# Hovnanian Enterprises Inc: Form 10-Q for the period ended Jan 31, 2023

- Company: [Hovnanian Enterprises Inc](/companies/hov.md) (CIK 357294)
- Form: 10-Q
- Filed: 2023-03-06
- Accepted by EDGAR: Mar 6, 2023, 16:43 ET
- Period: 2023-01-31
- Accession: 0001437749-23-005546
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/357294/000143774923005546/hov20230131_10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/357294/000143774923005546/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-01-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2022-11-01 to 2023-01-31 | $515.4m | us-gaap:Revenues |
| Income tax | 3 months, 2022-11-01 to 2023-01-31 | −$669.0k | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2022-11-01 to 2023-01-31 | $18.7m | us-gaap:ProfitLoss |
| Diluted EPS | 3 months, 2022-11-01 to 2023-01-31 | $2.26 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2022-11-01 to 2023-01-31 | $2.37 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2022-11-01 to 2023-01-31 | 6,468,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 3 months, 2022-11-01 to 2023-01-31 | −$31.2m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2022-11-01 to 2023-01-31 | $3.7m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 3 months, 2022-11-01 to 2023-01-31 | $2.7m | us-gaap:PaymentsOfDividends |
| Share repurchases | 3 months, 2022-11-01 to 2023-01-31 | $4.8m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Total assets | at 2023-01-31 | $2.44bn | us-gaap:Assets |
| Total liabilities | at 2023-01-31 | $2.04bn | us-gaap:Liabilities |
| Long-term debt | at 2023-01-31 | $1.15bn | us-gaap:LongTermDebt |
| Shareholders' equity | at 2023-01-31 | $395.8m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 63,290 characters.

Hovnanian Enterprises, Inc. (“HEI”) conducts all of its homebuilding and financial services operations through its subsidiaries (references herein to the “Company,” “we,” “us” or “our” refer to HEI and its consolidated subsidiaries and should be understood to reflect the consolidated business of HEI’s subsidiaries).

### Segments

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 Accounting Standards Codification 280, Segment Reporting, 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.

### Key Performance Indicators

The following key performance indicators are commonly used in the homebuilding industry and by management as a means to better understand our operating performance and trends affecting our business and compare our performance with the performance of other homebuilders. We believe these key performance indicators also provide useful information to investors in analyzing our performance:

- *Net contracts* is a volume indicator which represents the number of new contracts executed during the period for the purchase of homes, less cancellations of contracts in the same period. The dollar value of net contracts represents the dollars associated with net contracts executed in the period. These values are an indicator of potential future revenues;
- *Contract backlog* is a volume indicator which represents the number of homes that are under contract, but not yet delivered as of the stated date. The dollar value of contract backlog represents the dollar amount of the homes in contract backlog. These values are an indicator of potential future revenues;
- *Active selling communities* is a volume indicator which represents the number of communities which are open for sale with ten or more home sites available as of the end of a period. We identify communities based on product type; therefore, at times there are multiple communities at one land site. These values are an indicator of potential revenues;
- *Net contracts per average active selling community* is used to indicate the pace at which homes are being sold (put into contract) in active selling communities and is calculated by dividing the number of net contracts in a period by the average number of active selling communities in the same period. Sales pace is an indicator of market strength and demand; and
- *Contract cancellation rates* is a volume indicator which represents the number of sales contracts cancelled in the period divided by the number of gross sales contracts executed during the period. Contract cancellation rates as a percentage of backlog is calculated by dividing the number of cancelled contracts in the period by the contract backlog at the beginning of the period. Cancellation rates as compared to prior periods can be an indicator of market strength or weakness.

### Overview

#### Market Conditions and Operating Results

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 a high of 7.1% at the end of October 2022, and then back down slightly to 6.1% at the end of January 2023. The quick and sharp increase in interest rates from 2021 to 2022, persistently high levels of inflation and doubt about the stability of the economy, continues to negatively impact housing demand. 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 potential buyers still remain cautious about their decision to purchase a home. As a result, our net contracts and net contracts per average active selling community remained adversely impacted compared to the first quarter of fiscal 2022, although we did see positive improvement throughout the quarter. Our gross contract cancellation rate for the three months ended January 31, 2023 was higher than the three months ended January 31, 2022 but decreased compared to the fourth quarter of fiscal 2022. For the month of January 2023 our gross contract cancellation rate was 27%, which remained above our historical average. We continue to experience extended build times due to lingering supply chain issues but given the lower volume of homes in construction we expect to see improvements resulting from an increase in available labor going forward. In addition, we have renegotiated the timing or pricing of certain land contracts and continue to build on our national initiatives to drive down costs with our vendors and trade partners who are also being affected by the difficult macro-economic environment. Although recent sales per community in January and February have begun to improve, given the slower sales pace in the second half of fiscal 2022 and the first quarter of fiscal 2023 compared to the prior year and uncertainty in the homebuilding market, the Company will be taking measures in the second quarter of fiscal 2023 to reduce its overhead expenses through a combination of workforce reductions and certain other cost reduction measures.

