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

9 Months Ended

Jul. 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 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.

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" for the three and nine months ended July 31, 2023. 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.

(In thousands)		July 31, 2023
						Land
		Homebuilding				Development				Total
Assets:
Cash and cash equivalents		$	133,631			$	829			$	134,460
Inventories			643,489				-				643,489
Other assets			23,628				-				23,628
Total assets		$	800,748			$	829			$	801,577

Liabilities and equity:
Accounts payable and accrued liabilities		$	515,034			$	616			$	515,650
Notes payable			90,652				-				90,652
Total liabilities			605,686				616				606,302
Equity of:
Hovnanian Enterprises, Inc.			82,916				209				83,125
Others			112,146				4				112,150
Total equity			195,062				213				195,275
Total liabilities and equity		$	800,748			$	829			$	801,577
Debt to capitalization ratio			32	%			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 July 31, 2023 and October 31, 2022, we had outstanding advances to unconsolidated joint ventures of $2.1 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 equity reflected in the tables above because of differences between asset impairments recorded against our unconsolidated joint venture investments and any impairments recorded in the applicable unconsolidated joint venture. During the nine months ended July 31, 2023 and 2022, we did not write-down any of our unconsolidated joint venture investments.

		Three Months Ended July 31, 2023
(In thousands)						Land
		Homebuilding				Development				Total

Revenues		$	122,579			$	-			$	122,579
Cost of sales and expenses			(106,873	)			(1	)			(106,874	)
Joint venture net income (loss)		$	15,706			$	(1	)		$	15,705
Our share of net income (loss)		$	8,401			$	-			$	8,401

		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

		Nine Months Ended July 31, 2023
(In thousands)						Land
		Homebuilding				Development				Total

Revenues		$	283,710			$	-			$	283,710
Cost of sales and expenses			(260,110	)			(4	)			(260,114	)
Joint venture net income (loss)		$	23,600			$	(4	)		$	23,596
Our share of net income (loss)		$	20,969			$	-			$	20,969

		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

The reason “Our share of net income” in homebuilding joint ventures 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 both the three and nine months ended July 31, 2023 and 2022, respectively, we had investments in eight unconsolidated joint ventures 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 and nine months ended July 31, 2023, "Our share of net income" was less than the "Joint venture net income" due to two unconsolidated joint ventures with increased income during the period for which we currently recognize a lower profit-sharing percentage as well as a third newly formed unconsolidated joint venture that we are currently recognizing all of the net loss. In addition, homebuilding joint venture net income for the three and nine months ended July 31, 2023 was negatively impacted by an unconsolidated joint venture that was generating losses but such losses did not impact our share of net income because we had previously written off our investment in such joint venture.

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 ventures' revenues. These management fees, which totaled $4.5 million and $2.9 million for the three months ended July 31, 2023 and 2022, respectively, and $11.2 million and $8.5 million for the nine months ended July 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.