Hovnanian Enterprises : 2021 Annual Report

Hovnanian Enterprises, Inc.

Annual Report 2021

Hovnanian Enterprises, Inc.

Communities

	Active Selling	Proposed
	Communities	Communities
Arizona	10	11
California	15	16
Delaware	7	11
Florida	11	16
Georgia	1	-
Illinois	1	1
Maryland	1	9
New Jersey	6	28
Ohio	7	11
Pennsylvania	-	-
South Carolina	10	5
Texas	43	36
Virginia/DC	10	19
West Virginia	2	2
Consolidated Total	124	165
Unconsolidated
Joint Ventures	17	-
Total	141	165

Financial Highlights

		Years Ended October 31,
	2021	2020	2019	2018	2017
REVENUES AND INCOME
(Dollars in Millions)
Total Revenues	$2,782.9	$2,343.9	$2,016.9	$1,991.2	$2,451.7
Income (Loss) Before Income Taxes	$189.9	$55.4	$(39.7)	$8.1	$(45.2)
Income Before Income Taxes Excluding Land-Related
Charges, Joint Venture Write-Downs and Loss (Gain) on
Extinguishment of Debt(1)	$197.2	$50.9	$9.9	$20.4	$10.2
Net Income (Loss)	$607.8	$50.9	$(42.1)	$4.5	$(332.2)
ASSETS, DEBT AND EQUITY
(Dollars in Millions)
Total Assets	$2,320.5	$1,827.3	$1,881.4	$1,662.0	$1,900.9
Total Recourse Debt(2)	$1,248.4	$1,431.1	$1,480.0	$1,439.2	$1,637.9
Total Stockholders' Equity (Deficit)	$175.4	$(436.1)	$(489.8)	$(453.5)	$(460.4)
INCOME (LOSS) PER COMMON SHARE(3)
(Shares in Thousands)
Assuming Dilution:
Net Income (Loss) Per Common Share	$85.86	$7.03	$(7.06)	$0.72	$(56.23)
Weighted-Average Number of Common Shares Outstanding	6,395	6,584	5,968	6,072	5,908

1. Income Before Income Taxes Excluding Land-Related Charges, Joint Venture Write-Downs and Loss (Gain) on Extinguishment of Debt is not a financial measure calculated in accordance with generally accepted accounting principles (GAAP). See page 3 of this Annual Report for a reconciliation to Income (Loss) Before Income Taxes, the most directly comparable GAAP financial measure.
2. Total Recourse Debt is derived from adding notes and credit facilities, net of discount, premium and debt issuance costs, and excluding accrued interest.
3. All share and per share amounts throughout this report have been retroactively adjusted to reflect the March 2019 reverse stock split.

This summary should be read in conjunction with the related consolidated financial statements and accompanying notes included elsewhere in this Annual Report.

Communities Under Development(1)