We expect continued pressure on our results from higher wages due to inflation, as well as increased advertising spending, and less favorable margins on the mortgage rates we offer customers in order to attract buyers. The changing conditions in the housing market caused by increased mortgage rates and other factors make it difficult to predict how strongly our business will be adversely impacted as we head into the spring selling season.

Information on our operating results for the three months ended January 31, 2023 are as follows:

- Sale of homes revenues decreased to $499.6 million for the three months ended January 31, 2023 from $551.4 million for the three months ended January 31, 2022. There was a 20.1% decrease in the number of home deliveries, due in part to the prior year deliveries being unusually high as a result of an extremely strong sales pace in late fiscal 2021 and early fiscal 2022. Partially offsetting the decrease in home deliveries was an increase in average prices of 13.4% for the three months ended January 31, 2023, compared to the prior year period, as home prices increased rapidly in virtually all of our markets through the first half of fiscal 2022, along with the geographic and community mix of our deliveries.
- Gross margin dollars decreased 15.0% for the three months ended January 31, 2023, as compared to the same period of the prior year, as a result of the decrease in gross margin percentage to 18.7% for the three months ended January 31, 2023 from 19.9% for the three months ended January 31, 2022. Gross margin percentage, before cost of sales interest expense and land charges, decreased from 22.4% for the three months ended January 31, 2022 to 21.8% for the three months ended January 31, 2023. The decreases were primarily due to our use of incentives and concessions to make our homes more affordable in the markets in which we operate, partially offset by a reduction in construction costs.
- Selling, general and administrative costs (including corporate general and administrative expenses) ("Total SGA") was $73.4 million, or 14.2% of total revenues, in the three months ended January 31, 2023 compared with $72.2 million, or 12.8% of total revenues, in the three months ended January 31, 2022. The increase in Total SGA as a percentage of total revenues is primarily due to the decrease in revenues for the three months ended January 31, 2023, as compared to the same period of the prior year, as discussed above.
- Other interest increased to $15.1 million for the three months ended January 31, 2023 from $13.4 million for the three months ended January 31, 2022, primarily due to additional inventory financing resulting from an increase in average inventory not owned.
- Pre-tax income decreased to $18.0 million for the three months ended January 31, 2023 from pre-tax income of $35.4 million for the three months ended January 31, 2022. Net income decreased to $18.7 million for the three months ended January 31, 2023 from net income of $24.8 million for the three months ended January 31, 2022. Net income for the first quarter of fiscal 2023 included a $6.2 million tax benefit from energy efficient home credits. Earnings per share, basic and diluted, decreased to $2.37 and $2.26, respectively, for the three months ended January 31, 2023 compared to $3.12 and $3.07, respectively, for the three months ended January 31, 2022.
- Net contracts decreased 49.2% for the three months ended January 31, 2023, compared to the same period of the prior year, as the slow sales pace across the industry during the second half of fiscal 2022 continued into the first quarter of fiscal 2023, primarily as a result of fluctuating interest rates and a continuing uncertain economic outlook. However, sales pace per community did improve in each consecutive month of the first quarter of fiscal 2023.
- Net contracts per average active selling community decreased to 6.5 for the three months ended January 31, 2023 compared to 13.1 in the same period of the prior year. The decline was due to the decrease in net contracts discussed above.
- Contract backlog decreased from 3,624 homes at January 31, 2022 to 2,028 homes at January 31, 2023, and the dollar value of contract backlog decreased to $1.2 billion, a 37.6% decrease in dollar value compared to the prior year. The decreases were primarily attributed to lower sales and an increase in cancellations as buyers continue to try and navigate a difficult environment. Our gross contract cancellation rate of 30% in the first quarter of fiscal 2023 was an improvement sequentially from the fourth quarter of fiscal 2022 when it was 41%.
- Our cash position allowed us to spend $134.4 million on land purchases and land development during the three months ended January 31, 2023 and still have total liquidity of $365.7 million, including $234.9 million of homebuilding cash and cash equivalents as of January 31, 2023 and $125.0 million of borrowing capacity under our senior secured revolving credit facility.

### Results of Operations

### Total Revenues

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

*(Dollars in thousands)*

| Homebuilding: | Three Months Ended January 31, 2023 | January 31, 2022 | Dollar Change | Percentage Change |
| --- | ---: | ---: | ---: | ---: |
| Sale of homes | $499,645 | $551,366 | $(51,721) | (9.4)% |
| Land sales and other revenues | 3,557 | 638 | 2,919 | 457.5% |
| Financial services | 12,164 | 13,309 | (1,145) | (8.6)% |
| Total revenues | $515,366 | $565,313 | $(49,947) | (8.8)% |

### Homebuilding: Sale of Homes

For the three months ended January 31, 2023, sale of homes revenues decreased 9.4% compared to the same period in the prior year. The sale of homes revenue decrease is due to a 20.1% decrease in homes delivered, partially offset by a 13.4% increase in the average price per home for the three months ended January 31, 2023, compared with the prior year period. The average price per home increased to $532,671 in the three months ended January 31, 2023 from $469,647 in the three months ended January 31, 2022. The increase in average price was the result of increases in home prices in virtually all of our markets, primarily during the first half of fiscal 2022, along with the geographic and community mix of our deliveries. Land sales are ancillary to our homebuilding operations and are expected to continue in the future. For further detail on changes in segment revenues see “Homebuilding: Operations by Segment” below. For further detail on land sales and other revenues, see “Homebuilding: Land Sales and Other Revenues” below.

