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 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 contributed to improving conditions for new home sales. However, overall economic conditions inthe United States have been impacted negatively by the COVID-19 pandemic, which 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 restricted daily activities and caused many businesses to curtail or cease normal operations. While 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, we cannot predict the magnitude of either the near-term or long-term effects that the pandemic will have on our business. 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 the first half 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 half 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 half of fiscal 2021 improved significantly as compared to the first half of fiscal 2020. 33
--------------------------------------------------------------------------------
Table of Contents Operating Results
We experienced significant positive operating results for the three and six
months ended
?For the three and six months endedApril 30, 2021 , sale of homes revenues increased 29.8% and 22.8%, respectively, as compared to the same periods of the prior year, as a result of a 22.1% and 17.3% increase in deliveries, respectively, primarily due to our increased sales absorption pace and favorable sales prices as discussed below. ?Gross margin dollars increased 61.8% and 58.3% for the three and six months endedApril 30, 2021 , respectively, as compared to the same periods of the prior year, as a result of our increased revenues. Additionally, gross margin percentage increased to 18.1% for the three months endedApril 30, 2021 from 14.5% for the three months endedApril 30, 2020 and increased to 17.7% for the six months endedApril 30, 2021 from 13.7% for the six months endedApril 30, 2020 . Gross margin percentage, before cost of sales interest expense and land charges, increased from 18.2% and 17.8% for the three and six months endedApril 30, 2020 , respectively, to 21.3% and 21.0% for the three and six months endedApril 30, 2021 , respectively. 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) ("Total SGA") was$82.6 million , or 11.7% of total revenues, in the three months endedApril 30, 2021 compared with$55.9 million , or 10.4% of total revenues, in the three months endedApril 30, 2020 . During the first six months of fiscal 2021, total SG&A was$146.3 million , or 11.4% of total revenues, compared with$116.3 million , or 11.3% of total revenues, in the same period of the prior fiscal year. Such costs increased$26.7 million and$30.0 million for the three and six months endedApril 30, 2021 , respectively, as compared to the same periods of the prior year, primarily due to increased compensation costs mainly related to the grants of phantom stock awards under our 2019 Long Term Incentive Plan ("2019 LTIP") which expense increased due to the significant increase in our stock price from$51.16 atJanuary 31, 2021 to$132.59 atApril 30, 2021 . Had equity shares rather than phantom shares been utilized for the 2019 LTIP, there would not have been expenses related to the movement in our stock price. Excluding the$17.5 million of incremental phantom stock expense associated with the 2019 LTIP due solely to the increase in the stock price for the second quarter of fiscal 2021, Total SGA would have been$65.1 million , or 9.3% of total revenues for the three months endedApril 30, 2021 and$128.8 million , or 10.1% of total revenues, for the six months endedApril 30, 2021 . ?Pre-tax income increased to$31.0 million for the three months endedApril 30, 2021 from pre-tax income of$4.2 million for the three months endedApril 30, 2020 , and increased to$50.6 million for the six months endedApril 30, 2021 from a pre-tax loss of$3.3 million for the six months endedApril 30, 2020 . Net income increased to$488.7 million for the three months endedApril 30, 2021 from net income of$4.1 million for the three months endedApril 30, 2020 , and increased to$507.6 million for the six months endedApril 30, 2021 from a net loss of$5.1 million for the six months endedApril 30, 2020 . Earnings per share, basic and diluted, increased to$71.11 and$69.65 , respectively, for the three months endedApril 30, 2021 compared to$0.63 and$0.60 , respectively, for the three months endedApril 30, 2020 . Earnings per share, basic and diluted, increased to$74.00 and$72.71 , respectively, for the six months endedApril 30, 2021 compared to loss per share of$0.82 , both basic and diluted, for the six months endedApril 30, 2020 . The significant increase in net income for the three and six months endedApril 30, 2021 was due to the full reversal of our federal valuation allowance and a portion of the state valuation allowance in respect of our deferred tax assets in the second quarter of fiscal 2021 (see Note 16 to the Condensed Consolidated Financial Statements).
?Net contracts increased 19.1% and 26.3% for the three and six months ended
?Net contracts per average active selling community increased to 17.5 for the three months endedApril 30, 2021 compared to 11.1 in the same period of the prior year, and increased to 33.5 for the six months endedApril 30, 2021 compared to 20.7 in the same period of the prior year. This strong absorption pace resulted in our active selling communities atApril 30, 2021 decreasing by 26.5% over last year's second quarter. However, we are actively pursuing replacement communities, and our total lots controlled has increased each quarter sinceJuly 31, 2020 .
