HOVNANIAN ENTERPRISES INC MANAGEMENT REPORT OF FINANCIAL POSITION AND RESULTS OF OPERATIONS (Form 10-Q)

0
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.



In March 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 in May 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

————————————————– ——————————

  Table of Contents



Operating Results


We recorded strong positive operating results for the three months ended
January 31, 2022 as following:



? Sale of homes revenues remained flat at $551.4 million for both the three
months ended January 31, 2022 and 2021. There was an increase in average prices
of 18.0% for the three months ended January 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 ended January 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 ended January
31, 2022 from 17.3% for the three months ended January 31, 2021. Gross margin
percentage, before cost of sales interest expense and land charges, increased
from 20.7% for the three months ended January 31, 2021 to 22.4% for the three
months ended January 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 ended January 31, 2022 compared with $63.7
million, or 11.1% of total revenues, in the three months ended January 31, 2021.
Such costs increased $8.5 million for the three months ended January 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 ended January
31, 2022 from $24.0 million for the three months ended January 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 ended January
31, 2022 compared to the three months ended January 31, 2021.



? Pre-tax income increased to $35.4 million for the three months ended January
31, 2022 from pre-tax income of $19.6 million for the three months ended January
31, 2021. Net income increased to $24.8 million for the three months ended
January 31, 2022 from net income of $19.0 million for the three months ended
January 31, 2021. Earnings per share, basic and diluted, increased to $3.12 and
$3.07, respectively, for the three months ended January 31, 2022 compared to
$2.79 and $2.75, respectively, for the three months ended January 31, 2021.



? Net contracts decreased by 12.8% for the quarter ended January 31, 2022compared to the same periods of the previous year.



? Net contracts per average active selling community decreased to 13.1 for the
three months ended January 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 ended
January 31, 2022 was above the 9.7 net contracts per average active selling
community for the three months ended January 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 at January 31, 2022 decreasing by 10.5% from October 31, 2021.
However, we are actively pursuing replacement communities, and our total lots
controlled has increased each quarter since July 31, 2020 through July 31, 2021,
and again from October 31, 2021 to January 31, 2022.



? Contract backlog decreased from 3,795 homes at January 31, 2021 to 3,624 homes
at January 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 ended January 31, 2022 and still have
total liquidity of $271.0 million, including $137.9 million of homebuilding cash
and cash equivalents as of January 31, 2022 and $125.0 million of borrowing
capacity under our senior secured revolving credit facility.



                                       32

————————————————– ——————————

  Table of Contents



CRITICAL ACCOUNTING POLICIES



As disclosed in our annual report on Form 10-K for the fiscal year ended October
31, 2021, our most critical accounting policies relate to income recognition
from mortgage loans; inventories; unconsolidated joint ventures; and warranty
and construction defect reserves. Since October 31, 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 and Pennsylvania), the Mid-Atlantic (Delaware,
Maryland, Virginia, Washington D.C. and West Virginia), the Midwest (Illinois
and Ohio), the Southeast (Florida, Georgia and South Carolina), the Southwest
(Arizona and Texas) and the West (California). In addition, we provide certain
financial services to our homebuilding customers.



We have historically funded our homebuilding and financial services operations
with cash flows from operating activities, borrowings under our credit
facilities, the issuance of new debt and equity securities and other financing
activities. Due to covenant restrictions in our debt instruments, we are
currently limited in the amount of debt we can incur that does not qualify as
refinancing indebtedness, 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 at January 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 ended January 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

————————————————– ——————————

  Table of Contents



Debt Transactions



Senior notes and credit facilities balances as of January 31, 2022 and October
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 November 15, 2025

                                                       $    158,502     

$158,502
7.75% Senior Secured 1.125 Lien bonds due February 15, 2026

                                                            350,000     

350,000

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

                                                            282,322     

282 322

11.25% Senior Secured 1.5 Lien Notes due February 15,
2026                                                            162,269          162,269
Total Senior Secured Notes                                 $    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 due February 1, 2040                           90,120     

90 120

Total Senior Notes                                         $    180,710     

$180,710
Senior unsecured term credit facility February 1, 2027

                                                    $     39,551     

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

                                           $     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 January 31, 2022plans up to $125.0 million in aggregate amount of senior secured senior revolving loans. Availability hereunder will end on December 28, 2022.