Information on the sale of homes is set forth in the table below:

*(Dollars in thousands, except average sales price)*

| Consolidated total: | Three Months Ended January 31, 2023 | 2022 | % Change |
| --- | ---: | ---: | ---: |
| Housing revenues | $499,645 | $551,366 | (9.4)% |
| Homes delivered | 938 | 1,174 | (20.1)% |
| Average sales price | $532,671 | $469,647 | 13.4% |
| **Unconsolidated joint ventures (1)** |  |  |  |
| Housing revenues | $78,670 | $63,620 | 23.7% |
| Homes delivered | 107 | 109 | (1.8)% |
| Average sales price | $735,234 | $583,670 | 26.0% |

*(1) Represents housing revenues and home deliveries for our unconsolidated homebuilding joint ventures for the period. We provide this data as a supplement to our consolidated results as an indicator of the volume managed in our unconsolidated joint ventures. See Note 18 to the Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q for a further discussion of our unconsolidated joint ventures.*

### Homebuilding: Land Sales and Other Revenues

Land sales and other revenues increased $2.9 million for the three months ended January 31, 2023 compared to the same period in the prior year. Other revenues include interest income, which increased as a result of an increase in rates on cash and cash equivalent accounts 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 deposits have been forfeited due to contract terminations, which increased due to higher cancellations in the first quarter of fiscal 2023 compared to the first quarter of fiscal 2022. Revenue associated with land sales can vary significantly due to the mix of land parcels sold. There was one land sale in both of the three months ended January 31, 2023 and 2022, and a $0.3 million increase in land sales revenue.

### Homebuilding: Cost of Sales

Cost of sales includes expenses for consolidated housing and land and lot sales, including inventory impairments and land option write-offs (defined as “land charges” in the tables below). A breakout of such expenses for homebuilding and land and lot sales and the gross margins for each is set forth below.

Homebuilding gross margin, before cost of sales interest expense and land charges is a non-GAAP financial measure. This measure should not be considered as an alternative to homebuilding gross margin determined in accordance with U.S. GAAP as an indicator of operating performance.

Management believes this non-GAAP measure enables investors to better understand our operating performance. This measure is also useful internally, helping management evaluate our operating results on a consolidated basis and relative to other companies in our industry. In particular, the magnitude and volatility of land charges for the Company, and for other homebuilders, have been significant and, as such, have made comparable financial analysis of our industry more difficult. Homebuilding metrics excluding land charges, as well as interest amortized to cost of sales, and other similar presentations prepared by analysts and other companies are frequently used to assist investors in understanding and comparing the operating characteristics of homebuilding activities by eliminating many of the differences in companies’ respective levels of impairments and debt.

*(Dollars in thousands)*

|  | Three Months Ended January 31, 2023 | 2022 |
| --- | ---: | ---: |
| Sale of homes | $499,645 | $551,366 |
| Cost of sales, excluding interest expense and land charges | 390,963 | 427,873 |
| Homebuilding gross margin, before cost of sales interest expense and land charges | 108,682 | 123,493 |
| Cost of sales interest expense, excluding land sales interest expense | 15,001 | 13,724 |
| Homebuilding gross margin, after cost of sales interest expense, before land charges | 93,681 | 109,769 |
| Land charges | 477 | 99 |
| Homebuilding gross margin | $93,204 | $109,670 |
| Homebuilding gross margin percentage | 18.7% | 19.9% |
| Homebuilding gross margin percentage, before cost of sales interest expense and land charges | 21.8% | 22.4% |
| Homebuilding gross margin percentage, after cost of sales interest expense, before land charges | 18.8% | 19.9% |

Cost of sales as a percentage of consolidated home sales revenues are presented below:

|  | Three Months Ended January 31, 2023 | 2022 |
| --- | ---: | ---: |
| Sale of homes | 100.0% | 100.0% |
| Cost of sales, excluding interest expense and land charges: |  |  |
| Housing, land and development costs | 68.0% | 69.0% |
| Commissions | 3.3% | 3.6% |
| Financing concessions | 2.3% | 0.8% |
| Overheads | 4.6% | 4.2% |
| Total cost of sales, before interest expense and land charges | 78.2% | 77.6% |
| Cost of sales interest | 3.0% | 2.5% |
| Land charges | 0.1% | 0.0% |
| Homebuilding gross margin percentage | 18.7% | 19.9% |
| Homebuilding gross margin percentage, before cost of sales interest expense and land charges | 21.8% | 22.4% |
| Homebuilding gross margin percentage, after cost of sales interest expense, before land charges | 18.8% | 19.9% |

We sell a variety of home types in various communities, each yielding a different gross margin. The decrease in gross margins for the three months ended January 31, 2023, was primarily due to the increase 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:

*(In thousands)*

|  | Three Months Ended January 31, 2023 | 2022 |
| --- | ---: | ---: |
| Land and lot sales | $329 | $34 |
| Cost of sales, excluding interest | 77 | 44 |
| Land and lot sales gross margin, excluding interest | 252 | (10) |
| Land and lot sales interest expense | 21 | 21 |
| Land and lot sales gross margin, including interest | $231 | $(31) |

Land sales are ancillary to our residential homebuilding operations and are expected to continue in the future but may fluctuate significantly.

