What changed in this filing

/stocks — the workspaceLOADING

Item 5. Market for Registrant’s Common Equity

2023-12-18 compared with 2022-12-19 · 221 added, 245 removed, 401 unchanged (54% of the section changed)

1 unchanged sentence

Our Class A common stock is traded on the New York Stock Exchange under the symbol “HOV”

and was held by 305 stockholders of record at December 13, 2022. There is no established public trading market for our Class B common stock, which was held by 168 stockholders of record at December 13, 2022.

and was held by 287 stockholders of record at December 12, 2023. There is no established public trading market for our Class B common stock, which was held by 164 stockholders of record at December 12, 2023.

If a stockholder desires to sell shares of Class B common stock (other than to Permitted Transferees (as defined in the Company’s amended Certificate of Incorporation)), such stock must be converted into shares of Class A common stock at a one-to-one conversion rate. 

1 unchanged sentence

Issuer Purchases of Equity Securities

The table below sets forth information regarding repurchases by the Company of its common stock during the periods indicated: 

Total Number of Shares Purchased

Average Price Paid Per Share

Total Number of Shares Purchased of Part of Publicly Announced Plans or Program (1)

Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans

August 1, 2022 through August 31, 2022

September 1, 2022 through September 30, 2022

October 1, 2022 through October 31, 2022

(1) On September 1, 2022, our Board of Directors terminated our prior repurchase program and authorized a new program for the repurchase of up to $50.0 million of our Class A common stock.

Under the new repurchase program, repurchases may be made from time to time in open market transactions, in privately negotiated transactions or otherwise.

The timing and the actual dollar amount repurchased will depend on a variety of factors, including legal requirements, future tax implications, price and economic and market conditions.

The repurchase program may be changed, suspended or discontinued at any time and does not have a specified expiration date.

Performance Graph

The following graph compares the five-year cumulative total return of our Class A common stock with the Dow Jones U.S.

Home Construction Index and the Dow Jones U.S.

Total Market Index.

The graph assumes $100 invested on October 31, 2017 in our Class A common stock, the Dow Jones U.S.

Home Construction Index and the Dow Jones U.S.

Total Market Index, and the reinvestment of all dividends.

This performance graph shall not be deemed “

soliciting material ”

filed ”

with the SEC for purposes of Section 18 of the Exchange Act, or otherwise subject to the liabilities under that Section, and shall not be deemed to be incorporated by reference into any of our filings under the Securities Act or the Exchange Act.

The following graph compares the five-year cumulative total return of our Class A common stock with the Standard & Poor's ("S&P") 500 Index and the S&P Homebuilding Index.

The graph assumes $100 invested on October 31, 2018 in our Class A common stock, the S&P 500 Index and the S&P Homebuilding Index, and the reinvestment of all dividends.

The stock price performance shown on the following graph is not necessarily indicative of future stock performance.

9 unchanged sentences

refer to HEI and its consolidated subsidiaries and should be understood to reflect the consolidated business of HEI’s subsidiaries).

Historically, the Company had seven reportable segments consisting of six homebuilding segments (Northeast, Mid-Atlantic, Midwest, Southeast, Southwest and West) and a financial services segment.

During the fourth quarter of fiscal 2022, we reevaluated our reportable segments as a result of changes in the business and our management thereof.

In particular, we considered the fact that, since our segments were last established, the Company had exited the Minnesota, North Carolina and Tampa markets and is currently in the process of exiting the Chicago market.

Applying the principles set forth under ASC 280, including that our business trends are reflective of economic conditions in markets with general geographic proximity, we realigned our homebuilding operating segments and determined that, in addition to our financial services segment, we now have three reportable homebuilding segments comprised of (1) Northeast, (2) Southeast and (3) West, as noted below.

All prior period amounts related to the segment change have been retrospectively reclassified to conform to the new presentation.

The following tables and related discussion set forth key operating and financial data for our homebuilding and financial services operations as of and for the fiscal years ended October 31, 2023 and 2022.

For similar operating and financial data and discussion of our fiscal 2022 results compared to our fiscal 2021 results, refer to Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”

of our annual report on Form 10-K for the fiscal year ended October 31, 2022, which was filed with the SEC on December 19, 2022.

Key Performance Indicators

16 unchanged sentences

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.

From early January 2022, 30-year mortgage rates increased rapidly from 3.2% to 7.1% at the end of October 2022.

While these rates are still low by historical standards, the quick and sharp increase in rates, along with high levels of inflation and general uncertainty and fear that the United States is headed towards an economic recession, started to have a negative impact on our net contracts and net contracts per average active selling community for the year ended October 31, 2022, particularly in the second half of the fiscal year.

Currently, many buyers have temporarily paused their home purchase decisions amid such uncertainty.

Despite the slowdown in net contracts during the second half of fiscal 2022, our revenues, gross margin percentage and pretax profit results showed strong improvement over the prior year through October 31, 2022.

The current market environment will make it hard for that trend to continue and it is difficult to predict the impact that increased mortgage rates and other factors will have on our future results, or how strongly our business will be adversely impacted.

We expect further pressure on our results from higher wages due to inflation and supply constraints in the labor market, as well as increased advertising spending, and less favorable margins on the mortgage rates we offer customers in order to attract buyers.

Our cash position allowed us to spend $759.3 million on land purchases and land development and to early retire $100 million principal amount of senior secured notes during fiscal 2022, and still have total liquidity of $457.3 million, including $326.2 million of homebuilding cash and cash equivalents and $125.0 million of borrowing capacity under our senior secured revolving credit facility as of October 31, 2022. 

From early January 2022, 30-year mortgage rates more than doubled from 3.2% to 7.8% at the end of October 2023.

The rapid and sharp increases in interest rates, persistently high levels of inflation and doubt about the stability of the economy, negatively impacted housing demand beginning in the second half of fiscal 2022 and continued into early fiscal 2023.

During the first quarter of fiscal 2023, we were aggressive in our pricing, incentives and concessions in order to increase affordability, which had a positive effect on our sales pace, but due to the general uncertainty about the stability of the economy potential buyers still remained cautious about their decision to purchase a home.

Beginning in the second quarter and through the third quarter of fiscal 2023, as interest rates stabilized around 6.5%, we saw an increase in customer demand and the housing market started to normalize.

During the fourth quarter of fiscal 2023, interest rates increased by approximately 100 basis points from the end of July to the end of October, which slowed down our sequential sales pace.

We were able to use our increased inventory of QMI homes during the year to help meet buyers’

needs in the current uncertain interest rate environment.

The time between contract signing and closing is shorter with a QMI home as compared to a to be built home, which provides customers with more certainty on their mortgage pricing.

The availability of QMI homes also allows us to offer mortgage interest rate buydown assistance, which is a tool we offer through our wholly-owned mortgage banking subsidiary ("K.

Hovnanian Mortgage"), to help ease the impact of higher monthly payments from rising interest rates.

We pay the cost of interest rate buydowns for customers that qualify through K.

Hovnanian Mortgage and decide to use the program.

The level of interest rate based incentives utilized differs across our markets and is one of several available options we use to drive sales and close homes.

The number of existing home sales listings are at all-time low levels, which limits the supply of homes available for purchase, leading to increased demand for new homes, which leads to improved pricing power.

During the fourth quarter of fiscal 2023, there continued to be strong demand for our homes as compared to the prior year, which lead to a significant increase in net contracts and net contracts per average active selling community, as compared to the fourth quarter of fiscal 2022 and the year ended October 31, 2022.

We were able to increase net prices in approximately 54% of our communities during the fourth quarter of fiscal 2023.

There still remains a great degree of uncertainty due to inflation, the continued possibility of an economic recession, employment risk and the potential for further mortgage rate increases.

While we continue to experience some lingering supply chain issues, we remain focused on continuing to shorten our construction cycle times and building on our national initiatives to drive down costs with our material providers and trade partners.

The changing conditions in the housing market, and in the general economy, make it difficult to predict how strongly our business will be impacted by these external factors over fiscal 2024 and beyond.

Our cash position allowed us to spend $679.3 million on land purchases and land development, repurchase $245.0 million principal amount of senior secured notes prior to maturity during fiscal 2023, and still have total liquidity of $564.2 million, including $434.1 million of homebuilding cash and cash equivalents and $125.0 million of borrowing capacity under our senior secured revolving credit facility as of October 31, 2023.

Also, in the fourth quarter of fiscal 2023, we refinanced $494.6 million of secured debt which extended our debt maturities to the fourth quarters of fiscal 2028 and 2029, and subsequently in November 2023 we redeemed an additional $113.5 million of secured debt with proceeds from the refinancing debt issued in the fourth quarter.

Additional information on our results for the year ended October 31, 2023 were as follows:

For the year ended October 31, 2022, sale of homes revenues increased 6.2% as compared to the prior year, primarily due to a 19.0% increase in average sales price, partially offset by a 10.7% decrease in homes delivered.

The decrease in deliveries in fiscal 2022 was primarily the result of a 2.4% reduction in community count as well as the slowdown in net contracts in the second half of the year.

Homebuilding gross margin percentage increased from 18.6% for the year ended October 31, 2021 to 21.5% for the year ended October 31, 2022, and homebuilding gross margin percentage, before cost of sales interest expense and land charges, increased from 21.8% for the year ended October 31, 2021 to 25.0% for the year ended October 31, 2022.

The increases were primarily due to increases in home prices in virtually all of our markets during fiscal 2022, along with the mix of communities delivering compared to the prior year.

Selling, general and administrative expenses (including corporate general and administrative) increased $19.6 million for the year ended October 31, 2022 as compared to the prior year.

