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 represent the dollars associated with the net contracts executed in
period. These values are an indicator of potential future revenues;
? The order book is a volume indicator that represents the number of dwellings
which are under contract, but not yet delivered on the date indicated. the
the dollar value of the backlog represents the dollar amount of the houses
backlog. These values are an indicator of potential future earnings;
? Active selling communities is a volume indicator that represents the number
communities that are open for sale with ten or more home sites available
at the end of a period. We identify communities based on product type;
there are therefore sometimes several communities on the same land site. these
values are an indicator of potential revenues;
? Net contracts per average active community of sellers are used to indicate the
rate at which homes are sold (put into contract) in active sale
communities and is calculated by dividing the number of net contracts in a
period by the average number of active sales communities during the same period.
Sales pace is an indicator of market strength and demand; and
? The contract termination rate is a volume indicator that represents the number
of sales contracts terminated over the period divided by the number of gross contracts
sales contracts entered into during the period. Contract termination rate as
the percentage of backlog is calculated by dividing the number of cancellations
contracts for the period by the order book at the start of the
period. Cancellation rates compared to previous 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, inflation and overall housing affordability. In general, at the start of fiscal year 2020, factors including rising levels of household formation, a constrained supply of new and used homes, wage growth, strong employment conditions and mortgage rates that continue to be low by historical standards were contributing to improving conditions for new home sales. InMarch 2020 , as a result of 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. However, beginning inMay 2020 , the homebuilding market rapidly improved, 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 third quarter and continuing through the fourth quarter of fiscal 2020, 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 improved significantly in fiscal 2020 as compared to fiscal 2019, and improved even further in fiscal 2021 and the first quarter of fiscal 2022. 31
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Table of Contents Operating Results
We recorded strong positive operating results for the three months ended
? Sale of homes revenues remained flat at$551.4 million for both the three months endedJanuary 31, 2022 and 2021. There was an increase in average prices of 18.0% for the three months endedJanuary 31, 2022 , compared to the prior year period as home prices increased in virtually all of our markets, along with the geographic and community mix of our deliveries. However, there was a 15.2% decrease in the number of home deliveries due in part to the prior year deliveries being unusually high as a result of the unsustainable and extremely strong sales pace in late fiscal 2020 and early fiscal 2021, and also due to supply chain challenges extending construction cycle times and delaying some deliveries. ? Gross margin dollars increased 15.0% for the three months endedJanuary 31, 2022 , as compared to the same period of the prior year, as a result of the increase in gross margin percentage to 19.9% for the three months endedJanuary 31, 2022 from 17.3% for the three months endedJanuary 31, 2021 . Gross margin percentage, before cost of sales interest expense and land charges, increased from 20.7% for the three months endedJanuary 31, 2021 to 22.4% for the three months endedJanuary 31, 2022 . 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$72.2 million , or 12.8% of total revenues, in the three months endedJanuary 31, 2022 compared with$63.7 million , or 11.1% of total revenues, in the three months endedJanuary 31, 2021 . Such costs increased$8.5 million for the three months endedJanuary 31, 2022 , as compared to the same periods of the prior year primarily due to compensation expense related to finalizing the performance and related payouts for the phantom stock awards under our 2019 Long Term Incentive Plan ("2019 LTIP"), and increases in merits and incentives as a result of increased profitability. ? Other interest decreased to$13.4 million for the three months endedJanuary 31, 2022 from$24.0 million for the three months endedJanuary 31, 2021 , as we incurred less interest and had less debt in excess of inventory, as a result of the reduction of our debt during the second half of fiscal 2021, and due to the decrease in average inventory not owned during the three months endedJanuary 31, 2022 compared to the three months endedJanuary 31, 2021 . ? Pre-tax income increased to$35.4 million for the three months endedJanuary 31, 2022 from pre-tax income of$19.6 million for the three months endedJanuary 31, 2021 . Net income increased to$24.8 million for the three months endedJanuary 31, 2022 from net income of$19.0 million for the three months endedJanuary 31, 2021 . Earnings per share, basic and diluted, increased to$3.12 and$3.07 , respectively, for the three months endedJanuary 31, 2022 compared to$2.79 and$2.75 , respectively, for the three months endedJanuary 31, 2021 .
? Net contracts decreased by 12.8% for the quarter ended
? Net contracts per average active selling community decreased to 13.1 for the three months endedJanuary 31, 2022 compared to 16.0 in the same period of the prior year which was during the peak sales pace during the pandemic. The 13.1 net contracts per average active selling community for the three months endedJanuary 31, 2022 was above the 9.7 net contracts per average active selling community for the three months endedJanuary 31, 2020 , which was a strong first quarter pace by historical standards. While a decrease from the same period of the prior year, this strong absorption pace resulted in our active selling communities atJanuary 31, 2022 decreasing by 10.5% fromOctober 31, 2021 . However, we are actively pursuing replacement communities, and our total lots controlled has increased each quarter sinceJuly 31, 2020 throughJuly 31, 2021 , and again fromOctober 31, 2021 toJanuary 31, 2022 . ? Contract backlog decreased from 3,795 homes atJanuary 31, 2021 to 3,624 homes atJanuary 31, 2022 . Despite this decrease, as a result of price increases in virtually all of our markets, the dollar value of contract backlog increased 13.2% to$1.9 billion compared to the prior year. ? Our cash position allowed us to spend$194.8 million on land purchases and land development during the three months endedJanuary 31, 2022 and still have total liquidity of$271.0 million , including$137.9 million of homebuilding cash and cash equivalents as ofJanuary 31, 2022 and$125.0 million of borrowing capacity under our senior secured revolving credit facility. 32
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Table of Contents CRITICAL ACCOUNTING POLICIES As disclosed in our annual report on Form 10-K for the fiscal year endedOctober 31, 2021 , our most critical accounting policies relate to income recognition from mortgage loans; inventories; unconsolidated joint ventures; and warranty and construction defect reserves. SinceOctober 31, 2021 , there have been no significant changes to those critical accounting policies.