Except for K. Hovnanian, the issuer of the notes and borrower under the Credit
Facilities (as defined below), our home mortgage subsidiaries, certain of our
title insurance subsidiaries, joint ventures and subsidiaries holding interests
in our joint ventures, we and each of our subsidiaries are guarantors of the
Credit Facilities, the senior secured notes and senior notes outstanding at
January 31, 2022 (except for the 8.0% 2027 Notes which are not guaranteed by K.
Hovnanian at Sunrise Trail III, LLC, a wholly-owned subsidiary of the Company)
(collectively, the "Notes Guarantors").



The credit agreements governing the Credit Facilities and the indentures
governing the senior secured and senior notes (together, the "Debt Instruments")
outstanding at January 31, 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, including K. Hovnanian, to
incur additional indebtedness (other than non-recourse indebtedness, certain
permitted indebtedness and refinancing indebtedness), pay dividends and make
distributions on common and preferred stock, repay/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 of January 31, 2022, we
believe we were in compliance with the covenants of the Debt Instruments.



                                       34

————————————————– ——————————

Contents



If our consolidated fixed charge coverage ratio is less than 2.0 to 1.0, as
defined in the applicable Debt Instrument, we are restricted from making certain
payments, including dividends (in 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 of October 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, on December 3, 2021, our Board of Directors
authorized a dividend payment of $2.7 million to preferred shareholders of
record on January 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 and K.
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) at January 31,
2022 and October 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% at January 31, 2022 and October 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 of January 31, 2022 and October 31, 2021, we
had an aggregate of $71.6 million and $134.9 million, respectively, outstanding
under several of K. Hovnanian Mortgage's short-term borrowing facilities.



See Note 11 to the condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for a discussion of these arrangements.




                                       35

————————————————– ——————————

  Table of Contents



Inventory Activities



Total inventory, excluding consolidated inventory not owned, increased $133.0
million during the three months ended January 31, 2022 from October 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 ended January 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 ended January 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 at January 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 from October 31, 2021 to January 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, at January 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, at January 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 of January 31, 2022, we had mothballed land
in six communities. The book value associated with these communities at January
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 both January 31, 2022 and October 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

————————————————– ——————————

Contents



The following tables summarize home sites included in our total residential real
estate. The increase in total home sites available at January 31, 2022 compared
to October 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           Homes
January 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.




                                       37

————————————————– ——————————

  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.




                                       38

————————————————– ——————————

Contents



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 January 31, 2022 and

October 31, 2021, respectively. This ratio does not substantially include

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 at January 31, 2022 compared to October 31, 2021.
The increase was primarily due to income recorded from one of our unconsolidated
joint ventures during the period. As of January 31, 2022 and October 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 from October 31,
2021 to $34.8 million at January 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




                                       39

————————————————– ——————————

Contents



Prepaid insurance was relatively flat for the three months ended January 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 at January 31, 2022 and
October 31, 2021, respectively, were being temporarily warehoused and are
awaiting sale in the secondary mortgage market. The decrease in mortgage loans
held for sale from October 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 at
January 31, 2022 from $125.1 million at October 31, 2021. The increase was
primarily due to new mortgages for communities in most of our segments obtained
during the three months ended January 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 $14.9 million from October 31, 2021 for
$83.2 million at January 31, 2022. The increase is mainly related to the increase in the backlog during the period.



Liabilities from inventory not owned increased $12.6 million from October 31,
2021 to $75.3 million at January 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 at
January 31, 2022 from $182.2 million at October 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 at October 31, 2021,
to $47.3 million at January 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

————————————————– ——————————

  Table of Contents



RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED January 31, 2022 COMPARED TO THE THREE MONTHS ENDED January 31, 2021


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.