The increase was primarily due to an increase in compensation expense as a result of an increase in headcount and bonuses related to market conditions and company performance.

In addition, we had an increase in insurance costs as a result of an increase in premiums to obtain insurance, along with additional reserves for construction defect claims.

Despite the increase in dollars, as a percentage of total revenue, such costs remained relatively flat at 10.1% for the year ended October 31, 2022 compared to 9.9% for the year ended October 31, 2021.

Income before income taxes increased to $319.8 million for the year ended October 31, 2022 from $189.9 million for the year ended October 31, 2021.

Net income decreased to $225.5 million for the year ended October 31, 2022 from $607.8 million (which included a $468.6 million benefit from a reduction in our deferred tax asset valuation allowance) for the year ended October 31, 2021.

Earnings per share, basic and diluted, decreased to $30.31 and $29.00, respectively, for the year ended October 31, 2022, compared to earnings per share, basic and diluted of $87.50 and $85.86, respectively, for the year ended October 31, 2021, driven by the prior year reduction of our deferred tax asset valuation allowance.

Net contracts decreased 25.7% for the year ended October 31, 2022, compared to the prior year, as sales pace slowed significantly during the third and fourth quarters of fiscal 2022, due to an overall slow-down in home demand across the industry, primarily from the impact of the rise in interest rates during that time. 

Net contracts per average active selling community decreased to 39.6 for the year ended October 31, 2022 compared to 55.3 in the prior year.

The decrease was due to the decrease in net contracts discussed above.  

Active selling communities decreased slightly to 121 at October 31, 2022 compared 124 to October 31, 2021.

Our total lots controlled increased to 31,518 at October 31, 2022 compared to 30,874 at October 31, 2021.

However, given the slowdown in home sales, we are currently being more cautious about new land acquisitions and our lots controlled declined from the July 31, 2022 to October 31, 2022.

For the year ended October 31, 2023, sale of homes revenues decreased 7.4% as compared to the prior year, primarily due to a 11.9% decrease in homes delivered, partially offset by a 5.1% increase in average sales price.

The decrease in deliveries in fiscal 2023 was primarily the result of a 6.6% reduction in community count as well as the slowdown in net contracts during the second half of fiscal 2022 due to rising interest rates.

Homebuilding gross margin percentage decreased from 21.5% for the year ended October 31, 2022 to 19.6% for the year ended October 31, 2023, and homebuilding gross margin percentage, before cost of sales interest expense and land charges, decreased from 25.0% for the year ended October 31, 2022 to 22.7% for the year ended October 31, 2023.

The decreases were primarily due to the increased use of incentives and concessions to make our homes more affordable in a rising interest rate environment.

Selling, general and administrative expenses (including corporate general and administrative) increased $8.6 million for the year ended October 31, 2023 as compared to the prior year.

The increase was primarily due to an increase in selling overhead from higher advertising costs and fees incurred on unused builder forward commitments we began offering in the second half of fiscal 2022 to lower mortgage rates for our customers.

As a percentage of total revenue, such costs increased to 11.1% for the year ended October 31, 2023 compared to 10.1% for the year ended October 31, 2022.

Income before income taxes decreased to $256.0 million for the year ended October 31, 2023 from $319.8 million for the year ended October 31, 2022.

Net income decreased to $205.9 million for the year ended October 31, 2023 from $225.5 million for the year ended October 31, 2022.

Net income for the year ended October 31, 2023, included a $19.1 million gain on the consolidation of a previously unconsolidated joint venture, $9.4 million of income from our unconsolidated joint venture in the Kingdom of Saudi Arabia, a $9.0 million tax benefit from energy efficient home credits and a $14.8 million tax benefit from the release of state valuation allowances, partially offset by a $25.6 million loss on extinguishment of debt.

Earnings per share, basic and diluted, decreased to $28.76 and $26.88, respectively, for the year ended October 31, 2023, compared to earnings per share, basic and diluted of $30.31 and $29.00, respectively, for the year ended October 31, 2022.

Net contracts increased 3.8% to 4,647 for the year ended October 31, 2023, compared to 4,477 the prior year, primarily due to an increase in customer demand, partially due to the availability of QMI homes.

During the year ended October 31, 2023, we also executed 438 build-for-rent contracts in three communities in our Southeast segment.

Net contracts per average active selling community increased to 40.8 for the year ended October 31, 2023 compared to 39.6 in the prior year.

The increase was due to the increase in net contracts discussed above.  

Active selling communities decreased to 113 at October 31, 2023 compared to 121 at October 31, 2022, however, our total lots controlled increased to 31,726 at October 31, 2023 compared to 31,518 at October 31, 2022.

We expect our community count to grow in fiscal 2024.

Contract backlog decreased from 2,186 homes at October 31, 2022 to 1,824 homes at October 31, 2023, and the dollar value of contract backlog decreased to $1.1 billion, a 16.4% decrease in dollar value compared to the prior year.

The decreases were primarily attributed to a decrease in customer traffic and sales pace and an increase in cancellations due to current market uncertainty from buyers.

The decreases were primarily attributed to lower sales in the second half of fiscal 2022 and into the first quarter of fiscal 2023, as discussed above.

1 unchanged sentence

Total Revenues

Compared to the prior period, revenues increased (decreased) as follows:

Compared to the prior year, revenues (decreased) increased as follows:

Years Ended October 31,

(Dollars in thousands)

6 unchanged sentences

Sale of Homes

Sale of homes revenues increased $166.7 million, or 6.2%, for the year ended October 31, 2022, increased $421.7 million, or 18.7%, for the year ended October 31, 2021, and increased $302.3 million, or 15.5%, for the year ended October 31, 2020 in each case as compared to the prior fiscal year.

The increased revenues in fiscal 2022 were primarily due to the average sales price per home increasing to $512,902 in fiscal 2022 from $430,966 in fiscal 2021, partially offset by a 10.7% decrease in homes delivered.

The decrease in deliveries in fiscal 2022 was primarily the result of a 2.4% reduction in community count, as well as the impact of the decrease in contracts per community in the last half of fiscal 2022.

The increased revenues in fiscal 2021 were primarily due to the number of home deliveries increasing 9.1%, and the average sales price per home increasing to $430,966 in fiscal 2021 from $396,065 in fiscal 2020.

The increase in deliveries in fiscal 2021 was primarily due to increased demand for new home construction during fiscal 2021.

The increased revenues in fiscal 2020 were primarily due to the number of home deliveries increasing 15.0%, and the average sales price per home increasing to $396,065 in fiscal 2020 from $394,194 in fiscal 2019.

The increase in deliveries in fiscal 2020 was primarily due to the increased demand for new home construction during the latter half of fiscal 2020.

The increase in average sales price in fiscal 2022, 2021 and 2020 was primarily due to price increases in most of our communities as a result of a sustained surge in demand for new homes, which started in May 2020 and continued through the end of the second quarter of fiscal 2022.

However, since the third quarter of fiscal 2022 we have experienced softening demand.

Sale of homes revenues decreased $210.0 million, or 7.4%, for the year ended October 31, 2023, compared to the prior year.

The decreased revenues in fiscal 2023 were primarily due to a 11.9% decrease in homes delivered, partially offset by the average sales price per home increasing to $539,249 in fiscal 2023 from $512,902 in fiscal 2022.

The decrease in deliveries in fiscal 2023 was primarily the result of a 6.6% reduction in community count.

The increase in average sales price in fiscal 2023 was primarily due to price increases in a majority of our markets since the beginning of fiscal 2022, along with the geographic and community mix of our deliveries.

For further detail on changes in segment revenues see “Homebuilding Operations by Segment”

13 unchanged sentences

(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 20 to the Consolidated Financial Statements for a further discussion of our joint ventures.

We provide this data as a supplement to our consolidated results as an indicator of the volume managed in our unconsolidated joint ventures. During the fourth quarter of fiscal 2023, we delivered 2,176 homes in our unconsolidated joint venture in the Kingdom of Saudi Arabia.

See Note 20 to the Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K for a further discussion of our joint ventures.

Homebuilding:

Land Sales and Other Revenues

Land sales and other revenues decreased $7.2 million for the year ended October 31, 2022 compared to the prior year and increased $7.7 million for the year ended October 31, 2021 compared to the prior year.

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.

There were five land sales during the year ended October 31, 2022, compared to 11 in the prior year, resulting in an $9.2 million decrease in land sales revenue.

There were 11 land sales in the year ended October 31, 2021, compared to seven in the year ended October 31, 2020, resulting in a $8.5 million increase in land sales revenue.

Other revenues primarily include income from contract cancellations where the deposit has been forfeited due to contract terminations, which was not significant for any period.

Land sales and other revenues increased $45.2 million for the year ended October 31, 2023, compared to the prior year. Other revenues include interest income, which increased as a result of higher rates on cash and cash equivalent accounts beginning in the first quarter of fiscal 2023 compared to the same period in the prior year. In addition, other revenues include income from contract cancellations where customer deposits have been forfeited due to contract terminations, which increased due to higher cancellation rates during fiscal 2023 compared to fiscal 2022. 

Revenue associated with land sales can vary significantly due to the mix of land parcels sold.

There were four land sales during the year ended October 31, 2023, compared to five in the prior year.

Contributing to the increase in land sales was a transaction during the fourth quarter of fiscal 2023 which resulted in $30.3 million of revenue for the Northeast.

Homebuilding:

31 unchanged sentences

Homebuilding gross margin percentage, after cost of sales interest expense and before land charges

Total homebuilding gross margin percentage increased to 21.5% for the year ended October 31, 2022 compared to 18.6% for the prior year.