CAPITAL AND LIQUIDITY RESOURCES
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 atJanuary 31, 2022 was$271.0 million , including$137.9 million in homebuilding cash and cash equivalents and$125.0 million of borrowing capacity under our senior secured revolving credit facility. Our total liquidity was above our target liquidity range of$170.0 to$245.0 million . The unprecedented public health and governmental efforts to contain the COVID-19 pandemic have created significant uncertainty as to general economic and housing market conditions for fiscal 2022 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 2022 to finance our working capital requirements. We spent$194.8 million on land and land development during the first quarter of fiscal 2022. After considering this land and land development and all other operating activities, including revenue received from deliveries, cash used for operations was$115.7 million . During the first quarter of fiscal 2022, cash used in investing activities was$2.9 million , primarily due to the acquisition of certain fixed assets, partially offset by distributions from existing unconsolidated joint ventures. Cash provided by financing activities was$17.1 million during the first quarter of fiscal 2022, which was due to net proceeds for nonrecourse mortgage financings and land banking and model sale leaseback financings during the period, partially offset by net payments related to 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 three months endedJanuary 31, 2022 and 2021 were for operating expenses, land purchases, land deposits, land development, construction spending, state income taxes, interest payments, 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, model sale leasebacks, land banking transactions, unconsolidated joint ventures, financial service revenues and other revenues. Our net income historically does not approximate cash flow from operating activities. The difference between net income 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. 33
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Table of Contents Debt Transactions Senior notes and credit facilities balances as ofJanuary 31, 2022 andOctober 31, 2021 , were as follows: January 31, October 31, (In thousands) 2022 2021
Senior Secured Notes: 10.0% 1.75% Senior Secured Lien Notes Due
$ 158,502
7.75% Senior Secured 1.125 Lien bonds due
350,000
350,000
10.5% Senior Secured 1.25 Privil 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$ 953,093 $ 953,093 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
Senior unsecured term credit facility
$ 39,551
1.75 Lien Senior Secured Term Credit Facility
$ 81,498 $ 81,498 Senior Secured Revolving Credit Facility (2) $ - $ - Subtotal notes payable$ 1,254,852 $ 1,254,852 Net (discounts) premiums$ 8,672 $ 10,769 Net debt issuance costs$ (16,303 ) $ (17,248 ) Total notes payable, net of discounts, premiums and debt issuance costs$ 1,247,221 $ 1,248,373 (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.
(2) To
Except forK. Hovnanian , the issuer of the notes and borrower under the Credit Facilities (as defined below), our home mortgage subsidiaries, certain of our title insurance subsidiaries, joint ventures and subsidiaries holding interests in our joint ventures, we and each of our subsidiaries are guarantors of the Credit Facilities, the senior secured notes and senior notes outstanding atJanuary 31, 2022 (except for the 8.0% 2027 Notes which are not guaranteed byK. Hovnanian atSunrise Trail III, LLC , a wholly-owned subsidiary of the Company) (collectively, the "Notes Guarantors"). The credit agreements governing the Credit Facilities and the indentures governing the senior secured and senior notes (together, the "Debt Instruments") outstanding atJanuary 31, 2022 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/repurchase 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 ofJanuary 31, 2022 , we believe we were in compliance with the covenants of the Debt Instruments. 34
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If our consolidated fixed charge coverage ratio is less than 2.0 to 1.0, as defined in the applicable Debt Instrument, we are restricted from making certain payments, including dividends (in such case, 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 ofOctober 31, 2021 , as a result of our improved operating results, our fixed coverage ratio was above 2.0 to 1.0 and our secured debt leverage ratio was below 4.0 to 1.0, therefore we were no longer restricted from paying dividends. As such, onDecember 3, 2021 , our Board of Directors authorized a dividend payment of$2.7 million to preferred shareholders of record onJanuary 1, 2022 , which was paid in the first quarter of fiscal 2022. 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. 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$196.4 million and$125.1 million (net of debt issuance costs) atJanuary 31, 2022 andOctober 31, 2021 , respectively, which are secured by the related real property, including any improvements, with an aggregate book value of$563.9 million and$448.5 million , respectively. The weighted-average interest rate on these obligations was 4.8% and 4.4% atJanuary 31, 2022 andOctober 31, 2021 , 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 ofJanuary 31, 2022 andOctober 31, 2021 , we had an aggregate of$71.6 million and$134.9 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 arrangements.
