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Note 18 - Investments in Unconsolidated Homebuilding and Land Development Joint Ventures

9 Months Ended

Jul. 31, 2020

Equity Method Investments and Joint Ventures Disclosure [Text Block]

18.

Investments in Unconsolidated Homebuilding and Land Development Joint Ventures

We enter into homebuilding and land development joint ventures from time to time as a means of accessing lot positions, expanding our market opportunities, establishing strategic alliances, managing our risk profile, leveraging our capital base and enhancing returns on capital. Our homebuilding joint ventures are generally entered into with third-party investors to develop land and construct homes that are sold directly to third-party home buyers. Our land development joint ventures include those entered into with developers and other homebuilders as well as financial investors to develop finished lots for sale to the joint venture’s members or other third parties.

During the first quarter of fiscal 2020, we contributed eight communities we owned, including four active communities, to a new joint venture for $29.8 million of cash after our investment in the unconsolidated joint venture.

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)	July 31, 2020
				Land
	Homebuilding			Development			Total
Assets:
Cash and cash equivalents	$	103,972		$	1,940		$	105,912
Inventories		399,863			-			399,863
Other assets		25,728			461			26,189
Total assets	$	529,563		$	2,401		$	531,964

Liabilities and equity:
Accounts payable and accrued liabilities	$	156,753		$	2,199		$	158,952
Notes payable		91,692			-			91,692
Total liabilities		248,445			2,199			250,644
Equity of:
Hovnanian Enterprises, Inc.		122,501			660			123,161
Others		158,617			(458	)		158,159
Total equity		281,118			202			281,320
Total liabilities and equity	$	529,563		$	2,401		$	531,964
Debt to capitalization ratio		25	%		0	%		25	%

(Dollars in thousands)	October 31, 2019
				Land
	Homebuilding			Development			Total
Assets:
Cash and cash equivalents	$	108,520		$	2,203		$	110,723
Inventories		397,804			6,038			403,842
Other assets		24,896			233			25,129
Total assets	$	531,220		$	8,474		$	539,694

Liabilities and equity:
Accounts payable and accrued liabilities	$	71,297		$	592		$	71,889
Notes payable		186,882			-			186,882
Total liabilities		258,179			592			258,771
Equity of:
Hovnanian Enterprises, Inc.		120,891			4,747			125,638
Others		152,150			3,135			155,285
Total equity		273,041			7,882			280,923
Total liabilities and equity	$	531,220		$	8,474		$	539,694
Debt to capitalization ratio		41	%		0	%		40	%

As of July 31, 2020 and October 31, 2019, we had advances outstanding of $2.5 million and $1.4 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 $125.7 million and $127.0 million at July 31, 2020 and October 31, 2019, respectively. In some cases, our net investment in these unconsolidated joint ventures is less than our proportionate share of the equity reflected in the table above because of the differences between asset impairments recorded against our unconsolidated joint venture investments and any impairments recorded in the applicable unconsolidated joint venture. Impairments of unconsolidated joint venture investments are recorded at fair value while impairments recorded in the unconsolidated joint venture are recorded when undiscounted cash flows trigger the impairment. During the nine months ended July 31, 2019, we recorded a $0.9 million write-down in our investment in one of our consolidated joint ventures in the West. During the nine months ended July 31, 2020 we did not write-down any of our unconsolidated joint venture investments.

	Three Months Ended July 31, 2020
(In thousands)				Land
	Homebuilding			Development			Total

Revenues	$	132,511		$	3,688		$	136,199
Cost of sales and expenses		(127,653	)		(2,719	)		(130,372	)
Joint venture net income	$	4,858		$	969		$	5,827
Our share of net income (loss)	$	6,337		$	(238	)	$	6,099

	Three Months Ended July 31, 2019
(In thousands)				Land
	Homebuilding			Development			Total

Revenues	$	121,156		$	1,383		$	122,539
Cost of sales and expenses		(112,749	)		(846	)		(113,595	)
Joint venture net income	$	8,407		$	537		$	8,944
Our share of net income	$	3,578		$	268		$	3,846

	Nine Months Ended July 31, 2020
(In thousands)				Land
	Homebuilding			Development			Total

Revenues	$	332,287		$	11,240		$	343,527
Cost of sales and expenses		(323,657	)		(11,120	)		(334,777	)
Joint venture net income	$	8,630		$	120		$	8,750
Our share of net income (loss)	$	13,952		$	(663	)	$	13,289

	Nine Months Ended July 31, 2019
(In thousands)				Land
	Homebuilding			Development			Total

Revenues	$	342,669		$	4,979		$	347,648
Cost of sales and expenses		(320,080	)		(3,963	)		(324,043	)
Joint venture net income	$	22,589		$	1,016		$	23,605
Our share of net income	$	20,202		$	508		$	20,710

“Income 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 from 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 unconsolidated joint ventures and the deferral of income for lots purchased by us from certain unconsolidated joint ventures. For the three and nine months ended July 31, 2020, the difference is also attributed to two unconsolidated joint ventures which we had previously written off our investment in that are still active and are operating at a loss. For the nine months ended July 31, 2019, the difference is also attributed to a return of capital from an unconsolidated joint venture in which we had previously written off our investment. To compensate us for the administrative services we provide as the manager of certain unconsolidated joint ventures, we receive a management fee based on a percentage of the applicable unconsolidated joint venture’s revenues. These management fees, which totaled $4.7 million and $4.1 million for the three months ended July 31, 2020 and 2019, respectively, and $12.5 million and $11.9 million for the nine months ended July 31, 2020 and 2019, 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 unconsolidated joint ventures, obtaining financing was challenging; therefore, some of our unconsolidated joint ventures are capitalized only with equity. The total debt to capitalization ratio of all our unconsolidated joint ventures was 25% as of July 31, 2020. Any unconsolidated joint venture financing is on a nonrecourse basis, with guarantees from us limited only to performance and completion of development, environmental warranties and indemnification, standard indemnification for fraud, misrepresentation and other similar actions, including a voluntary bankruptcy filing. In some instances, the unconsolidated joint venture entity is considered a VIE under ASC 810-10 “Consolidation – Overall” due to the returns being capped to the equity holders; however, in these instances, we have determined that we are not the primary beneficiary, and therefore we do not consolidate these entities.