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

12 Months Ended

Oct. 31, 2023

Notes to Financial Statements

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 investments in homebuilding and land development joint ventures consist of equity interests that, in total, provide us with partner investment returns and management fees.

During the first quarter of fiscal 2023, we contributed four communities we owned, including one active selling community, to one new unconsolidated joint venture for $41.1 million of net cash.

During the second quarter of fiscal 2023, one of the Company's unconsolidated joint ventures was dissolved, and we assumed control of the remaining assets and liabilities.

During the third quarter of fiscal 2023, we contributed 16 communities we owned, including eight active selling communities, to one new unconsolidated joint venture for $75.7 million of net cash.

Also, during the third quarter of fiscal 2023, we assumed control of one of our unconsolidated joint ventures after the partner received their final cash distribution. We consolidated the remaining assets and liabilities that were in the unconsolidated joint venture at fair value on the date of distribution. Upon consolidation, we recorded a gain of $19.1 million in "Other (income) expense, net." Subsequent to consolidation, we contributed the same three active selling communities to an unconsolidated joint venture for $48.0 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, 2023*
						*Land*
(In thousands)		*Homebuilding*				*Development*				*Total*
Assets:
Cash and cash equivalents		$	127,547			$	822			$	128,369
Inventories			375,022				-				375,022
Other assets			380,989				-				380,989
Total assets		$	883,558			$	822			$	884,380
Liabilities and equity:
Accounts payable and accrued liabilities		$	524,586			$	605			$	525,191
Notes payable			101,126				-				101,126
Total liabilities			625,712				605				626,317
Equity of:
Hovnanian Enterprises, Inc.			96,281				210				96,491
Others			161,565				7				161,572
Total equity			257,846				217				258,063
Total liabilities and equity		$	883,558			$	822			$	884,380
Debt to capitalization ratio			28	%			0	%			28	%

		*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	%

As of October 31, 2023 and 2022, we had outstanding advances to unconsolidated joint ventures of $1.4 million and $1.6 million, respectively. These amounts were included in “Accounts payable and accrued liabilities” in the tables above. In some cases, our net investment in 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. During the years ended October 31, 2023 and 2022, we did not write-down any of our unconsolidated joint venture investments.

		*For The Year Ended October 31, 2023*
						*Land*
(In thousands)		*Homebuilding*				*Development*				*Total*
Revenues		$	783,298			$	-			$	783,298
Cost of sales and expenses			(654,217	)			-				(654,217	)
Joint venture net income		$	129,081			$	-			$	129,081
Our share of net income		$	43,160			$	-			$	43,160

		*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

The reason “Our share of net income” is higher or lower than the “Joint venture net income” in the tables above is a result of our varying ownership percentages in each investment. For the years ended October 31, 2023 and 2022, we had investments in eight and seven unconsolidated joint ventures, respectively, and our ownership in these joint ventures ranged from 20% to over 50% for both periods. 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, 2023, "Our share of net income" was lower than the "Joint venture net income" due to four unconsolidated joint ventures with increased income during the period for which we currently recognize a lower profit-sharing percentage as well as a fifth newly formed unconsolidated joint venture for which we are currently recognizing all of the net loss.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. 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 did not recognize those losses.

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 revenue. These management fees, which totaled $16.3 million, $12.5 million and $11.6 million for the years ended October 31, 2023, 2022 and 2021, 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 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.