changes to pre-existing
reserves in the table above.
The majority of the charges incurred during fiscal 2023 represented payments for construction defects related to
the settlement of four litigation matters. Insurance claims paid by our insurance carriers, excluding insurance deductibles
paid, were $0.2 million for each of the years ended October 31, 2023 and 2022, for prior year deliveries.
89
17. Transactions with Related Parties
During the years ended October 31, 2023, 2022 and 2021, an engineering firm owned by Tavit Najarian, a relative
of Ara K. Hovnanian, our Chairman of the Board and our Chief Executive Officer, provided services to the Company totaling
$1.3 million, $1.1 million and $0.6 million, respectively. Neither the Company nor Mr. Hovnanian has a financial interest in
the relative’s company from whom the services were provided.
Alexander Hovnanian, the son of Ara K. Hovnanian, is employed by the Company. Alexander Hovnanian holds
the position of Executive Vice President - National Homebuilding Operations. For fiscal 2023, he received cash compensation
of approximately $1,008,000 and equity awards with an aggregate grant date fair value of approximately $825,000. For fiscal
2022, he received cash compensation of approximately $1,684,000 and equity awards with an aggregate grant date fair value
of approximately $531,000. For fiscal 2021, he received cash compensation of approximately $989,000 and equity awards
with an aggregate grant date fair value of approximately $523,000.
Carson Sorsby, the son of J. Larry Sorsby, a member of the Board and our former Chief Financial Officer (retired
as of October 31, 2023), is employed by the Company. Carson Sorsby holds the position of Account Manager in the
Company’s mortgage subsidiary. His compensation is commensurate with that of similarly situated employees in his
position.
18. Commitments and Contingent Liabilities
We are involved in litigation arising in the ordinary course of business, none of which is expected to have a
material adverse effect on our financial position, results of operations or cash flows, and we are subject to extensive and
complex laws and regulations that affect the development of land and home building, sales and customer financing processes,
including zoning, density, building standards and mortgage financing. These laws and regulations often provide broad
discretion to the administering governmental authorities. This can delay or increase the cost of development or homebuilding.
The significant majority of our litigation matters are related to construction defect claims. Our estimated losses from
construction defect litigation matters, if any, are included in our construction defect reserves.
We also are subject to a variety of local, state, federal and foreign laws and regulations concerning protection of
health and the environment, including those regulating the emission or discharge of materials into the environment, the
management of storm water runoff at construction sites, the handling, use, storage and disposal of hazardous substances,
impacts to wetlands and other sensitive environments, and the remediation of contamination at properties that we have owned
or developed or currently own or are developing (“environmental laws”). The particular environmental laws that apply to a
site may vary greatly according to the community site, for example, due to the community, the environmental conditions at
or near the site, and the present and former uses of the site. These environmental laws may result in delays, may cause us to
incur substantial compliance, remediation and/or other costs, and can prohibit or severely restrict development and
homebuilding activity. In addition, noncompliance with these laws and regulations could result in fines and penalties,
obligations to remediate or take corrective action, permit revocations or other sanctions; and contamination or other
environmental conditions at or in the vicinity of our developments may result in claims against us for personal injury, property
damage or other losses.
We anticipate that increasingly stringent requirements will continue to be imposed on developers and
homebuilders in the future. In addition, some of these laws and regulations that significantly affect how certain properties
may be developed are contentious, attract intense political attention, and may be subject to significant changes over time. For
example, regulations governing wetlands permitting under the federal Clean Water Act have been the subject of extensive
rulemakings for many years, resulting in several major joint rulemakings by the EPA and the U.S. Army Corps of Engineers
that have expanded and contracted the scope of wetlands subject to regulation; and such rulemakings have been the subject
of many legal challenges, some of which remain pending. It is unclear how these and related developments, including at the
state or local level, ultimately may affect the scope of regulated wetlands where we operate. Although we cannot reliably
predict the extent of any effect these developments regarding wetlands, or any other requirements that may take effect, may
have on us, they could result in time-consuming and expensive compliance programs and in substantial expenditures, which
could cause delays and increase our cost of operations. In addition, our ability to obtain or renew permits or approvals and
the continued effectiveness of permits already granted or approvals already obtained is dependent upon many factors, some
of which are beyond our control, such as changes in policies, rules and regulations and their interpretations and application.