Total homebuilding gross margin percentage, before cost of sales interest expense and land charges increased to 25.0% for the year ended October 31, 2022 compared to 21.8% for the prior year.

Total homebuilding gross margin percentage increased to 18.6% for the year ended October 31, 2021 compared to 14.7% for the prior year.

Total homebuilding gross margin percentage, before cost of sales interest expense and land charges increased to 21.8% for the year ended October 31, 2021 compared to 18.4% for the prior year.

The increases in gross margins were primarily due to increases in home sales prices across virtually all of our geographic markets, along with the mix of communities delivering compared to the prior year.

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 decreased to 19.6% for the year ended October 31, 2023 compared to 21.5% for the prior year.

Total homebuilding gross margin percentage, before cost of sales interest expense and land charges decreased to 22.7% for the year ended October 31, 2023 compared to 25.0% for the prior year.

The decreases in gross margins were primarily due to increases in our use of incentives and concessions to make our homes more affordable.

Land and lot sale expenses and gross margins are set forth below:

8 unchanged sentences

Inventory Impairments and Land Option Write-offs

Inventory impairments and land option write-offs reflects certain inventories we have either written off or written down to their estimated fair value totaling $14.1 million, $3.6 million and $8.8 million in expense for the years ended October 31, 2022, 2021 and 2020, respectively.

During the years ended October 31, 2022, 2021 and 2020, we wrote off residential land option, approval and engineering costs totaling $5.7 million, $1.6 million and $6.8 million, respectively.

Inventory impairments and land option write-offs reflect certain inventories we have either written off or written down to their estimated fair value totaling $1.5 million and $14.1 million in expense for the years ended October 31, 2023 and 2022, respectively.

During the years ended October 31, 2023 and 2022, we wrote off residential land option, approval and engineering costs totaling $1.5 million and $5.7 million, respectively.

Land option, approval and engineering costs are written off when a community’s pro forma profitability is not projected to produce an adequate return on investment commensurate with the risk.

If we determine an adequate return is not probable, we cancel the option, or when a community is redesigned, we write off the engineering costs related to the initial design.

Such write-offs occurred across each of our segments in fiscal 2022, 2021 and 2020.

Inventory impairments amounted to $8.4 million, $2.0 million and $2.0 million for the years ended October 31, 2022, 2021 and 2020, respectively.

It is difficult to predict future impairments, but if conditions in the overall housing market or a specific geographic market worsen in the future beyond our current expectations, there are future changes in our business strategy that significantly affect the key assumptions used in our projections of future cash flows, and/or there are material changes in any other items we consider in assessing recoverability, we may need to recognize additional inventory impairments and any such charges could be material.

Such write-offs occurred across each of our segments in fiscal 2023 and 2022.

We did not record any inventory impairments for the year ended October 31, 2023 and inventory impairments were $8.4 million for the year ended October 31, 2022.

It is difficult to predict future impairments, but if conditions in the overall housing industry or a specific geographic market worsen in the future beyond our current expectations, there are future changes in our business strategy that significantly affect the key assumptions used in our projections of future cash flows, and/or there are material changes in any other items we consider in assessing recoverability, we may need to recognize additional inventory impairments and any such charges could be material.

In fiscal 2023, we walked away from 13.6% of all the lots we controlled under option contracts.

3 unchanged sentences

Includes lots optioned at October 31, 2023 and lots optioned that the Company walked away from in the year ended October 31, 2023.

The following table represents impairments by segment for the year ended October 31, 2022:

(In millions)

Represents carrying value, net of prior period impairments, if any, at the time of recording the applicable period’s impairments.

Homebuilding:

1 unchanged sentence

Homebuilding selling, general and administrative (“SGA”) expenses increased $8.0 million to $201.6 million for the year ended October 31, 2023 compared to the year ended October 31, 2022.

The increase was due to an increase in total compensation expense as a result of an increase in headcount and bonuses related to positive overall market conditions and specific company performance.

In addition, insurance costs increased as a result of higher premiums to obtain insurance during fiscal 2022, along with additional reserves for construction defect claims during fiscal 2022.

SGA expenses increased $8.6 million to $169.9 million for the year ended October 31, 2021 as compared to the year ended October 31, 2020.

The increase was primarily attributed to a decrease in volume of our unconsolidated joint venture deliveries, and an increase in compensation expense.

The increase is related to the decrease in volume of our unconsolidated joint venture deliveries because we receive a payment for each delivery by our unconsolidated joint ventures intended to offset our SGA expenses incurred to manage the joint ventures.

The increase in compensation expense was mostly attributed to our long-term incentive programs that forecasted to achieve above target metrics as a result of improved operating results and a higher stock price.

Homebuilding:

1 unchanged sentence

Net Contracts Per Average Active Selling Community

Net contracts per average active selling community in fiscal 2022 were 39.6 compared to 55.3 in fiscal 2021, a 28.4% decrease in sales pace per community.

Our reported level of sales contracts (net of cancellations) was impacted by a decrease in the pace of sales primarily in the West segment during fiscal 2022.

As noted above, the current level of demand for new homes is significantly lower due to high levels of inflation, a sharp increase in mortgage rates and concerns about an economic recession. 

Net contracts per average active selling community in fiscal 2023 were 40.8 compared to 39.6 in fiscal 2022, a 3.0% increase in sales pace per community.

Our reported level of sales contracts (net of cancellations) was impacted by an increase in customer demand partially due to the increased availability of QMI homes. 

Contract Cancellation Rates

1 unchanged sentence

The following table provides quarterly contract cancellations as a percentage of the beginning backlog, excluding unconsolidated joint ventures:

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 the first half of fiscal 2022 cancellation rates, in particular, being below historical norms as a result of strong market conditions.

Fiscal 2020 had varying cancellation rates due to the COVID-19 pandemic and its effects.

During the third and fourth quarters of fiscal 2022, due to the sharp decline in gross sales and an increase in cancellations, our cancellation rate as a percentage of gross sales increased significantly to 27% and 41%, respectively, which is higher than our historical normal range.

Despite the increase in cancellations, due to our solid backlog position, our cancellation rate as a percentage of beginning backlog for the fourth quarter of fiscal 2022 was 13%, which is in line with our historical normal range.

Market conditions remain uncertain and it is difficult to predict what cancellation rates will be in the future.

Contract cancellations over the past several years have generally been within what we believe to be a normal range, with fiscal 2021 and the first half of fiscal 2022 cancellation rates, in particular, being below historical norms as a result of strong market conditions.

However, during the third and fourth quarters of fiscal 2022 and the first quarter of fiscal 2023, due to the sharp decline in gross sales and an increase in cancellations, our cancellation rate as a percentage of gross sales increased significantly to 27%, 41% and 30%, respectively, which is higher than our historical normal range. For the second and third quarters of fiscal 2023 the cancellation rate returned to a more normalized level of 18% and 16%, respectively.

During the fourth quarter of fiscal 2023, the cancellation rate increased to 25% as mortgage rates increased 100 basis points during the quarter.

Despite the increase in cancellations, due to our solid backlog position, our cancellation rate as a percentage of beginning backlog for the fourth quarter of fiscal 2023 was 13%, which is in line with our historical normal range.

When sales pace is increasing, the cancellation rate as a percentage of beginning backlog tends to lag behind the changes seen in our cancellation rate as a percentage of gross sales.

Although market conditions improved during fiscal 2023 as compared to fiscal 2022, uncertainty remains and it is difficult to predict what cancellation rates will be in the future.

Contract Backlog

Our consolidated contract backlog, excluding unconsolidated joint ventures, by segment is set forth below:

Our consolidated contract backlog, excluding unconsolidated joint ventures, by homebuilding segment is set forth below:

(Dollars in thousands)

7 unchanged sentences

Number of homes

Reflects the reclassification of 14 homes and $7.4 million of contract backlog as of October 31, 2021 from unconsolidated joint ventures to the consolidated Northeast segment.

This is related to our acquisition of the remaining assets and liabilities from one of our unconsolidated joint ventures which was dissolved during the fourth quarter of fiscal 2021.

Reflects the reclassification of 38 homes and $32.3 million of contract backlog as of April 30, 2023 from an unconsolidated joint venture to the consolidated Northeast segment.

This is related to the assets and liabilities acquired from a joint venture the Company closed out during the three months ended April 30, 2023.

Reflects the reclassification of 90 homes and $73.7 million, 59 homes and $33.0 million, and 12 homes and $5.7 million of contract backlog from the consolidated Northeast, Southeast and West segments, respectively, to an unconsolidated joint venture as of July 31, 2023.

This is related to the assets and liabilities contributed to a joint venture by the Company during the three months ended July 31, 2023.

Contract backlog dollars decreased 16.4% as of October 31, 2023 compared to October 31, 2022, and the number of homes in backlog decreased 16.6% for the same period.

The decrease in backlog dollars and number of homes for the year ended October 31, 2022 compared to the prior fiscal year was driven by the slower sales environment in the second half of fiscal 2022.

Homebuilding Operations by Segment

The decrease in backlog dollars and number of homes for the year ended October 31, 2023 compared to the prior fiscal year was driven by the slower sales environment beginning in the second half of fiscal 2022 and continuing through the first half of fiscal 2023.

Homebuilding Operations by Segment 

Financial information relating to our homebuilding operations by segment was as follows:

13 unchanged sentences

Average sales price

The increase in housing revenues during the year ended October 31, 2022, as compared to the year ended October 31, 2021, was primarily attributed to the increase in average sales price.

