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Note 18 - Investments in Unconsolidated Homebuilding and Land Development Joint Ventures | 6 Months Ended
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Apr. 30, 2022
Notes to Financial Statements |
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. 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, 2022 |
|  |  |  |  |  | Land |  |  |  |  |
|  | Homebuilding |  |  | Development |  |  | Total |
Assets: |  |  |  |  |  |  |  |  |  |  |  |
Cash and cash equivalents |  | $ | 141,858 |  |  | $ | 1,434 |  |  | $ | 143,292 |
Inventories |  |  | 456,277 |  |  |  | - |  |  |  | 456,277 |
Other assets |  |  | 38,288 |  |  |  | - |  |  |  | 38,288 |
Total assets |  | $ | 636,423 |  |  | $ | 1,434 |  |  | $ | 637,857 |
Liabilities and equity: |  |  |  |  |  |  |  |  |  |  |  |
Accounts payable and accrued liabilities |  | $ | 459,344 |  |  | $ | 1,061 |  |  |  | 460,405 |
Notes payable |  |  | 45,772 |  |  |  | - |  |  |  | 45,772 |
Total liabilities |  |  | 505,116 |  |  |  | 1,061 |  |  |  | 506,177 |
Equity of: |  |  |  |  |  |  |  |  |  |  |  |
Hovnanian Enterprises, Inc. |  |  | 64,921 |  |  |  | 298 |  |  |  | 65,219 |
Others |  |  | 66,386 |  |  |  | 75 |  |  |  | 66,461 |
Total equity |  |  | 131,307 |  |  |  | 373 |  |  |  | 131,680 |
Total liabilities and equity |  | $ | 636,423 |  |  | $ | 1,434 |  |  | $ | 637,857 |
Debt to capitalization ratio |  |  | 26 | % |  |  | 0 | % |  |  | 26 | %
(Dollars in thousands) |  | October 31, 2021 |
|  |  |  |  |  | Land |  |  |  |  |
|  | 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 April 30, 2022 and October 31, 2021, we had advances outstanding of $2.1 million and $2.2 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 $67.3 million and $60.9 million at April 30, 2022 and October 31, 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 assessed 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. During the six months ended April 30, 2022 and 2021, we did not write-down any of our unconsolidated joint venture investments.
|  | Three Months Ended April 30, 2022 |
(In thousands) |  |  |  |  |  | Land |  |  |  |  |
|  | Homebuilding |  |  | Development |  |  | Total |
Revenues |  | $ | 87,396 |  |  | $ | - |  |  | $ | 87,396 |
Cost of sales and expenses |  |  | (78,286 | ) |  |  | (5 | ) |  |  | (78,291 | )
Joint venture net income (loss) |  | $ | 9,110 |  |  | $ | (5 | ) |  | $ | 9,105 |
Our share of net income |  | $ | 3,170 |  |  | $ | - |  |  | $ | 3,170 |
|  | Three Months Ended April 30, 2021 |
(In thousands) |  |  |  |  |  | Land |  |  |  |  |
|  | Homebuilding |  |  | Development |  |  | Total |
Revenues |  | $ | 91,526 |  |  | $ | 428 |  |  | $ | 91,954 |
Cost of sales and expenses |  |  | (87,696 | ) |  |  | (149 | ) |  |  | (87,845 | )
Joint venture net income |  | $ | 3,830 |  |  | $ | 279 |  |  | $ | 4,109 |
Our share of net income |  | $ | 2,637 |  |  | $ | 113 |  |  | $ | 2,750 |
|  | Six Months Ended April 30, 2022 |
(In thousands) |  |  |  |  |  | Land |  |  |  |  |
|  | Homebuilding |  |  | Development |  |  | Total |
Revenues |  | $ | 156,987 |  |  | $ | 113 |  |  | $ | 157,100 |
Cost of sales and expenses |  |  | (143,868 | ) |  |  | (31 | ) |  |  | (143,899 | )
Joint venture net income |  | $ | 13,119 |  |  | $ | 82 |  |  | $ | 13,201 |
Our share of net income |  | $ | 11,317 |  |  | $ | 45 |  |  | $ | 11,362 |
|  | Six Months Ended April 30, 2021 |
(In thousands) |  |  |  |  |  | Land |  |  |  |  |
|  | Homebuilding |  |  | Development |  |  | Total |
Revenues |  | $ | 162,990 |  |  | $ | 691 |  |  | $ | 163,681 |
Cost of sales and expenses |  |  | (158,969 | ) |  |  | (177 | ) |  |  | (159,146 | )
Joint venture net income |  | $ | 4,021 |  |  | $ | 514 |  |  | $ | 4,535 |
Our share of net income |  | $ | 4,548 |  |  | $ | 208 |  |  | $ | 4,756 |
“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 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. The reason “Our share of net income” is higher or lower than the “Joint venture net income” shown in the tables above for both the three and six months ended April 30, 2022 and 2021, respectively, is because we have varying ownership percentages, ranging from 20% to over 50%, in our 10 and 13 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 three months ended April 30, 2022, "Our share of net income" was lower than the "Joint venture net income" due to one of our newer unconsolidated joint ventures for which we recognize a lower share percentage based on the joint venture agreements generating income for the three months ended April 30, 2022. For the six months ended April 30, 2022, "Our share of net income" was lower than the "Joint venture net income" due to the fact we had previously written off our investment in one of our unconsolidated joint ventures that was generating income for the six months ended April 30, 2022 and therefore we currently did not recognize this income. In addition, one of our newer unconsolidated joint ventures for which we recognize a lower share percentage based on the joint venture agreements generated income for the six months ended April 30, 2022. The decreases in amounts of our net income were offset by distributions received from one of our unconsolidated joint ventures that we recognized entirely as income by the Company since our investment balance is zero, as well as the fact that we had previously written off our investment in one of our unconsolidated joint ventures that was generating losses for the six months ended April 30, 2022 and therefore we currently do 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, this unconsolidated joint venture loss significantly reduced the profit when looking at all of our 10 unconsolidated joint ventures, in the aggregate, without having any impact on our share of net income or loss recorded in the applicable period. For the three months ended April 30, 2021, "Our share of net income" is lower than the "Joint venture net income" due to improved performance during the quarter of the two unconsolidated joint ventures for which we have written off our investment and therefore do not recognize income (loss) from these joint ventures as discussed below, along with income on two of our newer unconsolidated joint ventures during the quarter for which we recognize a lower share percentage of the profit based on the joint venture agreements. In addition, for the six months ended April 30, 2021 we had written off our investment in two of our unconsolidated joint ventures that are generating losses and therefore we currently do not recognize those losses. Had we not fully written off our investment, our share of the net loss in these unconsolidated joint ventures 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 ventures losses significantly reduce the profit when looking at all of our 13 unconsolidated joint ventures, 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 $3.2 million and $3.0 million for the three months ended April 30, 2022 and 2021, respectively, and $5.6 million and $5.3 million for the six months ended April 30, 2022 and 2021, respectively, are recorded in “Homebuilding: Selling, general and administrative” on the Condensed 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. The total debt to capitalization ratio of all our unconsolidated joint ventures was 26% as of April 30, 2022. 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.

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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://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 323 -URI https://asc.fasb.org/topic&trid=2196965 + Details
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