90
In 2015, the condominium association of the Four Seasons at Great Notch condominium community (the “Great
Notch Plaintiff”) filed a lawsuit in the Superior Court of New Jersey, Law Division, Passaic County (the “Court”) alleging
various construction defects, design defects, and geotechnical issues relating to the community. The operative complaint
(“Complaint”) asserts claims against Hovnanian Enterprises, Inc. and several of its affiliates, including K. Hovnanian at Great
Notch, LLC, K. Hovnanian Construction Management, Inc., and K. Hovnanian Companies, LLC. The Complaint also asserts
claims against various other design professionals and contractors. The Special Masters appointed by the Court to decide non-
dispositive motions issued an opinion that (a) granted the Great Notch Plaintiff’s motion to permit it to assert a claim to pierce
the corporate veil of K. Hovnanian at Great Notch, LLC to hold its alleged parent entities liable for any damages awarded
against it, and (b) further stated that the Great Notch Plaintiff is not permitted to pursue that claim until after any trial on the
underlying liability claims. To date, the Hovnanian-affiliated defendants have reached a partial settlement with the Great
Notch Plaintiff as to a portion of the Great Notch Plaintiff’s claims against them for an amount immaterial to the Company. On
its remaining claims against the Hovnanian-affiliated defendants, the Great Notch Plaintiff has asserted damages of
approximately $119.5 million, which amount is potentially subject to treble damages pursuant to the Great Notch Plaintiff’s
claim under the New Jersey Consumer Fraud Act. In December 2023, the parties reached a settlement through mediation
subject to the execution of a final confidential settlement agreement. The settlement amount was not materially different than
what we had reserved for this case.
In December 2020, the New Jersey Department of Environmental Protection ("NJDEP") and the Administrator of
the New Jersey Spill Compensation Fund (the “Spill Fund”) filed a lawsuit in the Superior Court of New Jersey, Law Division,
Union County against Hovnanian Enterprises, Inc. in addition to other unrelated parties, in connection with contamination at
Hickory Manor, a residential condominium development. Alleged predecessors of certain defendants had used the Hickory
Manor property for decades for manufacturing purposes. In 1998, NJDEP confirmed that groundwater at this site was
impacted from an off-site source. The site was later remediated, resulting in the NJDEP issuing an unconditional site-wide
No Further Action determination letter and Covenant Not to Sue in 1999. Subsequently, one of our affiliates was involved in
redeveloping the property as a residential community. The complaint asserts claims under the New Jersey Spill Act and other
state law claims and alleges that the NJDEP and the Spill Fund have incurred over $5.3 million since 2009 to investigate
vapor intrusion at the development and to install vapor mitigation systems. Among other things, the complaint seeks recovery
of the costs incurred, an order that defendants perform additional required remediation and disgorgement of profits on our
affiliate’s sales of the units in the development. Discovery has commenced. Hovnanian Enterprises, Inc. intends to defend
these claims vigorously.
19. Variable Interest Entities
We enter into land and lot option purchase contracts to procure land or lots for the construction of homes. Under
these contracts, the Company will fund a stated deposit in consideration for the right, but not the obligation, to purchase land
or lots at a future point in time with predetermined terms. Under the terms of the option purchase contracts, many of the
option deposits are not refundable at the Company's discretion. Under the requirements of ASC 810, certain option purchase
contracts may result in the creation of a VIE that owns the land parcel under option.