### Homebuilding: 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 $0.5 million and $0.1 million in expense for the three months ended January 31, 2023 and 2022, respectively. There were no inventory impairments during the three months ended January 31, 2023 and 2022. During the three months ended January 31, 2023 and 2022, we wrote-off residential land option, approval and engineering costs. Such write-offs occurred across each of our segments in the first quarter of fiscal 2023 and 2022.

### Homebuilding: Selling, General and Administrative

Homebuilding selling, general and administrative (“SGA”) expenses increased $5.2 million to $47.9 million for the three months ended January 31, 2023 compared to the same period in the prior year. The increase was primarily due to fees incurred on unused builder forward commitments we are offering to lower mortgage rates for our customers, which began in the second half of fiscal 2022. Also contributing to the increase in SGA was an increase in compensation expense related to merit-based salary increases.

### Homebuilding: Key Performance Indicators

#### Net Contracts Per Average Active Selling Community

Net contracts per average active selling community for the three months ended January 31, 2023 were 6.5 compared to 13.1 for the same period in the prior year. Our reported level of sales contracts (net of cancellations) were impacted by a decrease in the pace of sales in all of our segments. 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 from the prior year and continued concern about an economic recession. During the quarter, net contracts per average active selling community did increase from 1.5 in November to 3.0 in January as mortgage rates started to stabilize slightly during the period for potential home buyers.

#### Contract Cancellation Rates

The following table provides historical quarterly cancellation rates, which represents the number of cancelled contracts in the quarter divided by the number of gross sales contracts executed in the quarter, excluding unconsolidated joint ventures:

| Quarter | 2023 | 2022 | 2021 | 2020 | 2019 |
| --- | ---: | ---: | ---: | ---: | ---: |
| First | 30% | 14% | 17% | 19% | 24% |
| Second |  | 17% | 16% | 23% | 19% |
| Third |  | 27% | 16% | 18% | 19% |
| Fourth |  | 41% | 15% | 18% | 21% |

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

| Quarter | 2023 | 2022 | 2021 | 2020 | 2019 |
| --- | ---: | ---: | ---: | ---: | ---: |
| First | 16% | 8% | 11% | 14% | 16% |
| Second |  | 9% | 9% | 20% | 20% |
| Third |  | 8% | 6% | 21% | 16% |
| Fourth |  | 13% | 6% | 14% | 14% |

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 generally been within what we believe to be a normal range, with fiscal 2021 and first half of fiscal 2022 cancellation rates, in particular, being below historical norms as a result of the strong market conditions. However, during the last three quarters, 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. Additionally, our cancellation rate as a percentage of beginning backlog for the first quarter of fiscal 2023 was 16%, which is also above our historical normal range of 13%. Market conditions remain uncertain and it is difficult to predict what cancellation rates will be in the future.

#### Contract Backlog

Our consolidated sales contracts and homes in contract backlog, excluding unconsolidated joint ventures, by segment is set forth below:

*(Dollars in thousands)*

| Northeast: | Net Contracts for the Three Months Ended January 31, 2023 | 2022 | Contract Backlog as of January 31, 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: |
| Dollars | $185,850 | $261,577 | $432,508 | $761,929 |
| Number of homes | 311 | 468 | 782 | 1,395 |
| Southeast: |  |  |  |  |
| Dollars | $82,191 | $126,454 | $319,344 | $292,384 |
| Number of homes | 164 | $228 | 525 | 545 |
| West: |  |  |  |  |
| Dollars | $147,087 | $410,231 | $425,669 | $831,289 |
| Number of homes | 313 | 855 | 721 | 1,684 |
| Total: |  |  |  |  |
| Dollars | $415,128 | $798,262 | $1,177,521 | $1,885,602 |
| Number of homes | 788 | 1,551 | 2,028 | 3,624 |

Contract backlog dollars decreased 37.6% as of January 31, 2023 compared to January 31, 2022, and the number of homes in backlog decreased 44.0% for the same period. The decrease in backlog dollars and number of homes for the three months ended January 31, 2023 compared to the same period in the prior year was driven by the slower sales environment in the second half of fiscal 2022 and first quarter of fiscal 2023.