	Net Contracts(2)			Deliveries		Contract Backlog
(Dollars In Thousands Except Average Price)
(Unaudited)			Years Ended October 31,			As of October 31,
	2021	2020	% Change	2021	2020	% Change	2021	2020	% Change
Northeast
(NJ, PA)
Home	243	326	(25.5)%	201	348	(42.2)%	172	130	32.3%
Dollars	$196,496	$171,181	14.8%	$140,212	$175,627	(20.2)%	$138,396	$82,111	68.5%
Avg. Price	$808,626	$525,095	54.0%	$697,572	$504,675	38.2%	$804,628	$631,623	27.4%
Mid-Atlantic(3)
(DE, MD, VA, WV)
Home	837	990	(15.5)%	849	755	12.5%	508	557	(8.8)%
Dollars	$541,684	$510,229	6.2%	$465,432	$402,647	15.6%	$342,189	$291,115	17.5%
Avg. Price	$647,173	$515,383	25.6%	$548,212	$533,307	2.8%	$673,600	$522,648	28.9%
Midwest
(IL, OH)
Home	782	873	(10.4)%	773	727	6.3%	605	596	1.5%
Dollars	$273,459	$272,170	0.5%	$248,531	$225,334	10.3%	$194,446	$169,517	14.7%
Avg. Price	$349,692	$311,764	12.2%	$321,515	$309,950	3.7%	$321,398	$284,424	13.0%
Southeast
(FL, GA, SC)
Home	662	599	10.5%	602	548	9.9%	421	298	41.3%
Dollars	$320,485	$270,277	18.6%	$276,207	$232,333	18.9%	$221,425	$146,971	50.7%
Avg. Price	$484,118	$451,214	7.3%	$458,816	$423,965	8.2%	$525,950	$493,191	6.6%
Southwest
(AZ, TX)
Home	2,541	2,636	(3.6)%	2,531	2,233	13.3%	1,076	1,066	0.9%
Dollars	$1,001,844	$872,630	14.8%	$902,248	$743,301	21.4%	$459,820	$360,225	27.6%
Avg. Price	$394,271	$331,043	19.1%	$356,479	$332,871	7.1%	$427,342	$337,922	26.5%
West
(CA)
Home	958	1,529	(37.3)%	1,248	1,075	16.1%	465	755	(38.4)%
Dollars	$553,624	$717,973	(22.9)%	$641,080	$472,786	35.6%	$282,430	$369,887	(23.6)%
Avg. Price	$577,896	$469,570	23.1%	$513,686	$439,801	16.8%	$607,376	$489,917	24.0%
Consolidated Total
Home	6,023	6,953	(13.4)%	6,204	5,686	9.1%	3,247	3,402	(4.6)%
Dollars	$2,887,592	$2,814,460	2.6%	$2,673,710	$2,252,028	18.7%	$1,638,706	$1,419,826	15.4%
Avg. Price	$479,428	$404,784	18.4%	$430,966	$396,065	8.8%	$504,683	$417,350	20.9%
Unconsolidated Joint Ventures(3,4)
Home	1,485	1,629	(8.8)%	589	728	(19.1)%	2,288	1,418	61.4%
Dollars	$536,597	$571,926	(6.2)%	$345,793	$432,602	(20.1)%	$542,003	$356,197	52.2%
Avg. Price	$361,345	$351,090	2.9%	$587,085	$594,234	(1.2)%	$236,889	$251,197	(5.7)%
Total
Home	7,508	8,582	(12.5)%	6,793	6,414	5.9%	5,535	4,820	14.8%
Dollars	$3,424,189	$3,386,386	1.1%	$3,019,503	$2,684,630	12.5%	$2,180,709	$1,776,023	22.8%
Avg. Price	$456,072	$394,592	15.6%	$444,502	$418,558	6.2%	$393,985	$368,470	6.9%

DELIVERIES INCLUDE EXTRAS

Notes:

1. Segment data excludes unconsolidated joint ventures.
2. Net contracts are defined as new contracts signed during the period for the purchase of homes, less cancellations of prior contracts.
3. Reflects the reclassification of 14 homes and $7.4 million of contract backlog as of October 31, 2021 from unconsolidated joint ventures to the consolidated Mid-Atlantic segment. This is related to our acquisition of the remaining assets and liabilities from one of our unconsolidated joint ventures which was dissolved during the fourth quarter of fiscal 2021.
4. Represents home deliveries, home revenues and average prices 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 homebuilding joint ventures. Our proportionate share of the income or loss of unconsolidated homebuilding and land development joint ventures is reflected as a separate line item in our consolidated financial statements under "Income from unconsolidated joint ventures".