?Contract backlog increased from 2,383 homes at
? Our cash position allowed us to spend$353.6 million on land purchases and land development during the six months endedApril 30, 2021 and still have total liquidity of$352.8 million , including$218.3 million of homebuilding cash and cash equivalents as ofApril 30, 2021 and$125.0 million of borrowing capacity under our senior secured revolving credit facility. 34
--------------------------------------------------------------------------------
Table of Contents CRITICAL ACCOUNTING POLICIES As disclosed in our annual report on Form 10-K for the fiscal year endedOctober 31, 2020 , our most critical accounting policies relate to income recognition from mortgage loans; inventories; unconsolidated joint ventures; and warranty and construction defect reserves. SinceOctober 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 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, even if market conditions, including then-current market available interest rates (in recent years, we have not been able to access the traditional capital and bank lending markets at competitive interest rates due to our highly leveraged capital structure), 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, 2021 was$352.8 million , including$218.3 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 . Some of our cash will be used in the third quarter of fiscal 2021 to pay for debt due inJuly 2022 that we have called for redemption (see Note 22 to the Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q). 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$353.6 million on land and land development during the first half of fiscal 2021. After considering this land and land development and all other operating activities, including revenue received from deliveries, cash provided by operations was$15.5 million . During the first half of fiscal 2021, cash used in investing activities was$12.4 million , primarily due to investments in two new unconsolidated joint ventures, partially offset by distributions from existing unconsolidated joint ventures. Cash used in financing activities was$40.9 million during the first half of fiscal 2021, which was primarily due to net payments for nonrecourse mortgage financings and land banking and model sale leaseback financings during the period, partially offset by net proceeds from 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, 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 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, 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. 35
--------------------------------------------------------------------------------
Table of Contents Debt Transactions Senior notes and credit facilities balances as ofApril 30, 2021 andOctober 31, 2020 , were as follows: April 30, 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
158,502
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 162,269 162,269 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 dueFebruary 1, 2040 90,120
90,120
Total Senior Notes$ 180,710
$ 39,551
$ 81,498 $ 81,498 Senior Secured Revolving Credit Facility (2) $ - $ - Subtotal notes payable$ 1,435,749 $ 1,435,749 Net (discounts) premiums$ 13,614 $ 17,521 Net debt issuance costs$ (20,039 ) $ (22,160 ) Total notes payable, net of discounts, premiums and debt issuance costs$ 1,429,324 $ 1,431,110 (1)$26.0 million of 8.0% Senior Notes due 2027 (the "8.0% 2027 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% 2027 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 (except that certain of the Notes Guarantors (as defined below) do not guarantee the 10.5% Senior Secured Notes due 2024 as discussed in Note 12 to the Condensed and Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q subject
and
senior notes (except for the 8.0% 2027 Notes which are not guaranteed by
The credit agreements governing the Credit Facilities and the indentures governing the senior secured and senior notes (together, the "Debt Instruments") outstanding atApril 30, 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, 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 (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 (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, 2021 , we believe we were in compliance with the covenants of the Debt Instruments. 36
--------------------------------------------------------------------------------
Table of Contents
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. 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, interest rates 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, redemptions, 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, even if market conditions, including then-current market available interest rates (in recent years, we have not been able to access the traditional capital and bank lending markets at competitive interest rates due to our highly leveraged capital structure), 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$9.3 million and$11.3 million letters of credit outstanding atApril 30, 2021 andOctober 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. AtApril 30, 2021 andOctober 31, 2020 , the amount of cash collateral in these segregated accounts was$9.5 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 andK. Hovnanian's senior secured notes and senior notes, including information with respect to the collateral securing our Secured Debt Instruments. Mortgages and Notes Payable We have nonrecourse mortgage loans for certain communities totaling$113.9 million and$135.1 million (net of debt issuance costs) atApril 30, 2021 andOctober 31, 2020 , respectively, which are secured by the related real property, including any improvements, with an aggregate book value of$419.7 million and$368.1 million , respectively. The weighted-average interest rate on these obligations was 5.0% and 6.4% atApril 30, 2021 andOctober 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 ofApril 30, 2021 andOctober 31, 2020 , we had an aggregate of$110.5 million and$87.2 million , respectively, outstanding under several ofK. 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.
37
--------------------------------------------------------------------------------
