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OFFON

HOVNANIAN ENTERPRISES, INC.

(HOV)
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HOVNANIAN ENTERPRISES : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q)

03/05/2021 | 04:52pm EDT
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 and 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 net

contracts 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 2020 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 in the
United States have been, and continue to be, 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 have substantially restricted daily activities
and caused many businesses to curtail or cease normal operations.
Notwithstanding these developments, all of the state and local governments in
the markets in which we operate have deemed housing to be an essential business,
which has allowed us to continue with construction and sales of homes. Although
most of the states in which we operate have begun to resume normal business
operations, the United States continues to struggle with rolling outbreaks of
the virus. Accordingly, we cannot predict the magnitude of either the near-term
or long-term effects that the pandemic will have on our business.



Last year, in response to the pandemic, we actively took 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.
Among other measures, we implemented appropriate health and safety protocols so
that our community construction and sales activities, wherever authorized, could
continue operations.



During the second quarter of fiscal 2020 when we confronted the initial impact
of COVID-19, we experienced adverse business conditions, including a slowdown in
customer traffic and sales pace and an increase in cancellations. That said, the
homebuilding industry generally was only impacted from mid-March through April
of 2020. Towards the end of April, economic conditions in our markets started to
improve, and this improvement continued throughout the second half of fiscal
2020 and into first quarter of fiscal 2021 due to what we believe is a
combination of factors including low interest rates, low inventory levels of
existing homes and a general desire for more indoor and outdoor space. During
the second half of fiscal 2020 and continuing through the first quarter of
fiscal 2021, we returned to our normal activities with respect to land
purchases, land development and resuming the construction of unsold homes. As a
result, our operating metrics for the first quarter of fiscal 2021 improved
significantly as compared to the first quarter of fiscal 2020.



The full magnitude and duration of the COVID-19 pandemic remains unknown as
there continues to be uncertainty surrounding the virus and various re-opening
strategies. We may experience material declines in our net contracts,
deliveries, revenues, cash flow and/or profitability during the remainder of
fiscal 2021 and beyond, compared to the corresponding prior-year periods, and
compared to our expectations at the beginning of our 2021 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.



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Operating Results


We experienced significant positive operating results for the three months ended January 31, 2021 as follows:




? For the three months ended January 31, 2021, sale of homes revenues increased
15.1% as compared to the same period of the prior year, as a result of a 12.1%
increase in deliveries, primarily due to our increased sales absorption pace.



? Gross margin dollars increased 54.0% for the three months ended January 31,
2021, as compared to the same period of the prior year, as a result of our
increased revenues. Additionally, gross margin percentage increased to 17.3% for
the three months ended January 31, 2021 from 12.9% for the three months ended
January 31, 2020. Gross margin percentage, before cost of sales interest expense
and land charges, increased from 17.3% for the three months ended January 31,
2020 to 20.7% for the three months ended January 31, 2021. The increases were
primarily due to price increases in virtually all of our markets.



? Selling, general and administrative costs (including corporate general and
administrative expenses) as a percentage of total revenue decreased from 12.2%
for the three months ended January 31, 2020 to 11.1% for the three months ended
January 31, 2021. However, such costs increased $3.3 million for the three
months ended January 31, 2021, as compared to the same period of the prior year,
primarily due to increased compensation costs.



? Pre-tax income increased to $19.6 million for the three months ended January
31, 2021 from a pre-tax loss of $7.4 million for the three months ended January
31, 2020. Net income increased to $19.0 million for the three months ended
January 31, 2021 from a net loss of $9.1 million for the three months ended
January 31, 2020. Earnings per share, basic and diluted, increased to $2.79 and
$2.75, respectively, for the three months ended January 31, 2021 compared to
loss per share of $1.49, both basic and diluted, for the three months ended
January 31, 2020.



? Net contracts increased 34.5% for the three months ended January 31, 2021, compared to the same period of the prior year.




? Net contracts per average active selling community increased to 16.0 for the
three months ended January 31, 2021 compared to 9.7 in the same period of the
prior year. This strong absorption pace resulted in our active selling
communities at January 31, 2021 decreasing by 22.8% over last year's first
quarter. However, we are actively pursuing replacement communities, and our
total lots controlled has increased each quarter since July 31, 2020.



? Contract backlog increased from 2,221 homes at January 31, 2020 to 3,795 homes
at January 31, 2021, with a dollar value of $1.7 billion, representing an 85.2%
increase in dollar value compared to the prior year.



? Our cash position allowed us to spend $178.6 million on land purchases and
land development during the three months ended January 31, 2021 and still have
total liquidity of $306.4 million, including $172.1 million of homebuilding cash
and cash equivalents as of January 31, 2021 and $125.0 million of borrowing
capacity under our senior secured revolving credit facility.