Note: All statements in this annual report 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 a result of a variety of factors. Such risks, uncertainties and other factors include, but are not limited to, (1) changes in general and local economic, industry and business conditions and impacts of a significant homebuilding downturn; (2) 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; (3) the outbreak and spread of COVID-19 and the measures that governments, agencies, law enforcement and/or health authorities implement to address it; (4) adverse weather and other environmental conditions and natural disasters; (5) the seasonality of the Company's business; (6) the availability and cost of suitable land and improved lots and sufficient liquidity to invest in such land and lots; (7) reliance on, and the performance of, subcontractors; (8) 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; (9) increases in cancellations of agreements of sale; (10) fluctuations in interest rates and the availability of mortgage financing; (11) changes in tax laws affecting the after-tax costs of owning a home; (12) legal claims brought against us and not resolved in our favor, such as product liability litigation, warranty claims and claims made by mortgage investors; (13) levels of competition; (14) utility shortages and outages or rate fluctuations; (15) information technology failures and data security breaches; (16) negative publicity; (17) high leverage and restrictions on the Company's operations and activities imposed by the agreements governing the Company's outstanding indebtedness; (18) availability and terms of financing to the Company; (19) the Company's sources of liquidity; (20) changes in credit ratings; (21) government regulation, including regulations concerning development of land, the home building, sales and customer financing processes, tax laws and the environment; (22) operations through unconsolidated joint ventures with third parties; (23) significant influence of the Company's controlling stockholders; (24) availability of net operating loss carryforwards; (25) loss of key management personnel or failure to attract qualified personnel; and (26) certain risks, uncertainties and other factors described in detail in the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 2021 and subsequent filings with the Securities and Exchange Commission. 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.

1

Five-Year Financial Review

		Years Ended October 31,
(In Thousands Except Number of Homes and Per-Share Data)	2021	2020	2019	2018	2017
Statement of Operations Data:
Total Revenues	$2,782,857	$2,343,901	$2,016,916	$1,991,233	$2,451,665
Inventory Impairment Loss and Land Option Write-Offs	$3,630	$8,813	$6,288	$3,501	$17,813
Income (Loss) from Unconsolidated Joint Ventures	$8,849	$16,565	$28,932	$24,033	$(7,047)
Income (Loss) Before Income Taxes	$189,861	$55,403	$(39,668)	$8,146	$(45,244)
Income Before Income Taxes Excluding Land-Related Charges, Joint
Venture Write-Downs and Loss (Gain) on Extinguishment of Debt (1)	$197,239	$50,879	$9,910	$20,444	$10,186
Net Income (Loss)	$607,817	$50,928	$(42,117)	$4,520	$(332,193)
Assuming Dilution:(2)
Net Income (Loss) Per Common Share	$85.86	$7.03	$(7.06)	$0.72	$(56.23)
Weighted-Average Number of Common Shares Outstanding	6,395	6,584	5,968	6,072	5,908
Balance Sheet Data:
Cash, Restricted Cash and Cash Equivalents	$262,059	$277,220	$182,266	$232,992	$493,742
Total Inventories	$1,254,260	$1,195,775	$1,292,485	$1,078,165	$1,009,827
Total Assets	$2,320,508	$1,827,342	$1,881,424	$1,662,042	$1,900,898
Total Recourse Debt (3)	$1,248,373	$1,431,110	$1,479,990	$1,439,235	$1,637,874
Total Nonrecourse Debt	$125,089	$135,122	$203,585	$95,557	$77,524
Total Stockholders' Equity (Deficit)	$175,384	$(436,094)	$(489,776)	$(453,504)	$(460,371)
Supplemental Financial Data:
Adjusted EBIT (4)	$359,055	$229,010	$169,837	$183,165	$193,263
Adjusted EBITDA (4)	$364,335	$234,314	$174,009	$186,321	$199,144
Net Cash Provided by (Used in) Operating Activities (5)	$210,213	$292,828	$(249,127)	$(66,822)	$301,578
Interest Incurred	$155,514	$176,457	$165,906	$161,048	$160,203
Adjusted EBITDA/Interest Incurred	2.34x	1.33x	1.05x	1.16x	1.24x
Financial Statistics:
Average Net Debt/Net Capitalization (6)	109.1%	158.8%	155.5%	160.8%	125.4%
Inventory Turnover (7)	1.9x	1.8x	1.5x	1.7x	2.0x
Homebuilding Gross Margin Percentage, Before Cost of Sales
Interest Expense and Land Charges (8)	21.8%	18.4%	18.1%	18.4%	17.2%
Adjusted EBITDA Margin (4) (9)	13.1%	10.0%	8.6%	9.4%	8.1%
Operating Statistics:
Net Sales Contracts - Homes	6,023	6,953	5,340	4,671	5,196
Net Sales Contracts - Dollars	$2,887,592	$2,814,460	$2,100,544	$1,835,213	$2,084,097
Deliveries - Homes	6,204	5,686	4,946	4,847	5,602
Deliveries - Dollars	$2,673,710	$2,252,028	$1,949,682	$1,906,228	$2,340,033
Backlog - Homes	3,247	3,402	2,191	1,826	1,983
Backlog - Dollars	$1,638,706	$1,419,826	$880,144	$745,630	$808,033

