HOVNANIAN ENTERPRISES, INC. Hovnanian Enterprises, Inc. ("HEI") conducts all of its homebuilding and financial services operations through its subsidiaries (references herein to the "Company," "we," "us" or "our" refer to HEI and its consolidated subsidiaries and should be understood to reflect the consolidated business of HEI's subsidiaries).
Key Performance Indicators
The following key performance indicators are commonly used in the homebuilding
industry and by management as a means to better understand our operating
performance, trends affecting our business and compare our performance with the
performance of other homebuilders. We believe these key performance indicators
also provide useful information to investors in analyzing our performance:
? Net contracts is a volume indicator which represents the number of new
contracts executed during the period for the purchase of homes, less
cancellations of contracts in the same period. The dollar value of netcontracts represents the dollars associated with net contracts executed in the
period. These values are an indicator of potential future revenues;
? Contract backlog is a volume indicator which represents the number of homes
that are under contract, but not yet delivered as of the stated date. The
dollar value of contract backlog represents the dollar amount of the homes in
contract backlog. These values are an indicator of potential future revenues;
? Active selling communities is a volume indicator which represents the number
of communities which are open for sale with ten or more home sites available
as of the end of a period. We identify communities based on product type,
therefore at times there are multiple communities at one land site. These
values are an indicator of potential revenues;
? Net contracts per average active selling community is used to indicate the
pace at which homes are being sold (put into contract) in active selling
communities and is calculated by dividing the number of net contracts in a
period by the average number of active selling communities in the same period.
Sales pace is an indicator of market strength and demand; and
? Contract cancellation rates is a volume indicator which represents the number
of sales contracts cancelled in the period divided by the number of gross
sales contracts executed during the period. Contract cancellation rates as a
percentage of backlog is calculated by dividing the number of cancelled
contracts in the period by the contract backlog at the beginning of the
period. Cancellation rates as compared to prior periods can be an indicator of
market strength or weakness.
Overview
Market Conditions and COVID-19 Impact and Strategy
The demand for new and existing homes is dependent on a variety of demographic and economic factors, including job and wage growth, household formation, consumer confidence, mortgage financing, interest rates and overall housing affordability. In general, at the start of our fiscal year, factors including rising levels of household formation, a constrained supply of new and used homes, wage growth, strong employment conditions and mortgage rates that continue to be low by historical standards were contributing to improving conditions for new home sales. However, overall economic conditions inthe United States have been impacted negatively by the COVID-19 pandemic, which has resulted in, among other things, quarantines, "stay-at-home" or "shelter-in-place" orders, and similar mandates from national, state and local governments that substantially restrict daily activities and for many businesses to curtail or cease normal operations. At the current time, all of the state and local governments in the markets in which we operate are allowing construction and sales of homes. However, due to uncertainty surrounding this ongoing public health crisis and its continued impact on theU.S. economy, we cannot predict either the near-term or long-term effects that the pandemic will have on our business. In response to the pandemic, we are actively taking steps to navigate through this extraordinary period by placing our highest priority on helping to protect the health and safety of our associates, trade partners and customers. We have implemented appropriate health and safety protocols so that our community construction and sales activities, wherever authorized, could continue operations, followed recommended social distancing and other health and safety protocols when meeting in person with a customer and transitioned our non-essential office employees to a work from home environment. We also temporarily closed our sales centers, model homes and design studios to the general public, and our sales teams shifted to an appointment-only home sales process, leveraging virtual sales tools to connect with our customers online. Very recently, in some of our markets, we have re-opened sales offices where allowed by local governments. In the field, we implemented construction site health and safety guidelines to ensure both our employees and our trade partners adhere to social distancing requirements. Our strategy over the past several years, including through the start of our second fiscal quarter, has been to grow through increased open for sale communities. While our community count grew throughout fiscal 2019, our community count decreased 6.4% from 141 communities atOctober 31, 2019 to 132 atApril 30, 2020 and decreased 10.2% from 147 communities atApril 30, 2019 , due to selling through communities faster than anticipated, as well as transferring four previously owned communities to a new unconsolidated joint venture in the first half of fiscal 2020. Despite the recent decrease, the increases in community count through the past year have resulted in increased year-over-year delivery growth, as discussed further below. During the quarter endedApril 30, 2020 , we experienced adverse business conditions as a result of the COVID-19 pandemic, including a slowdown in customer traffic and sales pace and an increase in cancellations. To mitigate the adverse impacts, the Company is implementing initiatives to maximize positive cash flow, retain a strong liquidity position and optimize the organization, including, but not limited to, by focusing on closing homes in backlog and limiting cash expenditures, reducing or delaying certain land purchases and land development activity and beginning work on unsold homes and electing to draw in full the$125.0 million available under its Secured Credit Agreement. These actions are expected to reduce growth and may cause a decline of our community count and the number of homes deliveries in the third quarter of 2020 and future periods. Further, inMay 2020 , the Company announced certain operational optimization measures including streamlining the organizational structure by: (1) transitioning from three homebuilding operational Groups to two; (2) consolidating several business units, resulting in the reduction of three Divisional offices; and (3) gradually phasing out of theChicago market as it sells through its existing communities. In addition, the Company took measures to reduce overhead expenses through a combination of furloughs, layoffs and other cost reduction measures, the implementation of which will continue through fiscal 2020. We expect these steps to reduce our annualized overhead expense by approximately$20 million beginning in fiscal 2021. The Company expects to take a charge of approximately$3 million for severance and other related expenses in the third quarter of fiscal 2020. The Company's senior leadership is monitoring the impacts of the COVID-19 pandemic and will continue to adjust our operations as needed. Although our sales pace has increased since the end of the second fiscal quarter, the magnitude and duration of the COVID-19 pandemic is unknown, we may experience material declines in our net contracts, deliveries, revenues, cash flow and/or profitability in one or more periods during the remainder of fiscal 2020 and beyond, compared to the corresponding prior-year periods, and compared to our expectations at the beginning of our 2020 fiscal year. In addition, if conditions in the overall housing market or in a specific market worsen in the future beyond our current expectations, if future changes in our business strategy significantly affect any key assumptions used in our projections of future cash flows, or if there are material changes in any of the other items we consider in assessing recoverability, we may recognize charges in future periods for inventory impairments related to our current inventory assets or other reorganization activities. Any such charges could be material to our consolidated financial statements. For further discussion of the potential impacts on our business from the COVID-19 pandemic, see Part II, Item 1A - Risk Factors below. 34
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Table of Contents Operating Results Despite the COVID-19 related slow-downs experienced from mid-March through early April as described above, we had positive operating results for the three and six months endedApril 30, 2020 as follows:
? For the three and six months ended
? Gross margin percentage increased to 14.5% for the three months endedApril 30, 2020 from 13.3% for the three months endedApril 30, 2019 and decreased slightly to 13.7% for the six months endedApril 30, 2020 from 14.0% for the six months endedApril 30, 2019 . Gross margin percentage, before cost of sales interest expense and land charges, increased from 16.9% and 17.3% for the three and six months endedApril 30, 2019 , respectively, to 18.2% and 17.8% for the three and six months endedApril 30, 2020 , respectively. The increases were primarily due to the mix of communities delivered and increased volume during the periods. ? Selling, general and administrative costs (including corporate general and administrative expenses) decreased$4.5 million for both the three and six months endedApril 30, 2020 as compared to the same periods of the prior year. As a percentage of total revenue, such costs decreased from 13.7% and 14.7% for the three and six months endedApril 30, 2019 , respectively, to 10.4% and 11.3% for the three and six months endedApril 30, 2020 , respectively. ? Active selling communities atApril 30, 2020 decreased by 10.2% over last year's second quarter. Net contracts decreased 3.8% and increased 13.3% for the three and six months endedApril 30, 2020 , respectively, compared to the same periods of the prior year. ? Net contracts per average active selling community increased to 11.1 for the three months endedApril 30, 2020 compared to 10.5 in the same period of the prior year, and increased to 20.7 for the six months endedApril 30, 2020 compared to 18.2 in the same period of the prior year. ? Contract backlog increased from 2,254 homes atApril 30, 2019 to 2,383 homes atApril 30, 2020 , with a dollar value of$958.1 million , representing a 0.9% increase in dollar value compared to the prior year. 35
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Table of Contents CRITICAL ACCOUNTING POLICIES As disclosed in our annual report on Form 10-K for the fiscal year endedOctober 31, 2019 , our most critical accounting policies relate to income recognition from mortgage loans; inventories; unconsolidated joint ventures; and warranty and construction defect reserves. SinceOctober 31, 2019 , there have been no significant changes to those critical accounting policies.
CAPITAL RESOURCES AND LIQUIDITY
Our operations consist primarily of residential housing development and sales in the Northeast (New Jersey andPennsylvania ), the Mid-Atlantic (Delaware ,Maryland ,Virginia ,Washington D.C. andWest Virginia ), the Midwest (Illinois andOhio ), the Southeast (Florida ,Georgia andSouth Carolina ), the Southwest (Arizona andTexas ) and the West (California ). In addition, we provide certain financial services to our homebuilding customers. We have historically funded our homebuilding and financial services operations with cash flows from operating activities, borrowings under our credit facilities, the issuance of new debt and equity securities and other financing activities. Due to covenant restrictions in our debt instruments, we are currently limited in the amount of debt we can incur that does not qualify as refinancing indebtedness with certain maturity requirements (a limitation that we expect to continue for the foreseeable future), even if market conditions would otherwise be favorable, which could also impact our ability to grow our business.