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CRITICAL ACCOUNTING POLICIES



As disclosed in our annual report on Form 10-K for the fiscal year ended October
31, 2020, our most critical accounting policies relate to income recognition
from mortgage loans; inventories; unconsolidated joint ventures; and warranty
and construction defect reserves. Since October 31, 2020, 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 and Pennsylvania), the Mid-Atlantic (Delaware,
Maryland, Virginia, Washington D.C. and West Virginia), the Midwest (Illinois
and Ohio), the Southeast (Florida, Georgia and South Carolina), the Southwest
(Arizona and Texas) 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 (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 at January 31, 2021 was $306.4 million, including
$172.1 million in homebuilding cash and cash equivalents and $125.0 million of
borrowing capacity under our senior secured revolving credit facility. This
was 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 fiscal 2021 and beyond. We believe that these sources of
cash together with available borrowings on our senior secured revolving credit
facility will be sufficient through fiscal 2021 to finance our working capital
requirements.



We spent $178.6 million on land and land development during the first quarter of
fiscal 2021. After considering this land and land development and all other
operating activities, including revenue received from deliveries, we
used $94.1 million in cash from operations. During the first quarter of fiscal
2021, cash provided by investing activities was $7.9 million, primarily due to
distributions from existing unconsolidated joint ventures, partially offset by
advances to certain unconsolidated joint ventures. Cash provided by financing
activities was $3.4 million during the first quarter of fiscal 2021, which was
primarily due to net proceeds from our mortgage warehouse lines of credit,
partially offset by net payments for nonrecourse mortgage financings and land
banking and model sale leaseback financings during the period. 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 three months ended January 31, 2021 and 2020 were for
operating expenses, land purchases, land deposits, land development,
construction spending, state income taxes, interest payments, financing
transaction costs, debt repurchases, litigation matters and investments in
unconsolidated joint ventures. During this period, 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, noncash charges relating to depreciation and
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.





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Debt Transactions



Senior notes and credit facilities balances as of January 31, 2021 and October
31, 2020, were as follows:



                                                            January 31,      October 31,
(In thousands)                                                     2021             2020
Senior Secured Notes:
10.0% Senior Secured Notes due July 15, 2022               $    111,214$    111,214
10.5% Senior Secured Notes due July 15, 2024                     69,683     

69,683

10.0% Senior Secured 1.75 Lien Notes due November 15, 2025

                                                            158,502     

158,502

7.75% Senior Secured 1.125 Lien Notes due February 15, 2026

                                                            350,000     

350,000

10.5% Senior Secured 1.25 Lien Notes due February 15, 2026

                                                            282,322     

282,322

11.25% Senior Secured 1.5 Lien Notes due February 15,
2026                                                            162,269          162,269
Total Senior Secured Notes                                 $  1,133,990$  1,133,990
Senior Notes:
8.0% Senior Notes due November 1, 2027 (1)                 $          -     $          -
13.5% Senior Notes due February 1, 2026                          90,590     

90,590

5.0% Senior Notes due February 1, 2040                           90,120     

90,120

Total Senior Notes                                         $    180,710

$ 180,710 Senior Unsecured Term Loan Credit Facility due February 1, 2027

                                                    $     39,551

$ 39,551 Senior Secured 1.75 Lien Term Loan Credit Facility due January 31, 2028

                                           $     81,498$     81,498
Senior Secured Revolving Credit Facility (2)               $          -     $          -
Subtotal notes payable                                     $  1,435,749$  1,435,749
Net (discounts) premiums                                   $     15,563$     17,521
Net debt issuance costs                                    $    (21,099 )$    (22,160 )
Total notes payable, net of discounts, premiums and debt
issuance costs                                             $  1,430,213$  1,431,110




(1) $26.0 million of 8.0% Senior Notes due 2027 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. On
November 1, 2019, the maturity of the 8.0% Senior Notes was extended to November
1, 2027.


(2) At January 31, 2021, provides for up to $125.0 million in aggregate amount of senior secured first lien revolving loans. Availability thereunder will terminate on December 28, 2022.




Except for K. 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 (except that certain of the Notes
Guarantors do not guarantee the 10.5% Senior Secured Notes due 2024 as discussed
in Note 12 to the Condensed Consolidated Financial Statements included elsewhere
in the Quarterly Report on Form 10-Q) and senior notes (except for the 8.0% 2027
Notes which are not guaranteed by K. Hovnanian at Sunrise Trail III, LLC, a
wholly-owned subsidiary of the Company) outstanding at January 31,
2021 (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 at January 31, 2021 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, including K. 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 (including through exchanges) 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 (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 of January 31, 2021, we believe
we were in compliance with the covenants of the Debt Instruments.



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 (in the case of the payment of dividends, our
secured debt leverage ratio must also be less than 4.0 to 1.0), 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, which are not
cumulative, on our 7.625% Series A Preferred Stock. 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.



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Under the terms of our Debt Instruments, we have the right to make certain
redemptions and prepayments and, depending on market conditions, our strategic
priorities 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 (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 $9.0 million and $11.3 million
letters of credit outstanding at January 31, 2021 and October 31, 2020,
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. At January 31, 2021 and October 31, 2020, the amount of cash
collateral in these segregated accounts was $9.3 million and $11.6 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 K. Hovnanian's senior secured notes and senior notes.