### Homebuilding: Operations by Segment

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

*(Dollars in thousands, except average sales price)*

| Northeast | Three Months Ended January 31, 2023 | 2022 | Variance | Variance % |
| --- | ---: | ---: | ---: | ---: |
| Homebuilding revenue | $211,462 | $174,945 | $36,517 | 20.9% |
| Income before income taxes | $28,512 | $19,838 | $8,674 | 43.7% |
| Homes delivered | 371 | 358 | 13 | 3.6% |
| Average sales price | $568,394 | $487,930 | $80,464 | 16.5% |
| Southeast |  |  |  |  |
| Homebuilding revenue | $73,794 | $55,582 | $18,212 | 32.8% |
| Income before income taxes | $11,623 | $10,162 | $1,461 | 14.4% |
| Homes delivered | 141 | 104 | 37 | 35.6% |
| Average sales price | $522,950 | $533,606 | $(10,656) | (2.0)% |
| West |  |  |  |  |
| Homebuilding revenue | $215,734 | $321,470 | $(105,736) | (32.9)% |
| Income before income taxes | $9,889 | $43,935 | $(34,046) | (77.5)% |
| Homes delivered | 426 | 712 | (286) | (40.2)% |
| Average sales price | $504,777 | $451,112 | $53,665 | 11.9% |

### Homebuilding Results by Segment

*Northeast -* Homebuilding revenue increased 20.9% for the three months ended January 31, 2023 compared to the same period in the prior year. The increase for the three months ended January 31, 2023 was attributed to a 3.6% increase in homes delivered as well as a 16.5% 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 $8.7 million to $28.5 million for the three months ended January 31, 2023 as compared to the same period in the prior year. This was primarily due to the increase in homebuilding revenue discussed above, a $1.8 million decrease in SGA, and a slight increase in gross margin percentage.

*Southeast –* Homebuilding revenue increased 32.8% for the three months ended January 31, 2023 compared to the same period in the prior year. The increase was due to a 35.6% increase in homes delivered, partially offset by a 2.0% decrease in average sales price. The decrease in average sales price was the result of new communities delivering lower priced, smaller single-family homes and townhomes in lower-end submarkets of the segment for the three months ended January 31, 2023 compared to a mix of more deliveries in higher-end submarkets for the three months ended January 31, 2022. This decrease is partially offset by price increases in certain communities.

Income before income taxes increased $1.5 million to $11.6 million for the three months ended January 31, 2023 compared to the same period in the prior year. This was primarily due to the increase in homebuilding revenue discussed above and an increase in gross margin percentage.

*West –* Homebuilding revenue decreased 32.9% for the three months ended January 31, 2023 compared to the same period in the prior year. The decrease was due to a 40.2% decrease in homes delivered, partially offset by an 11.9% increase in average sales price. The increase in average sales price was the result of price increases in certain communities.

Income before income taxes decreased $34.0 million to $9.9 million for the three months ended January 31, 2023 compared to the same period in the prior year. The decrease is primarily due to the decrease in homebuilding revenue discussed above and a decrease in gross margin percentage.

#### Financial Services

Financial services consist primarily of originating mortgages from our home buyers, selling such mortgages in the secondary market, and title insurance activities. We use mandatory investor commitments and forward sales of mortgage-backed securities (“MBS”) to hedge our mortgage-related interest rate exposure on agency and government loans. For the three months ended January 31, 2023 and 2022, Federal Housing Administration and Veterans Administration (“FHA/VA”) loans represented 29.1% and 24.3%, respectively, of our total loans. For the three months ended January 31, 2023 compared to the same period in the prior year, our conforming conventional loan originations as a percentage of our total loans decreased from 74.6% to 70.1%, respectively. The origination of loans which exceed conforming conventions decreased to 0.8% for the three months ended January 31, 2023 compared to 1.1% for the same period in the prior year.

During the three months ended January 31, 2023 and 2022, financial services provided $3.1 million and $2.9 million of income before income taxes, respectively. The slight increase in financial services income before income taxes was primarily due to the decrease in total financial services costs from closing less loans in the first quarter of fiscal 2023 compared to the same period in the prior year and an increase in the basis point spread between the loans originated and the implied rate from our sale of the loans. In the market areas served by our wholly owned mortgage banking subsidiaries, 63.3% and 64.1% of our noncash homebuyers obtained mortgages originated by these subsidiaries during the three months ended January 31, 2023 and 2022, respectively.

#### Corporate General and Administrative

Corporate general and administrative expenses include operations at our headquarters in New Jersey. These expenses include payroll, stock compensation, facility costs and rent and other costs associated with our executive offices, legal expenses, information services, human resources, corporate accounting, training, treasury, process redesign, internal audit, national and digital marketing, construction services and administration of insurance, quality and safety. Corporate general and administrative expenses decreased to $25.5 million for the three months ended January 31, 2023 compared to $29.4 million for the three months ended January 31, 2022, primarily due to a decrease in compensation expense, mainly related to the grants of phantom stock awards under our 2019 long-term incentive plan, for which expense is impacted by the change in our stock price each period. During the first quarter of fiscal 2023, stock awards were granted under a new Long-Term Incentive Program (the “2023 LTIP”) that consists of 50% cash-settled phantom shares and 50% equity-settled shares. The 2023 LTIP included phantom shares based on analysis that demonstrated a higher likelihood of dilution to our book value per share if the entire award was settled in shares rather than cash via phantom shares.

#### Other Interest

Other interest increased $1.7 million for the three months ended January 31, 2023 compared to the same period in the prior year. Our assets that qualify for interest capitalization (inventory under development) are less than our debt, and therefore the portion of interest not covered by qualifying assets is directly expensed. Other interest increased primarily due to additional inventory financing resulting from an increase in average inventory not owned.