Operating, Investing and Financing Activities - Overview
Our total liquidity atApril 30, 2020 was$247.1 million , including$232.8 million in homebuilding cash and cash equivalents after fully drawing$125.0 million from our senior secured revolving credit facility, which we drew given the uncertain environment resulting from the COVID-19 pandemic and as a precautionary measure to maximize financial flexibility and increase our current cash position. This is slightly above our target liquidity range of$170.0 to$245.0 million . The unprecedented public health and governmental efforts to contain the COVID-19 pandemic have created significant uncertainty as to general economic and housing market conditions for the remainder of 2020 and beyond. As of the date of this report, we believe that these sources of cash (including our borrowings on our senior secured revolving credit facility) will be sufficient through fiscal 2020 to finance our working capital requirements. We spent$232.3 million on land and land development during the period. After considering this land and land development and all other operating activities, including revenue received from deliveries, we had$79.7 million of cash provided from operations. During the first half of fiscal 2020, cash used in investing activities was$21.3 million , primarily due to an investment in a new unconsolidated joint venture, partially offset by distributions from existing unconsolidated joint ventures. Cash provided from financing activities was$42.7 million during the first half of fiscal 2020, which was primarily due to the$125.0 million draw-down of our senior secured revolving credit facility, partially offset by net payments of$80.8 million made on our mortgage warehouse lines of credit. We intend to continue to use nonrecourse mortgage financings, model sale leaseback, joint ventures, and, subject to covenant restrictions in our debt instruments, land banking programs as our business needs dictate. Our cash uses during the six months endedApril 30, 2020 and 2019 were for operating expenses, land purchases, land deposits, land development, construction spending, state income taxes, interest payments, financing transaction costs, litigation matters and investments in unconsolidated joint ventures. During these periods, we provided for our cash requirements from available cash on hand, housing and land sales, financing transactions, model sale leasebacks, land banking transactions, unconsolidated joint ventures, financial service revenues and other revenues. Our net income (loss) historically does not approximate cash flow from operating activities. The difference between net income (loss) and cash flow from operating activities is primarily caused by changes in inventory levels together with changes in receivables, prepaid and other assets, mortgage loans held for sale, interest and other accrued liabilities, deferred income taxes, accounts payable and other liabilities, and noncash charges relating to depreciation, stock compensation awards and impairment losses for inventory. When we are expanding our operations, inventory levels, prepaids and other assets increase causing cash flow from operating activities to decrease. Certain liabilities also increase as operations expand and partially offset the negative effect on cash flow from operations caused by the increase in inventory levels, prepaids and other assets. Similarly, as our mortgage operations expand, net income from these operations increases, but for cash flow purposes, net income is partially offset by the net change in mortgage assets and liabilities. The opposite is true as our investment in new land purchases and development of new communities decrease, causing us to generate positive cash flow from operations. During the first six months of fiscal 2020 and 2019, with continued spending on land purchases and land development, we used cash from operations. 36
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Table of Contents Debt Transactions Senior notes and credit facilities balances as ofApril 30, 2020 andOctober 31, 2019 , were as follows: April 30, October 31, (In thousands) 2020 2019 Senior Secured Notes: 10.0% Senior Secured Notes due July 15, 2022$136,714
10.5% Senior Secured Notes dueJuly 15, 2024 69,683
211,391
10.0% Senior Secured 1.75 Lien Notes due
158,502 -
7.75% Senior Secured 1.125 Lien Notes due
350,000 350,000
10.5% Senior Secured 1.25 Lien Notes due
282,322 282,322
11.25% Senior Secured 1.5 Lien Notes due February 15, 2026 162,269 103,141 Total Senior Secured Notes$1,159,490 $1,165,848 Senior Notes: 8.0% Senior Notes due November 1, 2027 (1) $-
$-
13.5% Senior Notes dueFebruary 1, 2026 90,590
90,590
5.0% Senior Notes dueFebruary 1, 2040 90,120
90,120
Total Senior Notes$180,710
Senior Unsecured Term Loan Credit Facility due
$39,551
Senior Secured 1.75 Lien Term Loan Credit Facility due
$81,498
$-
Senior Secured Revolving Credit Facility (2)$125,000 $- Net discounts and premiums$21,461 $(49,145 ) Net debt issuance costs$(24,203 ) $(19,970 ) Total Senior Notes and Credit Facilities, net of discount, premium and debt issuance costs$1,583,507 $1,479,990 (1)$26.0 million of 8.0% Senior Notes are owned by a wholly-owned consolidated subsidiary of HEI. Therefore, in accordance with GAAP, such notes are not reflected on the Condensed Consolidated Balance Sheets of HEI. OnNovember 1, 2019 , the maturity of the 8.0% Senior Notes was extended toNovember 1, 2027 .
(2) At
Except forK. Hovnanian , the issuer of the notes and borrower under the Credit Facilities (as defined below), our home mortgage subsidiaries, certain of our title insurance subsidiaries, joint ventures and subsidiaries holding interests in our joint ventures, we and each of our subsidiaries are guarantors of the Credit Facilities, the senior secured notes and senior notes outstanding atApril 30, 2020 (collectively, the "Notes Guarantors"). The credit agreements governing the Credit Facilities and the indentures governing the senior secured and senior notes (together, the "Debt Instruments") outstanding atApril 30, 2020 do not contain any financial maintenance covenants, but do contain restrictive covenants that limit, among other things, the ability of HEI and certain of its subsidiaries, includingK. Hovnanian , to incur additional indebtedness (other than non-recourse indebtedness, certain permitted indebtedness and refinancing indebtedness), pay dividends and make distributions on common and preferred stock, repay certain indebtedness prior to its respective stated maturity, repurchase common and preferred stock, make other restricted payments (including investments), sell certain assets (including in certain land banking transactions), incur liens, consolidate, merge, sell or otherwise dispose of all or substantially all of their assets and enter into certain transactions with affiliates. The Debt Instruments also contain customary events of default which would permit the lenders or holders thereof to exercise remedies with respect to the collateral (as applicable), declare the loans made under the Unsecured Term Loan Facility (defined below) (the "Unsecured Term Loans"), loans made under the Secured Term Loan Facility (defined below) (the "Secured Term Loans") and loans made under the Secured Credit Agreement (as defined below) (the "Secured Revolving Loans") or notes to be immediately due and payable if not cured within applicable grace periods, including the failure to make timely payments on the Unsecured Term Loans, Secured Term Loans, Secured Revolving Loans or notes or other material indebtedness, cross default to other material indebtedness, the failure to comply with agreements and covenants and specified events of bankruptcy and insolvency, with respect to the Unsecured Term Loans, Secured Term Loans and Secured Revolving Loans, material inaccuracy of representations and warranties and with respect to the Unsecured Term Loans, Secured Term Loans and Secured Revolving Loans, a change of control, and, with respect to the Secured Term Loans, Secured Revolving Loans and senior secured notes, the failure of the documents granting security for the obligations under the secured Debt Instruments to be in full force and effect, and the failure of the liens on any material portion of the collateral securing the obligations under the secured Debt Instruments to be valid and perfected. As ofApril 30, 2020 , we believe we were in compliance with the covenants of the Debt Instruments. 37
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If our consolidated fixed charge coverage ratio is less than 2.0 to 1.0, as defined in the applicable Debt Instrument, we are restricted from making certain payments, including dividends, and from incurring indebtedness other than certain permitted indebtedness, refinancing indebtedness and nonrecourse indebtedness. As a result of this ratio restriction, we are currently restricted from paying dividends (in the case of the payment of dividends on preferred stock, our secured debt leverage ratio must also be less than 4.0 to 1.0), which are not cumulative, on our 7.625% Series A Preferred Stock. We anticipate that we will continue to be restricted from paying dividends for the foreseeable future. Our inability to pay dividends is in accordance with covenant restrictions and will not result in a default under our Debt Instruments or otherwise affect compliance with any of the covenants contained in our Debt Instruments. Under the terms of our Debt Instruments, we have the right to make certain redemptions and prepayments and, depending on market conditions and covenant restrictions, may do so from time to time. We also continue to actively analyze and evaluate our capital structure and explore transactions to simplify our capital structure and to strengthen our balance sheet, including those that reduce leverage and/or extend maturities, and will seek to do so with the right opportunity. We may also continue to make debt purchases and/or exchanges for debt or equity from time to time through tender offers, exchange offers, open market purchases, private transactions, or otherwise, or seek to raise additional debt or equity capital, depending on market conditions and covenant restrictions. Any liquidity-enhancing or other capital raising or refinancing transaction will depend on identifying counterparties, negotiation of documentation and applicable closing conditions and any required approvals. Due to covenant restrictions in our Debt Instruments, we are currently limited in the amount of debt we can incur that does not qualify as refinancing indebtedness with certain maturity requirements as discussed above (a limitation that we expect to continue for the foreseeable future), even if market conditions would otherwise be favorable, which could also impact our ability to grow our business. We have certain stand-alone cash collateralized letter of credit agreements and facilities under which there was a total of$14.0 million and$19.2 million letters of credit outstanding atApril 30, 2020 andOctober 31, 2019 , respectively. These agreements and facilities require us to maintain specified amounts of cash as collateral in segregated accounts to support the letters of credit issued thereunder, which will affect the amount of cash we have available for other uses. AtApril 30, 2020 andOctober 31, 2019 , the amount of cash collateral in these segregated accounts was$14.3 million and$19.9 million , respectively, which is reflected in "Restricted cash and cash equivalents" on the Condensed Consolidated Balance Sheets.