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Table of Contents Inventory Activities Total inventory, excluding consolidated inventory not owned, increased$133.0 million during the three months endedJanuary 31, 2022 fromOctober 31, 2021 . Total inventory, excluding consolidated inventory not owned, increased in the Southwest by$52.4 million , in the Mid-Atlantic by$50.4 million , in the Northeast by$25.5 million and in the Southeast by$16.8 million . The increase was partially offset by decreases in the West of$6.9 million and the Midwest of$5.2 million . The net increase was primarily attributable to new land purchases and land development, partially offset by home deliveries during the period. During the three months endedJanuary 31, 2022 , we wrote-off costs in the amount of$0.1 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. There were no impairment losses during the three months endedJanuary 31, 2022 . 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 atJanuary 31, 2022 are expected to be delivered during the next six to nine months. Consolidated inventory not owned increased$26.1 million . Consolidated inventory not owned consists of options related to land banking and model financing transactions that were added to our Condensed Consolidated Balance Sheet in accordance with US GAAP. The increase fromOctober 31, 2021 toJanuary 31, 2022 was primarily due to an increase in land banking transactions along with an increase 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, atJanuary 31, 2022 , inventory of$88.6 million was recorded to "Consolidated inventory not owned," with a corresponding amount of$38.8 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, atJanuary 31, 2022 , inventory of$36.2 million was recorded to "Consolidated inventory not owned," with a corresponding amount of$36.5 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 ofJanuary 31, 2022 , we had mothballed land in six communities. The book value associated with these communities atJanuary 31, 2022 was$4.3 million , which was net of impairment charges recorded in prior periods of$57.5 million . We continually review communities to determine if mothballing is appropriate. During the first quarter of fiscal 2022, we did not mothball any additional communities, nor did we sell or re-activate any previously mothballed communities. Inventories held for sale, which are land parcels where we have decided not to build homes and we are actively marketing the land for sale, are reported at the lower of carrying amount or fair value less costs to sell. There were no inventories held for sale at bothJanuary 31, 2022 andOctober 31, 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. 36
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The following tables summarize home sites included in our total residential real estate. The increase in total home sites available atJanuary 31, 2022 compared toOctober 31, 2021 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 HomesJanuary 31, 2022 : Northeast 6 816 2,712 3,528 Mid-Atlantic 16 2,179 6,166 8,345 Midwest 9 1,227 1,121 2,348 Southeast 18 2,082 1,915 3,997 Southwest 47 4,483 5,695 10,178 West 15 2,527 1,827 4,354 Consolidated total 111 13,314 19,436 32,750 Unconsolidated joint ventures (2) 16 3,798 - 3,798 Owned 8,096 3,693 11,789 Optioned 4,796 15,743 20,539 Controlled lots 12,892 19,436 32,328 Construction to permanent financing lots 422 - 422 Consolidated total 13,314 19,436 32,750
(1) Active communities are communities open for sale 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
addition to our consolidated results as an indicator of the volume managed
in our unconsolidated joint ventures. See Note 18 to the Condensed
Consolidated Financial Statements for a further discussion of our
unconsolidated joint ventures.
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Table of Contents
Active Proposed
Active Communities Developable Total
Communities(1) Homes Homes Homes
October 31, 2021 :
Northeast 6 821 2,525 3,346
Mid-Atlantic 20 2,160 6,083 8,243
Midwest 8 1,263 1,120 2,383
Southeast 22 1,736 2,043 3,779
Southwest 53 4,728 4,680 9,408
West 15 2,225 1,859 4,084
Consolidated total 124 12,933 18,310 31,243
Unconsolidated joint ventures (2) 17 4,030 - 4,030
Owned 7,257 3,194 10,451
Optioned 5,307 15,116 20,423
Controlled lots 12,564 18,310 30,874
Construction to permanent financing lots 369 - 369
Consolidated total 12,933 18,310 31,243
(1) Active communities are communities open for sale with ten or more home sites
available. We identify communities based on product type. Therefore, to
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
addition to our consolidated results as an indicator of the volume managed
in our unconsolidated joint ventures. See Note 18 to the Condensed
Consolidated Financial Statements for a further discussion of our
unconsolidated joint ventures.
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The following table summarizes our started or completed unsold homes and models,
excluding unconsolidated joint ventures, in active and substantially completed
communities.
January 31, 2022 October 31, 2021:
Unsold Unsold
Homes Models Total Homes Models Total
Northeast 7 10 17 8 10 18
Mid-Atlantic 45 23 68 26 22 48
Midwest 13 9 22 8 9 17
Southeast 19 10 29 24 22 46
Southwest 87 23 110 114 29 143
West 3 10 13 7 12 19
Total 174 85 259 187 104 291
Started or completed
unsold homes and
models per active
selling communities
(1) 1.6 0.8 2.4 1.5 0.8 2.3
(1) Active Selling Communities (which are open selling communities with
ten or more host sites available) were 111 and 124 at
completed communities, which are communities with less than ten home sites
available.
Other balance sheet activities
Investments in and advances to unconsolidated joint ventures increased$6.6 million to$67.5 million atJanuary 31, 2022 compared toOctober 31, 2021 . The increase was primarily due to income recorded from one of our unconsolidated joint ventures during the period. As ofJanuary 31, 2022 andOctober 31, 2021 , we had investments in nine unconsolidated homebuilding joint ventures and one unconsolidated land development joint venture for both periods. We have no guarantees associated with our unconsolidated joint ventures, other than guarantees limited to performance and completion of development activities, environmental indemnification and standard warranty and representation against fraud, misrepresentation and similar actions, including a voluntary bankruptcy. Receivables, deposits and notes, net decreased$5.1 million fromOctober 31, 2021 to$34.8 million atJanuary 31, 2022 . The decrease was primarily due to a decrease in receivables due to the timing of home closings.
