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Note 18 - Investments in Unconsolidated Homebuilding and Land Development Joint Ventures | 3 Months Ended
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Jan. 31, 2023
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. During the first quarter of fiscal 2023, we contributed four communities we owned, including one active community, to one new unconsolidated joint venture for $41.1 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.
(In thousands) |  | January 31, 2023 |
|  |  |  |  |  | Land |  |  |  |  |
|  | Homebuilding |  |  | Development |  |  | Total |
Assets: |  |  |  |  |  |  |  |  |  |  |  |
Cash and cash equivalents |  | $ | 132,931 |  |  | $ | 859 |  |  | $ | 133,790 |
Inventories |  |  | 501,596 |  |  |  | - |  |  |  | 501,596 |
Other assets |  |  | 25,388 |  |  |  | - |  |  |  | 25,388 |
Total assets |  | $ | 659,915 |  |  | $ | 859 |  |  | $ | 660,774 |
Liabilities and equity: |  |  |  |  |  |  |  |  |  |  |  |
Accounts payable and accrued liabilities |  | $ | 479,122 |  |  | $ | 642 |  |  | $ | 479,764 |
Notes payable |  |  | 58,767 |  |  |  | - |  |  |  | 58,767 |
Total liabilities |  |  | 537,889 |  |  |  | 642 |  |  |  | 538,531 |
Equity of: |  |  |  |  |  |  |  |  |  |  |  |
Hovnanian Enterprises, Inc. |  |  | 97,047 |  |  |  | 209 |  |  |  | 97,256 |
Others |  |  | 24,979 |  |  |  | 8 |  |  |  | 24,987 |
Total equity |  |  | 122,026 |  |  |  | 217 |  |  |  | 122,243 |
Total liabilities and equity |  | $ | 659,915 |  |  | $ | 859 |  |  | $ | 660,774 |
Debt to capitalization ratio |  |  | 33 | % |  |  | 0 | % |  |  | 32 | %
(In thousands) |  | October 31, 2022 |
|  |  |  |  |  | Land |  |  |  |  |
|  | 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 January 31, 2023 and October 31, 2022, we had advances outstanding of $3.8 million and $1.6 million, respectively, to these unconsolidated joint ventures. These amounts were included in “Accounts payable and accrued liabilities” in the tables above. 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. During the three months ended January 31, 2023 and 2022, we did not write-down any of our unconsolidated joint venture investments.
|  | Three Months Ended January 31, 2023 |
(In thousands) |  |  |  |  |  | Land |  |  |  |  |
|  | Homebuilding |  |  | Development |  |  | Total |
Revenues |  | $ | 79,601 |  |  | $ | - |  |  | $ | 79,601 |
Cost of sales and expenses |  |  | (76,885 | ) |  |  | - |  |  |  | (76,885 | )
Joint venture net income |  | $ | 2,716 |  |  | $ | - |  |  | $ | 2,716 |
Our share of net income |  | $ | 7,160 |  |  | $ | - |  |  | $ | 7,160 |
|  | Three Months Ended January 31, 2022 |
(In thousands) |  |  |  |  |  | Land |  |  |  |  |
|  | Homebuilding |  |  | Development |  |  | Total |
Revenues |  | $ | 69,591 |  |  | $ | 113 |  |  | $ | 69,704 |
Cost of sales and expenses |  |  | (65,582 | ) |  |  | (26 | ) |  |  | (65,608 | )
Joint venture net income |  | $ | 4,009 |  |  | $ | 87 |  |  | $ | 4,096 |
Our share of net income |  | $ | 8,147 |  |  | $ | 45 |  |  | $ | 8,192 |
The reason “Our share of net income” in our homebuilding joint ventures is higher than the “Joint venture net income” shown in the tables above is a result of our varying ownership percentages in each investment. For both the three months ended January 31, 2023 and 2022, we had investments in eight and ten 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 three months ended January 31, 2023, "Our share of net income" was higher than the "Joint venture net income" due to the recognition of income in excess of our current sharing percentage for one of our unconsolidated joint ventures in accordance with the joint venture agreement, which provides a higher earning percentage than ownership percentage when the joint venture partner exceeds defined rate of return thresholds. This was slightly offset by a second unconsolidated joint venture that experienced increased income during the period for which we currently recognize a lower profit-sharing percentage based on the joint venture's agreements. In addition, we had previously written off our investment in one of our unconsolidated joint ventures that was generating losses and therefore for the three months ended January 31, 2023 we did not recognize any losses on this investment. 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 eight 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 $3.6 million and $2.4 million for the three months ended January 31, 2023 and 2022, respectively, are recorded in “Selling, general and administrative” homebuilding expenses in 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. 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.

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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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