Housing revenues in fiscal 2022 increased 6.2% on a combined basis across all of our homebuilding segments, and average sales price increased by 19.0% in all such segments combined, excluding unconsolidated joint ventures.

Overall, in fiscal 2022 as compared to fiscal 2021, homes delivered decreased 10.7% across all our segments, excluding unconsolidated joint ventures.

Homes delivered decreased in fiscal 2022 as compared to fiscal 2021 by 20.8% in the West, partially offset by a 3.9% and 8.0% increase in the Northeast and Southeast, respectively. 

The increase in housing revenues during the year ended October 31, 2021, as compared to the year ended October 31, 2020, was primarily attributed to our increased deliveries, from the sustained strong homebuilding market and high demand for new home construction we saw begin in fiscal 2020, and by the increase in average sales price.

Housing revenues in fiscal 2021 increased 18.7% on a combined basis across all of our homebuilding segments, and average sales price increased by 8.8% in all such segments combined, excluding unconsolidated joint ventures.

Overall, in fiscal 2021 as compared to fiscal 2020, homes delivered increased 9.1% across all our segments, excluding unconsolidated joint ventures.

Homes delivered increased in fiscal 2021 as compared to fiscal 2020 by 9.9% and 14.2% in the Southeast and West, respectively, partially offset by a 0.4% decrease in the Northeast. 

Homebuilding Results by Segment

Northeast –

Homebuilding revenues increased 24.6% in fiscal 2022 compared to fiscal 2021 primarily due to a 3.9% increase in homes delivered and a 20.3% 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 $74.5 million to $177.4 million, which was mainly due to the increase in homebuilding revenues discussed above, a $9.7 million increase in income from unconsolidated joint ventures, and an increase in gross margin percentage, before cost of sales interest expense for fiscal 2022 compared to fiscal 2021. 

Homebuilding revenues increased 6.0% in fiscal 2021 compared to fiscal 2020 primarily due to a 6.7% increase in average sales price, partially offset by a 0.4% decrease in homes delivered.

Northeast – Homebuilding revenues decreased 10.7% in fiscal 2023 compared to fiscal 2022, primarily due to a 14.6% decrease in homes delivered, partially offset by a 2.3% 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 $39.8 million to $102.9 million, which was mainly due to the increase in homebuilding revenues discussed above, a $2.5 million decrease in SGA, a $6.7 million decrease in inventory impairments and land option write offs, and an increase in gross margin percentage, before cost of sales interest expense for fiscal 2021 compared to fiscal 2020. 

Income before income taxes increased $1.1 million to $178.5 million in fiscal 2023 compared to fiscal 2022, primarily due to a $14.6 million increase in income from unconsolidated joint ventures and a $5.6 million decrease in SGA, while gross margin percentage, before cost of sales interest expense was relatively flat.

Southeast –

Homebuilding revenues increased 13.4% in fiscal 2022 compared to fiscal 2021 primarily due to an 8.0% increase in homes delivered and an 8.5% increase in average sales price.

The increase in average sales price was the result of new communities delivering higher priced, larger single-family homes in higher-end submarkets of the segment in fiscal 2022 compared to some communities delivering in fiscal 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 average sales price was price increases in certain communities.

Income before income taxes increased $42.4 million to $60.2 million in fiscal 2022 compared to fiscal 2021, mainly due to the increase in homebuilding revenue discussed above, a $14.3 million increase in income from unconsolidated joint ventures and an increase in gross margin percentage, before cost of sales interest expense for fiscal 2022 compared to fiscal 2021.

Homebuilding revenues increased 22.7% in fiscal 2021 compared to fiscal 2020 primarily due to a 9.9% increase in homes delivered, an 8.2% increase in average sales price and a $9.1 million increase in land sales and other revenue. 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 fiscal 2021 compared to some communities delivering in fiscal 2020 that had lower priced, smaller single family homes and townhomes in lower-end submarkets of the segment that are no longer delivering. Also impacting the increase in average sales price was price increases in certain communities.

Income before income taxes increased $16.4 million to $17.8 million in fiscal 2021 compared to fiscal 2020, mainly due to the increase in homebuilding revenue discussed above, a $1.2 million increase in income from unconsolidated joint ventures and an increase in gross margin percentage, before cost of sales interest expense for fiscal 2021 compared to fiscal 2020.

Homebuilding revenues increased 29.7% in fiscal 2023 compared to fiscal 2022, primarily due to an 19.4% increase in homes delivered and an 8.7% increase in average sales price.

The increase in average sales price was the result of price increases in certain communities.

Income before income taxes increased $17.6 million to $77.8 million in fiscal 2023 compared to fiscal 2022, primarily due to the increase in homebuilding revenue discussed above and a slight increase in gross margin percentage, before cost of sales interest expense.

West –

Homebuilding revenues decreased 6.1% in fiscal 2022 compared to fiscal 2021 primarily due to a 20.8% decrease in homes delivered, partially offset by a 18.5% increase in average sales price.

Homebuilding revenues decreased 10.7% in fiscal 2023 compared to fiscal 2022, primarily due to a 17.0% decrease in homes delivered, partially offset by a 6.3% 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 $9.2 million to $207.5 million in fiscal 2022 compared to the prior year mainly due to an increase in gross margin percentage, before cost of sales interest expense for fiscal 2022 compared to the prior year, partially offset by a $10.9 million increase in inventory impairments and land option write-offs.

Homebuilding revenues increased 26.9% in fiscal 2021 compared to fiscal 2020 primarily due to a 14.2% increase in homes delivered and an 11.1% increase in average sales price.

The increase in average sales price was the result of new communities delivering higher priced, larger single family homes in higher-end submarkets of the segment in fiscal 2021 compared to some communities delivering in fiscal 2020 that had lower priced, smaller single-family homes in lower-end submarkets of the segment that are no longer delivering.

Also impacting the increase in average sales price was price increases in certain communities.

Income before income taxes increased $113.7 million to $198.3 million in fiscal 2021 compared to the prior year mainly due to the increase in homebuilding revenues discussed above and an increase in gross margin, percentage before cost of sales interest expense for fiscal 2021 compared to the prior year, partially offset by a $0.9 million increase in inventory impairments and land option write-offs.

Income before income taxes decreased $93.4 million to $114.1 million in fiscal 2023 compared to fiscal 2022, primarily due to the decrease in homebuilding revenue discussed above and a decrease in gross margin percentage, before cost of sales interest expense.

Financial Services

Financial services consist primarily of originating mortgages from our home buyers, selling such mortgages in the secondary market, and title insurance activities.

Financial services consists primarily of originating mortgages for 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.

2 unchanged sentences

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 years ended October 31, 2022, 2021 and 2020, our conforming conventional loan originations as a percentage of our total loans were 74.8%, 71.9% and 69.1%, respectively.

For the years ended October 31, 2023 and 2022, our conforming conventional loan originations as a percentage of our total loans were 69.8% and 74.8%, respectively.

FHA/VA loans represented 29.5% and 24.1%, respectively, of our total loans.

1 unchanged sentence

Realized gains and losses relating to the sale of mortgage loans are recognized when control passes to the buyer of the mortgage.

During the years ended October 31, 2022, 2021 and 2020, financial services provided $19.1 million, $37.6 million and $32.1 million of income before income taxes, respectively.

In fiscal 2022, financial services income before income taxes decreased $18.5 million from the prior year primarily due to the decrease in homebuilding deliveries and a decrease in the basis point spread between the loans originated and the implied rate from our sale of the loans.

In fiscal 2021, financial services income before income taxes increased $5.5 million from the prior year due to the increase in homebuilding deliveries and an increase in the average price of the loans settled. Also impacting the increase in fiscal 2021 was the increase in the basis point spread between the loans originated and the implied rate from the sale of the loans.

In the markets served by our wholly owned mortgage banking subsidiaries, 58.8%, 68.3% and 69.3% of our noncash home buyers obtained mortgages originated by these subsidiaries during the years ended October 31, 2022, 2021 and 2020, respectively.

During the years ended October 31, 2023 and 2022, financial services provided $19.4 million and $19.1 million of income before income taxes, respectively.

In fiscal 2023, financial services income before income taxes increased $0.3 million from the prior year primarily due to a decrease in compensation expense as a result of a workforce reduction.

In the markets served by our wholly owned mortgage banking subsidiaries, 70.1% and 58.8% of our noncash home buyers obtained mortgages originated by these subsidiaries during the years ended October 31, 2023 and 2022, respectively.

Corporate General and Administrative

1 unchanged sentence

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 decreased $4.1 million for the year ended October 31, 2022 compared to the year ended October 31, 2021 and increased $26.1 million for the year ended October 31, 2021 compared to the year ended October 31, 2020.

The decrease in expense for fiscal 2022 was primarily due to decreases in compensation expense, mainly related to the grants of phantom stock awards under our 2019 long-term incentive plan ("2019 LTIP"), for which expense is impacted by the change in our stock price each period.

The Company's phantom shares issued under the 2019 LTIP are classified as liabilities under the applicable accounting guidance, which requires remeasurement of the awards at each reporting period.

During fiscal 2022, the Company experienced a significant decrease in our stock price.

As a result, the remeasurement generated a reduction in compensation expense.

Conversely during fiscal 2021, the Company experienced a significant increase in our stock price.

As a result, the remeasurement generated an increase in compensation expense for fiscal 2021 as compared to fiscal 2020.

Had equity-classified shares been utilized for the 2019 LTIP, there would not have been an expense recognized related to the movement in our stock price in fiscal 2021.