Prepaid expenses and other assets were as follows at:
January 31, October 31, Dollar
(In thousands) 2022 2021 Change
Prepaid insurance $ 2,600 $ 2,577 $ 23
Prepaid project costs 27,503 25,880 1,623
Other prepaids 11,331 9,140 2,191
Other assets 713 745 (32 )
Lease right of use asset 19,922 17,844 2,078
Total $ 62,069 $ 56,186 $ 5,883
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Prepaid insurance was relatively flat for the three months endedJanuary 31, 2022 . 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. The increase was primarily due to costs incurred for communities not yet open for sale. 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. 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. The increase in lease right of use assets was primarily due to a lease renewal for one of our offices, partially offset by lease payments during the period. Financial services assets consist primarily of residential mortgages receivable held for sale of which$79.2 million and$149.2 million atJanuary 31, 2022 andOctober 31, 2021 , respectively, were being temporarily warehoused and are awaiting sale in the secondary mortgage market. The decrease in mortgage loans held for sale fromOctober 31, 2021 was related to the decrease in the volume of loans originated during the first quarter of fiscal 2022 compared to the fourth quarter of fiscal 2021, along with a slight decrease in the average loan value. Nonrecourse mortgages secured by inventory increased to$196.4 million atJanuary 31, 2022 from$125.1 million atOctober 31, 2021 . The increase was primarily due to new mortgages for communities in most of our segments obtained during the three months endedJanuary 31, 2022 , along with additional loan borrowings on existing mortgages, partially offset by the payment of existing mortgages during the period.
Accounts payable and other liabilities were as follows at:
January 31, October 31, Dollar
(In thousands) 2022 2021 Change
Accounts payable $ 141,414 $ 163,898 $ (22,484 )
Reserves 96,721 98,831 (2,110 )
Lease liability 21,004 18,952 2,052
Accrued expenses 14,733 17,588 (2,855 )
Accrued compensation 43,219 102,862 (59,643 )
Other liabilities 18,578 24,250 (5,672 )
Total $ 335,669 $ 426,381 $ (90,712 )
The decrease in accounts payable was primarily due to the decrease in deliveries
in the first quarter of fiscal 2022 as compared to the fourth quarter of fiscal
2021. Reserves decreased slightly due to claim payments during the period,
partially offset by new accruals primarily for warranty and construction defect
claims. 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. The increase
corresponds to the increase in the lease right of use asset discussed above.
Accrued expenses decreased primarily due to a decrease in accrued property
taxes, partially offset by an increase in an accrual for a sales reward program.
The decrease in accrued compensation was primarily due to the payment of our
fiscal year 2021 bonuses during the first quarter of fiscal 2022, partially
offset by the accrual of fiscal 2022 bonuses in the first quarter of fiscal
2022. Other liabilities decreased primarily due to deferred payroll tax
withholdings which were paid during the period.
Customer deposits increased
Liabilities from inventory not owned increased$12.6 million fromOctober 31, 2021 to$75.3 million atJanuary 31, 2022 . The increase was primarily due to an increase in land banking activity during the period and an increase in the sale and leaseback of certain model homes, both accounted for as financing transactions as described above. Financial Services (liabilities) decreased$60.0 million to$122.2 million atJanuary 31, 2022 from$182.2 million atOctober 31, 2021 . The decrease was primarily due to a decrease in amounts outstanding under our mortgage warehouse lines of credit and directly correlates to the decrease in the volume of mortgage loans held for sale during the period. Accrued interest increased$19.1 million from$28.2 million atOctober 31, 2021 , to$47.3 million atJanuary 31, 2022 . The increase was primarily due to timing of new accruals, partially offset by payments, related to our senior secured, senior notes and term loan during the period. 40
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RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED
Total Revenues
Compared to the same prior period, revenues increased as follows:
Three Months Ended
January 31, January 31, Dollar Percentage
(Dollars in thousands) 2022 2021 Change Change
Homebuilding:
Sale of homes $ 551,366 $ 551,365 $ 1 0.0 %
Land sales and other revenues 638 3,802 (3,164 ) (83.2 )%
Financial services 13,309 19,497 (6,188 ) (31.7 )%
Total revenues $ 565,313 $ 574,664 $ (9,351 ) (1.6 )%
Homebuilding
For the three months ended January 31, 2022 , sale of homes revenues was flat
when compared to the same period of the prior year. The sale of homes revenue is
flat due to an 18.0% increase in the average price per home, partially offset by
a 15.2% decrease in homes delivered for the three months ended January 31, 2022 ,
compared with the respective prior year period. The average price per home
increased to $469,647 in the three months ended January 31, 2022 from $398,097
in the three months ended January 31, 2021 . 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.