#### Income from Unconsolidated Joint Ventures

Income from unconsolidated joint ventures consists of our share of the earnings or losses of our unconsolidated joint ventures. Income from unconsolidated joint ventures decreased $1.0 million to $7.2 million for the three months ended January 31, 2023 compared to the same period in the prior year. The decrease was primarily due to receiving the final distribution from one of our unconsolidated joint ventures in the first quarter of fiscal 2022.

#### Income Taxes

The total income tax benefit for the three months ended January 31, 2023 was $0.7 million. The benefit was primarily due to $6.2 million in energy efficient home tax credits offset by federal and state tax expense as a result of pretax income. The total income tax expense for the three months ended January 31, 2022 was $10.6 million. The expense was primarily due to federal and state tax expense recorded as a result of our pretax income. The federal tax expense is not paid in cash as it is offset by the use of our existing NOL carryforwards.

### Capital Resources and Liquidity

#### Overview

Our total liquidity at January 31, 2023 was $365.7 million, including $234.9 million in homebuilding cash and cash equivalents and $125.0 million of borrowing capacity under our senior secured revolving credit facility. We believe that our cash on hand together with available borrowings on our senior secured revolving credit facility will be sufficient for at least the next 12 months to finance our working capital requirements.

We have historically funded our homebuilding and financial services operations with cash flows from operating activities, borrowings under our credit facilities, the issuance of new debt and equity securities, and other financing activities. 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 $134.4 million on land and land development during the first quarter of fiscal 2023. After land and land development spending and all other operating activities, including revenue received from deliveries, cash used in operations was $31.2 million. During the first quarter of fiscal 2023, cash used in investing activities was $23.3 million, primarily due to a new unconsolidated joint venture entered into during the period, along with the acquisition of certain fixed assets, partially offset by distributions from existing unconsolidated joint ventures. Cash used in financing activities was $48.4 million during the first quarter of fiscal 2023, primarily due to net payments related to our mortgage warehouse lines of credit, net payments for nonrecourse mortgage financings and model sale leaseback financings, repurchases of common stock and the payment of preferred dividends, partially offset by net proceeds from land banking financings during the period. 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 three months ended January 31, 2023 and 2022 were for operating expenses, land purchases, land deposits, land development, construction spending, model sale leasebacks, state income taxes, interest payments, preferred dividends, 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, land banking 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. Certain liabilities also increase as operations expand and partially offset the negative effect on cash flow from operations caused by the increase in inventory, prepaid expenses and other assets. Similarly, as our mortgage operations expand, net income from these operations increases, but for cash flow purposes, net income is partially offset by the net change in mortgage assets and liabilities. The opposite is true as our investment in new land purchases and development of new communities decrease, causing us to generate positive cash flow from operations.

#### Debt Transactions

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

*(In thousands)*

|  | January 31, 2023 | October 31, 2022 |
| --- | ---: | ---: |
| Senior Secured Notes | $853,093 | $853,093 |
| Senior Notes | $180,710 | $180,710 |
| Senior Unsecured Term Loan Credit Facility due February 1, 2027 | $39,551 | $39,551 |
| Senior Secured 1.75 Lien Term Loan Credit Facility due January 31, 2028 | $81,498 | $81,498 |
| Senior Secured Revolving Credit Facility (1) | $- | $- |
| Less: Net (discounts), premiums and unamortized debt issuance costs | $(9,591) | $(8,305) |
| Total senior notes and credit facilities, net of discounts, premiums and unamortized debt issuance costs | $1,145,261 | $1,146,547 |

*(1) At January 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. 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%. In addition, K. Hovnanian will pay an unused commitment fee on the undrawn revolving commitments at a rate of 1.00% per annum.*

Except for K. Hovnanian, the issuer of the notes and borrower under the Credit Facilities (as defined below), our home mortgage subsidiaries, certain of our title insurance subsidiaries, joint ventures and subsidiaries holding interests in our joint ventures, we and each of our subsidiaries are guarantors of the Credit Facilities, the senior secured notes and senior notes outstanding at January 31, 2023 (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”).

The credit agreements governing the Credit Facilities and the indentures governing the senior secured and senior notes (together, the “Debt Instruments”) outstanding at January 31, 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. As of January 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. 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 the first quarter of both fiscal 2023 and 2022. As discussed above, market conditions continue to adversely impact our business, and it is therefore likely that by the end of fiscal 2023 we will 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 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.

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). We also continue to actively analyze and evaluate our capital structure and explore transactions to simplify our capital structure and to strengthen our balance sheet, including those that reduce leverage, interest rates and/or extend maturities, and will seek to do so with the right opportunity. We may also continue to make debt or equity purchases and/or exchanges from time to time through tender offers, exchange offers, redemptions, open market purchases, private transactions, or otherwise, or seek to raise additional debt or equity capital, depending on market conditions and covenant restrictions.

Any liquidity-enhancing or other capital raising or refinancing transaction will depend on identifying counterparties, negotiation of documentation and applicable closing conditions and any required approvals. Due to covenant restrictions in our Debt Instruments, we are currently limited in the amount of debt we can incur, even if market conditions, including then-current market available interest rates (in recent years, we have not been able to access the traditional capital and bank lending markets at competitive interest rates due to our highly leveraged capital structure), would otherwise be favorable, which could also impact our ability to grow our business.