The increase in expense in fiscal 2021 was further impacted by increases in total variable compensation expenses related to performance-based compensation attributable to improved profitability.

Corporate general and administrative expenses was relatively flat with a $0.6 million increase for the year ended October 31, 2023 compared to the year ended October 31, 2022.

The slight increase in expense for fiscal 2023 was primarily due to a $1.7 million increase in the net cost for self-insured medical claims, which fluctuate based on actual claims, partially offset by a decrease in compensation expense for bonuses as a result of reduced profitability in fiscal 2023.

Other Interest

Other interest decreased $30.4 million to $47.3 million for the year ended October 31, 2022 compared to the year ended October 31, 2021 and decreased $26.1 million to $77.7 million for the year ended October 31, 2021 compared to the year ended October 31, 2020. Our assets that qualify for interest capitalization (inventory under development) are less than our debt, and therefore the portion of interest not covered by qualifying assets is directly expensed.

In fiscal 2022, other interest decreased as a result of redeeming $100.0 million in principal of our debt (as discussed below) and having less debt in excess of inventory due to an increase in our qualifying assets during the period.

In fiscal 2021, the decrease was primarily due to a decrease in interest on nonrecourse mortgages, inventory financing arrangements and total notes payable as compared to the prior fiscal year.  

Other interest increased $6.7 million to $54.1 million for the year ended October 31, 2023 compared to the year ended October 31, 2022. 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.

In fiscal 2023, other interest increased primarily due to additional inventory financing resulting from an increase in average inventory not owned. 

(Loss) Gain on Extinguishment of Debt, Net

On April 29, 2022, we redeemed $100.0 million aggregate principal amount of the 7.75% Senior Secured 1.125 Lien Notes due 2026.

On May 30, 2023, we redeemed $100.0 million aggregate principal amount of our 7.75% Senior Secured 1.125 Lien Notes due 2026 (the "Existing 1.125 Lien Notes").

The aggregate purchase price for this redemption was $104.2 million, which included accrued and unpaid interest and was funded with cash on hand.

This redemption resulted in a loss on extinguishment of debt of $4.1 million, including the write-off of unamortized debt issuance costs and fees.

On August 29, 2023, we redeemed an additional $100.0 million aggregate principal amount of our Existing 1.125 Lien Notes.

The aggregate purchase price for this redemption was $102.2 million, which included accrued and unpaid interest and was funded with cash on hand.

This redemption resulted in a loss on extinguishment of debt of $3.8 million, including the write-off of unamortized debt issuance costs and fees.

On September 7, 2023, we repurchased in the open market $45.0 million aggregate principal amount of our 10.0% Senior Secured 1.75 Lien Notes due 2025.

The aggregate purchase price for this repurchase was $46.7 million, which included accrued and unpaid interest and which was funded with cash on hand. This repurchase resulted in a gain on extinguishment of debt of $0.2 million, including the write-off of unamortized debt issuance costs and fees.

On October 5, 2023, we issued new 8.0% Senior Secured 1.125 Lien Notes due 2028 (the "New 1.125 Lien Notes") and new 11.75% Senior Secured 1.25 Lien Notes due 2029 (the "New 1.25 Lien Notes") and redeemed with the proceeds from the issuances of the New 1.125 Lien Notes and New 1.25 Lien Notes all of the remaining (i) $50.0 million aggregate principal amount of our Existing 1.125 Lien Notes for a redemption price of $51.5 million, which included accrued and unpaid interest, (ii) $282.3 million aggregate principal amount of our 10.5% Senior Secured 1.25 Lien Notes due 2026 for a redemption price of $293.9 million, which included accrued and unpaid interest, and (iii) $162.3 million aggregate principal amount of our 11.25% Senior Secured 1.5 Lien Notes due 2026 for a redemption price of $164.8 million, which included accrued and unpaid interest.

These redemptions resulted in a loss on extinguishment of debt of $17.9 million, including the write-off of unamortized debt issuance costs and fees.

On April 29, 2022, we redeemed $100.0 million aggregate principal amount of the Existing 1.125 Lien Notes.

The aggregate purchase price for this redemption was $105.5 million, which included accrued and unpaid interest and which was funded with cash on hand.

This redemption resulted in a loss on extinguishment of debt of $6.8 million for the year ended October 31, 2022, net of the write-off of unamortized discounts, financing costs and fees.

On July 30, 2021, we redeemed in full all $111.2 million aggregate principal amount of the 10.0% Senior Secured Notes due 2022.

The aggregate purchase price for this redemption was $111.7 million, which included accrued and unpaid interest.

This redemption resulted in a loss on extinguishment of debt of $0.3 million for the year ended October 31, 2021, net of the write-off of unamortized discounts, financing costs and fees.

On August 2, 2021, we redeemed in full all $69.7 million aggregate principal amount of our 10.5% Senior Secured Notes due 2024.

The aggregate purchase price for this redemption was $71.9 million, which included accrued and unpaid interest.

This redemption resulted in a loss on extinguishment of debt of $3.4 million for the year ended October 31, 2021, net of the write-off of unamortized discounts, financing costs and fees.

This redemption resulted in a loss on extinguishment of debt of $6.8 million for the year ended October 31, 2022, including the write-off of unamortized debt issuance costs and fees.

Income from Unconsolidated Joint Ventures

Income from unconsolidated joint ventures consists of our share of the earnings or losses of our joint ventures.

Income from unconsolidated joint ventures increased $20.2 million for the year ended October 31, 2022 from income of $8.8 million for the year ended October 31, 2021 to income of $29.0 million and decreased $7.8 million for the year ended October 31, 2021 from income of $16.6 million for the year ended October 31, 2020 to income of $8.8 million.

The increase in fiscal 2022 was primarily due to the recognition of our share of income from two of our unconsolidated joint ventures 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 income.

The decrease in fiscal 2021 was primarily due to the recognition of our share of income from certain of our joint ventures delivering fewer homes in fiscal 2021 compared to fiscal 2020.

The total income tax expense for the year ended October 31, 2022 was $94.3 million. 

The expense was primarily due to federal and state tax expense recorded as a result of our income before income taxes.

Income from unconsolidated joint ventures increased to $43.2 million for the year ended October 31, 2023 from income of $29.0 million for the year ended October 31, 2022.

The increase of $14.2 million in fiscal 2023 was primarily due to recognizing our share of income from the delivery of a majority of the backlog in the unconsolidated joint venture we have in the Kingdom of Saudi Arabia.

The increase in fiscal 2023 was also due to the recognition of our share of income from one of our unconsolidated joint ventures based on the joint venture partner achieving certain return hurdles, and as a result, we were able to recognize a higher share of the unconsolidated joint venture’s income.

Income Taxes 

Income tax expense of $50.1 million and $94.3 million for the years ended October 31, 2023 and 2022, respectively, was primarily due to federal and state tax expense recorded as a result of our income before income taxes.

Income tax expense for fiscal 2023 was partially offset by the benefit of releasing state tax valuation allowances and qualifying for energy efficient home tax credits.

The federal tax expense is not paid in cash as it is offset by the use of our existing net operating loss (“NOL”) carryforwards.

The total income tax benefit for the year ended October 31, 2021 was $418.0 million.

The benefit was primarily due to the reversal of a substantial portion of our valuation allowance previously recorded against our deferred tax assets (“DTAs”).

The total income tax expense of $4.5 million for the year ended October 31, 2020 was primarily related to state tax expense from income generated in states where we do not have NOL carryforwards to offset the current year income. In addition, the expense for the year ended October 31, 2020 was primarily related to state tax expense from the impact of a cancellation of debt income recorded for tax purposes but not for U.S.

GAAP purposes, creating a permanent difference.

Deferred federal and state income tax assets primarily represent the deferred tax benefits arising from NOL carryforwards and temporary differences between book and tax income which will be recognized in future years as an offset against future taxable income.

Deferred federal and state income tax assets ("DTAs") primarily represent the deferred tax benefits arising from NOL carryforwards and temporary differences between book and tax income which will be recognized in subsequent years as an offset against future taxable income.

If the combination of future years’

1 unchanged sentence

In accordance with ASC 740, we evaluate our DTAs quarterly to determine if valuation allowances are required.

ASC 740 requires that companies assess whether valuation allowances should be established based on the consideration of all available evidence using a “more-likely-than-not”

As of October 31, 2022, we considered all available positive and negative evidence to determine whether, based on the weight of that evidence, our valuation allowance for our DTAs was appropriate in accordance with ASC 740.

Based on our analysis, we determined that the current valuation allowance for deferred taxes was $95.7 million as of October 31, 2022.

See Note 11 to the Consolidated Financial Statements for further information.

We assess whether valuation allowances should be established based on the consideration of all available evidence using a “more-likely-than-not”

As of October 31, 2023, we considered the weight of all available positive and negative evidence to determine the valuation allowance for DTAs of $71.9 million.

See Note 11 to the Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K for further information.

Deferred tax assets, net, of $302.8 million at October 31, 2023 decreased $42.0 million from October 31, 2022, due to the utilization of our DTAs to offset tax expense on taxable income during fiscal 2023.

5 unchanged sentences

Operating leases (4)

Total contractual obligations exclude our accrual for uncertain tax positions of $0.3 million recorded for financial reporting purposes as of October 31, 2022 because we were unable to make reasonable estimates as to the period of cash settlement with the respective taxing authorities.

Represents our senior secured and unsecured term loan credit facilities, senior secured and senior notes and other notes payable and $441.8 million of related interest payments for the life of such debt.