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The information on the homes delivered by segment is presented below:
Three Months Ended January 31,
(Dollars in thousands) 2022 2021 % Change
Northeast:
Dollars $ 20,357 $ 31,216 (34.8 )%
Homes 28 53 (47.2 )%
Mid-Atlantic:
Dollars $ 99,400 $ 92,911 7.0 %
Homes 168 176 (4.5 )%
Midwest:
Dollars $ 54,922 $ 56,593 (3.0 )%
Homes 162 183 (11.5 )%
Southeast:
Dollars $ 55,495 $ 45,648 21.6 %
Homes 104 102 2.0 %
Southwest:
Dollars $ 194,330 $ 190,182 2.2 %
Homes 498 582 (14.4 )%
West:
Dollars $ 126,862 $ 134,815 (5.9 )%
Homes 214 289 (26.0 )%
Consolidated total:
Dollars $ 551,366 $ 551,365 0.0 %
Homes 1,174 1,385 (15.2 )%
Unconsolidated joint ventures (1)
Dollars $ 63,620 $ 71,113 (10.5 )%
Homes 109 119 (8.4 )%
(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 noted above, consolidated housing revenue remained flat for the three months ended
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An important indicator of our future results are recently signed contracts and
our home contract backlog for future deliveries. Our sales contracts and homes
in contract backlog by segment are set forth below:
Net Contracts (1) for the
Three Months Ended Contract Backlog as of
January 31, January 31,
(Dollars in thousands) 2022 2021 2022 2021
Northeast:
Dollars $ 70,068 $ 33,670 $ 188,106 $ 84,566
Homes 96 43 240 120
Mid-Atlantic:
Dollars $ 131,716 $ 144,481 $ 374,506 $ 342,685
Homes 205 229 545 610
Midwest:
Dollars $ 59,793 $ 79,386 $ 199,317 $ 192,310
Homes 167 238 610 651
Southeast:
Dollars $ 126,454 $ 98,194 $ 292,384 $ 199,517
Homes 228 210 545 406
Southwest:
Dollars $ 290,090 $ 267,825 $ 555,580 $ 437,868
Homes 656 736 1,234 1,220
West:
Dollars $ 120,141 $ 174,114 $ 275,709 $ 409,186
Homes 199 322 450 788
Consolidated total:
Dollars $ 798,262 $ 797,670 $ 1,885,602 $ 1,666,132
Homes 1,551 1,778 3,624 3,795
Unconsolidated joint ventures:(2)
Dollars $ 108,055 $ 135,280 $ 586,438 $ 420,364
Homes 335 397 2,514 1,696
(1) Net contracts are defined as new contracts executed during the period for the purchase of housing, less contract terminations during the same period.
(2) Represents net contract dollars, net contract homes and contract backlog dollars and homes for our unconsolidated homebuilding joint ventures for the period. We provide this data as a supplement to our consolidated results as an indicator of the volume managed in our unconsolidated joint ventures. See Note 18 to the Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q for a further discussion of our unconsolidated joint ventures. In the first quarter of 2022, our open for sale community count decreased to 111 from 124 atOctober 31, 2021 , which was the net result of opening 13 new communities and closing 26 communities since the beginning of fiscal 2022. The high demand we continue to see in the market has accelerated the close out of some of our communities, which contributed to the decrease in community count. Our reported level of sales contracts (net of cancellations) was impacted by a decrease in sales pace per community for the three months endedJanuary 31, 2022 as compared to the same period of the prior year. Net contracts per average active selling community for the three months endedJanuary 31, 2022 decreased to 13.1 compared to 16.0 for the same period in the prior year which was during a peak in sales pace during the pandemic. The 13.1 net contracts per average active selling community for the three months endedJanuary 31, 2022 was above the 9.7 net contracts per average active selling community for the three months endedJanuary 31, 2020 , which was a strong first quarter pace by historical standards. 43
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Cancellation rates represent the number of contracts canceled during the quarter divided by the number of gross sales contracts executed during the quarter. For comparison, here are the historical termination rates, excluding unconsolidated joint ventures:
Quarter 2022 2021 2020 2019 2018 First 14 % 17 % 19 % 24 % 18 % Second 16 % 23 % 19 % 17 % Third 16 % 18 % 19 % 19 % Fourth 15 % 18 % 21 % 23 %
Another common and meaningful way to analyze our cancellation trends is to compare the number of contract cancellations as a percentage of initial order backlog. The following table presents this historical comparison, excluding unconsolidated joint ventures:
Quarter 2022 2021 2020 2019 2018
First 8 % 11 % 14 % 16 % 12 %
Second 9 % 20 % 20 % 15 %
Third 6 % 21 % 16 % 14 %
Fourth 6 % 14 % 14 % 13 %
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 and
first quarter fiscal 2022 cancellation rates, in particular, being below
historical norms as a result of the strong market conditions. Fiscal 2020 had
varying cancellation rates due to the COVID-19 pandemic and its effects. Market
conditions remain uncertain and it is difficult to predict what cancellation
rates will be in the future.
Total cost of sales on our Condensed Consolidated Statements of Operations
includes expenses for consolidated housing and land and lot sales, including
inventory impairment loss and land option write-offs (defined as "land charges"
in the tables below). A breakout of such expenses for housing sales and
homebuilding gross margin is set forth below.
Homebuilding gross margin before cost of sales interest expense and land charges
is a non-GAAP financial measure. This measure should not be considered as an
alternative to homebuilding gross margin determined in accordance with GAAP as
an indicator of operating performance.
Management believes this non-GAAP measure enables investors to better understand
our operating performance. This measure is also useful internally, helping
management evaluate our operating results on a consolidated basis and relative
to other companies in our industry. In particular, the magnitude and volatility
of land charges for the Company, and for other homebuilders, have been
significant and, as such, have made financial analysis of our industry more
difficult. Homebuilding metrics excluding land charges, as well as interest
amortized to cost of sales, and other similar presentations prepared by analysts
and other companies are frequently used to assist investors in understanding and
comparing the operating characteristics of homebuilding activities by
eliminating many of the differences in companies' respective level of
impairments and levels of debt.