                                       41

————————————————– ——————————

Contents

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 January 31, 2022 compared to the same period last year due to an increase in the average sale price per house which was offset by a decrease in the number of houses delivered.

                                       42

————————————————– ——————————

Contents



An important indicator of our future results are recently signed contracts and
our home contract backlog for future deliveries. Our sales contracts and homes
in contract backlog by segment are set forth below:



                                             Net Contracts (1) for the
                                                 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 at October 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 ended January 31, 2022
as compared to the same period of the prior year. Net contracts per average
active selling community for the three months ended January 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 ended January 31, 2022 was above
the 9.7 net contracts per average active selling community for the three months
ended January 31, 2020, which was a strong first quarter pace by historical
standards.





                                       43

————————————————– ——————————

Contents

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.





                                       44

————————————————– ——————————

  Table of Contents



                                                               Three Months Ended
                                                                   January 31,
(Dollars in thousands)                                        2022            2021

Sale of homes                                              $   551,366    

$551,365
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
ended January 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 ended January 31, 2021
to 22.4% for the three months ended January 31, 2022. The increases for
the three months ended January 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

————————————————– ——————————

Contents



Reflected as inventory impairment loss and land option write-offs in cost of
sales, we wrote-off or wrote-down certain inventories totaling $0.1 million and
$1.9 million during the three months ended January 31, 2022 and 2021,
respectively, to their estimated fair value. During the three months ended
January 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 ended January 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 ended January 31, 2022. We recorded inventory impairments of $0.8 million
during the three months ended January 31, 2021, which was related to one
community in the West segment. 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 $ (31 ) $648




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 ended January 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 ended
January 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 ended January 31, 2022,
compared to the three months ended January 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.



                                       46

————————————————– ——————————

Contents

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 %




                                       47

————————————————– ——————————

Contents

Residential construction results by segment



Northeast - Homebuilding revenues decreased 36.5% for the three months ended
January 31, 2022 compared to the same period of the prior year. The decrease for
the three months ended January 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 ended January 31, 2022 compared to some
communities delivering in the three months ended January 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 ended January 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 ended
January 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 ended January
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 ended January 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 ended January 31, 2022 compared to the same period of the prior year.



Midwest - Homebuilding revenues decreased 7.1% for the three months ended
January 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 ended January 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 ended January 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

————————————————– ——————————

Contents



Southeast - Homebuilding revenues increased 21.4% for the three months ended
January 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 ended January 31, 2022 compared to some
communities delivering in the three months ended January 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 ended January 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 ended
January 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 ended January 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 ended January 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 ended January 31, 2022 compared to the same period of the prior
year.



                                       49

————————————————– ——————————

Contents



West - Homebuilding revenues decreased 5.8% for the three months ended January
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 ended January 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 and Veterans 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 ended January 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 ended January 31, 2022 and 2021,
respectively.



Corporate General and Administrative



Corporate general and administrative expenses include the operations at our
headquarters in New Jersey. These expenses include payroll, stock compensation,
facility costs and rent and other costs associated with our executive offices,
legal expenses, information services, human resources, corporate accounting,
training, treasury, process redesign, internal audit, national and digital
marketing, construction services and administration of insurance, quality and
safety. Corporate general and administrative expenses increased to $29.4 million
for the three months ended January 31, 2022 compared to $23.5 million for the
three months ended January 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

————————————————– ——————————

  Table of Contents



Other Interest



Other interest decreased $10.6 million for the three months ended January 31,
2022 compared to the three months ended January 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 ended January 31, 2022 compared to
the three months ended January 31, 2021.



Income from Unconsolidated joint ventures



Income from unconsolidated joint ventures consists of our share of the earnings
or losses of our unconsolidated joint ventures. Income from unconsolidated joint
ventures increased $6.3 million to $8.2 million for the three months ended
January 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 ended January 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 ended January 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 in the United States hit 7.5% in January 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 ended
January 31, 2022.



                                       51

————————————————– ——————————

  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 ended October 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

————————————————– ——————————

Contents

© Edgar Online, source Previews

Share.

Comments are closed.