Mortgages and Notes Payable



We have nonrecourse mortgage loans for certain communities totaling
$127.3 million and $135.1 million (net of debt issuance costs) at January 31,
2021 and October 31, 2020, respectively, which are secured by the related real
property, including any improvements, with an aggregate book value of
$383.3 million and $368.1 million, respectively. The weighted-average interest
rate on these obligations was 5.3% and 6.4% at January 31, 2021 and October 31,
2020, 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 of January 31, 2021 and October 31, 2020, we
had an aggregate of $111.1 million and $87.2 million, respectively, outstanding
under several of K. Hovnanian Mortgage's short-term borrowing facilities.



See Note 11 to the Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q for a discussion of these agreements.




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Inventory Activities



Total inventory, excluding consolidated inventory not owned, increased
$101.6 million during the three months ended January 31, 2021 from October 31,
2020. Total inventory, excluding consolidated inventory not owned, increased in
the Northeast by $35.8 million, in the Mid-Atlantic by $9.0 million, in the
Southeast by $9.7 million, in the Southwest by $41.6 million and in the West
by $6.1 million. The increase was slightly offset by a decrease in the Midwest
of $0.6 million. The net increase was primarily attributable to new land
purchases and land development, partially offset by home deliveries during the
period. During the three months ended January 31, 2021, we recorded an
impairment loss for one community in the amount of $0.8 million. We wrote-off
costs in the amount of $1.1 million during the three months ended January 31,
2021 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 at January 31, 2021 are
expected to be delivered during the next six to nine months.



Consolidated inventory not owned decreased $16.2 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 decrease from October 31, 2020 to January 31, 2021
was primarily due to a decrease in land banking transactions, along with 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, at January 31, 2021, inventory of $119.6 million was recorded to
"Consolidated inventory not owned," with a corresponding amount of $74.4 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, at January 31, 2021,
inventory of $46.4 million was recorded to "Consolidated inventory not owned,"
with a corresponding amount of $45.0 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 of January 31, 2021, we had mothballed land
in 11 communities. The book value associated with these communities at January
31, 2021 was $9.7 million, which was net of impairment charges recorded in prior
periods of $120.4 million. We continually review communities to determine if
mothballing is appropriate. During the first quarter of fiscal 2021, we did not
mothball any additional communities, but we sold one previously mothballed
community and 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, representing $1.4
million and $2.0 million of our total inventories held for sale at January 31,
2021 and October 31, 2020, respectively, are reported at the lower of carrying
amount or fair value less costs to sell. 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.





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The following tables summarize home sites included in our total residential real
estate. The increase in total home sites available at January 31, 2021 compared
to October 31, 2020 is attributable to acquiring new land parcels, partially
offset by delivering homes and terminating certain option agreements during the
period.



                                                                  Active           Proposed
                                               Active           Communities       Developable        Total
                                           Communities(1)          Homes             Homes           Homes
January 31, 2021:

Northeast                                                2               737             2,344         3,081
Mid-Atlantic                                            20             2,218             4,280         6,498
Midwest                                                 10             1,393               758         2,151
Southeast                                               12             1,661             1,358         3,019
Southwest                                               48             5,093             2,911         8,004
West                                                    13             1,664             2,691         4,355

Consolidated total                                     105            12,766            14,342        27,108

Unconsolidated joint ventures (2)                       20             4,605                 -         4,605

Owned                                                                  6,865             3,473        10,338
Optioned                                                               5,575            10,869        16,444

Controlled lots                                                       12,440            14,342        26,782

Construction to permanent financing lots                                 326                 -           326

Consolidated total                                                    12,766            14,342        27,108



(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 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 included elsewhere in this Quarterly

       Report on Form 10-Q 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, 2020:

Northeast                                                2               424             2,619         3,043
Mid-Atlantic                                            17             2,164             3,764         5,928
Midwest                                                 11             1,267               899         2,166
Southeast                                                9             1,599             1,472         3,071
Southwest                                               52             4,451             3,190         7,641
West                                                    25             2,000             2,495         4,495

Consolidated total                                     116            11,905            14,439        26,344

Unconsolidated joint ventures (2)                       20             4,724                 -         4,724

Owned                                                                  6,008             3,737         9,745
Optioned                                                               5,602            10,702        16,304

Controlled lots                                                       11,610            14,439        26,049

Construction to permanent financing lots                                 295                 -           295

Consolidated total                                                    11,905            14,439        26,344



(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 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.




The following table summarizes our started or completed unsold homes and models,
excluding unconsolidated joint ventures, in active and substantially completed
communities.