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Three Months Ended
January 31,
(Dollars in thousands) 2022 2021
Sale of homes $ 551,366
Cost of sales, excluding interest charges and land charges
427,873
437 372
Residential construction gross margin, before cost of sales, interest charges and land charges
123,493
113,993
Interest expense on cost of sales, excluding interest expense on land sales
13,724
16,717
Homebuilding gross margin, after cost of sales interest expense, before land charges 109,769 97,276 Land charges 99 1,877 Homebuilding gross margin$ 109,670 $ 95,399 Homebuilding gross margin percentage 19.9 %
17.3% Gross margin percentage on home construction, before interest expense on cost of sales and land charges
22.4 %
20.7% Percentage of gross margin on residential construction, after cost of sales, before property charges
19.9 % 17.6 %
Cost of sales expenses as a percentage of consolidated home sales revenues are
presented below:
Three Months Ended
January 31,
2022 2021
Sale of homes 100.0 % 100.0 %
Cost of sales, excluding financial charges and land charges: Housing, land and development costs
69.0 % 70.5 % Commissions 3.6 % 3.6 % Financing concessions 0.8 % 1.3 % Overheads 4.2 % 3.9 % Total cost of sales, before interest expense and land charges 77.6 % 79.3 % Cost of sales interest 2.5 % 3.1 % Land charges 0.0 % 0.3 % Homebuilding gross margin percentage 19.9 %
17.3% Gross margin percentage on home construction, before interest expense on cost of sales and land charges
22.4 %
20.7% Percentage of gross margin on residential construction, after cost of sales, before property charges
19.9 % 17.6 % 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 19.9% during the three months endedJanuary 31, 2022 compared to 17.3% for the same period last year. Homebuilding gross margin percentage, before cost of sales interest expense and land charges, increased from 20.7% for the three months endedJanuary 31, 2021 to 22.4% for the three months endedJanuary 31, 2022 . The increases for the three months endedJanuary 31, 2022 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 period. 45
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Reflected as inventory impairment loss and land option write-offs in cost of sales, we wrote-off or wrote-down certain inventories totaling$0.1 million and$1.9 million during the three months endedJanuary 31, 2022 and 2021, respectively, to their estimated fair value. During the three months endedJanuary 31, 2022 , we wrote-off residential land options and approval and engineering costs amounting to$0.1 million compared to$1.1 million for the three months endedJanuary 31, 2021 , which are included in the total land charges discussed above. Option, approval and engineering costs are written-off when a community's pro forma profitability is not projected to produce adequate returns on the investment commensurate with the risk and when we believe it is probable we will cancel the option or when a community is redesigned engineering costs related to the initial design are written-off. Such write-offs were located in all the segments, except the Midwest segment in the first quarter of fiscal 2022 and in the Southeast, Southwest and West segments in the first quarter of fiscal 2021. There were no inventory impairments during the three months endedJanuary 31, 2022 . We recorded inventory impairments of$0.8 million during the three months endedJanuary 31, 2021 , which was related to one community in the West segment. 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 income
Land sales and other income consist mainly of land and lot sales. A breakdown of land and lot sales is presented below:
Three Months Ended
January 31,
(In thousands) 2022 2021
Land and lot sales $ 34 $ 3,362
Cost of sales, excluding interest 44
2,266
Gross profit on land and lot sales, excluding interest (10 ) 1,096 Interest expense on land and lot sales
21
448
Gross profit from sales of land and lots, including interest
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 was one land sale in the three months endedJanuary 31, 2022 compared to four land sales in the same period of the prior year, resulting in a decrease of$3.3 million in land sales revenues. Land sales and other revenues decreased$3.2 million for the three months endedJanuary 31, 2022 compared to the same period in the prior year. Other revenues include income from contract cancellations where the deposit has been forfeited due to contract terminations, interest income, cash discounts and miscellaneous one-time receipts. The decrease for the three months endedJanuary 31, 2022 , compared to the three months endedJanuary 31, 2021 , was mainly due to the decrease in land sales discussed above.
Sale of residential, general and administrative construction
Homebuilding selling, general and administrative ("SGA") expenses increased $2.5
million to $42.7 million for the three months ended January 31, 2022 compared to
the same period last year. The increase was primarily due to an increase in
selling overhead costs as we prepare to open new communities during fiscal 2022
and an increase in stock compensation costs. SGA expenses as a percentage of
homebuilding revenues increased to 7.7% for the three months ended January 31,
2022 compared to 7.2% for the three months ended January 31, 2021 , respectively,
as a result of the 0.6% decrease in homebuilding revenue and the small increase
in expense for the first fiscal quarter compared to the prior year period.