Table of Contents Inventory Activities Total inventory, excluding consolidated inventory not owned, increased$117.9 million during the six months endedApril 30, 2021 fromOctober 31, 2020 . Total inventory, excluding consolidated inventory not owned, increased in the Northeast by$27.6 million , in the Southeast by$8.1 million , in the Southwest by$79.9 million and in the West by$20.1 million . The increase was partially offset by decreases in the Mid-Atlantic of$17.3 million and in the Midwest of$0.5 million . The net increase was primarily attributable to new land purchases and land development, partially offset by home deliveries during the period. During the six months endedApril 30, 2021 , we recorded an impairment loss for one community in the amount of$0.8 million , and wrote-off costs in the amount of$1.2 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, 2021 are expected to be delivered during the next six to nine months. Consolidated inventory not owned decreased$56.8 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 fromOctober 31, 2020 toApril 30, 2021 was primarily due to a decrease in land banking transactions and 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, 2021 , inventory of$84.6 million was recorded to "Consolidated inventory not owned," with a corresponding amount of$50.2 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, 2021 , inventory of$40.8 million was recorded to "Consolidated inventory not owned," with a corresponding amount of$40.2 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, 2021 , we had mothballed land in 8 communities. The book value associated with these communities atApril 30, 2021 was$4.4 million , which was net of impairment charges recorded in prior periods of$61.5 million . We continually review communities to determine if mothballing is appropriate. During the first half of fiscal 2021, we did not mothball any additional communities, but we sold two previously mothballed communities and we re-activated two previously mothballed communities and portions of two previously mothballed communities. Inventories held for sale, which are land parcels where we have decided not to build homes and are actively marketing the land for sale, represented$2.0 million of our total inventories held for sale atOctober 31, 2020 , and are reported at the lower of carrying amount or fair value less costs to sell. There were no inventories held for sale atApril 30, 2021 . 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. 38
--------------------------------------------------------------------------------
Table of Contents
The following tables summarize home sites included in our total residential real estate. The increase in total home sites available atApril 30, 2021 compared toOctober 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 HomesApril 30, 2021 : Northeast 3 788 2,146 2,934 Mid-Atlantic 15 2,206 5,268 7,474 Midwest 9 1,263 977 2,240 Southeast 14 1,510 1,896 3,406 Southwest 42 4,668 3,260 7,928 West 14 1,672 2,773 4,445 Consolidated total 97 12,107 16,320 28,427 Unconsolidated joint ventures (2) 21 4,798 - 4,798 Owned 6,708 3,795 10,503 Optioned 5,049 12,525 17,574 Controlled lots 11,757 16,320 28,077 Construction to permanent financing lots 350 - 350 Consolidated total 12,107 16,320 28,427
(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. 39
--------------------------------------------------------------------------------
Table of Contents Active Proposed Active Communities Developable Total Communities(1) Homes Homes HomesOctober 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. 40
--------------------------------------------------------------------------------
Table of Contents
The following table summarizes our started or completed unsold homes and models, excluding unconsolidated joint ventures, in active and substantially completed communities. April 30, 2021 October 31, 2020: Unsold Unsold Homes Models Total Homes Models Total Northeast 3 3 6 1 5 6 Mid-Atlantic 13 19 32 31 10 41 Midwest 2 10 12 11 8 19 Southeast 12 25 37 42 17 59 Southwest 100 18 118 174 16 190 West 4 21 25 14 19 33 Total 134 96 230 273 75 348 Started or completed unsold homes and models per active selling communities (1) 1.4 1.0 2.4 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 97 and 116 at
completed communities, which are communities with less than ten home sites
available.
Other Balance Sheet Activities
Homebuilding Restricted cash and cash equivalents decreased$2.0 million fromOctober 31, 2020 to$12.8 million atApril 30, 2021 . 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$9.3 million to$112.5 million atApril 30, 2021 compared toOctober 31, 2020 . The increase was primarily due to entry into two new unconsolidated joint ventures during the first half of fiscal 2021, partially offset by unconsolidated joint venture partner distributions during the period. As ofApril 30, 2021 andOctober 31, 2020 , we had investments in 12 and ten unconsolidated homebuilding joint ventures, respectively, and one unconsolidated land development joint venture for both periods. We have no guarantees associated with our unconsolidated joint ventures, other than guarantees limited to performance and completion of development activities, environmental indemnification and standard warranty and representation against fraud, misrepresentation and similar actions, including a voluntary bankruptcy.
Prepaid expenses and other assets were as follows as of:
April 30, October 31, Dollar (In thousands) 2021 2020 Change Prepaid insurance$ 2,347 $ 2,687 $ (340 ) Prepaid project costs 25,387 28,549 (3,162 ) Other prepaids 9,110 7,022 2,088 Other assets 909 431 478 Lease right of use asset 18,959 20,016 (1,057 ) Total$ 56,712 $ 58,705 $ (1,993 ) 41
--------------------------------------------------------------------------------
Table of Contents
Prepaid insurance decreased during the six months endedApril 30, 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 primarily due to new premiums for the renewal of certain software and related services during the period, partially offset by the amortization of these costs. Other assets increased primarily due to the timing of certain property tax payments. 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$124.0 million and$101.8 million atApril 30, 2021 andOctober 31, 2020 , respectively, were being temporarily warehoused and are awaiting sale in the secondary mortgage market. The increase in mortgage loans held for sale fromOctober 31, 2020 was related to an increase in the volume of loans originated during the second quarter of 2021 compared to the fourth quarter of 2020, primarily due to the increase in deliveries, along with an increase in the average loan value. Deferred tax assets, net, was$459.2 million atApril 30, 2021 , and zero atOctober 31, 2020 , due to the full reversal of our federal valuation allowance and the reversal of a portion of our state valuation allowance in the second quarter of fiscal 2021. Nonrecourse mortgages secured by inventory decreased to$113.9 million atApril 30, 2021 from$135.1 million atOctober 31, 2020 . The decrease was primarily due to the payment of existing mortgages, partially offset by additional loan borrowings on existing mortgages, along with new mortgages for communities in most of our segments obtained during the six months endedApril 30, 2021 .