See Note 12 to the Condensed Consolidated Financial Statements included
elsewhere in this Quarterly Report on Form 10-Q for a discussion of the
Unsecured Term Loans, the Secured Term Loans and Secured Revolving Loans and
Mortgages and Notes Payable We have nonrecourse mortgage loans for certain communities totaling$211.8 million and$203.6 million (net of debt issuance costs) atApril 30, 2020 andOctober 31, 2019 , respectively, which are secured by the related real property, including any improvements, with an aggregate book value of$440.4 million and$410.2 million , respectively. The weighted-average interest rate on these obligations was 7.7% and 8.3% atApril 30, 2020 andOctober 31, 2019 , respectively, and the mortgage loan payments on each community primarily correspond to home deliveries. Our wholly owned mortgage banking subsidiary,K. Hovnanian American Mortgage, LLC ("K. Hovnanian Mortgage"), originates mortgage loans primarily from the sale of our homes. Such mortgage loans and related servicing rights are sold in the secondary mortgage market within a short period of time. In certain instances, we retain the servicing rights for a small amount of loans.K. Hovnanian Mortgage finances the origination of mortgage loans through various master repurchase agreements, which are recorded in financial services liabilities on the Condensed Consolidated Balance Sheets. The loans are secured by the mortgages held for sale and are repaid when we sell the underlying mortgage loans to permanent investors. As ofApril 30, 2020 andOctober 31, 2019 , we had an aggregate of$59.5 million and$140.2 million , respectively, outstanding under several ofK. Hovnanian Mortgage's short-term borrowing facilities.
See Note 11 to the Condensed Consolidated Financial Statements for a discussion of these agreements.
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Table of Contents Inventory Activities Total inventory, excluding consolidated inventory not owned, decreased$11.9 million during the six months endedApril 30, 2020 fromOctober 31, 2019 . Total inventory, excluding consolidated inventory not owned, decreased in the Northeast by$11.0 million , in the Mid-Atlantic by$6.1 million , in the Southeast by$5.4 million and in the West by$10.4 million . The decrease was partially offset by increases in the Midwest of$4.6 million and in the Southwest of$16.4 million . The net decrease was primarily attributable to home deliveries during the period, partially offset by new land purchases and land development. During the six months endedApril 30, 2020 , we wrote-off costs in the amount of$3.8 million related to land options that expired or that we terminated, as the communities' forecasted profitability was not projected to produce adequate returns on investment commensurate with the risk. In the last few years, we have been able to acquire new land parcels at prices that we believe will generate reasonable returns under current homebuilding market conditions. This trend may not continue in either the near or the long term. Substantially all homes under construction or completed and included in inventory atApril 30, 2020 are expected to be delivered during the next six to nine months. Consolidated inventory not owned increased$7.9 million . Consolidated inventory not owned consists of options related to land banking and model financing transactions that were added to our Condensed Consolidated Balance Sheet in accordance with US GAAP. The increase fromOctober 31, 2019 toApril 30, 2020 was primarily due to an increase in land banking transactions, partially offset by a decrease in the sale and leaseback of certain model homes during the period. We have land banking arrangements, whereby we sell land parcels to the land bankers and they provide us an option to purchase back finished lots on a predetermined schedule. Because of our options to repurchase these parcels, for accounting purposes in accordance with ASC 606-10-55-70, these transactions are considered a financing rather than a sale. For purposes of our Condensed Consolidated Balance Sheet, atApril 30, 2020 , inventory of$153.6 million was recorded to "Consolidated inventory not owned," with a corresponding amount of$101.2 million (net of debt issuance costs) recorded to "Liabilities from inventory not owned" for the amount of net cash received from the transactions. In addition, we sell and lease back certain of our model homes with the right to participate in the potential profit when each home is sold to a third party at the end of the respective lease. As a result of our continued involvement, for accounting purposes in accordance with ASC 606-10-55-68, these sale and leaseback transactions are considered a financing rather than a sale. Therefore, for purposes of our Condensed Consolidated Balance Sheet, atApril 30, 2020 , inventory of$44.6 million was recorded to "Consolidated inventory not owned," with a corresponding amount of$43.3 million (net of debt issuance costs) recorded to "Liabilities from inventory not owned" for the amount of net cash received from the transactions. When possible, we option property for development prior to acquisition. By optioning property, we are only subject to the loss of the cost of the option and predevelopment costs if we choose not to exercise the option. As a result, our commitment for major land acquisitions is reduced. The costs associated with optioned properties are included in "Land and land options held for future development or sale" on the Condensed Consolidated Balance Sheets. Also included in "Land and land options held for future development or sale" are amounts associated with inventory in mothballed communities. We mothball (or stop development on) certain communities when we determine the current performance does not justify further investment at the time. That is, we believe we will generate higher returns if we decide against spending money to improve land today and save the raw land until such time as the markets improve or we determine to sell the property. As ofApril 30, 2020 , we had mothballed land in 13 communities. The book value associated with these communities atApril 30, 2020 was$13.8 million , which was net of impairment charges recorded in prior periods of$138.1 million . We continually review communities to determine if mothballing is appropriate. During the first half of fiscal 2020, we did not mothball any additional communities, or sell any previously mothballed communities, but we re-activated a portion of one previously mothballed community. Inventories held for sale, which are land parcels where we have decided not to build homes and are actively marketing the land for sale, are reported at the lower of carrying amount or fair value less costs to sell. At bothApril 30, 2020 andOctober 31, 2019 , there were no inventories held for sale. In determining fair value for land held for sale, management considers, among other things, prices for land in recent comparable sale transactions, market analysis studies, which include the estimated price a willing buyer would pay for the land (other than in a forced liquidation sale) and recent bona fide offers received from outside third parties. 39
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The following tables summarize home sites included in our total residential real estate. The decrease in total home sites available atApril 30, 2020 compared toOctober 31, 2019 is attributable to delivering homes and terminating certain option agreements, as well as contributing eight previously owned communities, including four active communities, to a new unconsolidated joint venture in the first quarter of fiscal 2020, partially offset by signing new land option agreements and acquiring new land parcels. Active Proposed Active Communities Developable Total Communities(1) Homes Homes HomesApril 30, 2020 : Northeast 4 537 2,883 3,420 Mid-Atlantic 20 2,146 3,262 5,408 Midwest 15 1,515 1,319 2,834 Southeast 12 1,837 1,717 3,554 Southwest 56 4,486 2,673 7,159 West 25 2,381 2,241 4,622 Consolidated total 132 12,902 14,095 26,997 Unconsolidated joint ventures (2) 24 5,116 - 5,116 Owned 6,903 3,794 10,697 Optioned 5,736 10,301 16,037 Controlled lots 12,639 14,095 26,734 Construction to permanent financing lots 263 - 263 Consolidated total 12,902 14,095 26,997
(1) Active communities are open for sale communities with ten or more home sites
available. We identify communities based on product type. Therefore, at
times there are multiple communities at one land site.
(2) Represents active communities and home sites for our unconsolidated
homebuilding joint ventures for the period. We provide this data as asupplement to our consolidated results as an indicator of the volume managed
in our unconsolidated joint ventures. See Note 18 to the Condensed
Consolidated Financial Statements for a further discussion of our
unconsolidated joint ventures.
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Active Proposed
Active Communities Developable Total
Communities(1) Homes Homes Homes
October 31, 2019 :
Northeast 6 499 2,798 3,297
Mid-Atlantic 25 2,281 3,016 5,297
Midwest 16 1,758 2,140 3,898
Southeast 17 2,628 2,065 4,693
Southwest 58 4,487 2,701 7,188
West 19 2,465 2,795 5,260
Consolidated total 141 14,118 15,515 29,633
Unconsolidated joint ventures (2) 22 4,226 - 4,226
Owned 7,522 3,852 11,374
Optioned 6,341 11,663 18,004
Controlled lots 13,863 15,515 29,378
Construction to permanent financing lots 255 - 255
Consolidated total 14,118 15,515 29,633
(1) Active communities are open for sale communities with ten or more home sites
available. We identify communities based on product type. Therefore, at
times there are multiple communities at one land site.