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RESIDENTIAL CONSTRUCTION ACTIVITIES BY SEGMENT
Segment Analysis
Three Months Ended January 31,
(Dollars in thousands, except average
sales price) 2022 2021 Variance Variance %
Northeast
Homebuilding revenue $ 20,359 $ 32,044 $ (11,685 ) (36.5 )%
Income before income taxes $ 2,450 $ 4,594 $ (2,144 ) (46.7 )%
Homes delivered 28 53 (25 ) (47.2 )%
Average sales price $ 727,036 $ 588,981 $ 138,055 23.4 %
Mid-Atlantic
Homebuilding revenue $ 99,614 $ 92,945 $ 6,669 7.2 %
Income before income taxes $ 16,737 $ 10,701 $ 6,036 56.4 %
Homes delivered 168 176 (8 ) (4.5 )%
Average sales price $ 591,667 $ 527,903 $ 63,764 12.1 %
Midwest
Homebuilding revenue $ 54,972 $ 59,157 $ (4,185 ) (7.1 )%
Income before income taxes $ 651 $ 3,584 $ (2,933 ) (81.8 )%
Homes delivered 162 183 (21 ) (11.5 )%
Average sales price $ 339,025 $ 309,251 $ 29,774 9.6 %
Southeast
Homebuilding revenue $ 55,582 $ 45,774 $ 9,808 21.4 %
Income before income taxes $ 10,162 $ 354 $ 9,808 2,770.6 %
Homes delivered 104 102 2 2.0 %
Average sales price $ 533,606 $ 447,529 $ 86,077 19.2 %
Southwest
Homebuilding revenue $ 194,510 $ 190,409 $ 4,101 2.2 %
Income before income taxes $ 21,876 $ 21,050 $ 826 3.9 %
Homes delivered 498 582 (84 ) (14.4 )%
Average sales price $ 390,221 $ 326,773 $ 63,448 19.4 %
West
Homebuilding revenue $ 126,960 $ 134,832 $ (7,872 ) (5.8 )%
Income before income taxes $ 22,059 $ 9,677 $ 12,382 128.0 %
Homes delivered 214 289 (75 ) (26.0 )%
Average sales price $ 592,813 $ 466,488 $ 126,325 27.1 %
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Residential construction results by segment
Northeast - Homebuilding revenues decreased 36.5% for the three months endedJanuary 31, 2022 compared to the same period of the prior year. The decrease for the three months endedJanuary 31, 2022 was attributed to a 47.2% decrease in homes delivered, partially offset by a 23.4% 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 endedJanuary 31, 2022 compared to some communities delivering in the three months endedJanuary 31, 2021 that had smaller single family homes, townhomes and affordable-housing homes in mid to higher-end submarkets of the segment that are no longer delivering. Also impacting the increase in average sales price was price increases in certain communities. Income before income taxes decreased$2.1 million to$2.5 million for the three months endedJanuary 31, 2022 as compared to the prior year period. This was primarily due to a$1.0 million increase in selling, general and administrative costs, and a decrease in gross margin percentage before interest expense for the period compared to the same period of the prior year. Mid-Atlantic - Homebuilding revenues increased 7.2% for the three months endedJanuary 31, 2022 compared to the same period in the prior year period. The increase was primarily due to a 12.1% increase in average sales price, partially offset by a 4.5% decrease in homes delivered for the three months endedJanuary 31, 2022 compared to the same period in the prior year. The increase in average sales price was mainly the result of price increases in certain communities. Income before income taxes increased$6.0 million to$16.7 million for the three months endedJanuary 31, 2022 compared to the same period in the prior year. This 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 endedJanuary 31, 2022 compared to the same period of the prior year. Midwest - Homebuilding revenues decreased 7.1% for the three months endedJanuary 31, 2022 compared to the same period in the prior year. The decrease was due to a an 11.5% decrease in homes delivered and a$2.5 million decrease in land sales and other revenue, partially offset by a 9.6% increase in average sales price for the three months endedJanuary 31, 2022 . The increase in average sales price was mainly the result of price increases in certain communities. Income before income taxes decreased$2.9 million to$0.7 million for the three months endedJanuary 31, 2022 compared to the same period in the prior year. The decrease was primarily due to the decrease in homebuilding revenue discussed above, a$0.9 million increase in selling, general and administrative costs and a decrease in gross margin percentage before interest expense for the period compared to the same period of the prior year. 48
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Southeast - Homebuilding revenues increased 21.4% for the three months endedJanuary 31, 2022 compared to the same period in the prior year. The increase was due to a 19.2% increase in average sales price and a 2.0% increase in homes delivered. 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 endedJanuary 31, 2022 compared to some communities delivering in the three months endedJanuary 31, 2021 that had lower priced, smaller single family homes in higher-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$9.8 million to$10.2 million for the three months endedJanuary 31, 2022 compared to the prior year period, primarily due to the increase in homebuilding revenue discussed above, a$4.6 million increase in income from unconsolidated joint ventures and an increase in gross margin percentage before interest expense for the period compared to the same period of the prior year. Southwest - Homebuilding revenues increased 2.2% for the three months endedJanuary 31, 2022 compared to the same period in the prior year. The increase was primarily due to a 19.4% increase in average sales price, partially offset by a 14.4% decrease in homes delivered for the three months endedJanuary 31, 2022 compared to the same period in the prior year. The increase in average sales price was mainly the result of price increases in certain communities. Income before income taxes increased$0.8 million to$21.9 million for the three months endedJanuary 31, 2022 compared to the same period in the prior year. The increase was primarily due to the increase in homebuilding revenues discussed above, while gross margin percentage before interest expense was flat for the three months endedJanuary 31, 2022 compared to the same period of the prior year. 49
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West - Homebuilding revenues decreased 5.8% for the three months endedJanuary 31, 2022 compared to the same period in the prior year. The decrease was due to a 26.0% decrease in homes delivered, partially offset by a 27.1% 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 increased$12.4 million to$22.1 million for the three months endedJanuary 31, 2022 compared to the prior year period. The increase is primarily due to a$0.6 million decrease in selling, general and administrative costs, a$1.6 million decrease in inventory impairment loss and land option write-offs and an increase in gross margin percentage before interest expense for the period compared to the same period of the prior year. Financial Services Financial services consist primarily of originating mortgages from our home buyers, selling such mortgages in the secondary market, and title insurance activities. We use mandatory investor commitments and forward sales of mortgage-backed securities ("MBS") to hedge our mortgage-related interest rate exposure on agency and government loans. These instruments involve, to varying degrees, elements of credit and interest rate risk. Credit risk associated with MBS forward commitments and loan sales transactions is managed by limiting our counterparties to investment banks, federally regulated bank affiliates and other investors meeting our credit standards. Our risk, in the event of default by the purchaser, is the difference between