                                    January 31, 2021                             October 31, 2020:

                          Unsold                                       Unsold
                          Homes          Models         Total           Homes          Models         Total

Northeast                        -              7              7               1              5              6
Mid-Atlantic                    19             11             30              31             10             41
Midwest                          9             11             20              11              8             19
Southeast                       18             22             40              42             17             59
Southwest                      147             19            166             174             16            190
West                            13             19             32              14             19             33

Total                          206             89            295             273             75            348


Started or completed
unsold homes and
models per active
selling communities
(1)                            2.0            0.8            2.8             2.4            0.6            3.0



(1) Active selling communities (which are communities that are open for sale with

ten or more home sites available) were 105 and 116 at January 31, 2021 and

October 31, 2020, respectively. This ratio does not include substantially

completed communities, which are communities with less than ten home sites

    available.




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Other Balance Sheet Activities

Homebuilding - Restricted cash and cash equivalents decreased $2.1 million from October 31, 2020 to $12.6 million at January 31, 2021. The decrease was primarily due to a reduction in cash collateral of our stand-alone letters of credit during the period.






Investments in and advances to unconsolidated joint ventures decreased
$9.7 million to $93.5 million at January 31, 2021 compared to October 31, 2020.
The decrease was primarily due to unconsolidated joint venture partner
distributions during the period. As of January 31, 2021 and October 31, 2020, we
had investments in ten unconsolidated homebuilding joint ventures 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 increased $7.6 million from October 31,
2020 to $41.2 million at January 31, 2021. The increase was primarily due to a
new receivable related to a land sale in our Midwest segment, along with
increased escrow and municipal deposits, as well as an increase in receivables
due to the timing of home closings during the period.



Prepaid expenses and other assets were as follows as of:



                            January 31,       October 31,      Dollar
(In thousands)                 2021              2020          Change

Prepaid insurance          $       4,091$       2,687$ 1,404
Prepaid project costs             27,719            28,549        (830 )
Other prepaids                     8,833             7,022       1,811
Other assets                         390               431         (41 )
Lease right of use asset          19,634            20,016        (382 )
Total                      $      60,667$      58,705$ 1,962




Prepaid insurance increased during the three months ended January 31, 2021 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.
Other prepaids increased mainly due to new premiums for the renewal of certain
software and related services during the period, partially offset by
amortization of these costs. Lease right of use asset represents the net present
value of our operating leases which, in accordance with ASC 842, are 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.



Financial services assets consist primarily of residential mortgages receivable
held for sale of which $122.3 million and $101.8 million at January 31, 2021 and
October 31, 2020, respectively, were being temporarily warehoused and are
awaiting sale in the secondary mortgage market. The increase in mortgage loans
held for sale from October 31, 2020 is related to an increase in the volume of
loans originated during the first quarter of 2021 compared to the fourth quarter
of 2020, along with an increase in the average loan value. Also contributing to
the increase in financial services other assets was an increase in restricted
cash primarily due to the timing of home closings at the end of the fourth
quarter of fiscal 2020 compared to the end of the first quarter of fiscal 2021.



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Nonrecourse mortgages secured by inventory decreased to $127.3 million at
January 31, 2021 from $135.1 million at October 31, 2020. The decrease was
primarily due to the payment of existing mortgages, partially offset by
additional loan borrowings on existing mortgages, along with new mortgages for
communities in our Northeast and Southwest segments obtained during the three
months ended January 31, 2021.



Accounts payable and other liabilities are as follows as of:




                        January 31,       October 31,       Dollar
(In thousands)             2021              2020           Change

Accounts payable       $     149,132$     148,541$     591
Reserves                      92,109            89,985         2,124
Lease liability               20,664            21,049          (385 )
Accrued expenses               9,188            10,680        (1,492 )
Accrued compensation          33,855            68,641       (34,786 )
Other liabilities             23,858            20,378         3,480
Total                  $     328,806$     359,274$ (30,468 )




Reserves increased due to new accruals, partially offset by claim payments
during the period. 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 in accordance with ASC 842. Accrued
expenses decreased primarily due to the timing of property tax payments during
the period. The decrease in accrued compensation was primarily due to the
payment of our fiscal year 2020 bonuses during the first quarter of fiscal 2021,
partially offset by the accrual of fiscal 2021 bonuses in the first quarter of
fiscal 2021. Other liabilities increased primarily due to deferred payroll tax
withholdings, along with an increase related to the timing of hospitalization
claims and payments during the period.



Customers' deposits increased $9.0 million from October 31, 2020 to $57.3 million at January 31, 2021. The increase was primarily related to the increase in backlog during the period.




Liabilities from inventory not owned decreased $11.8 million to $119.4 million
at January 31, 2021. The decrease was primarily due to a decrease in land
banking activity during the period, along with a decrease in the sale and
leaseback of certain model homes, both accounted for as financing transactions
as described above.



Accrued interest increased $14.5 million to $50.0 million at January 31, 2021.
The increase was primarily due to the timing of new accruals, partially offset
by payments, related to our senior notes and credit facilities during the
period.



Financial Services (liabilities) increased $30.6 million from $119.0 million at
October 31, 2020, to $149.6 million at January 31, 2021. The increase is
primarily due to an increase in amounts outstanding under our mortgage warehouse
lines of credit, and directly correlates to the increase in the volume of
mortgage loans held for sale during the period.



