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Note 18 - Investments in Unconsolidated Homebuilding and Land Development Joint Ventures

3 Months Ended

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.