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Note 17 - Investments in Unconsolidated Homebuilding and Land Development Joint Ventures
6 Months Ended
Apr. 30, 2018
Notes to Financial Statements  
Equity Method Investments and Joint Ventures Disclosure [Text Block]
17.
Investments in Unconsolidated Homebuilding and Land Development Joint Ventures
 
We enter into homebuilding and land development joint ventures from time to time as a means of accessing lot positions, expanding our market opportunities, establishing strategic alliances, managing our risk profile, leveraging our capital base and enhancing returns on capital. Our homebuilding joint ventures are generally entered into with
third
-party investors to develop land and construct homes that are sold directly to
third
-party home buyers. Our land development joint ventures include those entered into with developers and other homebuilders as well as financial investors to develop finished lots for sale to the joint venture’s members or other
third
parties.
 
In the
first
quarter of fiscal
2018,
we acquired the remaining assets of
one
of our joint ventures, resulting in a
$13.6
 million reduction in our investment in the joint venture and a corresponding increase to inventory.
  
During the
first
quarter of fiscal
2017,
we transferred
one
community we owned and our option to buy
three
communities to an existing joint venture, resulting in the receipt of
$11.2
million of net cash.
 
The tables set forth below summarize the combined financial information related to our unconsolidated homebuilding and land development joint ventures that are accounted for under the equity method.
 
(Dollars in thousands)
 
April 30, 2018
 
   
Homebuilding
   
Land
Development
   
Total
 
Assets:
                       
Cash and cash equivalents
  $
31,166
    $
2,414
    $
33,580
 
Inventories
   
651,968
     
6,923
     
658,891
 
Other assets
   
29,695
     
-
     
29,695
 
Total assets
  $
712,829
    $
9,337
    $
722,166
 
                         
Liabilities and equity:
                       
Accounts payable and accrued liabilities
  $
96,770
    $
504
    $
97,274
 
Notes payable
   
371,382
     
-
     
371,382
 
Total liabilities
   
468,152
     
504
     
468,656
 
Equity of:
                       
Hovnanian Enterprises, Inc.
   
79,690
     
3,914
     
83,604
 
Others
   
164,987
     
4,919
     
169,906
 
Total equity
   
244,677
     
8,833
     
253,510
 
Total liabilities and equity
  $
712,829
    $
9,337
    $
722,166
 
Debt to capitalization ratio
   
60
%
   
0
%
   
59
%
 
(Dollars in thousands)
 
October 31, 2017
 
   
Homebuilding
   
Land
Development
   
Total
 
Assets:
                       
Cash and cash equivalents
  $
60,580
    $
194
    $
60,774
 
Inventories
   
666,017
     
9,162
     
675,179
 
Other assets
   
36,026
     
-
     
36,026
 
Total assets
  $
762,623
    $
9,356
    $
771,979
 
                         
Liabilities and equity:
                       
Accounts payable and accrued liabilities
  $
121,646
    $
429
    $
122,075
 
Notes payable
   
330,642
     
-
     
330,642
 
Total liabilities
   
452,288
     
429
     
452,717
 
Equity of:
                       
Hovnanian Enterprises, Inc.
   
88,884
     
3,746
     
92,630
 
Others
   
221,451
     
5,181
     
226,632
 
Total equity
   
310,335
     
8,927
     
319,262
 
Total liabilities and equity
  $
762,623
    $
9,356
    $
771,979
 
Debt to capitalization ratio
   
52
%
   
0
%
   
51
%
 
As of
April 30, 2018
and
October 31, 2017,
we had advances and a note receivable outstanding of
$5.2
million and
$22.4
million, respectively, to these unconsolidated joint ventures. These amounts were included in the “Accounts payable and accrued liabilities” balances in the tables above. On our Condensed Consolidated Balance Sheets, our “Investments in and advances to unconsolidated joint ventures” amounted to
$88.3
million and
$115.1
million at
April 30, 2018
and
October 31, 2017,
respectively. In some cases our net investment in these joint ventures is less than our proportionate share of the equity reflected in the table above because of the differences between asset impairments recorded against our joint venture investments and any impairments recorded in the applicable joint venture. Impairments of joint venture investments are recorded at fair value while impairments recorded in the joint venture are recorded when undiscounted cash flows trigger the impairment. During the
six
months ended
April 30, 2018,
we did
not
write-down any of our joint venture investments; however,
one
of our joint ventures in the Northeast recorded an asset impairment. We recorded our proportionate share of this impairment charge of
$0.7
million as part of our share of the net loss of the venture.
      
