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Note 17 - Investments in Unconsolidated Homebuilding and Land Development Joint Ventures | 6 Months Ended
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Apr. 30, 2018
Notes to Financial Statements |
Equity Method Investments and Joint Ventures Disclosure [Text Block] |
17. | Investments in Unconsolidated Homebuilding and Land Development Joint Ventures
We enter into homebuilding and land development joint ventures from time to time as a means of accessing lot positions, expanding our market opportunities, establishing strategic alliances, managing our risk profile, leveraging our capital base and enhancing returns on capital. Our homebuilding joint ventures are generally entered into with third -party investors to develop land and construct homes that are sold directly to third -party home buyers. Our land development joint ventures include those entered into with developers and other homebuilders as well as financial investors to develop finished lots for sale to the joint venture’s members or other third parties. In the first quarter of fiscal 2018, we acquired the remaining assets of one of our joint ventures, resulting in a $13.6 million reduction in our investment in the joint venture and a corresponding increase to inventory. During the first quarter of fiscal 2017, we transferred one community we owned and our option to buy three communities to an existing joint venture, resulting in the receipt of $11.2 million of net cash. The tables set forth below summarize the combined financial information related to our unconsolidated homebuilding and land development joint ventures that are accounted for under the equity method.
(Dollars in thousands) |  | April 30, 2018 |
|  | Homebuilding |  |  | Land Development |  |  | Total |
Assets: |  |  |  |  |  |  |  |  |  |  |  |
Cash and cash equivalents |  | $ | 31,166 |  |  | $ | 2,414 |  |  | $ | 33,580 |
Inventories |  |  | 651,968 |  |  |  | 6,923 |  |  |  | 658,891 |
Other assets |  |  | 29,695 |  |  |  | - |  |  |  | 29,695 |
Total assets |  | $ | 712,829 |  |  | $ | 9,337 |  |  | $ | 722,166 |
Liabilities and equity: |  |  |  |  |  |  |  |  |  |  |  |
Accounts payable and accrued liabilities |  | $ | 96,770 |  |  | $ | 504 |  |  | $ | 97,274 |
Notes payable |  |  | 371,382 |  |  |  | - |  |  |  | 371,382 |
Total liabilities |  |  | 468,152 |  |  |  | 504 |  |  |  | 468,656 |
Equity of: |  |  |  |  |  |  |  |  |  |  |  |
Hovnanian Enterprises, Inc. |  |  | 79,690 |  |  |  | 3,914 |  |  |  | 83,604 |
Others |  |  | 164,987 |  |  |  | 4,919 |  |  |  | 169,906 |
Total equity |  |  | 244,677 |  |  |  | 8,833 |  |  |  | 253,510 |
Total liabilities and equity |  | $ | 712,829 |  |  | $ | 9,337 |  |  | $ | 722,166 |
Debt to capitalization ratio |  |  | 60 | % |  |  | 0 | % |  |  | 59 | %
(Dollars in thousands) |  | October 31, 2017 |
|  | Homebuilding |  |  | Land Development |  |  | Total |
Assets: |  |  |  |  |  |  |  |  |  |  |  |
Cash and cash equivalents |  | $ | 60,580 |  |  | $ | 194 |  |  | $ | 60,774 |
Inventories |  |  | 666,017 |  |  |  | 9,162 |  |  |  | 675,179 |
Other assets |  |  | 36,026 |  |  |  | - |  |  |  | 36,026 |
Total assets |  | $ | 762,623 |  |  | $ | 9,356 |  |  | $ | 771,979 |
Liabilities and equity: |  |  |  |  |  |  |  |  |  |  |  |
Accounts payable and accrued liabilities |  | $ | 121,646 |  |  | $ | 429 |  |  | $ | 122,075 |
Notes payable |  |  | 330,642 |  |  |  | - |  |  |  | 330,642 |
Total liabilities |  |  | 452,288 |  |  |  | 429 |  |  |  | 452,717 |
Equity of: |  |  |  |  |  |  |  |  |  |  |  |
Hovnanian Enterprises, Inc. |  |  | 88,884 |  |  |  | 3,746 |  |  |  | 92,630 |
Others |  |  | 221,451 |  |  |  | 5,181 |  |  |  | 226,632 |
Total equity |  |  | 310,335 |  |  |  | 8,927 |  |  |  | 319,262 |
Total liabilities and equity |  | $ | 762,623 |  |  | $ | 9,356 |  |  | $ | 771,979 |
Debt to capitalization ratio |  |  | 52 | % |  |  | 0 | % |  |  | 51 | %
As of April 30, 2018 and October 31, 2017, we had advances and a note receivable outstanding of $5.2 million and $22.4 million, respectively, to these unconsolidated joint ventures. These amounts were included in the “Accounts payable and accrued liabilities” balances in the tables above. On our Condensed Consolidated Balance Sheets, our “Investments in and advances to unconsolidated joint ventures” amounted to $88.3 million and $115.1 million at April 30, 2018 and October 31, 2017, respectively. In some cases our net investment in these joint ventures is less than our proportionate share of the equity reflected in the table above because of the differences between asset impairments recorded against our joint venture investments and any impairments recorded in the applicable joint venture. Impairments of joint venture investments are recorded at fair value while impairments recorded in the joint venture are recorded when undiscounted cash flows trigger the impairment. During the six months ended April 30, 2018, we did not write-down any of our joint venture investments; however, one of our joint ventures in the Northeast recorded an asset impairment. We recorded our proportionate share of this impairment charge of $0.7 million as part of our share of the net loss of the venture.