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RESULTS OF OPERATIONS FOR THE Three Months Ended January 31, 2021 COMPARED TO THE Three Months Ended January 31, 2020



Total Revenues


Compared to the same prior period, revenues increased as follows:



                                               Three Months Ended January 31,

                                 January 31,       January 31,       Dollar       Percentage
(Dollars in thousands)              2021              2020           Change         Change
Homebuilding:
Sale of homes                   $     551,365$     479,233$ 72,132             15.1 %
Land sales and other revenues           3,802               809        2,993            370.0 %
Financial services                     19,497            14,014        5,483             39.1 %

Total revenues                  $     574,664$     494,056$ 80,608             16.3 %




Homebuilding



For the three months ended January 31, 2021, sale of homes revenues increased
$72.1 million, or 15.1%, as compared to the same period of the prior year. This
increase was due to the number of home deliveries increasing 12.1% for the three
months ended January 31, 2021 compared to the three months ended January 31,
2020, along with a 2.7% increase in the average price per home. The average
price per home increased to $398,097 in the three months ended January 31, 2021
from $387,729 in the three months ended January 31, 2020. The increase in
average price was the result of increases in home prices along with 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 January 31,
(Dollars in thousands)                  2021            2020         % Change

Northeast:
Dollars                             $     31,216$  45,264          (31.0 )%
Homes                                         53             81          (34.6 )%

Mid-Atlantic:
Dollars                             $     92,911$  87,589            6.1 %
Homes                                        176            155           13.5 %

Midwest:
Dollars                             $     56,593$  46,392           22.0 %
Homes                                        183            159           15.1 %

Southeast:
Dollars                             $     45,648$  36,680           24.4 %
Homes                                        102             97            5.2 %

Southwest:
Dollars                             $    190,182$ 163,703           16.2 %
Homes                                        582            493           18.1 %

West:
Dollars                             $    134,815$  99,605           35.3 %
Homes                                        289            251           15.1 %

Consolidated total:
Dollars                             $    551,365$ 479,233           15.1 %
Homes                                      1,385          1,236           12.1 %

Unconsolidated joint ventures (1)
Dollars$     71,113$  86,349          (17.6 )%
Homes                                        119            149          (20.1 )%




(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 included elsewhere in this Quarterly Report on Form 10-Q
for a further discussion of our unconsolidated joint ventures.



As discussed above, the overall increase in consolidated housing revenues during
the three months ended January 31, 2021 as compared to the same period of the
prior year was attributed to an increase in deliveries, due to the strong
homebuilding market and high demand for new home construction, and to the
increase in average sales price, due to raising prices and the geographic and
community mix of deliveries.

.



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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
                                                 Three Months Ended             Contract Backlog as of
                                                    January 31,                       January 31,
(Dollars in thousands)                         2021               2020            2021            2020

Northeast:
Dollars                                    $      33,670$   33,003$      84,566$  74,296
Homes                                                 43               63               120           134

Mid-Atlantic:
Dollars                                    $     144,481$   93,702$     342,685$ 189,646
Homes                                                229              183               610           350

Midwest:
Dollars                                    $      79,386$   58,276$     192,310$ 134,566
Homes                                                238              187               651           478

Southeast:
Dollars                                    $      98,194$   67,158$     199,517$ 139,505
Homes                                                210              155               406           305

Southwest:
Dollars                                    $     267,825$  178,433$     437,868$ 245,627
Homes                                                736              528             1,220           698

West:
Dollars                                    $     174,114$   90,832$     409,186$ 115,927
Homes                                                322              206               788           256

Consolidated total:
Dollars                                    $     797,670$  521,404$   1,666,132$ 899,567
Homes                                              1,778            1,322             3,795         2,221

Unconsolidated joint ventures:(2)
Dollars$     135,280$  121,758$     420,364$ 252,279
Homes                                                397              265             1,696           633



(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 included elsewhere in this
Quarterly Report on Form 10-Q for a further discussion of our unconsolidated
joint ventures.



In the first quarter of 2021, our open for sale community count decreased to 105
at January 31, 2021, from 116 at October 31, 2020, which was the net result of
opening 13 new communities and closing 24 communities since the beginning of
fiscal 2021. High demand accelerated the close out of our communities, which
contributed to the decrease in community count. Our reported level of sales
contracts (net of cancellations) was impacted by an increase in sales pace per
community in the first quarter of fiscal 2021 as compared to the same period
of the prior year. Net contracts per average active selling community for the
three months ended January 31, 2021 increased to 16.0 compared to 9.7 for the
same period in the prior year. This was the result of high volume of sales
traffic and demand in the current market across all our operating segments.