(2) Represents active communities and home sites for our unconsolidated
homebuilding joint ventures for the period. We provide this data as asupplement to our consolidated results as an indicator of the volume managed
in our unconsolidated joint ventures. See Note 18 to the Condensed
Consolidated Financial Statements for a further discussion of our
unconsolidated joint ventures.
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The following table summarizes our started or completed unsold homes and models, excluding unconsolidated joint ventures, in active and substantially completed communities. The decrease in unsold homes fromOctober 31, 2019 toApril 30, 2020 was primarily due to our decision to delay starting unsold homes given the uncertainty caused by the COVID-19 pandemic. The increase in model homes during the period was primarily due to new model homes in communities that are preparing to open for sale. April 30, 2020 October 31, 2019 Unsold Unsold Homes Models Total Homes Models Total Northeast 47 8 55 58 12 70 Mid-Atlantic 48 17 65 63 12 75 Midwest 34 9 43 31 10 41 Southeast 86 18 104 78 15 93 Southwest 267 19 286 320 12 332 West 132 31 163 213 19 232 Total 614 102 716 763 80 843 Started or completed unsold homes and models per active selling communities (1) 4.6 0.8 5.4 5.4 0.6 6.0
(1) Active selling communities (which are communities that are open for sale with
ten or more home sites available) were 132 and 141 at
completed communities, which are communities with less than ten home sites
available.
Other Balance Sheet Activities
Homebuilding Restricted cash and cash equivalents decreased$4.9 million fromOctober 31, 2019 to$16.9 million atApril 30, 2020 . The decrease was due to a reduction in cash collateralization of our stand-alone letters of credit during the period. Investments in and advances to unconsolidated joint ventures increased$12.3 million to$139.3 million atApril 30, 2020 compared toOctober 31, 2019 . The increase was primarily due to a new unconsolidated joint venture entered into in the first quarter of fiscal 2020, partially offset by unconsolidated joint venture partner distributions during the period. As ofApril 30, 2020 andOctober 31, 2019 , we had investments in 11 and ten unconsolidated homebuilding joint ventures, respectively, and one unconsolidated land development joint venture for both periods. We have no guarantees associated with our unconsolidated joint ventures, other than guarantees limited only to performance and completion of development, environmental indemnification and standard warranty and representation against fraud, misrepresentation and similar actions, including a voluntary bankruptcy. Receivables, deposits and notes, net decreased$12.2 million fromOctober 31, 2019 to$32.7 million atApril 30, 2020 . The decrease was primarily due to the timing of home closings, along with the receipt of a receivable during the period related to the funding of the satisfaction and discharge of certain of our senior secured notes in the fourth quarter of fiscal 2019.
Prepaid expenses and other assets were as follows as of:
April 30, October 31, Dollar
(In thousands) 2020 2019 Change
Prepaid insurance $1,621 $2,061 $(440 )
Prepaid project costs 31,684 32,015 (331 )
Other prepaids 10,264 10,808 (544 )
Other assets 678 820 (142 )
Lease right of use asset 21,144 - 21,144
Total $65,391 $45,704 $19,687
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Prepaid insurance decreased slightly during the three months endedApril 30, 2020 due to the timing of premium payments. These costs are amortized over the life of the associated insurance policy, which can be one to three years. Prepaid project costs consist of community specific expenditures that are used over the life of the community. Such prepaid costs are expensed as homes are delivered. Lease right of use asset represents the net present value of our operating leases which, in connection with the Company's adoption of ASU 2016-02 onNovember 1, 2019 , are now required to be recorded as an asset on our Condensed Consolidated Balance Sheets. See Note 9 to the Condensed Consolidated Financial Statements for further information. Other prepaids decreased slightly primarily due to the amortization of costs for certain software and related services during the period. Financial services assets consist primarily of residential mortgages receivable held for sale of which$71.9 million and$163.0 million atApril 30, 2020 andOctober 31, 2019 , respectively, were being temporarily warehoused and are awaiting sale in the secondary mortgage market. The decrease in mortgage loans held for sale fromOctober 31, 2019 was related to a decrease in the volume of loans originated during the second quarter of 2020 compared to the fourth quarter of 2019, primarily due to the decrease in deliveries, partially offset by an increase in the average loan value. Nonrecourse mortgages secured by inventory increased to$211.8 million atApril 30, 2020 from$203.6 million atOctober 31, 2019 . The increase was primarily due to additional loan borrowings on existing mortgages, along with new mortgages for communities in most of our segments obtained during the six months endedApril 30, 2020 , partially offset by the payment of existing mortgages.
Accounts payable and other liabilities are as follows as of:
April 30, October 31, Dollar
(In thousands) 2020 2019 Change
Accounts payable $123,851 $141,667 $(17,816 )
Reserves 90,427 92,083 (1,656 )
Lease liability 22,165 - 22,165
Accrued expenses 13,297 19,208 (5,911 )
Accrued compensation 34,508 53,157 (18,649 )
Other liabilities 11,679 14,078 (2,399 )
Total $295,927 $320,193 $(24,266 )
The decrease in accounts payable was primarily due to the lower volume of
deliveries in the second quarter of fiscal 2020 compared to the fourth quarter
of fiscal 2019. Lease liability represents the net present value of our minimum
lease obligations, which as discussed above, are required to be recorded on our
Condensed Consolidated Balance Sheets as a result of the Company's adoption of
ASU 2016-02 on November 1, 2019 . Accrued expenses decreased primarily due to the
timing of property tax payments, along with the timing of certain accruals for
legal fees associated with debt financing transactions during fiscal 2019. The
decrease in accrued compensation was primarily due to the payment of our fiscal
year 2019 bonuses during the first quarter of fiscal 2020, partially offset by
the accrual of fiscal 2020 bonuses in the second quarter of fiscal 2020. Other
liabilities decreased primarily due to the transfer of a municipal loan from a
previously consolidated community to a new unconsolidated joint venture formed
in the first quarter of fiscal 2020, partially offset by an increase related to
the timing of hospitalization claims and payments during the period.
Liabilities from inventory not owned increased $3.5 million to $144.5 million at
April 30, 2020 . The increase was primarily due to an increase in land banking
activity during the period, partially offset by a decrease in the sale and
leaseback of certain model homes, both accounted for as financing transactions
as described above.
Financial Services (liabilities) decreased $78.7 million from $169.1 million at
October 31, 2019 , to $90.4 million at April 30, 2020 . The decrease was primarily
due to a decrease in amounts outstanding under our mortgage warehouse lines of
credit, and directly correlates to the decrease in the volume of mortgage loans
held for sale during the period.
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RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED
Total Revenues
Compared to the same prior period, revenues increased as follows:
Three Months Ended April 30, 2020
April 30, April 30, Dollar Percentage
(Dollars in thousands) 2020 2019 Change Change
Homebuilding:
Sale of homes $523,347 $427,552 $95,795 22.4 %
Land sales and other revenues 643 832 (189 ) (22.7 )%
Financial services 14,361 12,307 2,054 16.7 %
Total revenues $538,351 $440,691 $97,660 22.2 %
Six Months Ended April 30, 2020
April 30, April 30, Dollar Percentage
(Dollars in thousands) 2020 2019 Change Change
Homebuilding:
Sale of homes $1,002,580 $789,687 $212,893 27.0 %
Land sales and other revenues 1,452 9,683 (8,231 ) (85.0 )%
Financial services 28,375 21,915 6,460 29.5 %
Total revenues $1,032,407 $821,285 $211,122 25.7 %
Homebuilding
For the three and six months ended April 30, 2020 , sale of homes revenues
increased $95.8 million , or 22.4% and $212.9 million , or 27.0%, respectively, as
compared to the same periods of the prior year. These increases were primarily
due to the number of home deliveries increasing 22.1% and 24.8% for the three
and six months ended April 30, 2020 , respectively, compared to the three and six
months ended April 30, 2019 , along with a 0.2% and 1.7% increase in the average
price per home, respectively. The average price per home increased to
$394,979 in the three months ended April 30, 2020 from $394,057 in the three
months ended April 30, 2019 . The average price per home increased to $391,480 in
the six months ended April 30, 2020 from $384,838 in the six months ended April
30, 2019 . The minor increase in average price was the result of the geographic
and community mix of our deliveries. Land sales are ancillary to our
homebuilding operations and are expected to continue in the future but may
significantly fluctuate up or down. For further details on the decrease in land
sales and other revenues, see the section titled "Land Sales and Other Revenues"
below.
