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Note 20 - Investments in Unconsolidated Homebuilding and Land Development Joint Ventures

12 Months Ended

Oct. 31, 2022

Equity Method Investments and Joint Ventures Disclosure [Text Block]

20. Investments in Unconsolidated Homebuilding and Land Development Joint Ventures

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

During the third quarter of fiscal 2021, we purchased the remaining equity interest in one of our unconsolidated joint ventures for $6.3 million of net cash. As a result of this transaction, we took control of four communities, including three active communities. The unconsolidated joint venture was subsequently dissolved.

During the second quarter of fiscal 2021, we contributed six communities we owned, including three active communities, to two new joint ventures for $21.2 million of net cash.

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

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:

	*October 31, 2022*
				*Land*
(In thousands)	*Homebuilding*			*Development*			*Total*
Assets:
Cash and cash equivalents	$	153,176		$	868		$	154,044
Inventories		441,140			-			441,140
Other assets		20,037			-			20,037
Total assets	$	614,353		$	868		$	615,221
Liabilities and equity:
Accounts payable and accrued liabilities	$	471,813		$	651		$	472,464
Notes payable		34,880			-			34,880
Total liabilities		506,693			651			507,344
Equity of:
Hovnanian Enterprises, Inc.		73,142			209			73,351
Others		34,518			8			34,526
Total equity		107,660			217			107,877
Total liabilities and equity	$	614,353		$	868		$	615,221
Debt to capitalization ratio		24	%		0	%		24	%

	*October 31, 2021*
				*Land*
(In thousands)	*Homebuilding*			*Development*			*Total*
Assets:
Cash and cash equivalents	$	132,963		$	1,972		$	134,935
Inventories		442,347			-			442,347
Other assets		34,551			-			34,551
Total assets	$	609,861		$	1,972		$	611,833
Liabilities and equity:
Accounts payable and accrued liabilities	$	386,117		$	1,681		$	387,798
Notes payable		73,994			-			73,994
Total liabilities		460,111			1,681			461,792
Equity of:
Hovnanian Enterprises, Inc.		58,460			254			58,714
Others		91,290			37			91,327
Total equity		149,750			291			150,041
Total liabilities and equity	$	609,861		$	1,972		$	611,833
Debt to capitalization ratio		33	%		0	%		33	%

As of October 31, 2022 and 2021, we had advances outstanding of $1.6 million and $2.2 million, respectively, to these unconsolidated joint ventures. These amounts were included in “Accounts payable and accrued liabilities” in the tables above. On our Consolidated Balance Sheets, our “Investments in and advances to unconsolidated joint ventures” amounted to $74.9 million and $60.9 million at October 31, 2022 and 2021, 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 years ended October 31, 2022 and 2021, we did not write-down any of our unconsolidated joint venture investments.

	*For The Year Ended October 31, 2022*
				*Land*
(In thousands)	*Homebuilding*			*Development*			*Total*
Revenues	$	351,767		$	113		$	351,880
Cost of sales and expenses		(318,788	)		(37	)		(318,825	)
Joint venture net income	$	32,979		$	76		$	33,055
Our share of net income	$	29,002		$	31		$	29,033

	*For The Year Ended October 31, 2021*
				*Land*
(In thousands)	*Homebuilding*			*Development*			*Total*
Revenues	$	347,898		$	691		$	348,589
Cost of sales and expenses		(335,077	)		(209	)		(335,286	)
Joint venture net income	$	12,821		$	482		$	13,303
Our share of net income	$	8,754		$	195		$	8,949

	*For The Year Ended October 31, 2020*
				*Land*
(In thousands)	*Homebuilding*			*Development*			*Total*
Revenues	$	435,077		$	13,024		$	448,101
Cost of sales and expenses		(420,977	)		(11,225	)		(432,202	)
Joint venture net income	$	14,100		$	1,799		$	15,899
Our share of net income	$	16,904		$	17		$	16,921

“Income (loss) from unconsolidated joint ventures” in the Consolidated Statements of Operations reflects our proportionate share of 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 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.

The reason “Our share of net income” is higher or lower than the “Joint venture net income” shown in the tables above for the years ended October 31, 2022 and 2021, respectively, is because we have varying ownership percentages, ranging from 20% to over 50%, in our seven and ten unconsolidated joint ventures for both periods, respectively. 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 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, 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. For the year ended October 31, 2021, "Our share of net income" was lower than the "Joint venture net income" due to increased income on one of our newer unconsolidated joint ventures during the year for which we currently recognize no share percentage of the profit based on the joint venture agreement, and a second unconsolidated joint venture which we recognize a lower profit-sharing percentage having higher profit in the current period. 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 currently do not recognize those losses. For the year ended October 31, 2021, we had written off our investment in two of our unconsolidated joint ventures that were generating losses and therefore we did not recognize those losses. Had we not fully written off our investment, our share of the net loss in this unconsolidated joint venture would have been approximately 50%, which would have reduced our overall share of net income across all of our unconsolidated joint ventures. As a result, these unconsolidated joint venture losses significantly reduce the profit when looking at all seven and ten of our unconsolidated joint ventures, respectively, in the aggregate, without having any impact on our share of net income or loss recorded in the applicable period.

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 $12.5 million, $11.6 million and $16.0 million for the years ended October 31, 2022, 2021 and 2020, 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 under ASC 810 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.