   
For the Three Months Ended April 30, 2018
 
(In thousands)
 
Homebuilding
   
Land
Development
   
Total
 
                         
Revenues
  $
96,931
    $
2,343
    $
99,274
 
Cost of sales and expenses
   
(102,230
)    
(2,123
)    
(104,353
)
Joint venture net (loss) income
  $
(5,299
)   $
220
    $
(5,079
)
Our share of net income
  $
1,296
    $
109
    $
1,405
 
 
   
For the Three Months Ended April 30, 2017
 
(In thousands)
 
Homebuilding
   
Land
Development
   
Total
 
                         
Revenues
  $
86,556
    $
1,658
    $
88,214
 
Cost of sales and expenses
   
(87,957
)
   
(1,841
)
   
(89,798
)
Joint venture net loss
  $
(1,401
)
  $
(183
)
  $
(1,584
)
Our share of net loss
  $
(4,583
)
  $
(92
)
  $
(4,675
)
  
   
For the Six Months Ended April 30, 2018
 
(In thousands)
 
Homebuilding
   
Land
Development
   
Total
 
                         
Revenues
  $
155,496
    $
3,618
    $
159,114
 
Cost of sales and expenses
   
(174,366
)    
(3,281
)    
(177,647
)
Joint venture net (loss) income
  $
(18,870
)   $
337
    $
(18,533
)
Our share of net (loss) income
  $
(3,903
)   $
168
    $
(3,735
)
 
   
For the Six Months Ended April 30, 2017
 
(In thousands)
 
Homebuilding
   
Land
Development
   
Total
 
                         
Revenues
  $
151,493
    $
2,860
    $
154,353
 
Cost of sales and expenses
   
(155,183
)
   
(2,823
)
   
(158,006
)
Joint venture net (loss) income
  $
(3,690
)
  $
37
    $
(3,653
)
Our share of net (loss) income
  $
(6,264
)
  $
18
    $
(6,246
)
 
“Income (loss) from unconsolidated joint ventures” is reflected as a separate line in the accompanying Condensed Consolidated Statements of Operations and reflects our proportionate share of the income or loss of these unconsolidated homebuilding and land development joint ventures. The difference between our share of the income or loss from these unconsolidated joint ventures in the tables above compared to the Condensed Consolidated Statements of Operations is due primarily to the reclassification of the intercompany portion of management fee income from certain joint ventures and the deferral of income for lots purchased by us from certain joint ventures. To compensate us for the administrative services we provide as the manager of certain joint ventures we receive a management fee based on a percentage of the applicable joint venture’s revenues. These management fees, which totaled
$2.9
million and
$3.0
million for the
three
months ended
April 30, 2018
and
2017,
respectively, and
$4.9
million and
$5.1
million for the
six
months ended
April 30, 2018
and
2017,
respectively, are recorded in “Homebuilding: Selling, general and administrative” on the Condensed Consolidated Statements of Operations.
  
In determining whether or
not
we must consolidate joint ventures that we manage, we assess whether the other partners have specific rights to overcome the presumption of control by us as the manager of the joint venture. In most cases, the presumption is overcome because the joint venture agreements require that both partners agree on establishing the operations and capital decisions of the partnership, including budgets in the ordinary course of business.
 
Typically, our unconsolidated joint ventures obtain separate project specific mortgage financing. For some of our joint ventures, obtaining financing was challenging, therefore, some of our joint ventures are capitalized only with equity. The total debt to capitalization ratio of all our joint ventures is currently
59%.
 Any joint venture financing is on a nonrecourse basis, with guarantees from us limited only to performance and completion of development, environmental warranties and indemnification, standard indemnification for fraud, misrepresentation and other similar actions, including a voluntary bankruptcy filing. In some instances, the joint venture entity is considered a VIE under ASC
810
-
10
“Consolidation – Overall” due to the returns being capped to the equity holders; however, in these instances, we have determined that we are
not
the primary beneficiary, and therefore we do
not
consolidate these entities.