|  | For the Three Months Ended April 30, 2018 |
(In thousands) |  | Homebuilding |  |  | Land Development |  |  | Total |
Revenues |  | $ | 96,931 |  |  | $ | 2,343 |  |  | $ | 99,274 |
Cost of sales and expenses |  |  | (102,230 | ) |  |  | (2,123 | ) |  |  | (104,353 | )
Joint venture net (loss) income |  | $ | (5,299 | ) |  | $ | 220 |  |  | $ | (5,079 | )
Our share of net income |  | $ | 1,296 |  |  | $ | 109 |  |  | $ | 1,405 |
|  | For the Three Months Ended April 30, 2017 |
(In thousands) |  | Homebuilding |  |  | Land Development |  |  | Total |
Revenues |  | $ | 86,556 |  |  | $ | 1,658 |  |  | $ | 88,214 |
Cost of sales and expenses |  |  | (87,957 | ) |  |  | (1,841 | ) |  |  | (89,798 | )
Joint venture net loss |  | $ | (1,401 | ) |  | $ | (183 | ) |  | $ | (1,584 | )
Our share of net loss |  | $ | (4,583 | ) |  | $ | (92 | ) |  | $ | (4,675 | )
|  | For the Six Months Ended April 30, 2018 |
(In thousands) |  | Homebuilding |  |  | Land Development |  |  | Total |
Revenues |  | $ | 155,496 |  |  | $ | 3,618 |  |  | $ | 159,114 |
Cost of sales and expenses |  |  | (174,366 | ) |  |  | (3,281 | ) |  |  | (177,647 | )
Joint venture net (loss) income |  | $ | (18,870 | ) |  | $ | 337 |  |  | $ | (18,533 | )
Our share of net (loss) income |  | $ | (3,903 | ) |  | $ | 168 |  |  | $ | (3,735 | )
|  | For the Six Months Ended April 30, 2017 |
(In thousands) |  | Homebuilding |  |  | Land Development |  |  | Total |
Revenues |  | $ | 151,493 |  |  | $ | 2,860 |  |  | $ | 154,353 |
Cost of sales and expenses |  |  | (155,183 | ) |  |  | (2,823 | ) |  |  | (158,006 | )
Joint venture net (loss) income |  | $ | (3,690 | ) |  | $ | 37 |  |  | $ | (3,653 | )
Our share of net (loss) income |  | $ | (6,264 | ) |  | $ | 18 |  |  | $ | (6,246 | )
“Income (loss) from unconsolidated joint ventures” is reflected as a separate line in the accompanying Condensed Consolidated Statements of Operations and reflects our proportionate share of the income or loss of these unconsolidated homebuilding and land development joint ventures. The difference between our share of the income or loss from these unconsolidated joint ventures in the tables above compared to the Condensed Consolidated Statements of Operations is due primarily to the reclassification of the intercompany portion of management fee income from certain joint ventures and the deferral of income for lots purchased by us from certain joint ventures. To compensate us for the administrative services we provide as the manager of certain joint ventures we receive a management fee based on a percentage of the applicable joint venture’s revenues. These management fees, which totaled $2.9 million and $3.0 million for the three months ended April 30, 2018 and 2017, respectively, and $4.9 million and $5.1 million for the six months ended April 30, 2018 and 2017, respectively, are recorded in “Homebuilding: Selling, general and administrative” on the Condensed Consolidated Statements of Operations. In determining whether or not we must consolidate joint ventures that we manage, we assess whether the other partners have specific rights to overcome the presumption of control by us as the manager of the joint venture. In most cases, the presumption is overcome because the joint venture agreements require that both partners agree on establishing the operations and capital decisions of the partnership, including budgets in the ordinary course of business. Typically, our unconsolidated joint ventures obtain separate project specific mortgage financing. For some of our joint ventures, obtaining financing was challenging, therefore, some of our joint ventures are capitalized only with equity. The total debt to capitalization ratio of all our joint ventures is currently 59%. Any joint venture financing is on a nonrecourse basis, with guarantees from us limited only to performance and completion of development, environmental warranties and indemnification, standard indemnification for fraud, misrepresentation and other similar actions, including a voluntary bankruptcy filing. In some instances, the joint venture entity is considered a VIE under ASC 810 - 10 “Consolidation – Overall” due to the returns being capped to the equity holders; however, in these instances, we have determined that we are not the primary beneficiary, and therefore we do not consolidate these entities.

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- Definition The entire disclosure for equity method investments and joint ventures. Equity method investments are investments that give the investor the ability to exercise significant influence over the operating and financial policies of an investee. Joint ventures are entities owned and operated by a small group of businesses as a separate and specific business or project for the mutual benefit of the members of the group. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 323 -URI http://asc.fasb.org/topic&trid=2196965 + Details
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