Accounts payable and other liabilities are as follows as of:
April 30, October 31, Dollar (In thousands) 2021 2020 Change Accounts payable$ 156,492 $ 148,541 $ 7,951 Reserves 93,973 89,985 3,988 Lease liability 19,970 21,049 (1,079 ) Accrued expenses 12,353 10,680 1,673 Accrued compensation 71,850 68,641 3,209 Other liabilities 24,743 20,378 4,365 Total$ 379,381 $ 359,274 $ 20,107 The increase in accounts payable was primarily due an increase in construction spending, which correlates with the increase in backlog for the six months endedApril 30, 2021 . Reserves increased due to new accruals primarily for warranty and construction defect claims, 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 increased primarily due to an accrual for a sales reward program. The increase in accrued compensation was primarily due to expenses associated with our 2019 LTIP plan based on the increase in our stock price during the first half of fiscal 2021, along with the accrual of fiscal 2021 bonuses, partially offset by the payment of our fiscal year 2020 bonuses during 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
Liabilities from inventory not owned decreased$40.8 million to$90.4 million atApril 30, 2021 . The decrease was primarily due to a decrease in land banking activity during the period and a decrease in the sale and leaseback of certain model homes, both accounted for as financing transactions as described above. Financial Services (liabilities) increased$29.4 million from$119.0 million atOctober 31, 2020 , to$148.4 million atApril 30, 2021 . The increase was primarily due to an increase in amounts outstanding under our mortgage warehouse lines of credit and directly correlates to the increase in the volume of mortgage loans held for sale during the period. 42
--------------------------------------------------------------------------------
Table of Contents
RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED
Total Revenues
Compared to the same prior period, revenues increased as follows:
Three Months Ended April 30, April 30, Dollar Percentage (Dollars in thousands) 2021 2020 Change Change Homebuilding: Sale of homes$ 679,515 $ 523,347 $ 156,168 29.8 % Land sales and other revenues 1,919 643 1,276 198.4 % Financial services 21,728 14,361 7,367 51.3 % Total revenues$ 703,162 $ 538,351 $ 164,811 30.6 % Six Months Ended April 30, April 30, Dollar Percentage (Dollars in thousands) 2021 2020 Change Change Homebuilding: Sale of homes$ 1,230,880 $ 1,002,580 $ 228,300 22.8 % Land sales and other revenues 5,721 1,452 4,269 294.0 % Financial services 41,225 28,375 12,850 45.3 % Total revenues$ 1,277,826 $ 1,032,407 $ 245,419 23.8 % Homebuilding For the three and six months endedApril 30, 2021 , sale of homes revenues increased$156.2 million , or 29.8%, and$228.3 million , or 22.8%, 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 17.3% for the three and six months endedApril 30, 2021 , respectively, compared to the three and six months endedApril 30, 2020 . In addition, there was a 6.3% and 4.7% increase in the average price per home for the three and six months endedApril 30, 2021 , respectively, compared with the respective prior year periods. The average price per home increased to$419,972 in the three months endedApril 30, 2021 from$394,979 in the three months endedApril 30, 2020 . The average price per home increased to$409,883 in the six months endedApril 30, 2021 from$391,480 in the six months endedApril 30, 2020 . The increase in average price was the result of increases in home prices in virtually all of our markets along with the geographic and community mix of our deliveries. Land sales are ancillary to our homebuilding operations and are expected to continue in the future but may significantly fluctuate up or down. For further details on the decrease in land sales and other revenues, see the section titled "Land Sales and Other Revenues" below. 43
--------------------------------------------------------------------------------
Table of Contents
Information on homes delivered by segment is set forth below:
Three Months Ended April 30, Six Months Ended April 30, (Dollars in thousands) 2021 2020 % Change 2021 2020 % Change Northeast: Dollars$ 28,686 $ 46,791 (38.7 )%$ 59,902 $ 92,055 (34.9 )% Homes 42 94 (55.3 )% 95 175 (45.7 )% Mid-Atlantic: Dollars$ 112,124 $ 89,677 25.0 %$ 205,035 $ 177,266 15.7 % Homes 216 168 28.6 % 392 323 21.4 % Midwest: Dollars$ 64,010 $ 56,543 13.2 %$ 120,603 $ 102,935 17.2 % Homes 203 184 10.3 % 386 343 12.5 % Southeast: Dollars$ 80,863 $ 56,317 43.6 %$ 126,511 $ 92,997 36.0 % Homes 167 127 31.5 % 269 224 20.1 % Southwest: Dollars$ 217,165 $ 170,485 27.4 %$ 407,347 $ 334,188 21.9 % Homes 633 515 22.9 % 1,215 1,008 20.5 % West: Dollars$ 176,667 $ 103,534 70.6 %$ 311,482 $ 203,139 53.3 % Homes 357 237 50.6 % 646 488 32.4 % Consolidated total: Dollars$ 679,515 $ 523,347 29.8 %$ 1,230,880 $ 1,002,580 22.8 % Homes 1,618 1,325 22.1 % 3,003 2,561 17.3 % Unconsolidated joint ventures(1) Dollars $ 91,067 $ 112,196 (18.8 )%$ 162,180 $ 198,545 (18.3 )% Homes 155 188 (17.6 )% 274 337 (18.7 )% (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 and six months endedApril 30, 2021 as compared to the same periods 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 in virtually all of our markets and the geographic and community mix of deliveries. 44
--------------------------------------------------------------------------------
Table of Contents
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) 2021 2020 2021 2020 2021 2020 Northeast: Dollars$ 49,948 $ 23,266 $ 83,618 $ 56,269 $ 105,828 $ 50,771 Homes 64 66 107 129 142 106 Mid-Atlantic: Dollars$ 152,237 $ 128,652 $ 296,718 $ 222,354 $ 350,183 $ 228,622 Homes 242 247 471 430 585 429 Midwest: Dollars$ 80,541 $ 54,501 $ 159,927 $ 112,777 $ 208,841 $ 132,523 Homes 225 174 463 361 673 468 Southeast: Dollars$ 66,485 $ 48,508 $ 164,679 $ 115,666 $ 185,139 $ 131,695 Homes 153 109 363 264 392 287 Southwest: Dollars$ 319,618 $ 187,493 $ 587,443 $ 365,926 $ 540,321 $ 262,634 Homes 829 582 1,565 1,110 1,416 765 West: Dollars$ 151,571 $ 139,418 $ 325,685 $ 230,250 $ 384,089 $ 151,812 Homes 258 309 580 515 689 328 Consolidated total: Dollars$ 820,400 $ 581,838 $ 1,618,070 $ 1,103,242 $ 1,774,401 $ 958,057 Homes 1,771 1,487 3,549 2,809 3,897 2,383 Unconsolidated joint ventures:(2) Dollars $ 132,611 $ 127,283 $ 267,891 $ 249,041 $ 494,524 $ 267,368 Homes 335 439 732 704 1,927 884