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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   2021      2020      2019      2018      2017

First        17 %      19 %      24 %      18 %      19 %
Second                 23 %      19 %      17 %      18 %
Third                  18 %      19 %      19 %      19 %
Fourth                 18 %      21 %      23 %      22 %



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   2021      2020      2019      2018      2017

First        11 %      14 %      16 %      12 %      12 %
Second                 20 %      20 %      15 %      16 %
Third                  21 %      16 %      14 %      13 %
Fourth                 14 %      14 %      13 %      12 %




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. However, market
trends 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
                                                                   January 31,
(Dollars in thousands)                                        2021            2020

Sale of homes                                              $   551,365

$ 479,233 Cost of sales, excluding interest expense and land charges

                                                        437,372      

396,318

Homebuilding gross margin, before cost of sales interest expense and land charges

                                       113,993      

82,915

Cost of sales interest expense, excluding land sales interest expense

                                                16,717      

18,136

Homebuilding gross margin, after cost of sales interest
expense, before land charges                                    97,276          64,779
Land charges                                                     1,877           2,828
Homebuilding gross margin                                  $    95,399$    61,951
Homebuilding gross margin percentage                              17.3 %    

12.9 % Homebuilding gross margin percentage, before cost of sales interest expense and land charges

                           20.7 %    

17.3 % Homebuilding gross margin percentage, after cost of sales interest expense, before land charges

                       17.6 %          13.5 %




Cost of sales expenses as a percentage of consolidated home sales revenues are
presented below:



                                                                Three Months Ended
                                                                    January 31,
                                                               2021             2020

Sale of homes                                                     100.0 %          100.0 %

Cost of sales, excluding interest expense and land charges: Housing, land and development costs

                                70.5 %           72.7 %
Commissions                                                         3.6 %            3.5 %
Financing concessions                                               1.3 %            1.4 %
Overheads                                                           3.9 %            5.1 %
Total cost of sales, before interest expense and land
charges                                                            79.3 %           82.7 %
Cost of sales interest                                              3.1 %            3.8 %
Land charges                                                        0.3 %            0.6 %

Homebuilding gross margin percentage                               17.3 %   

12.9 % Homebuilding gross margin percentage, before cost of sales interest expense and land charges

                            20.7 %   

17.3 % Homebuilding gross margin percentage, after cost of sales interest expense, before land charges

                        17.6 %           13.5 %




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 17.3% during the three months
ended January 31, 2021 compared to 12.9% for the same period last year. Also,
gross margin percentage, before cost of sales interest expense and land
charges increased from 17.3% for the three months ended January 31, 2020 to
20.7% for the three months ended January 31, 2021. The increase for both was
primarily due to increases in home prices across all our operating segments,
along with the mix of communities delivering compared to the prior year.



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Reflected as inventory impairment loss and land option write-offs in cost of
sales, we have written-off or written-down certain inventories totaling
$1.9 million and $2.8 million during the three months ended January 31, 2021 and
2020, respectively, to their estimated fair value. During the three months ended
January 31, 2021, we wrote-off residential land options and approval and
engineering costs amounting to $1.1 million compared to $2.8 million for the
three months ended January 31, 2020, 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 the Southeast, Southwest and West segments in the first quarter of
fiscal 2021 and in the Midwest and Southeast segments in the first quarter of
fiscal 2020. We recorded inventory impairments of $0.8 million during the three
months ended January 31, 2021, which was related to one community in the West
segment. We did not record any inventory impairments during the three months
ended January 31, 2020. It is difficult to predict impairment levels, and should
it become necessary or desirable to have additional land sales, or 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
                                                            January 31,
(In thousands)                                           2021           2020

Land and lot sales                                    $     3,362$  25
Cost of sales, excluding interest                           2,266          

37

Land and lot sales gross margin, excluding interest 1,096 (12 ) Land and lot sales interest expense

                           448           -

Land and lot sales gross margin, including interest $ 648$ (12 )





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 four land sales in the first quarter of fiscal 2021 compared to one land
sale in the same period of the prior year, resulting in an increase of
$3.3 million in land sales revenues.



Land sales and other revenues increased $3.0 million for the three months ended
January 31, 2021 compared to the same period 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 increase for the three months ended January 31, 2021,
compared to the three months ended January 31, 2020, was mainly due to the
increase in land sales discussed above.



Homebuilding Selling, General and Administrative




Homebuilding selling, general and administrative ("SGA") expenses decreased
$0.4 million to $40.2 million for the three months ended January 31, 2021
compared to the same period last year. The slight decrease can be attributed to
the reduction of our community count and a reduced need for advertising costs as
homes sales have improved. SGA expenses as a percentage of homebuilding revenues
decreased to 7.2% for the three months ended January 31, 2021 compared to 8.5%
for the three months ended January 31, 2020, as a result of the 15.6%
increase in homebuilding revenue for the first fiscal quarter compared to the
prior year period.