Represents our senior secured and unsecured term loan credit facilities, senior secured and senior notes and other notes payable and $552.9 million of related interest payments for the life of such debt, including the 10% Senior Secured 1.75 Lien Notes due 2025 which were subsequently redeemed in full on November 15, 2023.

Does not include $91.5 million of nonrecourse mortgages secured by inventory.

2 unchanged sentences

See “Capital Resources and Liquidity”

for further discussion.

Also, does not include our $125.0 million Secured Credit Facility under which there were no borrowings outstanding as of October 31, 2023.

(5)             

Lease payments exclude $3.2 million of legally binding minimum lease payments for office leases signed but not yet commenced as of October 31, 2023.

We had outstanding letters of credit and performance bonds of $6.0 million and $234.9 million, respectively, at October 31, 2022, related primarily to our obligations to local governments to construct roads and other improvements in various developments.

We had outstanding letters of credit and performance bonds of $4.9 million and $187.3 million, respectively, at October 31, 2023, related primarily to our obligations to local governments to construct roads and other improvements in various developments.

We do not believe that any such letters of credit or performance bonds are likely to be drawn upon.  

5 unchanged sentences

We may not be able to obtain desired financing 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 Cash Flow Activities

We spent $759.3 million on land and land development during fiscal 2022, along with $105.5 million for the $100.0 million partial redemption of our 7.75% Senior Secured 1.125 Lien Notes due 2026.

After considering this land and land development spending, debt payment and all other operating activities, including revenue received from deliveries, we had $89.5 million in cash provided from operations.

During fiscal 2022, cash used in investing activities was $2.2 million, primarily due to the acquisition of certain fixed assets, partially offset by distributions of capital from existing unconsolidated joint ventures.

Cash used in financing activities was $16.5 million during fiscal 2022, which in addition to the $100.0 million debt redemption mentioned above, was due primarily to net payments related to our mortgage warehouse lines of credit, repurchases of common stock, and the payment of preferred dividends, partially offset by net proceeds from nonrecourse mortgage financings, land banking and model sale leaseback financings during the period.

Operating, Investing and Financing Cash Flow Activities 

We spent $679.3 million on land and land development during fiscal 2023, along with $206.4 million for the $200.0 million principal amount for the partial redemption of our 7.75% Senior Secured 1.125 Lien Notes due 2026, and $46.7 million for the $45.0 million principal amount in open market repurchases of our 10.0% 1.75 Lien Notes due 2025.

After considering this land and land development spending, debt payments and all other operating activities, including revenue received from deliveries, we had $435.3 million in cash provided by operations.

During fiscal 2023, cash used in investing activities was $78.2 million, primarily due to new unconsolidated joint ventures entered into during the period, along with the acquisition of certain fixed assets.

Cash used in financing activities was $261.7 million during fiscal 2023, which in addition to the $245.0 million principal amount of debt reductions mentioned above, was due primarily to net payments from nonrecourse mortgage financings, land banking and model sale leaseback financings, repurchases of common stock and the payment of preferred dividends, partially offset by net payments related to our mortgage warehouse lines of credit.

We intend to continue to use nonrecourse mortgages, model sale leasebacks, joint ventures, and, subject to covenant restrictions in our debt instruments, land banking programs as our business needs dictate.

Our cash uses during the years ended October 31, 2022 and 2021 were for operating expenses, land purchases, land deposits, land development, construction spending, debt payments, state income taxes, interest payments, preferred dividend payments, financing transaction costs, debt and equity repurchases, litigation matters and investments in unconsolidated joint ventures. During these periods, we provided for our cash requirements from available cash on hand, housing and land sales, financing transactions, model sale leasebacks, land banking transactions, unconsolidated joint ventures, financial service revenues and other revenues.

Our net income (loss) historically does not approximate cash flow from operating activities.

The difference between net income (loss) and cash flow from operating activities is primarily caused by changes in inventory levels together with changes in receivables, prepaid expenses and other assets, mortgage loans held for sale, accrued interest, deferred income taxes, accounts payable and other liabilities, and noncash charges relating to depreciation, stock compensation and impairments.

Our cash uses during the years ended October 31, 2023 and 2022 were for operating expenses, land purchases, land deposits, land development, construction spending, debt payments, model sale leasebacks, land banking transactions, state income taxes, interest payments, preferred dividend payments, financing transaction costs, debt and equity repurchases, litigation matters and investments in unconsolidated joint ventures. During these periods, we provided for our cash requirements from available cash on hand, housing and land sales, financing transactions, income from 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 expenses and other assets, mortgage loans held for sale, accrued interest, deferred income taxes, accounts payable and other liabilities, and noncash charges relating to depreciation, stock compensation and impairments.

When we are expanding our operations, inventory levels, prepaid expenses and other assets increase causing cash flow from operating activities to decrease.

5 unchanged sentences

Debt Transactions

Senior notes and credit facilities balances as of October 31, 2022 and October 31, 2021, were as follows:

Senior secured notes, senior notes and credit facilities balances as of October 31, 2023 and October 31, 2022, were as follows:

(In thousands)

Senior Secured Notes:

10.0% Senior Secured 1.75 Lien Notes due November 15, 2025 (1)

7.75% Senior Secured 1.125 Lien Notes due February 15, 2026

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

11.25% Senior Secured 1.5 Lien Notes due February 15, 2026

8.0% Senior Secured 1.125 Lien Notes due September 30, 2028

11.75% Senior Secured 1.25 Lien Notes due September 30, 2029

Total Senior Secured Notes

Senior Notes:

8.0% Senior Notes due November 1, 2027 (2)

13.5% Senior Notes due February 1, 2026

5.0% Senior Notes due February 1, 2040

Total Senior Notes

Senior Unsecured Term Loan Credit Facility due February 1, 2027

1 unchanged sentence

Senior Secured Revolving Credit Facility (3)

Net (discounts), premiums and unamortized debt issuance costs

Subtotal senior notes and credit facilities

Net (discounts) premiums

Unamortized debt issuance costs

Total senior notes and credit facilities, net of discounts, premiums and unamortized debt issuance costs

(1) On November 15, 2023, K.

Hovnanian redeemed all of its $113.5 million aggregate principal amount of 10.0% Senior Secured 1.75 Lien Notes due November 15, 2025.

(2) At October 31, 2022, $26.0 million of 8.0% Senior Notes due 2027 (the “

8.0% 2027 Notes ”

) were owned by a wholly owned consolidated subsidiary of HEI.

Therefore, in accordance with U.S.

GAAP, such notes were not reflected on the Consolidated Balance Sheets of HEI.

On October 31, 2023, K.

Hovnanian redeemed all of the $26.0 million aggregate principal amount of its 8.0% 2027 Notes .

(3) At October 31, 2023 , provides for up to $125.0 million in aggregate amount of senior secured first lien revolving loans.

In the fourth quarter of fiscal 2022, we amended our Secured Credit Facility, which amendments became effective in the first quarter of fiscal 2023.

As amended, the revolving loans thereunder have a maturity of June 30, 2024 and borrowings bear interest, at K.

The revolving loans thereunder have a maturity of June 30, 2026 and borrowings bear interest, at K.

Hovnanian ’

s option, at either (i) a term secured overnight financing rate (subject to a floor of 1.00%) plus an applicable margin of 4.50% or (ii) an alternate base rate plus an applicable margin of 3.50%.

s option, at either (i) a term secured overnight financing rate (subject to a floor of 3.00%) plus an applicable margin of 4.50% or (ii) an alternate base rate (subject to a floor of 4.00%) plus an applicable margin of 3.50%.

In addition, K.

1 unchanged sentence

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 October 31, 2022 (except for the 8.0% Senior Notes due 2027 which are not guaranteed by K.

Hovnanian at Sunrise Trail III, LLC, a wholly-owned subsidiary of the Company) (collectively, the “Notes Guarantors”).

Hovnanian, the issuer of the notes and borrower under the credit agreements governing our term loans and revolving credit facilities (collectively, the "Credit Facilities"), 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 October 31, 2023 (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 October 31, 2023 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, 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.

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 (the "Unsecured Term Loans") made under the Senior Unsecured Term Loan Credit Facility due February 1, 2027, loans (the "Secured Term Loans") made under the Senior Secured 1.75 Lien Term Loan Credit Facility due January 31, 2028, and loans (the "Secured Revolving Loans") made under the Senior Secured Revolving Credit Agreement due June 30, 2026, 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 October 31, 2023, we believe we were in compliance with the covenants of the Debt Instruments.

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 each 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 and nonrecourse indebtedness.

If our consolidated fixed charge coverage ratio is less than 2.0 to 1.0, as defined in the applicable Debt Instrument, we are restricted from making certain payments, including dividends (in the case of such payment, our secured debt leverage ratio must also be less than 4.0 to 1.0), and from incurring indebtedness other than certain permitted indebtedness and nonrecourse indebtedness.

Beginning 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, we made dividend payments of $2.7 million to preferred shareholders in each quarter of fiscal 2022.

As discussed above, market conditions remain uncertain and it is difficult to predict how strongly our business will be adversely impacted or if and when we may be restricted under our Debt Instruments from continuing to pay dividends on our preferred stock.

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 (for example, we redeemed $100 million aggregate principal amount of our senior secured notes during the second quarter of fiscal 2022).

As such, we made dividend payments of $2.7 million to preferred shareholders in every quarter since the first quarter of fiscal 2022.

As discussed above, our sales pace improved during fiscal 2023 and assuming the improved current market conditions and our operating results continue, we currently believe our ratios will permit us to continue to make dividend payments on our preferred stock.