1. Income Before Income Taxes Excluding Land-Related Charges, Joint Venture Write-Downs and Loss (Gain) on Extinguishment of Debt is a non-GAAP financial measure. The most directly comparable GAAP financial measure is Income (Loss) Before Income Taxes. The reconciliation of Income Before Income Taxes Excluding Land-Related Charges, Joint Venture Write-Downs and Loss (Gain) on Extinguishment of Debt to Income (Loss) Before Income Taxes is presented on page 3 of this Annual Report. Income Before Income Taxes Excluding Land-Related Charges, Joint Venture Write-Downs and Loss (Gain) on Extinguishment of Debt should be considered in addition to, but not as a substitute for, Income (Loss) Before Income Taxes, Net Income (Loss) and other measures of financial performance prepared in accordance with GAAP that are presented on the financial statements included in the Company's reports filed with the Securities and Exchange Commission (SEC). Additionally, the Company's calculation of Income Before Income Taxes Excluding Land-Related Charges, Joint Venture Write-Downs and Loss (Gain) on Extinguishment of Debt may be different than the calculation used by other companies, and, therefore, comparability may be affected.
2. All share and per share amounts throughout this report have been retroactively adjusted to reflect the March 2019 reverse stock split.
3. Total Recourse Debt is derived from adding notes and credit facilities, net of discount, premium and debt issuance costs, and excluding accrued interest.
4. Adjusted EBIT and Adjusted EBITDA are non-GAAP financial measures. The most directly comparable GAAP financial measure is Net Income (Loss). The reconciliation of Adjusted EBIT and Adjusted EBITDA to Net Income (Loss) is presented on page 3 of this Annual Report. Adjusted EBIT and Adjusted EBITDA should be considered in addition to, but not as a substitute for, Income (Loss) Before Income Taxes, Net Income (Loss) and other measures of financial performance prepared in accordance with GAAP that are presented on the financial statements included in the Company's reports filed with the SEC. Additionally, the Company's calculation of Adjusted EBIT and Adjusted EBITDA may be different than the calculation used by other companies, and, therefore, comparability may be affected.
5. In connection with our adoption of Accounting Standards Update 2016-18 in November 2018, restricted cash amounts are no longer shown within the operating and investing activities as these balances are now included in the beginning and ending cash balances in our Consolidated Statements of Cash Flows. The adoption also resulted in the reclassification of restricted cash in operating and investing activities in prior periods.
6. Net Debt excludes mortgage warehouse debt and nonrecourse debt and is net of accrued interest and homebuilding cash and cash equivalents balances. Net Capitalization includes Net Debt, as previously defined, and total stockholders' equity deficit. Calculated based on a five quarter average. The calculation of Average Net Debt/Net Capitalization is presented on page 4 of this Annual Report. The Company's calculation of Average Net Debt/Net Capitalization may be different than the calculation used by other companies and, therefore, comparability may be affected.
7. Derived by dividing cost of sales, excluding cost of sales interest, by the five quarter average inventory, excluding liabilities from inventory not owned and capitalized interest. The calculation of Inventory Turnover is presented on page 5 of this Annual Report. The Company's calculation of Inventory Turnover may be different than the calculation used by other companies and, therefore, comparability may be affected.
8. Homebuilding Gross Margin Percentage, Before Cost of Sales Interest Expense and Land Charges is a non-GAAP financial measure. The most directly comparable GAAP financial measure is Homebuilding Gross Margin Percentage. The reconciliation of Homebuilding Gross Margin Percentage, Before Cost of Sales Interest Expense and Land Charges to Homebuilding Gross Margin Percentage is presented on page 3 of this Annual Report. Homebuilding Gross Margin, Before Cost of Sales Interest Expense and Land Charges should be considered in addition to, but not as an alternative to, Homebuilding Gross Margin Percentage determined in accordance with GAAP as an indicator of operating performance. Additionally, the Company's calculation of Homebuilding Gross Margin Percentage, Before Cost of Sales Interest Expense and Land Charges may be different than the calculation used by other companies, and, therefore, comparability may be affected.
9. Adjusted EBITDA Margin is derived by dividing Adjusted EBITDA by Total Revenues.