See Note 12 to the Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q for a discussion of K. Hovnanian’s Credit Facilities, senior secured notes and senior notes, including information with respect to the collateral securing our secured Debt Instruments.

#### Mortgages and Notes Payable

We have nonrecourse mortgage loans for certain communities totaling $133.9 million and $144.8 million (net of debt issuance costs) at January 31, 2023 and October 31, 2022, respectively, which are secured by the related real property, including any improvements, with an aggregate book value of $416.1 million and $418.9 million, respectively. The weighted-average interest rate on these obligations was 7.7% and 6.7% at January 31, 2023 and October 31, 2022, respectively, and the mortgage loan payments on each community primarily correspond to home deliveries.

Our wholly owned mortgage banking subsidiary, K. Hovnanian American Mortgage, LLC (“K. Hovnanian Mortgage”), originates mortgage loans primarily from the sale of our homes. Such mortgage loans and related servicing rights are sold in the secondary mortgage market within a short period of time. K. Hovnanian Mortgage finances the origination of mortgage loans through various master repurchase agreements, which are recorded in "Financial services" liabilities on the Condensed Consolidated Balance Sheets. The loans are secured by the mortgages held for sale and are repaid when we sell the underlying mortgage loans to permanent investors. As of January 31, 2023 and October 31, 2022, we had an aggregate of $58.4 million and $94.3 million, respectively, outstanding under several of K. Hovnanian Mortgage’s short-term borrowing facilities.

See Note 11 to the Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q for a discussion of these agreements.

#### Equity

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, 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.

During the three months ended January 31, 2023, we repurchased 118,478 shares under the new stock repurchase program, with a market value of $4.8 million, or $40.51 per share, which were added to "Treasury stock" on our Condensed Consolidated Balance Sheets as of January 31, 2023. There were no shares repurchased during the three months ended January 31, 2022. As of January 31, 2023, $33.0 million of our Class A common stock is available to be purchased under the stock repurchase program.

On July 12, 2005, we issued 5,600 shares of 7.625% Series A preferred stock, with a liquidation preference of $25,000 per share. Dividends on Series A preferred stock are not cumulative and are payable at an annual rate of 7.625%. The Series A preferred stock is not convertible into the Company’s common stock and is redeemable in whole or in part at our option at the liquidation preference of the shares. The Series A preferred stock is traded as depositary shares, with each depositary share representing 1/1000th of a share of Series A preferred stock. During both the three months ended January 31, 2023 and 2022 we paid dividends of $2.7 million 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. Investments in and advances to unconsolidated joint ventures increased $26.1 million to $101.0 million at January 31, 2023 compared to October 31, 2022. The increase was primarily due to a new joint venture formed in the first quarter of fiscal 2023, along with income recorded from one of our existing unconsolidated joint ventures during the period. As of January 31, 2023 and October 31, 2022, we had investments in seven and six unconsolidated homebuilding joint ventures, respectively, and one unconsolidated land development joint venture for both periods. We have no guarantees associated with our unconsolidated joint ventures, other than guarantees limited to performance and completion of development activities, environmental indemnification and standard warranty and representation against fraud, misrepresentation and similar actions, including a voluntary bankruptcy.

#### Inventories

Total inventory, excluding consolidated inventory not owned, decreased $18.6 million to $1.2 billion at January 31, 2023 compared to October 31, 2022. Total inventory, excluding consolidated inventory not owned, decreased in the Northeast by $54.5 million, partially offset by increases of $17.2 million in the Southeast and $18.7 million in the West. The net decrease was primarily attributable to home deliveries, along with inventory contributed to a new joint venture, partially offset by new land purchases and land development 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 January 31, 2023 are expected to be delivered during the next six to nine months.

Consolidated inventory not owned, which consists of options related to land banking and model financing, increased $6.4 million from October 31, 2022 to January 31, 2023. The increase was primarily due to an increase in land banking transactions, partially offset by 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 finished lots on a predetermined schedule. On our Condensed Consolidated Balance Sheet, at January 31, 2023, inventory of $267.6 million was recorded to “Consolidated inventory not owned,” with a corresponding amount of $160.3 million (net of debt issuance costs) recorded to “Liabilities from inventory not owned” for the amount of net cash received from land banking transactions. We also 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. On our Condensed Consolidated Balance Sheet, at January 31, 2023, inventory of $47.4 million was recorded to “Consolidated inventory not owned,” with a corresponding amount of $49.3 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.

We mothball (or stop development on) certain communities when we determine the current performance does not justify further investment at the time. That is, we believe we will generate higher returns if we decide against spending money to improve land today and save the raw land until such time as the markets improve or we determine to sell the property. As of January 31, 2023, we had mothballed land in two communities. The book value associated with these communities included on our Condensed Consolidated Balance Sheet in “Land and land options held for future development or sale” at January 31, 2023 was $1.4 million, which was net of impairment charges recorded in prior periods of $20.3 million. During the first quarter of fiscal 2023, we did not mothball any additional communities, nor did we sell or re-activate any previously mothballed communities.