(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 half of 2021, our open for sale community count decreased to 97 from 116 atOctober 31, 2020 , which was the net result of opening 31 new communities, closing 47 communities and contributing three active selling communities to an unconsolidated joint venture 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 half of fiscal 2021 as compared to the same period of the prior year. Net contracts per average active selling community for the three months endedApril 30, 2021 increased to 17.5 compared to 11.1 for the same period in the prior year. Net contracts per average active selling community for the six months endedApril 30, 2021 increased to 33.5 compared to 20.7 for the same period in the prior year. 45
--------------------------------------------------------------------------------
Table of Contents
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 16 % 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 9 % 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, with fiscal 2021 cancellation rates, in particular, being below historical norms as a result of the strong market conditions. However, 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. 46
--------------------------------------------------------------------------------
Table of Contents Three Months Ended Six Months Ended April 30, April 30, (Dollars in thousands) 2021 2020 2021 2020 Sale of homes$ 679,515 $ 523,347 $ 1,230,880 $ 1,002,580 Cost of sales, excluding interest expense and land charges 535,017 427,944 972,389 824,262 Homebuilding gross margin, before cost of sales interest expense and land charges 144,498 95,403 258,491 178,318 Cost of sales interest expense, excluding land sales interest expense 21,704 18,537 38,421 36,673 Homebuilding gross margin, after cost of sales interest expense, before land charges 122,794 76,866 220,070 141,645 Land charges 81 1,010 1,958 3,838 Homebuilding gross margin$ 122,713 $ 75,856 $ 218,112 $ 137,807 Homebuilding gross margin percentage 18.1 % 14.5 % 17.7 % 13.7 % Homebuilding gross margin percentage, before cost of sales interest expense and land charges 21.3 % 18.2 % 21.0 % 17.8 % Homebuilding gross margin percentage, after cost of sales interest expense, before land charges 18.1 % 14.7 % 17.9 % 14.1 % 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, 2021 2020 2021 2020 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 70.2 % 72.3 % 70.4 % 72.5 % Commissions 3.6 % 3.6 % 3.6 % 3.5 % Financing concessions 1.2 % 1.3 % 1.2 % 1.4 % Overheads 3.7 % 4.6 % 3.8 % 4.8 % Total cost of sales, before interest expense and land charges 78.7 % 81.8 % 79.0 % 82.2 % Cost of sales interest 3.2 % 3.5 % 3.1 % 3.7 % Land charges 0.0 % 0.2 % 0.2 % 0.4 % Homebuilding gross margin percentage 18.1 % 14.5 % 17.7 % 13.7 % Homebuilding gross margin percentage, before cost of sales interest expense and land charges 21.3 % 18.2 % 21.0 % 17.8 % Homebuilding gross margin percentage, after cost of sales interest expense, before land charges 18.1 % 14.7 % 17.9 % 14.1 % 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 18.1% during the three months endedApril 30, 2021 compared to 14.5% for the same period last year and increased to 17.7% during the six months endedApril 30, 2021 compared to 13.7% for the same period last year. Homebuilding gross margin percentage, before cost of sales interest expense and land charges, increased from 18.2% for the three months endedApril 30, 2020 to 21.3% for the three months endedApril 30, 2021 , and increased from 17.8% for the six months endedApril 30, 2020 to 21.0% for the six months endedApril 30, 2021 . The increases for the three and six months endedApril 30, 2021 for both gross margin percentage and gross margin percentage, before cost of sales interest expense and land charges, were primarily due to increases in home prices across virtually all our operating segments, along with the mix of communities delivering compared to the prior year periods. 47
--------------------------------------------------------------------------------
Table of Contents
Reflected as inventory impairment loss and land option write-offs in cost of sales, we wrote-off or wrote-down certain inventories totaling$0.1 million and$1.0 million during the three months endedApril 30, 2021 and 2020, respectively, and$2.0 million and$3.8 million during the six months endedApril 30, 2021 and 2020, respectively, to their estimated fair value. During the three and six months endedApril 30, 2021 , we wrote-off residential land options and approval and engineering costs amounting to$0.1 million and$1.2 million , respectively, compared to$1.0 and$3.8 million for the three and six months endedApril 30, 2020 , 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 the Southeast, Southwest and West segments in the first half of fiscal 2021 and all of our segments, execpt our Mid-Atlantic segment, in the first half of fiscal 2020. We recorded an inventory impairment of$0.8 million during the six months endedApril 30, 2021 , which was related to one community in the West segment. We did not record any inventory impairments during the three and six months endedApril 30, 2020 . It is difficult to predict impairment levels, and should it become necessary or desirable to have additional land sales, lower prices, or should the estimates or expectations used in determining estimated cash flows or fair value decrease or differ from current estimates in the future, we may need to recognize additional impairments.