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HOMEBUILDING OPERATIONS BY SEGMENT



Segment Analysis



                                                       Three Months Ended January 31,

(Dollars in thousands, except average
sales price)                                 2021          2020        Variance       Variance %

Northeast
Homebuilding revenue                       $  32,044$  45,276$ (13,232 )          (29.2 )%
Income before income taxes                 $   4,594$   5,741$  (1,147 )          (20.0 )%
Homes delivered                                   53            81           (28 )          (34.6 )%
Average sales price                        $ 588,981$ 558,815$  30,166              5.4 %

Mid-Atlantic

Homebuilding revenue                       $  92,945$  87,759$   5,186              5.9 %
Income before income taxes                 $  10,701$   4,058$   6,643            163.7 %
Homes delivered                                  176           155            21             13.5 %
Average sales price                        $ 527,903$ 565,090$ (37,187 )           (6.6 )%

Midwest

Homebuilding revenue                       $  59,157$  46,444$  12,713             27.4 %
Income (loss) before income taxes          $   3,584$  (3,443 )$   7,027            204.1 %
Homes delivered                                  183           159            24             15.1 %
Average sales price                        $ 309,251$ 291,774$  17,477              6.0 %

Southeast
Homebuilding revenue                       $  45,774$  36,774$   9,000             24.5 %
Income (loss) before income taxes          $     354$  (4,311 )$   4,665            108.2 %
Homes delivered                                  102            97             5              5.2 %
Average sales price                        $ 447,529$ 378,144$  69,385             18.3 %

Southwest
Homebuilding revenue                       $ 190,409$ 163,899$  26,510             16.2 %
Income before income taxes                 $  21,050$   8,620$  12,430            144.2 %
Homes delivered                                  582           493            89             18.1 %
Average sales price                        $ 326,773$ 332,055$  (5,282 )           (1.6 )%

West
Homebuilding revenue                       $ 134,832$  99,621$  35,211             35.3 %
Income before income taxes                 $   9,677$   1,611$   8,066            500.7 %
Homes delivered                                  289           251            38             15.1 %
Average sales price                        $ 466,488$ 396,833$  69,655             17.6 %



Homebuilding Results by Segment




Northeast - Homebuilding revenues decreased 29.2% for the three months ended
January 31, 2021 compared to the same period of the prior year. The decrease for
the three months ended January 31, 2021 was attributed to a 34.6% decrease in
homes delivered, partially offset by a 5.4% increase in average sales price. The
increase in average sales price was mainly the result of price increases in
certain communities.



Income before income taxes decreased $1.1 million to $4.6 million for the three
months ended January 31, 2021 as compared to the prior year. This was primarily
due to the decrease in homebuilding revenue discussed above and a $2.1 million
decrease in income from unconsolidated joint ventures, partially offset by an
increase in gross margin percentage before interest expense for the period
compared to the same period of the prior year.



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Mid-Atlantic - Homebuilding revenues increased 5.9% for the three months ended
January 31, 2021 compared to the same period in the prior year. The increase was
primarily due to a 13.5% increase in homes delivered, partially offset by a 6.6%
decrease in average sales price for the three months ended January 31,
2021 compared to the same period in the prior year. Although there were price
increases in virtually all communities overall, the decrease in average sales
price was the result of new communities delivering lower priced, larger single
family homes and townhomes in higher-end submarkets of the segment in the three
months ended January 31, 2021 compared to some communities delivering in the
three months ended January 31, 2020 that had higher priced, large single family
homes and townhomes in higher-end submarkets of the segment that are no longer
delivering.



Income before income taxes improved $6.6 million to $10.7 million for the three
months ended January 31, 2021 compared to the same period in the prior year,
which was primarily due to the increase in homebuilding revenue discussed above,
a $0.4 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.



Midwest - Homebuilding revenues increased 27.4% for the three months ended
January 31, 2021 compared to the same period in the prior year. The increase was
due to a 15.1% increase in homes delivered, a 6.0% increase in the average sales
price and a $2.5 million increase in land sales and other revenue. 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 three months ended January 31, 2021 compared to some communities
delivering in the three months ended January 31, 2020 that had lower priced,
single family homes in lower-end submarkets of the segment that are no longer
delivering. Also impacting the increase in the average sales price was price
increases in certain communities.



Loss before income taxes improved $7.0 million to income of $3.6 million for the
three months ended January 31, 2021 compared to the same period in the prior
year, which was primarily due to the increase in homebuilding revenue discussed
above, a $1.4 million decrease in selling, general and administrative costs, a
$2.6 million decrease in inventory impairment loss and land option write-offs
and a slight increase in gross margin percentage before interest expense for the
three months ended January 31, 2021 compared to the same period of the prior
year.



Southeast - Homebuilding revenues increased 24.5% for the three months ended
January 31, 2021 compared to the same period in the prior year. The increase was
due to an 5.2% increase in homes delivered and an 18.3% 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 ended January 31, 2021 compared to
some communities delivering in the three months ended January 31, 2020 that had
lower priced, smaller single family homes and townhomes in lower-end submarkets
of the segment that are no longer delivering. Also impacting the increase in the
average sales price was price increases in certain communities.



Loss before income taxes improved $4.7 million to income of $0.4 million for the
three months ended January 31, 2021 compared to the same period in the prior
year, which was primarily due to the increase in homebuilding revenue discussed
above, a $0.9 million increase in income from unconsolidated joint ventures and
an increase in gross margin percentage before interest expense for the period
compared to the same period of the prior year.