However, with general economic uncertainty, it is difficult to predict long-term market conditions and the effects on our business and if and when we may be restricted under our Debt Instruments from continuing to pay dividends on our Series A preferred stock.

Dividends on the Series A preferred stock are not cumulative and, accordingly, if for any reason we do not declare a dividend on the Series A preferred stock for a quarterly dividend period (regardless of our availability of funds), holders of the Series A Preferred Stock will have no right to receive a dividend for that period, and we will have no obligation to pay a dividend for that period.

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.

5 unchanged sentences

Mortgages and Notes Payable

We have nonrecourse mortgage loans for certain communities totaling $144.8 million and $125.1 million, net of debt issuance costs, at October 31, 2022 and October 31, 2021, respectively, which are secured by the related real property, including any improvements, with an aggregate book value of $418.9 million and $448.5 million, respectively.

We have nonrecourse mortgage loans for certain communities totaling $91.5 million and $144.8 million, net of debt issuance costs, at October 31, 2023 and October 31, 2022, respectively, which are secured by the related real property, including any improvements, with an aggregate book value of $331.6 million and $418.9 million, respectively.

The weighted-average interest rate on these obligations was 8.5% and 6.7% at October 31, 2023 and October 31, 2022, respectively, and the mortgage loan payments on each community primarily correspond to home deliveries.

7 unchanged sentences

liabilities on the 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 October 31, 2022 and 2021, we had an aggregate of $94.3 million and $134.9 million, respectively, outstanding under several of K.

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 October 31, 2023 and 2022, we had an aggregate of $110.8 million and $94.3 million, respectively, outstanding under several of K.

Hovnanian Mortgage’s short-term borrowing facilities.

4 unchanged sentences

The timing and the actual dollar amount repurchased will depend on a variety of factors, including legal requirements, price, future tax implications and economic and market conditions.

The repurchase program may be changed, suspended or discontinued at any time and does not have a specified expiration date.

The repurchase program may be changed, suspended or discontinued at any time and does not have a specified expiration date. During the year ended October 31, 2023, we repurchased 118,478 shares in the first quarter, with a market value of $4.8 million, or $40.51 per share, which were added to treasury stock.

During the year ended October 31, 2022, we repurchased 312,471 shares, with a market value of $12.2 million, or $39.12 per share, which were added to treasury stock.

There were no shares purchased during the year ended October 31, 2021 or 2020. As of October 31, 2022, $37.8 million of our Class A common stock is available to repurchase under our share repurchase program.

As of October 31, 2023, $33.0 million of our Class A common stock is available for repurchase under our share repurchase program.

See Part II, Item 5 for information on equity purchases.  

4 unchanged sentences

The depositary shares are listed on the NASDAQ Global Market under the symbol “HOVNP.”

In fiscal 2022 we paid dividends of $10.7 million in the aggregate on the Series A preferred stock.

In fiscal 2021 and 2020, we did not pay any dividends on the Series A preferred stock due to covenant restrictions in our debt instruments.

In both fiscal 2023 and 2022 we paid dividends of $10.7 million, respectively, in the aggregate on the Series A preferred stock.

Unconsolidated Joint Ventures  

We have investments in unconsolidated joint ventures in various markets where our homebuilding operations are located.

As of October 31, 2022 and 2021, we had investments in six and nine unconsolidated homebuilding joint ventures, respectively, and one unconsolidated land development joint venture for both periods.

As of October 31, 2023 and 2022, we had investments in seven and six unconsolidated homebuilding joint ventures, respectively, and one unconsolidated land development joint venture for both periods.

Our unconsolidated joint ventures had total combined assets of $884.4 million and $615.2 million at October 31, 2023 and 2022, respectively.

Our investments in unconsolidated joint ventures totaled $97.9 million and $74.9 million at October 31, 2023 and 2022, respectively.

The increase in investments of $14.0 million during fiscal 2022 was primarily due to income recorded from one of our unconsolidated joint ventures, partially offset by partner distributions.

The increase in investments of $23.0 million was primarily due to two new joint ventures formed during the year, along with income recognized in an existing joint venture.

The increase in our investments was partially offset by the consolidation of a previously unconsolidated joint venture, and the net impact of consolidation and subsequent recapitalization of another joint venture.

As of October 31, 2023 and 2022, our unconsolidated joint ventures had outstanding debt totaling $101.1 and $34.9 million, respectively, under separate construction loan agreements with different third-party lenders and affiliates of certain investment partners to finance land development activities.

1 unchanged sentence

Although we and our unconsolidated joint venture partners provide certain guarantees and indemnities to the lender, we do not have a guaranty or any other obligation to repay the outstanding debt or to support the value of the collateral underlying the outstanding debt.

Our guarantees are 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.

We do not believe that our existing exposure under our guaranty and indemnity obligations related to the outstanding debt is material.

2 unchanged sentences

See Notes 19 and 20 to the Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K for further discussion of joint ventures and variable interest entities.

Total inventory, excluding consolidated inventory not owned, increased $55.0 million during the year ended October 31, 2022, from October 31, 2021. Total inventory, excluding consolidated inventory not owned, increased in the Northeast by $25.2 million, in the Southeast by $1.1 million and in the West by $28.7 million.

These inventory fluctuations were primarily attributable to new land purchases and land development, partially offset by home deliveries and land sales during the period.

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 October 31, 2022 are expected to be closed during the next six to nine months.  

Consolidated inventory not owned, which consists of options related to land banking and model financing, increased $209.9 million during fiscal 2022. The increase 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 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, these transactions are considered a financing rather than a sale.

Our Consolidated Balance Sheet, at October 31, 2022, included inventory of $260.1 million recorded to “Consolidated inventory not owned,”

with a corresponding amount of $151.3 million (net of debt issuance costs) recorded to “Liabilities from inventory not owned”

Total inventory, excluding consolidated inventory not owned, decreased $86.2 million during the year ended October 31, 2023, from October 31, 2022. Total inventory, excluding consolidated inventory not owned, decreased in the Northeast by $51.5 million, in the Southeast by $26.1 million and in the West by $8.6 million.

The decreases were primarily attributable to home deliveries and land sales during the period, partially offset by new land purchases and land development.

In the previous 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 October 31, 2023 are expected to be closed during the next six to nine months.

Consolidated inventory not owned, which consists of options related to land banking and model financing, decreased $83.8 million during fiscal 2023. The decrease was primarily due to a decrease in land banking transactions along with a decrease in the sale and leaseback of certain model homes during the period.

We have land banking arrangements, whereby we sell land parcels to 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, these transactions are considered a financing rather than a sale.

Our Consolidated Balance Sheet, at October 31, 2023, included inventory of $183.1 million recorded to “Consolidated inventory not owned,”

with a corresponding amount of $82.3 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, these sale and leaseback transactions are considered a financing rather than a sale. Therefore, our Consolidated Balance Sheet, at October 31, 2022, included inventory of $48.5 million recorded to “Consolidated inventory not owned,”

with a corresponding amount of $51.2 million (net of debt issuance costs) recorded to “Liabilities from inventory not owned”

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, these sale and leaseback transactions are considered a financing rather than a sale. Therefore, our Consolidated Balance Sheet, at October 31, 2023, included inventory of $41.7 million recorded to “Consolidated inventory not owned,”

with a corresponding amount of $42.0 million (net of debt issuance costs) recorded to “Liabilities from inventory not owned”

for the amount of net cash received from sale and leaseback transactions.

10 unchanged sentences

Consolidated total

Lots controlled by unconsolidated joint ventures

October 31, 2022:

3 unchanged sentences

Consolidated total

Lots controlled by unconsolidated joint ventures

(1) Represents active communities and home sites for our unconsolidated homebuilding joint ventures for the period.

We provide this data as a supplement to our consolidated results as an indicator of the volume managed in our unconsolidated joint ventures.

See Note 20 to the Consolidated Financial Statements for a further discussion of our unconsolidated joint ventures.

The following table summarizes our started or completed unsold homes and models, excluding unconsolidated joint ventures, in active and substantially completed communities.

The increase in unsold homes was primarily due to a conscious effort to increase our number of started unsold homes per community to provide buyers the opportunity to close quickly, and to lock in a lower mortgage rate, thereby making our homes more affordable and creating certainty as mortgage rates continued to rise through fiscal 2022.

See Note 20 to the Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K for a further discussion of our unconsolidated joint ventures.

The following table summarizes our started or completed unsold homes and models, excluding unconsolidated joint ventures, in active communities.

The increase in unsold homes was primarily due to a conscious effort to increase the number of QMI homes per community to provide buyers the opportunity to close quickly, and to lock in a lower mortgage rate, thereby making our homes more affordable and creating certainty as mortgage rates continued to rise through fiscal 2023.

October 31, 2023

4 unchanged sentences

Financial Services Assets and Liabilities 

Financial services assets consist primarily of residential mortgage receivables held for sale of which $108.6 million and $149.2 million at October 31, 2022 and 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 primarily related to a decrease in the volume of loans originated during the fourth quarter of fiscal 2022 compared to the fourth quarter of fiscal 2021, slightly offset by an increase in the average loan value.

Financial Services liabilities decreased $46.6 million from $182.2 million at October 31, 2021, to $135.6 million at October 31, 2022.

The decrease was primarily due to the decrease in amounts outstanding under our mortgage warehouse lines of credit, and directly correlated to the decrease in the volume of mortgage loans held for sale during the year.

The annual rate of inflation in the United States hit 7.7% in October 2022, nearly 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 results in increasing the sale prices of our homes.