Although the Company does not have legal title to the underlying land, in compliance with ASC 810, we analyze
our option purchase contracts to determine whether the corresponding land and lot sellers are VIEs and, if so, whether we are
the primary beneficiary. The significant factors we consider in determining if the power to direct the activities of a VIE that
most significantly impact the VIE's economic performance are shared include, among other things, our ability in determining
or limiting the scope or purpose of the VIE, selling or transferring property owned or controlled by the VIE, changing the
terms of the contract or arranging financing for the VIE. As a result of our analyses, we have concluded, there are no VIEs
that required consolidation at either December 31, 2023 or 2022 because we are not the primary beneficiary of the land or
lots under option purchase contracts.
We will continue to secure land and lots using options, some of which are with VIEs where we have determined
power is shared among the partners and we do not have a controlling financial interest. Including deposits on our
unconsolidated VIEs, at October 31, 2023 and 2022, we had total cash deposits amounting to $192.3 million and $180.8
million, respectively, to purchase land and lots with a total purchase price of $2.2 billion and $1.9 billion, respectively. The
maximum exposure to loss with respect to our land and lot options is limited to the deposits plus any pre-development costs
invested in the property, although some deposits are refundable at our request or refundable if certain conditions are not met.
91
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 investments in homebuilding and land development joint ventures consist
of equity interests that, in total, provide us with partner investment returns and management fees.
During the first quarter of fiscal 2023, we contributed four communities we owned, including one active selling
community, to one new unconsolidated joint venture for $41.1 million of net cash.
During the second quarter of fiscal 2023, one of the Company's unconsolidated joint ventures was dissolved, and
we assumed control of the remaining assets and liabilities.
During the third quarter of fiscal 2023, we contributed 16 communities we owned, including eight active selling
communities, to one new unconsolidated joint venture for $75.7 million of net cash.
Also, during the third quarter of fiscal 2023, we assumed control of one of our unconsolidated joint ventures after
the partner received their final cash distribution. We consolidated the remaining assets and liabilities that were in the
unconsolidated joint venture at fair value on the date of distribution. Upon consolidation, we recorded a gain of $19.1 million
in "Other (income) expense, net." Subsequent to consolidation, we contributed the same three active selling communities to
an unconsolidated joint venture for $48.0 million of net cash.
The tables set forth below summarize the combined financial information related to our unconsolidated
homebuilding and land development joint ventures that are accounted for under the equity method:
(In thousands)
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, 2023
Land
Homebuilding Development Total
$
$
$
$
127,547 $
375,022
380,989
883,558 $
524,586 $
101,126
625,712
96,281
161,565
257,846
883,558 $
28%
822 $ 128,369
- 375,022
- 380,989
822 $ 884,380
605 $ 525,191
- 101,126
605 626,317
210 96,491
7 161,572
217 258,063
822 $ 884,380
0%
28%
92
(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, 2022
Land
Homebuilding Development Total
$
$
$
$
153,176 $
441,140
20,037
614,353 $
471,813 $
34,880
506,693
73,142
34,518
107,660
614,353 $
24%
868 $ 154,044
- 441,140
- 20,037
868 $ 615,221
651 $ 472,464
- 34,880
651 507,344
209 73,351
8 34,526
217 107,877
868 $ 615,221
0%
24%
As of October 31, 2023 and 2022, we had outstanding advances to unconsolidated joint ventures of $1.4 million
and $1.6 million, respectively. These amounts were included in “Accounts payable and accrued liabilities” in the tables above.
In some cases, our net investment in unconsolidated joint ventures is less than our proportionate share of 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. During the years ended October
31, 2023 and 2022, we did not write-down any of our unconsolidated joint venture investments.