Land Sales and Other Revenues
Land sales and other revenues consist primarily of land and lot sales. A breakout of land and lot sales is set forth below:
Three Months Ended Six Months Ended April 30, April 30, (In thousands) 2021 2020 2021 2020 Land and lot sales$ 1,549 $ 50 $ 4,911 $ 75 Cost of sales, excluding interest 1,517 83 3,783 120 Land and lot sales gross margin, excluding interest 32 (33 ) 1,128 (45 ) Land and lot sales interest expense 21 52 469 52 Land and lot sales gross margin, including interest$ 11 $ (85 ) $ 659 $ (97 ) 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 both the three months endedApril 30, 2021 and 2020. The increase of$1.5 million in land sales revenues was due to selling higher-priced land in the current period as compared to the same period of the prior year. There were six land sales in the six months endedApril 30, 2021 compared to three land sales in the same period of the prior year, resulting in an increase of$4.8 million in land sales revenues. Land sales and other revenues increased$1.3 million and$4.3 million for the three and six months endedApril 30, 2021 , 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 increase for the three and six months endedApril 30, 2021 , compared to the three and six months endedApril 30, 2020 , was mainly due to the increase in land sales discussed above.
Homebuilding Selling, General and Administrative
Homebuilding selling, general and administrative ("SGA") expenses increased$1.6 million and$1.2 million for the three and six months endedApril 30, 2021 , respectively, compared to the same periods last year. The increase for the three and six months endedApril 30, 2021 was primarily due to an increase in compensation expense, mostly attributed to our long-term incentive programs now forecasted to achieve above target metrics as a result of the recent improved operating results and higher stock price. SGA expenses as a percentage of homebuilding revenues decreased to 6.2% and 6.7% for the three and six months endedApril 30, 2021 , respectively, compared to 7.7% and 8.1% for the three and six months endedApril 30, 2020 , respectively, as a result of the 30.0% and 23.2% increase in homebuilding revenue for the same periods, respectively. 48
--------------------------------------------------------------------------------
Table of Contents
HOMEBUILDING OPERATIONS BY SEGMENT
Segment Analysis Three Months Ended April 30, (Dollars in thousands, except average sales price) 2021 2020 Variance Variance % Northeast Homebuilding revenue$ 30,189 $ 46,798 $ (16,609 ) (35.5 )% Income before income taxes$ 5,068 $ 6,722 $ (1,654 ) (24.6 )% Homes delivered 42 94 (52 ) (55.3 )% Average sales price$ 683,000 $ 497,777 $ 185,223 37.2 %
Mid-
Homebuilding revenue$ 112,200 $ 89,738 $ 22,462 25.0 % Income before income taxes$ 12,010 $ 5,466 $ 6,544 119.7 % Homes delivered 216 168 48 28.6 % Average sales price$ 519,093 $ 533,792 $ (14,699 ) (2.8 )%
Midwest
Homebuilding revenue$ 64,079 $ 56,673 $ 7,406 13.1 % Income (loss) before income taxes$ 4,128 $ (385 ) $ 4,513 1172.2 % Homes delivered 203 184 19 10.3 % Average sales price$ 315,320 $ 307,299 $ 8,021 2.6 % Southeast Homebuilding revenue$ 80,917 $ 56,369 $ 24,548 43.5 % Income before income taxes$ 6,504 $ 50 $ 6,454 12908 % Homes delivered 167 127 40 31.5 % Average sales price$ 484,210 $ 443,441 $ 40,769 9.2 % Southwest Homebuilding revenue$ 217,312 $ 170,654 $ 46,658 27.3 % Income before income taxes$ 29,275 $ 13,052 $ 16,223 124.3 % Homes delivered 633 515 118 22.9 % Average sales price$ 343,073 $ 331,039 $ 12,034 3.6 % West Homebuilding revenue$ 176,733 $ 103,603 $ 73,130 70.6 % Income before income taxes$ 21,863 $ 2,723 $ 19,140 702.9 % Homes delivered 357 237 120 50.6 % Average sales price$ 494,866 $ 436,852 $ 58,014 13.3 % 49
--------------------------------------------------------------------------------
Table of Contents Six Months Ended April 30, (Dollars in thousands, except average sales price) 2021 2020
Variance Variance %
Northeast
Homebuilding revenue$ 62,233 $ 92,074 $ (29,841 ) (32.4 )% Income before income taxes$ 9,662 $ 12,463 $ (2,801 ) (22.5 )% Homes delivered 95 175 (80 ) (45.7 )% Average sales price$ 630,547 $ 526,029 $ 104,518 19.9 % Mid-Atlantic Homebuilding revenue$ 205,145 $ 177,497 $ 27,648 15.6 % Income before income taxes$ 22,711 $ 9,524 $ 13,187 138.5 % Homes delivered 392 323 69 21.4 % Average sales price$ 523,048 $ 548,811 $ (25,763 ) (4.7 )% Midwest Homebuilding revenue$ 123,236 $ 103,117 $ 20,119 19.5 % Income (loss) before income taxes$ 7,712 $ (3,828 ) $ 11,540 301.5 % Homes delivered 386 343 43 12.5 % Average sales price$ 312,443 $ 300,102 $ 12,341 4.1 % Southeast Homebuilding revenue$ 126,691 $ 93,143 $ 33,548 36.0 %
Income (loss) before income taxes
260.9 % Homes delivered 269 224 45 20.1 % Average sales price$ 470,301 $ 415,165 $ 55,136 13.3 % Southwest Homebuilding revenue$ 407,721 $ 334,553 $ 73,168 21.9 % Income before income taxes$ 50,325 $ 21,672 $ 28,653 132.2 % Homes delivered 1,215 1,008 207 20.5 % Average sales price$ 335,265 $ 331,536 $ 3,729 1.1 % West Homebuilding revenue$ 311,565 $ 203,224 $ 108,341 53.3 % Income before income taxes$ 31,540 $ 4,334 $ 27,206 627.7 % Homes delivered 646 488 158 32.4 % Average sales price$ 482,170 $ 416,268 $ 65,902 15.8 % 50
--------------------------------------------------------------------------------
Table of Contents
Homebuilding Results by Segment