Financial services assets consist primarily of residential mortgage receivables held for sale of which $127.6 million and $108.6 million at October 31, 2023 and 2022, respectively, were being temporarily warehoused and are awaiting sale in the secondary mortgage market.

The increase in mortgage loans held for sale from October 31, 2022 was primarily related to an increase in the volume of loans originated during the fourth quarter of fiscal 2023 compared to the fourth quarter of fiscal 2022, along with an increase in the average loan value.

Financial Services liabilities increased $12.6 million from $135.6 million at October 31, 2022, to $148.2 million at October 31, 2023.

The increase was primarily due to the increase in amounts outstanding under our mortgage warehouse lines of credit, and directly correlated to the increase in the volume of mortgage loans held for sale.

The annual rate of inflation in the United States was 3.2% in October 2023, as measured by the Consumer Price Index ("CPI"), which is much improved from its peak of 9.1% in June 2022.

Inflation has a long-term effect, because of higher costs of land, materials and labor results in increasing the 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.

3 unchanged sentences

Construction costs for residential buildings represented approximately 60% of our homebuilding cost of sales for fiscal year 2023.

For the second half of fiscal year 2022, continued elevated inflation created economic uncertainty that led to a quick and sharp rise in interest rates, which in turn increased mortgage rates, and adversely impacted our home sales.

For fiscal 2022, elevated inflation created economic uncertainty and had a significant impact on interest rates, which in turn adversely impacted our home sales.

During fiscal 2023, inflation started to moderate and interest rates have become less volatile, which has given homebuyers time to adjust to the current higher rate environment.

Critical Accounting Policies

8 unchanged sentences

and (3) consolidated inventory not owned, which consists of model homes financed with an investor and inventory related to land banking arrangements accounted for as financings.

We decide to mothball (or stop development on) certain communities when we determine that the current performance does not justify further investment at the time.

When we decide to mothball a community, the inventory is reclassified on our Consolidated Balance Sheets from “Sold and unsold homes and lots under development”

to “Land and land options held for future development or sale.”

We regularly review communities to determine if mothballing is appropriate.

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, these sale and leaseback transactions are considered a financing rather than a sale.

As a result of our continued involvement, for accounting purposes in accordance with ASC 606 “Revenue From Contracts with Customers,”

these sale and leaseback transactions are considered a financing rather than a sale.

44 unchanged sentences

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 third parties.

Unconsolidated Homebuilding and Land Development Joint Ventures - Investments in unconsolidated homebuilding and land development joint ventures are accounted for under the equity method of accounting.

Under the equity method, we recognize our proportionate share of earnings and losses earned by the joint venture upon the delivery of lots or homes to third parties.

Our ownership interests in the joint ventures vary but our voting interests are generally 50% or less.

Unconsolidated Homebuilding and Land Development Joint Ventures - Investments in unconsolidated entities in which the Company has significant influence over the operating and financial decisions of the entity, but holds less than a controlling financial interest, are accounted for by the equity method.

Our investments in unconsolidated homebuilding and land development joint ventures are accounted for under the equity method.

Under the equity method, we recognize our proportionate share of income and loss earned by the joint venture upon the delivery of lots or homes to third parties.

Our ownership interests in joint ventures vary but our voting equity interests held are generally 20% to 50%.

In determining whether or not we must consolidate joint ventures where we are the managing member of the joint venture, we assess whether the other partners have specific rights to overcome the presumption of control by us as the manager of the joint venture.

In most cases, the presumption is overcome because the joint venture agreements require that both partners agree on establishing the significant operating and capital decisions of the partnership, including budgets, in the ordinary course of business.

The evaluation of whether or not we control a joint venture can require significant judgment.

In accordance with ASC 323, “Investments - Equity Method and Joint Ventures”

2 unchanged sentences

Warranty Costs and Construction Defect Reserves 

- We accrue for warranty costs that are covered under our existing general liability and construction defect policy as part of our general liability insurance deductible.

- We accrue warranty costs that are covered under our existing general liability and construction defect policy as part of our general liability insurance deductible.

This accrual is expensed as selling, general, and administrative costs.

2 unchanged sentences

Reserves for estimated losses for construction defects, warranty and bodily injury claims have been established using the assistance of a third-party actuary.

The third-party actuary uses our historical warranty and construction defect data to assist our management in estimating our unpaid claims, claim adjustment expenses and incurred but not reported claims reserves for the risks that we are assuming under the general liability and construction defect programs.

The estimates include provisions for inflation, claims handling and legal fees.

The third-party actuary uses our historical warranty and construction defect data to assist management in estimating our unpaid claims, claim adjustment expenses and incurred but not reported claims reserves for the risks that we are assuming under the general liability and construction defect programs.

The estimates consider provisions for inflation, claims handling and legal fees.

These estimates are subject to a high degree of variability due to uncertainties such as trends in construction defect claims relative to our markets and the types of products we build, claim settlement patterns, insurance industry practices and legal interpretations, among others.

Because of the high degree of judgment required in determining these estimated liability amounts, actual future costs could differ significantly from our currently estimated amounts.

As a high degree of judgment is required in determining these estimated liability amounts, actual future costs could differ significantly from our currently estimated amounts.

In addition, we establish a warranty accrual for lower cost-related issues to cover home repairs, community amenities and land development infrastructure that are not covered under our general liability and construction defect policy.

We accrue an estimate for these warranty costs as part of cost of sales at the time each home is closed and title and possession have been transferred to the homebuyer.

Deferred Income Taxes - Deferred income taxes are provided for temporary differences between amounts recorded for financial reporting and for income tax purposes.

Deferred Income Taxes - Deferred income taxes are provided for temporary differences between amounts recorded for financial reporting and income tax purposes.

If the combination of future years’

income (or loss) combined with the reversal of the timing differences results in a loss, such losses can be carried forward to future years to recover the deferred tax assets.

The Company evaluates all significant available positive and negative evidence, including the existence of losses in recent years and its forecast of future taxable income, in assessing the need for a valuation allowance.

The underlying assumptions the Company uses in forecasting future taxable income require significant judgment and consideration of the Company's recent performance.

The ultimate realization of deferred tax assets is dependent on the generation of future taxable income during the periods in which temporary differences or carry-forwards are deductible or creditable.

A valuation allowance is provided to offset deferred tax assets if, based upon the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.

In evaluating the exposures associated with our various tax filing positions, we recognize tax liabilities in accordance with ASC 740, for more likely than not exposures. We re-evaluate the exposures associated with our tax positions on a quarterly basis. This evaluation is based on factors such as changes in facts or circumstances, changes in tax law, new audit activity by taxing authorities and effectively settled issues. Determining whether an uncertain tax position is effectively settled requires judgment. Such a change in recognition or measurement would result in the recognition of a tax benefit or an additional charge to the tax provision. A number of years may elapse before a particular matter for which we have established a liability is audited and fully resolved or clarified. We adjust our liability for unrecognized tax benefits and income tax provision in the period in which an uncertain tax position is effectively settled, or the statute of limitations expires for the relevant taxing authority to examine the tax position or when more information becomes available.

income (or loss) combined with the reversal of the timing differences results in a loss, such losses can be carried forward to future years to recover the DTAs.

We evaluate all available positive and negative evidence, including the existence of losses in recent years and forecasts of future taxable income, in assessing the need for a valuation allowance.

The underlying assumptions we use in forecasting future taxable income require significant judgment.

The ultimate realization of DTAs is dependent on the generation of future taxable income during the periods in which temporary differences or carry-forwards are deductible or creditable.

A valuation allowance is provided to offset DTAs if, based upon the available evidence, it is more likely than not that some or all of the DTAs will not be realized.

In evaluating the exposures associated with our various tax filing positions, we recognize tax liabilities in accordance with ASC 740, “Income Taxes”

for more likely than not exposures. We re-evaluate the exposures associated with our tax positions on a quarterly basis. This evaluation is based on factors such as changes in facts or circumstances, changes in tax law, new audit activity by taxing authorities and effectively settled issues. Determining whether an uncertain tax position is effectively settled requires judgment. Such a change in recognition or measurement would result in the recognition of a tax benefit or an additional charge to the tax provision. A number of years may elapse before a particular matter for which we have established a liability is audited and fully resolved or clarified. We adjust our liability for unrecognized tax benefits and the income tax provision in the period in which an uncertain tax position is effectively settled, the statute of limitations expires for the relevant taxing authority to examine the tax position or when more information becomes available.

Due to the complexity of some of these uncertainties, the ultimate resolution may result in a liability that is materially different from our current estimate. Any such changes will be reflected as increases or decreases to income tax expense in the period in which they are determined.

14 unchanged sentences

Shortages in, and price fluctuations of, raw materials and labor, including due to geopolitical events, changes in trade policies, including the imposition of tariffs and duties on homebuilding materials and products, and related trade disputes with, and retaliatory measures taken by other countries;

Fluctuations in interest rates and the availability of mortgage financing; 

Fluctuations in interest rates and the availability of mortgage financing, including as a result of instability in the banking sector; 

Adverse weather and other environmental conditions and natural disasters;

18 unchanged sentences

Significant influence of the Company’s controlling stockholders;

Availability of net operating loss carryforwards; 

Loss of key management personnel or failure to attract qualified personnel;

The outbreak and spread of COVID-19 and the measures that governments, agencies, law enforcement and/or health authorities implement to address it, as well as continuing macroeconomic effects of the pandemic.

Public health issues such as a major epidemic or pandemic.

4 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 5. Market for Registrant’s Common Equity