For The Year Ended October 31, 2023
Land
(In thousands)
Revenues
Cost of sales and expenses
Joint venture net income
Our share of net income
(In thousands)
Revenues
Cost of sales and expenses
Joint venture net income
Our share of net income
(In thousands)
Revenues
Cost of sales and expenses
Joint venture net income
Our share of net income
Homebuilding Development Total
$
783,298 $
(654,217)
129,081 $
43,160 $
- $
-
- $
- $
783,298
(654,217)
129,081
43,160
For The Year Ended October 31, 2022
Land
Homebuilding Development Total
$
351,767 $
(318,788)
32,979 $
29,002 $
113 $
(37)
76 $
31 $
351,880
(318,825 )
33,055
29,033
For The Year Ended October 31, 2021
Land
Homebuilding Development Total
$
347,898 $
(335,077)
12,821 $
8,754 $
691 $
(209)
482 $
195 $
348,589
(335,286 )
13,303
8,949
$
$
$
$
$
$
The reason “Our share of net income” is higher or lower than the “Joint venture net income” in the tables above
is a result of our varying ownership percentages in each investment. For the years ended October 31, 2023 and 2022, we had
investments in eight and seven unconsolidated joint ventures, respectively, and our ownership in these joint ventures ranged
from 20% to over 50% for both periods. Therefore, depending on mix, if the unconsolidated joint ventures in which we have
higher sharing percentages are more profitable than our other unconsolidated joint ventures, that results in us having a higher
overall percentage of income in the aggregate than would occur if all joint ventures had the same sharing percentage;
conversely, if the unconsolidated joint ventures in which we have lower sharing percentages are more profitable than our
93
other unconsolidated joint ventures, that results in us having a lower overall percentage of income in the aggregate than would
occur if all joint ventures had the same sharing percentage. For the year ended October 31, 2023, "Our share of net income"
was lower than the "Joint venture net income" due to four unconsolidated joint ventures with increased income during the
period for which we currently recognize a lower profit-sharing percentage as well as a fifth newly formed unconsolidated
joint venture for which we are currently recognizing all of the net loss. For the year ended October 31, 2022, "Our share of
net income" was lower than the "Joint venture net income" due to increased income on two of our newer unconsolidated joint
ventures during the year for which we currently recognize a lower profit-sharing percentage based on the joint venture
agreements, a third unconsolidated joint venture which we recognize a lower profit-sharing percentage having higher profit
in the current period, and a fourth unconsolidated joint venture that generated profit that we did not recognize due to the fact
that we had previously written off our investment balance in the unconsolidated joint venture. In addition, for the year ended
October 31, 2022, we had written off our investment in one of our unconsolidated joint ventures that was generating losses
and therefore we did not recognize those losses.
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 revenue. These
management fees, which totaled $16.3 million, $12.5 million and $11.6 million for the years ended October 31, 2023, 2022
and 2021, are recorded in “Selling, general and administrative” homebuilding expenses in the Consolidated Statements of
Operations.
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. Any unconsolidated joint venture financing is on a nonrecourse basis, with guarantees from us
limited only to performance and completion of development, environmental warranties and indemnification, standard
indemnification for fraud, misrepresentation and other similar actions, including a voluntary bankruptcy filing. In some
instances, the unconsolidated joint venture entity is considered a VIE due to the returns being capped to the equity holders;
however, in these instances, we have determined that we are not the primary beneficiary, and therefore we do not consolidate
these entities.
21. Fair Value of Financial Instruments
ASC 820, "Fair Value Measurements and Disclosures", provides a framework for measuring fair value and
establishes a fair-value hierarchy which prioritizes the use of observable inputs when measuring fair value. The fair value
hierarchy can be 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
Fair Value at Fair Value at
Fair Value October 31, October 31,
2022
Hierarchy
2023
Level 2 $
Level 2
$
130,235 $
-
130,235 $
110,548
752
111,300
(1) The aggregate unpaid principal balance was $130.4 million and $110.2 million at October 31, 2023 and
2022, respectively.
Fair value of mortgage loans held for sale is based on independent quoted market prices, where available, or the
prices for other mortgage loans with similar characteristics.
The financial services segment had a pipeline of loan applications in process of $517.8 million at October 31,
2023. Loans in process for which interest rates were committed to the borrowers totaled $56.3 million as of October 31, 2023.
94
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.