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Information on homes delivered by segment is set forth below:
Three Months Ended April 30, Six Months Ended April 30,
(Dollars in thousands) 2020 2019 % Change 2020 2019 % Change
Northeast:
Dollars $46,791 $13,040 258.8 % $92,055 $25,545 260.4 %
Homes 94 23 308.7 % 175 45 288.9 %
Mid-Atlantic:
Dollars $89,677 $80,818 11.0 % $177,266 $133,997 32.3 %
Homes 168 142 18.3 % 323 253 27.7 %
Midwest:
Dollars $56,543 $42,870 31.9 % $102,935 $87,759 17.3 %
Homes 184 141 30.5 % 343 290 18.3 %
Southeast:
Dollars $56,317 $49,346 14.1 % $92,997 $93,229 (0.2 )%
Homes 127 123 3.3 % 224 231 (3.0 )%
Southwest:
Dollars $170,485 $143,634 18.7 % $334,188 $261,497 27.8 %
Homes 515 431 19.5 % 1,008 796 26.6 %
West:
Dollars $103,534 $97,844 5.8 % $203,139 $187,660 8.2 %
Homes 237 225 5.3 % 488 437 11.7 %
Consolidated total:
Dollars $523,347 $427,552 22.4 % $1,002,580 $789,687 27.0 %
Homes 1,325 1,085 22.1 % 2,561 2,052 24.8 %
Unconsolidated joint
ventures (1)
Dollars $112,196 $124,776 (10.1 )% $198,545 $219,803 (9.7 )%
Homes 188 195 (3.6 )% 337 347 (2.9 )%
(1) Represents housing revenues and home deliveries for our unconsolidated homebuilding joint ventures for the period. We provide this data as a supplement to our consolidated results as an indicator of the volume managed in our unconsolidated joint ventures. See Note 18 to the Condensed Consolidated Financial Statements for a further discussion of our unconsolidated joint ventures.
As discussed above, the overall increase in consolidated housing revenues during the three and six months endedApril 30, 2020 as compared to the same period of the prior year was attributed to an increase in deliveries, along with an increase in average sales price. 45
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An important indicator of our future results are recently signed contracts and
our home contract backlog for future deliveries. Our sales contracts and homes
in contract backlog by segment are set forth below:
Net Contracts (1) for the Net Contracts (1) for the
Three Months Ended Six Months Ended Contract Backlog as of
April 30, April 30, April 30,
(Dollars in thousands) 2020 2019 2020 2019 2020 2019
Northeast:
Dollars $23,266 $62,580 $56,269 $97,530 $50,771 $102,481
Homes 66 104 129 156 106 162
Mid-Atlantic:
Dollars $128,652 $118,245 $222,354 $199,759 $228,622 $246,307
Homes 247 199 430 350 429 393
Midwest:
Dollars $54,501 $68,744 $112,777 $105,790 $132,523 $125,181
Homes 174 235 361 362 468 466
Southeast:
Dollars $48,508 $64,772 $115,666 $105,232 $131,695 $120,140
Homes 109 155 264 250 287 270
Southwest:
Dollars $187,493 $192,630 $365,926 $307,968 $262,634 $227,325
Homes 582 559 1,110 921 765 648
West:
Dollars $139,418 $120,616 $230,250 $177,634 $151,812 $128,422
Homes 309 294 515 441 328 315
Consolidated total:
Dollars $581,838 $627,587 $1,103,242 $993,913 $958,057 $949,856
Homes 1,487 1,546 2,809 2,480 2,383 2,254
Unconsolidated joint
ventures:(2)
Dollars $127,283 $131,282 $249,041 $216,851 $267,368 $228,730
Homes 439 229 704 363 884 382
(1) Net contracts are defined as new contracts executed during the period for the purchase of homes, less cancellations of contracts in the same period.
(2) Represents net contract dollars, net contract homes and contract backlog dollars and homes for our unconsolidated homebuilding joint ventures for the period. We provide this data as a supplement to our consolidated results as an indicator of the volume managed in our unconsolidated joint ventures. See Note 18 to the Condensed Consolidated Financial Statements for a further discussion of our unconsolidated joint ventures. In the first half of 2020, our open for sale community count decreased to 132 from 141 atOctober 31, 2019 , which was the net result of opening 29 new communities, closing 34 communities and contributing four communities to an unconsolidated joint venture since the beginning of fiscal 2020. Our reported level of sales contracts (net of cancellations) has been positively impacted by an increase in sales pace per community in the first half of fiscal 2020 as compared to the same period of the prior year. Despite the impact of the COVID-19 pandemic, net contracts per average active selling community for the three months endedApril 30, 2020 increased to 11.1 compared to 10.5 for the same period in the prior year. Net contracts per average active selling community for the six months endedApril 30, 2020 increased to 20.7 compared to 18.2 for the same period in the prior year. 46
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Cancellation rates represent the number of cancelled contracts in the quarter divided by the number of gross sales contracts executed in the quarter. For comparison, the following are historical cancellation rates, excluding unconsolidated joint ventures:
Quarter 2020 2019 2018 2017 2016 First 19 % 24 % 18 % 19 % 20 % Second 23 % 19 % 17 % 18 % 19 % Third 19 % 19 % 19 % 21 % Fourth 21 % 23 % 22 % 20 %
Another common and meaningful way to analyze our cancellation trends is to compare the number of contract cancellations as a percentage of the beginning backlog. The following table provides this historical comparison, excluding unconsolidated joint ventures:
Quarter 2020 2019 2018 2017 2016
First 14 % 16 % 12 % 12 % 13 %
Second 20 % 20 % 15 % 16 % 14 %
Third 16 % 14 % 13 % 12 %
Fourth 14 % 13 % 12 % 11 %
Most cancellations occur within the legal rescission period, which varies by
state but is generally less than two weeks after the signing of the contract.
Cancellations also occur as a result of a buyer's failure to qualify for a
mortgage, which generally occurs during the first few weeks after signing. As
shown in the tables above, contract cancellations over the past several years
have been within what we believe to be a normal range but did increase in the
second quarter of fiscal 2020 due to the COVID-19 pandemic. Market conditions
and further impacts from COVID-19 remain uncertain, and it is difficult to
predict what cancellation rates will be in the future.
Total cost of sales on our Condensed Consolidated Statements of Operations
includes expenses for consolidated housing and land and lot sales, including
inventory impairment loss and land option write-offs (defined as "land charges"
in the tables below). A breakout of such expenses for housing sales and
homebuilding gross margin is set forth below.
Homebuilding gross margin before cost of sales interest expense and land charges
is a non-GAAP financial measure. This measure should not be considered as an
alternative to homebuilding gross margin determined in accordance with GAAP as
an indicator of operating performance.
Management believes this non-GAAP measure enables investors to better understand
our operating performance. This measure is also useful internally, helping
management evaluate our operating results on a consolidated basis and relative
to other companies in our industry. In particular, the magnitude and volatility
of land charges for the Company, and for other homebuilders, have been
significant and, as such, have made financial analysis of our industry more
difficult. Homebuilding metrics excluding land charges, as well as interest
amortized to cost of sales, and other similar presentations prepared by analysts
and other companies are frequently used to assist investors in understanding and
comparing the operating characteristics of homebuilding activities by
eliminating many of the differences in companies' respective level of
impairments and levels of debt.
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Three Months Ended Six Months Ended
April 30, April 30,
(Dollars in thousands) 2020 2019 2020 2019
Sale of homes $523,347 $427,552 $1,002,580 $789,687
Cost of sales, excluding interest expense
and land charges 427,944 355,477 824,262 653,047
Homebuilding gross margin, before cost of sales interest expense and land charges 95,403 72,075 178,318 136,640
Cost of sales interest expense, excluding land sales interest expense 18,537 13,898
36,673 24,140
Homebuilding gross margin, after cost of sales interest expense, before land charges 76,866 58,177 141,645 112,500 Land charges 1,010 1,462 3,838 2,166 Homebuilding gross margin$75,856 $56,715 $137,807 $110,334 Gross margin percentage 14.5 % 13.3 % 13.7 % 14.0 % Gross margin percentage, before cost of sales interest expense and land charges 18.2 % 16.9 %
17.8 % 17.3 %
Gross margin percentage, after cost of sales
interest expense, before land charges 14.7 % 13.6 % 14.1 % 14.2 %
Cost of sales expenses as a percentage of consolidated home sales revenues are
presented below:
Three Months Ended Six Months Ended
April 30, April 30,
2020 2019 2020 2019
Sale of homes 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales, excluding interest expense
and land charges:
Housing, land and development costs 72.3 % 72.8 % 72.5 % 72.3 %
Commissions 3.6 % 3.6 % 3.5 % 3.5 %
Financing concessions 1.3 % 1.3 % 1.4 % 1.3 %
Overheads 4.6 % 5.4 % 4.8 % 5.5 %
Total cost of sales, before interest expense
and land charges 81.8 % 83.1 % 82.2 % 82.6 %
Cost of sales interest 3.5 % 3.3 % 3.7 % 3.1 %
Land charges 0.2 % 0.3 % 0.4 % 0.3 %
Gross margin percentage 14.5 % 13.3 % 13.7 % 14.0 %
Gross margin percentage, before cost of
sales interest expense and land charges 18.2 % 16.9 % 17.8 % 17.3 %
Gross margin percentage, after cost of sales
interest expense and before land charges 14.7 % 13.6 % 14.1 % 14.2 %
We sell a variety of home types in various communities, each yielding a
different gross margin. As a result, depending on the mix of communities
delivering homes, consolidated gross margin may fluctuate up or down. Total
homebuilding gross margin percentage increased to 14.5% during the three months
ended April 30, 2020 compared to 13.3% for the same period last year and
decreased to 13.7% during the six months ended April 30, 2020 compared to 14.0%
for the same period last year. This increase for the three months ended April
30, 2020 was primarily attributed to the mix of communities delivering in each
period, as well as, an increase in volume which allowed us to better leverage
our overhead costs. This decrease for the six months ended April 30, 2020 was
primarily attributed to an increase in cost of sales interest, as well as the
impact of additional incentives on spec homes delivered in the first quarter of
fiscal 2020 and was also the result of the mix of communities delivering in each
period. Gross margin percentage, before cost of sales interest expense and land
charges, increased from 16.9% for the three months ended April 30, 2019 to 18.2%
for the three months ended April 30, 2020 , and increased from 17.3% for the six
months ended April 30, 2019 to 17.8% for the six months ended April 30, 2020 .