Southwest - Homebuilding revenues increased 16.2% for the three months ended
January 31, 2021 compared to the same period in the prior year. The increase in
homebuilding revenues was primarily due to a 18.1% increase in homes
delivered. Although there were price increases in virtually all communities
overall, average sales price was relatively flat with a 1.6% decrease for the
three months ended January 31, 2021.



Income before income taxes increased $12.4 million to $21.1 million for the
three months ended January 31, 2021 compared to the same period in the prior
year. The increase was primarily due to the increase in homebuilding revenues
discussed above and an increase in gross margin percentage before interest
expense for the three months ended January 31, 2021 compared to the same period
of the prior year.



West - Homebuilding revenues increased 35.3% for the three months ended January
31, 2021 compared to the same period in the prior year. The increase for the
three months ended January 31, 2021 was primarily attributed to a 15.1% increase
in homes delivered as well as a 17.6% 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 ended January 31, 2021 compared to some communities
delivering in the three months ended January 31, 2020 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 the average sales price was
price increases in certain communities.



Income before income taxes increased $8.1 million to $9.7 million for the three
months ended January 31, 2021. The increase for the three months ended January
31, 2021 was primarily due to the increase in homebuilding revenue discussed
above and an increase in gross margin percentage before interest expense for the
period compared to the same period of the prior year, partially offset by a $1.7
million increase in inventory impairment loss and land option write-offs





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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 quarters of fiscal 2021 and 2020,
Federal Housing Administration and Veterans Administration ("FHA/VA") loans
represented 31.5% and 33.2%, respectively, of our total loans. The origination
of FHA/VA loans decreased from the first quarter of fiscal 2020 to the first
quarter of fiscal 2021, and our conforming conventional loan originations as a
percentage of our total loans increased from 64.4% to 68.2% for these periods,
respectively. The origination of loans which exceed conforming conventions
decreased from 2.4% for the first quarter of fiscal 2020 to 0.3% for the first
quarter of fiscal 2021. 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 months ended January 31, 2021, financial services provided a
$9.1 million pretax profit compared to $4.5 million of pretax profit for the
same period of fiscal 2020. This increase in pretax profit was attributed to the
increase in the homebuilding deliveries and the increase in the basis point
spread between the loans originated and the implied rate from the sale of the
loans, as well as an increase in the average price of the loans settled. In the
market areas served by our wholly owned mortgage banking subsidiaries, 70.9% and
68.1% of our noncash homebuyers obtained mortgages originated by these
subsidiaries during the three months ended January 31, 2021 and 2020,
respectively.



Corporate General and Administrative




Corporate general and administrative expenses include the operations at our
headquarters in New 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 increased to $23.5 million
for the three months ended January 31, 2021 compared to $19.7 million for the
three months ended January 31, 2020, primarily due to an increase in
compensation expense, mostly attributed to our long-term incentive programs now
forecasted to achieve above target metrics as a result of the recent improved
operating results.



Other Interest



Other interest decreased $1.0 million for the three months ended January 31,
2021 compared to the three months ended January 31, 2020. 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 decreased for the three months ended
January 31, 2021 compared to the three months ended January 31, 2020 as a result
of the decrease in nonrecourse mortgages outstanding for the quarter ended
January 31, 2021 compared to the quarter ended January 31, 2020.



Gain on Extinguishment of Debt




On December 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. On December 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 for the three months ended January 31, 2020.



Income from Unconsolidated Joint Ventures




Income from unconsolidated joint ventures consists of our share of the earnings
or losses of our unconsolidated joint ventures. Income from unconsolidated joint
ventures increased $0.4 million to $1.9 million for the three months ended
January 31, 2021 compared to the same period of the prior year. The increase was
primarily due to the recognition of our share of income from certain joint
ventures delivering homes with higher margins in the first quarter of fiscal
2021 as compared to the same period of the prior year.



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Total Taxes



The total income tax expense of $0.6 million recognized for the three months
ended January 31, 2021 was primarily related to state tax expense from income
generated in states where we do not have net operating loss carryforwards to
offset the current year income. The total income tax expense of $1.7 million
recognized for the three months ended January 31, 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.



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 52.6% of our homebuilding cost of sales for the three months ended
January 31, 2021.



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 outbreak and spread of COVID-19 and the measures that 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;

? 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;

? Legal claims brought against us and not resolved in our favor, such as

product liability litigation, warranty claims and claims made by mortgage

     investors;




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  ? Levels of competition;
  ? Utility shortages and outages or rate fluctuations;
  ? Information technology failures and data security breaches;
  ? Negative publicity;

? 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;

Government regulations, including regulations concerning development of land,

? the home building, sales and customer financing processes, tax laws and the

    environment;
  ? Operations through unconsolidated joint ventures with third parties;
  ? Significant influence of the Company's controlling stockholders;
  ? Availability of net operating loss carryforwards; and

? Loss of key management personnel or failure to attract qualified personnel;





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 ended October 31, 2020. 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.

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