In addition, the financial services segment uses investor commitments and forward sales of mandatory MBS to
hedge its mortgage-related interest rate exposure. These instruments involve, to varying degrees, elements of credit and
interest rate risk. Credit risk is managed by entering into MBS forward commitments, option contracts with investment banks,
federally regulated bank affiliates and loan sales transactions with permanent investors meeting the segment’s credit
standards. Our risk, in the event of default by the purchaser, is the difference between the contract price and fair value of the
MBS forward commitments and option contracts. At October 31, 2023, we had no open mandatory investor commitments to
sell MBS.
Changes in fair value that are included in income are shown, by financial instrument and financial statement line
item, below:
(In thousands)
Year Ended October 31, 2023
Mortgage Interest Rate
Loans Held
for Sale
Lock
Commitments Contracts
Forward
Change in fair value included in financial services revenue
$
(177) $
- $
-
Year Ended October 31, 2022
(In thousands)
Mortgage Interest Rate
Loans Held
for Sale
Lock
Commitments Contracts
Forward
Change in fair value included in financial services revenue
$
385 $
- $
752
Year Ended October 31, 2021
(In thousands)
Mortgage Interest Rate
Loans Held
for Sale
Lock
Commitments Contracts
Forward
Change in fair value included in financial services revenue
$
4,580 $
152 $
(107)
Assets measured at fair value on a nonrecurring basis are those assets for which we have recorded valuation
adjustments and write-offs. We did not have assets measured at fair value on a nonrecurring basis during the year ended
October 31, 2023. The assets measured at fair value on a nonrecurring basis during the year ended October 31, 2022 are all
within our homebuilding operations and are summarized below:
(In thousands)
Year Ended
October 31, 2022
Fair
Value
Pre-
Impairment
Hierarchy Amount
Total Losses Fair Value
Land and land options held for future development or sale Level 3
$
10,558 $
(8,374 ) $
2,184
We recorded inventory impairments, which are included in the Consolidated Statements of Operations as
“Inventory impairments and land option write-offs” and deducted from inventory of $8.4 million and $2.0 million for the
years ended October 2022 and 2021, respectively. We did not have any assets measured at fair value on a nonrecurring basis
during the year ended October 31, 2023 (see Note 12).
The fair value of our cash equivalents, restricted cash and cash equivalents and customers' deposits approximates
their carrying amount, based on Level 1 inputs.
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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. As shown in
the table below, our 10.0% Senior Secured 1.75 Lien Notes due 2025 and 11.75% Senior Secured 1.25 Lien Notes due 2029
were a Level 2 measurement at October 31, 2023 due to recent trades for the same notes.
Fair Value as of October 31, 2023
(In thousands)
Level 1 Level 2 Level 3
Total
Senior Secured Notes:
10.0% Senior Secured 1.75 Lien Notes due November 15, 2025
8.0% Senior Secured 1.125 Lien Notes due September 30, 2028
11.75% Senior Secured 1.25 Lien Notes due September 30, 2029
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,
- 113,843
-
- 476,655
- 113,843
- 230,690 230,690
- 476,655
-
-
-
- 95,062
- 44,843
95,062
44,843
- 35,034
35,034
2028
Total fair value
$
-
81,742
- 81,742
- $ 590,498 $ 487,371 $ 1,077,869
Fair Value as of October 31, 2022
(In thousands)
Level 1 Level 2 Level 3
Total
Senior Secured Notes:
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
$
-
-
-
-
-
-
-
-
- $
- 165,844 165,844
- 240,393 240,393
- 272,966 272,966
- 162,566 162,566
-
-
94,282
55,654
94,282
55,654
-
31,301
31,301
85,247
-
85,247
- $1,108,253 $ 1,108,253
The Senior Secured Revolving Credit Facility is not included in the above tables because there were no borrowings
outstanding thereunder as of October 31, 2023 and 2022.
22. Subsequent Events
On November 15, 2023, K. Hovnanian redeemed in full all of the $113.5 million aggregate principal amount of
its 10.0% Senior Secured 1.75 Lien Notes due 2025 for a redemption price of $119.2 million, which included accrued and
unpaid interest.
96