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Note 18 - Investments in Unconsolidated Homebuilding and Land Development Joint Ventures | 9 Months Ended
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Jul. 31, 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. 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 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, 2022 |
|  |  |  |  |  | Land |  |  |  |  |
|  | Homebuilding |  |  | Development |  |  | Total |
Assets: |  |  |  |  |  |  |  |  |  |  |  |
Cash and cash equivalents |  | $ | 142,058 |  |  | $ | 1,104 |  |  | $ | 143,162 |
Inventories |  |  | 459,356 |  |  |  | - |  |  |  | 459,356 |
Other assets |  |  | 28,809 |  |  |  | - |  |  |  | 28,809 |
Total assets |  | $ | 630,223 |  |  | $ | 1,104 |  |  | $ | 631,327 |
Liabilities and equity: |  |  |  |  |  |  |  |  |  |  |  |
Accounts payable and accrued liabilities |  | $ | 465,579 |  |  | $ | 884 |  |  |  | 466,463 |
Notes payable |  |  | 44,380 |  |  |  | - |  |  |  | 44,380 |
Total liabilities |  |  | 509,959 |  |  |  | 884 |  |  |  | 510,843 |
Equity of: |  |  |  |  |  |  |  |  |  |  |  |
Hovnanian Enterprises, Inc. |  |  | 72,737 |  |  |  | 211 |  |  |  | 72,948 |
Others |  |  | 47,527 |  |  |  | 9 |  |  |  | 47,536 |
Total equity |  |  | 120,264 |  |  |  | 220 |  |  |  | 120,484 |
Total liabilities and equity |  | $ | 630,223 |  |  | $ | 1,104 |  |  | $ | 631,327 |
Debt to capitalization ratio |  |  | 27 | % |  |  | 0 | % |  |  | 27 | %
(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 July 31, 2022 and October 31, 2021, we had advances outstanding of $1.8 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 $74.7 million and $60.9 million at July 31, 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 nine months ended July 31, 2022 and 2021, we did not write-down any of our unconsolidated joint venture investments.
|  | Three Months Ended July 31, 2022 |
(In thousands) |  |  |  |  |  | Land |  |  |  |  |
|  | Homebuilding |  |  | Development |  |  | Total |
Revenues |  | $ | 80,745 |  |  | $ | - |  |  | $ | 80,745 |
Cost of sales and expenses |  |  | (74,303 | ) |  |  | (3 | ) |  |  | (74,306 | )
Joint venture net income (loss) |  | $ | 6,442 |  |  | $ | (3 | ) |  | $ | 6,439 |
Our share of net income (loss) |  | $ | 12,570 |  |  | $ | (13 | ) |  | $ | 12,557 |
|  | Three Months Ended July 31, 2021 |
(In thousands) |  |  |  |  |  | Land |  |  |  |  |
|  | Homebuilding |  |  | Development |  |  | Total |
Revenues |  | $ | 102,576 |  |  | $ | - |  |  | $ | 102,576 |
Cost of sales and expenses |  |  | (96,622 | ) |  |  | (31 | ) |  |  | (96,653 | )
Joint venture net income (loss) |  | $ | 5,954 |  |  | $ | (31 | ) |  | $ | 5,923 |
Our share of net income |  | $ | 5,012 |  |  | $ | - |  |  | $ | 5,012 |
|  | Nine Months Ended July 31, 2022 |
(In thousands) |  |  |  |  |  | Land |  |  |  |  |
|  | Homebuilding |  |  | Development |  |  | Total |
Revenues |  | $ | 237,732 |  |  | $ | 113 |  |  | $ | 237,845 |
Cost of sales and expenses |  |  | (218,171 | ) |  |  | (34 | ) |  |  | (218,205 | )
Joint venture net income |  | $ | 19,561 |  |  | $ | 79 |  |  | $ | 19,640 |
Our share of net income |  | $ | 23,887 |  |  | $ | 32 |  |  | $ | 23,919 |
|  | Nine Months Ended July 31, 2021 |
(In thousands) |  |  |  |  |  | Land |  |  |  |  |
|  | Homebuilding |  |  | Development |  |  | Total |
Revenues |  | $ | 265,566 |  |  | $ | 691 |  |  | $ | 266,257 |
Cost of sales and expenses |  |  | (255,591 | ) |  |  | (208 | ) |  |  | (255,799 | )
Joint venture net income |  | $ | 9,975 |  |  | $ | 483 |  |  | $ | 10,458 |
Our share of net income |  | $ | 9,560 |  |  | $ | 208 |  |  | $ | 9,768 |
“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 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 nine months ended July 31, 2022 and 2021, respectively, is because we have varying ownership percentages, ranging from 20% to over 50%, in our 8 and 12 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 July 31, 2022, "Our share of net income (loss)" was higher than the "Joint venture net income (loss)" due to the recognition of income in excess of our current sharing percentage based on the joint venture agreement as a result of a management analysis conducted which determined it is more likely than not that the Company will achieve its return on investment. For the nine months ended July 31, 2022, "Our share of net income" was higher than the "Joint venture net income" due to distributions we received during the nine months ended July 31, 2022 that we recognized entirely as income by the Company since our investment balance is zero, as well as the aforementioned management analysis which resulted in the recognition of income in excess of our current sharing percentage based on the joint venture agreement. In addition, we had previously written off our investment in one of our unconsolidated joint ventures that was generating losses for the nine months ended July 31, 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 8 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 July 31, 2021, "Our share of net income" is lower than the "Joint venture net income" due to increased income on one of our newer unconsolidated joint ventures during the quarter for which we currently recognize no percentage of the profit based on the joint venture agreement, and a second unconsolidated joint venture for which we recognize a lower profit sharing percentage which had higher profit in the current period. In addition, for the nine months ended July 31, 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 12 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 $2.9 million and $3.2 million for the three months ended July 31, 2022 and 2021, respectively, and $8.5 million for the nine months ended July 31, 2022 and 2021 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 27% as of July 31, 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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