This increase for the three and six months ended April 30, 2020 was primarily
attributed to the mix of communities delivering in each period, as well as, an
increase in volume which allowed us to better leverage our overhead costs.
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Reflected as inventory impairment loss and land option write-offs in cost of sales, we wrote-off or wrote-down certain inventories totaling$1.0 million and$1.5 million during the three months endedApril 30, 2020 and 2019, respectively, and$3.8 million and$2.2 million during the six months endedApril 30, 2020 and 2019, respectively, to their estimated fair value. During the three and six months endedApril 30, 2020 , we wrote-off residential land options and approval and engineering costs amounting to$1.0 million and$3.8 million , respectively, compared to$0.5 and$1.2 million for the three and six months endedApril 30, 2019 , respectively, which are included in the total land charges discussed above. Option, approval and engineering costs are written-off when a community's pro forma profitability is not projected to produce adequate returns on the investment commensurate with the risk and when we believe it is probable we will cancel the option or when a community is redesigned engineering costs related to the initial design are written-off. Such write-offs were located in all of our segments in the first half of fiscal 2020 and 2019. We did not record any inventory impairments during the three and six months endedApril 30, 2020 . We recorded inventory impairments of$1.0 million for both the three and six months endedApril 30, 2019 , which were primarily related to three communities in the Northeast, Mid-Atlantic and Southeast. It is difficult to predict impairment levels, and should it become necessary or desirable to have additional land sales, further lower prices, or should the estimates or expectations used in determining estimated cash flows or fair value decrease or differ from current estimates in the future, we may need to recognize additional impairments.
Land Sales and Other Revenues
Land sales and other revenues consist primarily of land and lot sales. A breakout of land and lot sales is set forth below:
Three Months Ended Six Months Ended
April 30, April 30,
(In thousands) 2020 2019 2020 2019
Land and lot sales $50 $- $75 $7,508
Cost of sales, excluding interest 83 - 120 7,357
Land and lot sales gross margin, excluding
interest (33 ) - (45 ) 151
Land and lot sales interest expense 52 - 52 -
Land and lot sales gross margin, including
interest $(85 ) $- $(97 ) $151
Land sales are ancillary to our residential homebuilding operations and are
expected to continue in the future but may significantly fluctuate up or down.
Although we budget land sales, they are often dependent upon receiving approvals
and entitlements, the timing of which can be uncertain. As a result, projecting
the amount and timing of land sales is difficult. Revenue associated with land
sales can vary significantly due to the mix of land parcels sold. There were two
land sales in the three months ended April 30, 2020 compared to no land sales
for the same period of the prior year. There were three land sales in the six
months ended April 30, 2020 compared to four land sales in the same period of
the prior year, resulting in a decrease of $7.4 million in land sales revenues.
Land sales and other revenues decreased $0.2 million and $8.2 million for the
three and six months ended April 30, 2020 , respectively, as compared to the same
periods in the prior year. Other revenues include income from contract
cancellations where the deposit has been forfeited due to contract terminations,
interest income, cash discounts and miscellaneous one-time receipts. The slight
decrease for the three months ended April 30, 2020 as compared to the same
period of the prior was mainly due to less interest income earned as a result of
lower interest rates on interest bearing accounts. The decrease for the six
months ended April 30, 2020 compared to the same period of the prior year was
mainly due to the decrease in land sales discussed above.
Homebuilding Selling, General and Administrative
Homebuilding selling, general and administrative ("SGA") expenses decreased $3.6
million and $5.6 million for the three and six months ended April 30, 2020 ,
respectively, compared to the same periods last year. The decrease for the three
and six months ended April 30, 2020 is attributed to lower selling overhead and
advertising costs, as a result of the reduction of our community count. SGA
expenses as a percentage of homebuilding revenues decreased to 7.7% and 8.1% for
the three and six months ended April 30, 2020 , respectively, compared to 10.3%
and 10.9% for the three and six months ended April 30, 2019 , respectively, as a
result of the 22.3% and 25.6% increase in homebuilding revenue for the same
periods, respectively.
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HOMEBUILDING OPERATIONS BY SEGMENT
Segment Analysis
Three Months Ended April 30,
(Dollars in thousands, except average sales
price) 2020 2019 Variance Variance %
Northeast
Homebuilding revenue $46,798 $13,059 $33,739 258.4 %
Income before income taxes $6,722 $125 $6,597 5277.6 %
Homes delivered 94 23 71 308.7 %
Average sales price $497,777 $566,957
Mid-
Homebuilding revenue$89,738 $80,847 $8,891 11.0 % Income before income taxes$5,466 $393 $5,073 1290.8 % Homes delivered 168 142 26 18.3 % Average sales price$533,792 $569,141
Midwest Homebuilding revenue$56,673 $42,937 $13,736 32.0 % Loss before income taxes$(385 ) $(594 ) $209 35.2 % Homes delivered 184 141 43 30.5 % Average sales price$307,299 $304,035 $3,264 1.1 % Southeast Homebuilding revenue$56,369 $49,382 $6,987 14.1 % Income (loss) before income taxes$50 $(4,132 ) $4,182 101.2 % Homes delivered 127 123 4 3.3 % Average sales price$443,441 $401,187 $42,254 10.5 % Southwest Homebuilding revenue$170,654 $143,850 $26,804 18.6 % Income before income taxes$13,052 $4,286 $8,766 204.5 % Homes delivered 515 431 84 19.5 % Average sales price$331,039 $333,258 $(2,219 ) (0.7 )% West Homebuilding revenue$103,603 $97,883 $5,720 5.8 % Income before income taxes$2,723 $10,310 $(7,587 ) (73.6 )% Homes delivered 237 225 12 5.3 % Average sales price$436,852 $434,862 $1,990 0.5 % 50
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Six Months Ended April 30,
(Dollars in thousands, except average sales
price) 2020 2019 Variance Variance %
Northeast
Homebuilding revenue $92,074 $33,000 $59,074 179.0 %
Income before income taxes $12,463 $6,004 $6,459 107.6 %
Homes delivered 175 45 130 288.9 %
Average sales price $526,029 $567,667 $(41,638 ) (7.3 )%
Mid-Atlantic
Homebuilding revenue $177,497 $134,277 $43,220 32.2 %
Income before income taxes $9,524 $386 $9,138 2367.4 %
Homes delivered 323 253 70 27.7 %
Average sales price $548,811 $529,632 $19,179 3.6 %
Midwest
Homebuilding revenue $103,117 $87,858 $15,259 17.4 %
Loss before income taxes $(3,828 ) $(1,443 ) $(2,385 ) (165.3 )%
Homes delivered 343 290 53 18.3 %
Average sales price $300,102 $302,617 $(2,515 ) (0.8 )%
Southeast
Homebuilding revenue $93,143 $93,373 $(230 ) (0.2 )%
Loss before income taxes $(4,261 ) $(7,061 ) $2,800 39.7 %
Homes delivered 224 231 (7 ) (3.0 )%
Average sales price $415,165 $403,589 $11,576 2.9 %
Southwest
Homebuilding revenue $334,553 $262,049 $72,504 27.7 %
Income before income taxes $21,672 $6,672 $15,000 224.8 %
Homes delivered 1,008 796 212 26.6 %
Average sales price $331,536 $328,514 $3,022 0.9 %
West
Homebuilding revenue $203,224 $187,784 $15,440 8.2 %
Income before income taxes $4,334 $22,015 $(17,681 ) (80.3 )%
Homes delivered 488 437 51 11.7 %
Average sales price $416,268 $429,428 $(13,160 ) (3.1 )%
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Homebuilding Results by Segment
Northeast - Homebuilding revenues increased 258.4% for the three months endedApril 30, 2020 compared to the same period of the prior year. The increase for the three months endedApril 30, 2020 was attributed to a 308.7% increase in homes delivered, partially offset by a 12.2% decrease in average sales price. The decrease in average sales price was the result of new communities delivering smaller single family homes, townhomes and affordable-housing homes in mid to higher-end submarkets of the segment in the three months endedApril 30, 2020 compared to some communities delivering in the three months endedApril 30, 2019 that had higher priced, single family homes in higher-end submarkets of the segment that are no longer delivering. Also impacting the decrease in average sales price was an increase in pricing concessions and a decrease in location premiums in certain communities. Income before income taxes increased$6.6 million to$6.7 million for the three months endedApril 30, 2020 as compared to the prior year, which was primarily the result of the increase in homebuilding revenues discussed above and an increase in gross margin percentage before interest expense. Homebuilding revenues increased 179.0% for the six months endedApril 30, 2020 compared to the same period of the prior year. The increase was attributed to a 288.9% increase in homes delivered, partially offset by a 7.3% decrease in average sales price and a$7.5 million decrease in land sales and other revenue. The decrease in average sales price was the result of new communities delivering smaller single family homes, townhomes and affordable-housing homes in mid to higher-end submarkets of the segment in the six months endedApril 30, 2020 compared to some communities delivering in the six months endedApril 30, 2019 that had higher priced, single family homes also in higher-end submarkets of the segment that are no longer delivering. Also impacting the decrease in average sales price was an increase in pricing concessions and a decrease in location premiums in certain communities. Income before income taxes increased$6.5 million to$12.5 million for the six months endedApril 30, 2020 as compared to the prior year. The increase was mainly due to the increase in homebuilding revenues discussed above, a$0.6 million decrease in selling, general and administrative costs, and an increase in gross margin percentage before interest expense, partially offset by a$7.4 million decrease in income from unconsolidated joint ventures. Mid-Atlantic - Homebuilding revenues increased 11.0% for the three months endedApril 30, 2020 compared to the same period in the prior year. The increase was primarily due to an 18.3% increase in homes delivered, partially offset by a 6.2% decrease in average sales price for the three months endedApril 30, 2020 compared to the same period in the prior year. The decrease in average sales price was the result of new communities delivering lower priced, smaller single family homes and townhomes in lower-end submarkets of the segment in the three months endedApril 30, 2020 compared to some communities delivering in the three months