the contract price and fair value of the MBS forward commitments. For the first quarters of fiscal 2022 and 2021,Federal Housing Administration andVeterans Administration ("FHA/VA ") loans represented 24.3% and 31.5%, respectively, of our total loans. The origination of FHA/VA loans decreased from the first quarter of fiscal 2021 to the first quarter of fiscal 2022, and our conforming conventional loan originations as a percentage of our total loans increased from 68.2% to 74.6% for this period, respectively. The origination of loans which exceed conforming conventions increased from 0.3% for the first quarter of fiscal 2021 to 1.1% for the first quarter of fiscal 2022. Profits and losses relating to the sale of mortgage loans are recognized when legal control passes to the buyer of the mortgage and the sales price is collected. During the three months endedJanuary 31, 2022 , financial services provided a$2.9 million pretax profit compared to$9.1 million of pretax profit for the same period of fiscal 2021. The decrease in pretax profit was attributed to the decrease in the homebuilding deliveries and a decrease 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, 64.1% and 70.9% of our noncash homebuyers obtained mortgages originated by these subsidiaries during the three months endedJanuary 31, 2022 and 2021, 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$29.4 million for the three months endedJanuary 31, 2022 compared to$23.5 million for the three months endedJanuary 31, 2021 , primarily due to increases in compensation expense related to finalizing the performance and related payouts for the phantom stock awards under our 2019 LTIP, and increases in merits and incentives as a result of increased profitability. 50
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Table of Contents Other Interest Other interest decreased$10.6 million for the three months endedJanuary 31, 2022 compared to the three months endedJanuary 31, 2021 . Our assets that qualify for interest capitalization (inventory under development) are less than our debt, and therefore the portion of interest not covered by qualifying assets is directly expensed. Other interest decreased because we incurred less interest and had less debt in excess of inventory as a result of the reduction of our debt during the second half of fiscal 2021 and due to the decrease in average inventory not owned during the three months endedJanuary 31, 2022 compared to the three months endedJanuary 31, 2021 .
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 increased$6.3 million to$8.2 million for the three months endedJanuary 31, 2022 compared to the same period of the prior year. The increase was primarily due to the recognition of our share of income from two of our unconsolidated joint ventures during the quarter based on the joint venture partner achieving certain return hurdles, in compliance with the joint venture agreement, and as a result, the Company was able to recognize a higher share of the unconsolidated joint venture's calendar year 2021 profit. Total Taxes The total income tax expense for the three months endedJanuary 31, 2022 was$10.6 million . The expense was primarily due to federal and state tax expense recorded as a result of our pretax income. The federal tax expense is not paid in cash as it is offset by the use of our existing NOL carryforwards. For the three months endedJanuary 31, 2021 , our deferred tax assets were still fully reserved, therefore we had no federal tax expense and only recorded state tax expense of$0.6 million primarily related to state tax expense from income generated in states where we do not have NOL carryforwards to offset that income. Inflation The annual rate of inflation inthe United States hit 7.5% inJanuary 2022 , the highest in more than three decades, as measured by the Consumer Price Index (CPI). Inflation has a long-term effect, because increasing costs of land, materials and labor result in increasing sale prices of our homes. Historically, 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 57.8% of our homebuilding cost of sales for the three months endedJanuary 31, 2022 . 51
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Table of Contents Safe Harbor Statement All statements in this Quarterly Report on Form 10-Q that are not historical facts should be considered as "Forward-Looking Statements" within the meaning of the "Safe Harbor" provisions of the Private Securities Litigation Reform Act of 1995. Such statements involve known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Such forward-looking statements include but are not limited to statements related to the Company's goals and expectations with respect to its financial results for future financial periods. Although we believe that our plans, intentions and expectations reflected in, or suggested by, such forward-looking statements are reasonable, we can give no assurance that such plans, intentions or expectations will be achieved. By their nature, forward-looking statements: (i) speak only as of the date they are made, (ii) are not guarantees of future performance or results and (iii) are subject to risks, uncertainties and assumptions that are difficult to predict or quantify. Therefore, actual results could differ materially and adversely from those forward-looking statements as result of a variety of factors. Such risks, uncertainties and other factors include, but are not limited to:
? Changes in general and local economic, industrial and business conditions and
the impacts of a significant slowdown in residential construction;
? Shortages and price fluctuations of raw materials and labor, including
due to changes in trade policies, including the imposition of customs duties and
duties on residential building materials and products and related trade disputes with
and retaliatory actions taken by other countries;
? The outbreak and spread of COVID-19 and the measures that governments,
the agencies, law enforcement and/or health authorities take action to remedy it;
? Adverse weather and other environmental conditions and natural disasters;
? The seasonality of the Company’s activities;
? The availability and cost of suitable land and improved lots and
cash to invest in such land and lots;
? Dependence on subcontractors and their performance;
? Regional and local economic factors, including dependence on certain sectors
of the economy and employment levels affecting home prices and sales
activity in markets where the Company builds homes;
? Increase in terminations of promises to sell;
? Interest rate fluctuations 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 favour, such as
product liability disputes, warranty claims and mortgage claims
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 operations and activities of the Company
imposed by the agreements governing the Company’s outstanding debt;
? Availability and terms of financing of the Company;
? The Company’s sources of liquidity;
? Changes in credit ratings;
? Government regulations, including regulations regarding land development,
customer home building, sales and financing processes, tax laws and
environment; ? Operations through unconsolidated joint ventures with third parties; ? Significant influence of the Company's controlling stockholders; ? Availability of net operating loss carryforwards;
? Loss of key management personnel or inability to attract qualified personnel;
and ? Increases in inflation. 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, 2021 . 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. 52
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