Northeast - Homebuilding revenues decreased 35.5% for the three months endedApril 30, 2021 compared to the same period of the prior year. The decrease for the three months endedApril 30, 2021 was attributed to a 55.3% decrease in homes delivered, partially offset by a 37.2% 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$1.7 million to$5.1 million for the three months endedApril 30, 2021 as compared to the prior year period. This was primarily due to the decrease in homebuilding revenues discussed above and a$3.0 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. Homebuilding revenues decreased 32.4% for the six months endedApril 30, 2021 compared to the same period of the prior year. The decrease was attributed to a 45.7% decrease in homes delivered, partially offset by a 19.9% 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$2.8 million to$9.7 million for the six months endedApril 30, 2021 as compared to the prior year. This was primarily due to the decrease in homebuilding revenues discussed above and a$5.2 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. Mid-Atlantic - Homebuilding revenues increased 25.0% for the three months endedApril 30, 2021 compared to the same period in the prior year period. The increase was primarily due to a 28.6% increase in homes delivered, partially offset by a 2.8% decrease in average sales price for the three months endedApril 30, 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 endedApril 30, 2021 compared to some communities delivering in the three months endedApril 30, 2020 that had higher priced, large single family homes and townhomes in such submarkets of the segment that are no longer delivering. Income before income taxes increased$6.5 million to$12.0 million for the three months endedApril 30, 2021 compared to the same period in the prior year. This was primarily due to the increase in homebuilding revenue discussed above and a$0.4 million decrease in selling, general and administrative costs, while gross margin percentage before interest expense was flat for the three months endedApril 30, 2021 compared to the same period of the prior year. Homebuilding revenues increased 15.6% for the six months endedApril 30, 2021 compared to the same period in the prior year. The increase was primarily due to a 21.4% increase in homes delivered, partially offset by a 4.7% decrease in average sales price for the six months endedApril 30, 2021 . 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 six months endedApril 30, 2021 compared to some communities delivering in the six months endedApril 30, 2020 that had higher priced, large single family homes and townhomes in such submarkets of the segment that are no longer delivering. Income before income taxes increased$13.2 million to$22.7 million for the six months endedApril 30, 2021 as compared to the prior year period, which was primarily due to the increase in homebuilding revenues discussed above, a$0.8 million decrease in selling, general and administrative costs and a slight increase in gross margin percentage before interest expense. Midwest - Homebuilding revenues increased 13.1% for the three months endedApril 30, 2021 compared to the same period in the prior year. The increase was due to a 10.3% increase in homes delivered and a 2.6% increase in average sales price. The increase in average sales price was the result of new communities delivering higher priced, larger single family homes and townhomes in higher-end submarkets of the segment in the three months endedApril 30, 2021 compared to some communities delivering in the three months endedApril 30, 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$4.5 million to income of$4.1 million for the three months endedApril 30, 2021 compared to the same period in the prior year. The improvement was primarily due to the increase in homebuilding revenue discussed above, a$1.1 million decrease in selling, general and administrative costs and a slight increase in gross margin percentage before interest expense. 51
--------------------------------------------------------------------------------
Table of Contents
Homebuilding revenues increased 19.5% for the six months endedApril 30, 2021 compared to the same period in the prior year. The increase was primarily due to an 12.5% increase in homes delivered and a 4.1% increase in the average sales price. 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, 2021 compared to some communities delivering in the six months endedApril 30, 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$11.5 million to income of$7.7 million for the six months endedApril 30, 2021 as compared to the prior year period, primarily due to the increase in homebuilding revenue discussed above, a$2.5 million decrease in selling, general and administrative costs, a$2.8 million decrease in inventory impairment loss and land option write-offs and a slight increase in gross margin percentage before interest expense. Southeast - Homebuilding revenues increased 43.5% for the three months endedApril 30, 2021 compared to the same period in the prior year. The increase was due to a 31.5% increase in homes delivered and a 9.2% 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, 2021 compared to some communities delivering in the three months endedApril 30, 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. Income before income taxes increased$6.5 million to$6.5 million for the three months endedApril 30, 2021 compared to the prior year period, 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. Homebuilding revenues increased 36.0% for the six months endedApril 30, 2021 compared to the same period in the prior year. The increase for the six months endedApril 30, 2021 was due to a 20.1% increase in homes delivered and a 13.3% 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 six months endedApril 30, 2021 compared to some communities delivering in the six months endedApril 30, 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$11.1 million to income of$6.9 million for the six months endedApril 30, 2021 compared to the prior year period, primarily due to the increase in homebuilding revenue discussed above, a$0.8 million increase in income from unconsolidated joint ventures and an increase in gross margin percentage before interest expense. Southwest - Homebuilding revenues increased 27.3% for the three months endedApril 30, 2021 compared to the same period in the prior year. The increase in homebuilding revenues was primarily due to a 22.9% increase in homes delivered and a 3.6% increase in average sales price. The increase in the average sales price was due to price increases in certain communities. Income before income taxes increased$16.2 million to$29.3 million for the three months endedApril 30, 2021 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, 2021 compared to the same period of the prior year. Homebuilding revenues increased 21.9% for the six months endedApril 30, 2021 compared to the same period in the prior year. The increase was primarily due to a 20.5% increase in homes delivered, while average sales price was essentially flat with a 1.1% increase for the six months endedApril 30, 2021 . Income before income taxes increased$28.7 million to$50.3 million for the six months endedApril 30, 2021 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 for the six months endedApril 30, 2021 compared to the same period of the prior year. 52