endedApril 30, 2019 that had higher priced, larger single family homes and townhomes in higher-end submarkets of the segment that are no longer delivering. Income before income taxes increased$5.1 million to$5.5 million for the three months endedApril 30, 2020 compared to the same period in the prior year, which was primarily due to the increase in homebuilding revenue discussed above, a$0.6 million decrease in selling, general and administrative costs and an increase in gross margin percentage before interest expense for the period compared to the same period of the prior year. Homebuilding revenues increased 32.2% for the six months endedApril 30, 2020 compared to the same period in the prior year. The increase was primarily due to a 27.7% increase in homes delivered and a 3.6% increase in average sales price for the six months endedApril 30, 2020 . The increase in average sales price was the result of new communities delivering higher priced, larger single family homes and townhomes in higher-end submarkets of the segment in the six months endedApril 30, 2020 compared to some communities delivering in the six months endedApril 30, 2019 that had lower priced, smaller single family homes and townhomes in lower-end submarkets of the segment that are no longer delivering. Income before income taxes increased$9.1 million to$9.5 million for the six months endedApril 30, 2020 as compared to the prior year, which was primarily due to the increase in homebuilding revenues discussed above, a$1.1 million decrease in selling, general and administrative costs and an increase in gross margin percentage before interest expense. Midwest - Homebuilding revenues increased 32.0% for the three months endedApril 30, 2020 compared to the same period in the prior year. The increase was due to a 30.5% increase in homes delivered, while the average sales price was essentially flat with a 1.1% increase. Loss before income taxes improved$0.2 million to a loss of$0.4 million for the three months endedApril 30, 2020 compared to the same period in the prior year. The improvement was primarily due to the increase in homebuilding revenue discussed above and a$0.2 million decrease in selling, general and administrative costs, partially offset by a slight decrease in gross margin percentage before interest expense. 52
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Homebuilding revenues increased 17.4% for the six months endedApril 30, 2020 compared to the same period in the prior year. The increase was primarily due to an 18.3% increase in homes delivered, while the average sales price was essentially flat with a 0.8% decrease. Loss before income taxes increased$2.4 million to a loss of$3.8 million for the six months endedApril 30, 2020 as compared to the prior year, primarily due to the$2.7 million increase in inventory impairment loss and land option write-offs and a slight decrease in gross margin percentage before interest expense, partially offset by the increase in homebuilding revenue discussed above. Southeast - Homebuilding revenues increased 14.1% for the three months endedApril 30, 2020 compared to the same period in the prior year. The increase was due to a 3.3% increase in homes delivered and a 10.5% increase in average sales price. The increase in average sales price was the result of new communities delivering higher priced, larger single family homes in higher-end submarkets of the segment in the three months endedApril 30, 2020 compared to some communities delivering in the three months endedApril 30, 2019 that had lower priced, smaller single family homes in lower-end submarkets of the segment that are no longer delivering. Also impacting the increase in average sales price was an increase in base price and a decrease in pricing concessions in certain communities. Loss before income taxes improved$4.2 million to income of$0.1 million for the three months endedApril 30, 2020 primarily due to the increase in homebuilding revenue discussed above, an$0.8 million decrease to selling, general and administrative costs and an increase in gross margin percentage before interest expense for the period compared to the same period of the prior year. Homebuilding revenues decreased 0.2% for the six months endedApril 30, 2020 compared to the same period in the prior year. The slight decrease for the six months endedApril 30, 2020 was attributed a 3.0% decrease in homes delivered, partially offset by a 2.9% increase in average sales price. The increase in average sales price was the result of new communities delivering higher priced, larger single family homes in higher-end submarkets of the segment in the six months endedApril 30, 2020 compared to some communities delivering in the six months endedApril 30, 2019 that had lower priced, smaller single family homes in lower-end submarkets of the segment that are no longer delivering. Also impacting the increase in average sales price was an increase in base price and a decrease in pricing concessions in certain communities. Loss before income taxes improved$2.8 million to a loss of$4.3 million for the six months endedApril 30, 2020 , primarily due to a$1.8 million decrease in selling, general and administrative costs, a$1.0 million improvement in loss from unconsolidated joint ventures and a slight increase in gross margin percentage before interest expense Southwest - Homebuilding revenues increased 18.6% for the three months endedApril 30, 2020 compared to the same period in the prior year. The increase in homebuilding revenues was primarily due to a 19.5% increase in homes delivered, while average sales price was essentially flat with a 0.7% decrease for the three months endedApril 30, 2020 . Income before income taxes increased$8.8 million to$13.1 million for the three months endedApril 30, 2020 compared to the same period in the prior year. The increase was primarily due to the increase in homebuilding revenue discussed above and an increase in gross margin percentage before interest expense for the three months endedApril 30, 2020 compared to the same period of the prior year. Homebuilding revenues increased 27.7% for the six months endedApril 30, 2020 compared to the same period in the prior year. The increase was primarily due to a 26.6% increase in homes delivered, while average sales price was essentially flat with a 0.9% increase for the six months endedApril 30, 2020 . Income before income taxes increased$15.0 million to$21.7 million for the six months endedApril 30, 2020 compared to the same period in the prior year. The increase was due to the increase in homebuilding revenues discussed above and an increase in gross margin percentage before interest expense. 53
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West - Homebuilding revenues increased 5.8% for the three months endedApril 30, 2020 compared to the same period in the prior year. The increase for the three months endedApril 30, 2020 was primarily attributed to a 5.3% increase in homes delivered, while average sales price was essentially flat with a 0.5% increase. Income before income taxes decreased$7.6 million to$2.7 million for the three months endedApril 30, 2020 . The decrease for the three months endedApril 30, 2020 was primarily due to a significant decrease in gross margin percentage before interest expense for the period compared to the same period of the prior year. Homebuilding revenues increased 8.2% for the six months endedApril 30, 2020 compared to the same period in the prior year. The increase for the six months endedApril 30, 2020 was primarily attributed to an 11.7% increase in homes delivered, partially offset by a 3.1% decrease in average sales price. The decrease in average sales price was the result of new communities delivering lower priced, smaller single family homes in lower-end submarkets of the segment in the six months endedApril 30, 2020 compared to some communities delivering in the six months endedApril 30, 2019 that had higher priced, larger single family homes in higher-end submarkets of the segment that are no longer delivering. Income before income taxes decreased$17.7 million to$4.3 million for the six months endedApril 30, 2020 . The decrease was primarily due to a significant decrease in gross margin percentage before interest expense for the six months endedApril 30, 2020 compared to the same period in the prior year. Financial Services Financial services consist primarily of originating mortgages from our home buyers, selling such mortgages in the secondary market, and title insurance activities. We use mandatory investor commitments and forward sales of mortgage-backed securities ("MBS") to hedge our mortgage-related interest rate exposure on agency and government loans. These instruments involve, to varying degrees, elements of credit and interest rate risk. Credit risk associated with MBS forward commitments and loan sales transactions is managed by limiting our counterparties to investment banks, federally regulated bank affiliates and other investors meeting our credit standards. Our risk, in the event of default by the purchaser, is the difference between the contract price and fair value of the MBS forward commitments. For the first half of fiscal 2020 and 2019,Federal Housing Administration andVeterans Administration ("FHA/VA ") loans represented 32.2% and 30.0%, respectively, of our total loans. The origination of FHA/VA loans increased from the first half of fiscal 2019 to the first half of fiscal 2020 and our conforming conventional loan originations as a percentage of our total loans increased slightly from 65.4% to 65.6% for these periods, respectively. The origination of loans which exceed conforming conventions decreased from 4.6% for the first half of fiscal 2019 to 2.2% for the first half of fiscal 2020. Profits and losses relating to the sale of mortgage loans are recognized when legal control passes to the buyer of the mortgage and the sales price is collected. During the three and six months endedApril 30, 2020 , financial services provided a$4.7 million and$9.2 million pretax profit, respectively, compared to$3.6 million and$4.8 million , respectively, of pretax profit for the same periods of fiscal 2019. This increase in pretax profit was attributed to the increase in the homebuilding deliveries and an increase in the average price of the loans settled. Also impacting the increase for the six months endedApril 30, 2020 was the increase in the basis point spread between the loans originated and the implied rate from the sale of the loans. In the market areas served by our wholly owned mortgage banking subsidiaries, 68.4% and 68.3% of our noncash homebuyers obtained mortgages originated by these subsidiaries during the three months endedApril 30, 2020 and 2019, respectively, and 68.5% and 69.4% of our noncash homebuyers obtained mortgages originated by these subsidiaries for the six months endedApril 30, 2020 and 2019, respectively.