This summary should be read in conjunction with the related consolidated financial statements and accompanying notes included elsewhere in this Annual Report.

2

Reconciliation of Income Before Income Taxes Excluding Land-Related Charges, Joint Venture Write-Downs and Loss (Gain) on Extinguishment of Debt to Income (Loss) Before Income Taxes:

		Years Ended October 31,
(Dollars In Thousands)	2021	2020	2019	2018	2017
Income (Loss) Before Income Taxes	$189,861	$55,403	$(39,668)	$8,146	$(45,244)
Inventory Impairment Loss and Land Option Write-Offs	3,630	8,813	6,288	3,501	17,813
Unconsolidated Joint Venture Investment Write-Downs	-	-	854	1,261	2,763
Loss (Gain) on Extinguishment of Debt	3,748	(13,337)	42,436	7,536	34,854
Income Before Income Taxes Excluding Land-Related Charges,
Joint Venture Write-Downs and Loss (Gain) on
Extinguishment of Debt	$197,239	$50,879	$9,910	$20,444	$10,186

Reconciliation of Adjusted EBIT and Adjusted EBITDA to Net Income (Loss):
		Years Ended October 31,
(Dollars In Thousands)	2021	2020	2019	2018	2017
Net Income (Loss)	$607,817	$50,928	$(42,117)	$4,520	$(332,193)
Income Tax (Benefit) Provision	(417,956)	4,475	2,449	3,626	286,949
Interest Expense	161,816	178,131	160,781	163,982	185,840
EBIT	351,677	233,534	121,113	172,128	140,596
Inventory Impairment Loss and Land Option Write-offs	3,630	8,813	6,288	3,501	17,813
Loss (Gain) on Extinguishment of Debt	3,748	(13,337)	42,436	7,536	34,854
Adjusted EBIT	$359,055	$229,010	$169,837	$183,165	$193,263
EBIT	$351,677	$233,534	$121,113	$172,128	$140,596
Depreciation	5,280	5,304	4,172	3,156	4,249
Amortization of Debt Costs	-	-	-	-	1,632
EBITDA	356,957	238,838	125,285	175,284	146,477
Inventory Impairment Loss and Land Option Write-offs	3,630	8,813	6,288	3,501	17,813
Loss (Gain) on Extinguishment of Debt	3,748	(13,337)	42,436	7,536	34,854
Adjusted EBITDA	$364,335	$234,314	$174,009	$186,321	$199,144

Homebuilding Gross Margin
		Years Ended October 31,
(Dollars In Thousands)	2021	2020	2019	2018	2017
Sale of Homes	$2,673,710	$2,252,029	$1,949,682	$1,906,228	$2,340,033
Cost of Sales, Excluding Interest Expense and Land Charges	2,091,016	1,837,332	1,596,237	1,555,894	1,937,116
Homebuilding Gross Margin, Before Cost of Sales Interest Expense and	582,694	414,697	353,445	350,334	402,917
Land Charges
Cost of Sales Interest Expense, Excluding Land Sales Interest Expense	82,181	74,174	70,520	56,588	76,902
Homebuilding Gross Margin, After Cost of Sales Interest Expense,	500,513	340,523	282,925	293,746	326,015
Before Land Charges
Land Charges	3,630	8,813	6,288	3,501	17,813
Homebuilding Gross Margin	$496,883	$331,710	$276,637	$290,245	$308,202
Homebuilding Gross Margin Percentage	18.6%	14.7%	14.2%	15.2%	13.2%
Homebuilding Gross Margin Percentage, Before Cost of Sales Interest	21.8%	18.4%	18.1%	18.4%	17.2%
Expense and Land Charges
Homebuilding Gross Margin Percentage, After Cost of Sales Interest	18.7%	15.1%	14.5%	15.4%	13.9%
Expense, Before Land Charges

3