--------------------------------------------------------------------------------
Table of Contents
West - Homebuilding revenues increased 70.6% for the three months endedApril 30, 2021 compared to the same period in the prior year. The increase was due to a 50.6% increase in homes delivered and a 13.3% 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 endedApril 30, 2021 compared to some communities delivering in the three months endedApril 30, 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$19.1 million to$21.9 million for the three months endedApril 30, 2021 compared to the prior year period, 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. Homebuilding revenues increased 53.3% for the six months endedApril 30, 2021 compared to the same period in the prior year. The increase was due to a 32.4% increase in homes delivered and a 15.8% 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, 2021 compared to some communities delivering in the six months endedApril 30, 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$27.2 million to$31.5 million for the six months endedApril 30, 2021 compared to the prior year period, 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$1.5 million increase in inventory impairment loss and land option write-offs. 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 2021 and 2020,Federal Housing Administration andVeterans Administration ("FHA/VA ") loans represented 31.5% and 32.2%, respectively, of our total loans. The origination of FHA/VA loans decreased from the first half of fiscal 2020 to the first half of fiscal 2021, and our conforming conventional loan originations as a percentage of our total loans increased from 65.6% to 68.1% for these periods, respectively. The origination of loans which exceed conforming conventions decreased from 2.2% for the first half of fiscal 2020 to 0.4% for the first half 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 and six months endedApril 30, 2021 , financial services provided a$10.4 million and$19.5 million pretax profit, respectively, compared to$4.7 million and$9.2 million , respectively, of pretax profit for the same periods of fiscal 2020. 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, 2021 , 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, 69.5% and 68.4% of our noncash homebuyers obtained mortgages originated by these subsidiaries during the three months endedApril 30, 2021 and 2020, respectively, and 70.1% and 68.5% of our noncash homebuyers obtained mortgages originated by these subsidiaries for the six months endedApril 30, 2021 and 2020, 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 increased to$40.4 million for the three months endedApril 30, 2021 compared to$15.3 million for the three months endedApril 30, 2020 and increased to$63.9 million for the six months endedApril 30, 2021 compared to$35.0 million for the six months endedApril 30, 2020 . The increase for both periods was primarily due to an increase in compensation expense, mainly related to the grants of phantom stock awards under our 2019 Long Term Incentive Plan ("2019 LTIP") which expense increased due to the significant increase in our stock price from$51.16 atJanuary 31, 2021 to$132.59 atApril 30, 2021 . Had equity shares rather than phantom shares been utilized for the 2019 LTIP, there would not have been expenses related to the movement in our stock price. 53
--------------------------------------------------------------------------------
Table of Contents Other Interest Other interest decreased$4.8 million for the three months endedApril 30, 2021 compared to the three months endedApril 30, 2020 and decreased$5.9 million for the six months endedApril 30, 2021 compared to the six months endedApril 30, 2020 primarily due to the decrease in nonrecourse mortgages atApril 30, 2021 compared toApril 30, 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.
(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 net gain on extinguishment of debt of$9.3 million (including additional costs of$0.2 million incurred in 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$3.6 million to$2.6 million for the three months endedApril 30, 2021 and decreased$3.2 million to$4.6 million for the six months endedApril 30, 2021 compared to the same respective periods of the prior year. The decrease was primarily due to the recognition of our share of income from certain of our joint ventures delivering fewer homes in the current fiscal year as compared to the prior fiscal year. Total Taxes The total income tax benefit for the three and six months endedApril 30, 2021 was$457.6 million and$457.0 million , respectively. As discussed in Note 16 to the Condensed Consolidated Financial Statements, the benefit for both the three and six months endedApril 30, 2021 was primarily due to the reversal of a substantial portion of our valuation allowance previously recorded against our deferred tax assets, partially offset by state tax expense from income generated in states where we do not have net operating loss carryforwards to offset the current year income. 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 represented approximately 53.1% of our homebuilding cost of sales for the six months endedApril 30, 2021 . 54
--------------------------------------------------------------------------------
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 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; ? 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 endedOctober 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. 55
--------------------------------------------------------------------------------
Table of Contents
© Edgar Online, source