Corporate General and Administrative
Corporate general and administrative expenses include the operations at our headquarters inNew Jersey . These expenses include payroll, stock compensation, facility costs and rent and other costs associated with our executive offices, legal expenses, information services, human resources, corporate accounting, training, treasury, process redesign, internal audit, national and digital marketing, construction services and administration of insurance, quality and safety. Corporate general and administrative expenses decreased slightly to$15.3 million for the three months endedApril 30, 2020 compared to$16.2 million for the three months endedApril 30, 2019 . The slight decrease for the three months endedApril 30, 2020 compared to 2019 was primarily due to lower compensation expense from the cancellation of certain market stock units awards based on performance conditions which were not met and a reduction in certain of our long-term incentive plans as a result of performance conditions which are no longer expected to meet target, as well as with our lower common stock price at the end of the second fiscal quarter and forfeitures of shares due to associate terminations. Corporate general and administrative expenses increased to$35.0 million for the six months endedApril 30, 2020 compared to$33.8 million for the six months endedApril 30, 2019 , primarily due to a lower adjustment to reserves for self-insured medical claims in the current fiscal year compared to the prior fiscal year, which were reduced based on claim estimates, and additional costs pertaining to software licenses and support fees for cybersecurity and monitoring services. 54
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Table of Contents Other Interest Other interest increased$4.2 million for the three months endedApril 30, 2020 compared to the three months endedApril 30, 2019 and increased$6.9 million for the six months endedApril 30, 2020 compared to the six months endedApril 30, 2019 . Our assets that qualify for interest capitalization (inventory under development) are less than our debt, and therefore the portion of interest not covered by qualifying assets is directly expensed. Other interest increased for the three and six months endedApril 30, 2020 compared to the three and six months endedApril 30, 2019 because we incurred more interest as a result of the increase in nonrecourse mortgages atApril 30, 2020 compared toApril 30, 2019 , and as a result of the debt exchange in the fourth quarter of fiscal 2019.
(Loss) Gain on Extinguishment of Debt
OnDecember 10, 2019 , the Company entered into a credit agreement providing for$81.5 million of senior secured 1.75 lien term loans in exchange for$163.0 million of senior unsecured term loans. OnDecember 10, 2019 , the Company also issued$158.5 million of 10.0% Senior Secured 1.75 Lien Notes due 2025 in exchange for$23.2 million of 10.0% Senior Secured Notes due 2022 and$141.7 million 10.5% Senior Secured Notes due 2024. These transactions were accounted for in accordance with ASC 470-60, resulting in a gain on extinguishment of debt of$9.5 million . Additional costs incurred pertaining to this transaction resulted in a$0.2 million loss on extinguishment of debt during the three months endedApril 30, 2020 .
Income from
Income from unconsolidated joint ventures consists of our share of the earnings or losses of our unconsolidated joint ventures. Income from unconsolidated joint ventures decreased$1.0 million to$6.2 million for the three months endedApril 30, 2020 and decreased$9.1 million to$7.8 million for the six months endedApril 30, 2020 compared to the same period of the prior year. The decrease was primarily due to the recognition of our share of income from certain of our joint ventures delivering less homes in the current fiscal year as compared to the prior fiscal year. Also impacting the decrease is income recorded in the first half of fiscal 2019 related to the return of capital from an unconsolidated joint venture in which we had previously written-off our investment. Total Taxes The total income tax expense of$1.8 million recognized for the six months endedApril 30, 2020 was primarily related to state tax expense from the impact of the cancellation of debt income recorded for tax purposes but not for GAAP purposes, creating a permanent difference. The total income tax expense of$0.1 million for the three months endedApril 30, 2020 , and$0.3 million and$0.7 million recognized for the three and six months endedApril 30, 2019 , respectively, was primarily related to state tax expense from income generated that was not offset by tax benefits in states where we fully reserve the tax benefit from net operating losses. Inflation Inflation has a long-term effect, because increasing costs of land, materials and labor result in increasing sale prices of our homes. In general, these price increases have been commensurate with the general rate of inflation in our housing markets and have not had a significant adverse effect on the sale of our homes. A significant risk faced by the housing industry generally is that rising house construction costs, including land and interest costs, will substantially outpace increases in the income of potential purchasers and therefore limit our ability to raise home sale prices, which may result in lower gross margins. Inflation has a lesser short-term effect, because we generally negotiate fixed-price contracts with many, but not all, of our subcontractors and material suppliers for the construction of our homes. These prices usually are applicable for a specified number of residential buildings or for a time period of between three to twelve months. Construction costs for residential buildings represent approximately 53.2% of our homebuilding cost of sales for the six months endedApril 30, 2020 . 55
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Table of Contents Safe Harbor Statement All statements in this Quarterly Report on Form 10-Q that are not historical facts should be considered as "Forward-Looking Statements" within the meaning of the "Safe Harbor" provisions of the Private Securities Litigation Reform Act of 1995. Such statements involve known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Such forward-looking statements include but are not limited to statements related to the Company's goals and expectations with respect to its financial results for future financial periods. Although we believe that our plans, intentions and expectations reflected in, or suggested by, such forward-looking statements are reasonable, we can give no assurance that such plans, intentions or expectations will be achieved. By their nature, forward-looking statements: (i) speak only as of the date they are made, (ii) are not guarantees of future performance or results and (iii) are subject to risks, uncertainties and assumptions that are difficult to predict or quantify. Therefore, actual results could differ materially and adversely from those forward-looking statements as result of a variety of factors. Such risks, uncertainties and other factors include, but are not limited to:
? The material and adverse disruption, and the expected continued disruption,
to our business caused by the present outbreak and worldwide spread of
COVID-19 and the measures that international, federal, state and local
governments, agencies, law enforcement and/or health authorities implement to
address it;
? Changes in general and local economic, industry and business conditions and
impacts of a significant homebuilding downturn;
? Adverse weather and other environmental conditions and natural disasters;
? High leverage and restrictions on the Company's operations and activities
imposed by the agreements governing the Company's outstanding indebtedness;
? Availability and terms of financing to the Company; ? The Company's sources of liquidity; ? Changes in credit ratings; ? The seasonality of the Company's business;
? The availability and cost of suitable land and improved lots and sufficient
liquidity to invest in such land and lots;
? Shortages in, and price fluctuations of, raw materials and labor, including
due to changes in trade policies, including the imposition of tariffs and
duties on homebuilding materials and products and related trade disputes with
and retaliatory measures taken by other countries;
? Reliance on, and the performance of, subcontractors;
? Regional and local economic factors, including dependency on certain sectors
of the economy, and employment levels affecting home prices and sales
activity in the markets where the Company builds homes;
? Increases in cancellations of agreements of sale;
? Fluctuations in interest rates and the availability of mortgage financing;
? Changes in tax laws affecting the after-tax costs of owning a home;
? Operations through unconsolidated joint ventures with third parties;
? Government regulation, including regulations concerning development of land,
the home building, sales and customer financing processes, tax laws and the
environment;
? Legal claims brought against us and not resolved in our favor, such as
product liability litigation, warranty claims and claims made by mortgage
investors;
? Levels of competition;
? Successful identification and integration of acquisitions;
? Significant influence of the Company's controlling stockholders;
? Availability of net operating loss carryforwards;
? Utility shortages and outages or rate fluctuations;
? Geopolitical risks, terrorist acts and other acts of war;
? Diseases, pandemics or other severe public health events;? Loss of key management personnel or failure to attract qualified personnel;
? Information technology failures and data security breaches; and ? Negative publicity. Certain risks, uncertainties and other factors are described in detail in Part I, Item 1 "Business" and Part I, Item 1A "Risk Factors" in our Annual Report on Form 10-K for the fiscal year endedOctober 31, 2019 . Except as otherwise required by applicable securities laws, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, changed circumstances or any other reason after the date of this Quarterly Report on Form 10-Q. 56
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