Inventories held for sale, which are land parcels where we have decided not to build homes and are actively marketing the land for sale, represented $10.2 million of our total inventories held for sale at January 31, 2023, and are reported at the lower of carrying amount or fair value less costs to sell. There were no inventories held for sale at October 31, 2022. In determining fair value for land held for sale, management considers, among other things, prices for land in recent comparable sale transactions, market analysis studies, which include the estimated price a willing buyer would pay for the land (other than in a forced liquidation sale) and recent bona fide offers received from outside third parties.

The following tables summarize home sites included in our total residential real estate. The decrease in total home sites available at January 31, 2023 compared to October 31, 2022 is attributable to delivering homes and terminating certain option agreements during the period, partially offset by acquiring new land parcels.

| January 31, 2023: | Active Communities(1) | Active Communities Homes | Proposed Developable Homes | Total Homes |
| --- | ---: | ---: | ---: | ---: |
| Northeast | 33 | 3,928 | 10,269 | 14,197 |
| Southeast | 21 | 1,776 | 1,873 | 3,649 |
| West | 67 | 6,570 | 4,956 | 11,526 |
| Consolidated total | 121 | 12,274 | 17,098 | 29,372 |
| Unconsolidated joint ventures (2) | 12 | 3,680 | 236 | 3,916 |
| Owned |  | 6,153 | 2,181 | 8,334 |
| Optioned |  | 5,872 | 14,917 | 20,789 |
| Construction to permanent financing lots |  | 249 | - | 249 |
| Consolidated total |  | 12,274 | 17,098 | 29,372 |

| October 31, 2022: | Active Communities(1) | Active Communities Homes | Proposed Developable Homes | Total Homes |
| --- | ---: | ---: | ---: | ---: |
| Northeast | 32 | 4,296 | 10,726 | 15,022 |
| Southeast | 21 | 1,898 | 2,823 | 4,721 |
| West | 68 | 6,909 | 5,148 | 12,057 |
| Consolidated total | 121 | 13,103 | 18,697 | 31,800 |
| Unconsolidated joint ventures (2) | 13 | 3,355 | - | 3,355 |
| Owned |  | 6,634 | 2,388 | 9,022 |
| Optioned |  | 6,187 | 16,309 | 22,496 |
| Construction to permanent financing lots |  | 282 | - | 282 |
| Consolidated total |  | 13,103 | 18,697 | 31,800 |

(1) Active communities are open for sale communities with ten or more home sites available. We identify communities based on product type. Therefore, at times there are multiple communities at one land site.

(2) Represents active communities and home sites for our unconsolidated homebuilding joint ventures for the period. We provide this data as a supplement to our consolidated results as an indicator of the volume managed in our unconsolidated joint ventures. See Note 18 to the Condensed Consolidated Financial Statements for a further discussion of our unconsolidated joint ventures.

38

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

|  | January 31, 2023 Unsold Homes | Models | Total | October 31, 2022: Unsold Homes | Models | Total |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Northeast | 76 | 36 | 112 | 92 | 32 | 124 |
| Southeast | 71 | 5 | 76 | 72 | 5 | 77 |
| West | 521 | 22 | 543 | 516 | 22 | 538 |
| Total | 668 | 63 | 731 | 680 | 59 | 739 |
| Started or completed unsold homes and models per active selling communities (1) | 5.5 | 0.5 | 6.0 | 5.6 | 0.5 | 6.1 |

(1) Active selling communities (which are communities that are open for sale with ten or more home sites available) were 121 at both January 31, 2023 and October 31, 2022, respectively. This ratio does not include substantially completed communities, which are communities with less than ten home sites available.

#### Financial Services Assets and Liabilities

Financial services assets decreased $43.2 million to $112.8 million at January 31, 2023, compared to October 31, 2022. Financial services assets consist primarily of residential mortgage receivables held for sale of which $70.9 million and $108.6 million at January 31, 2023 and October 31, 2022, 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, 2022 was primarily related to a decrease in the volume of loans originated during the first quarter of fiscal 2023 compared to the fourth quarter of fiscal 2022, partially offset by a slight increase in the average loan value.

Financial services liabilities decreased $44.5 million to $91.1 million at January 31, 2023 compared to October 31, 2022. The decrease was primarily due to a decrease in amounts outstanding under our mortgage warehouse lines of credit and directly correlates to the decrease in the volume of mortgage loans held for sale during the period.

### Inflation

The annual rate of inflation in the United States hit 6.4% in January 2023, nearly the highest in more than three decades, as measured by the Consumer Price Index. Inflation has a long-term effect, because higher costs for land, materials and labor results in increasing sales prices of our homes. Historically, these price increases have been commensurate with the general rate of inflation in our housing markets and have not had a significant adverse effect on the sale of our homes. A significant risk faced by the housing industry generally is that rising house construction costs, including land and interest costs, could substantially outpace increases in the income of potential purchasers and therefore limit our ability to raise home sale prices, which may result in lower gross margins.

Inflation has a lesser short-term effect, because we generally negotiate fixed-price contracts with many, but not all, of our subcontractors and material suppliers for the construction of our homes. These prices usually are applicable for a specified number of residential buildings or for a time period of between three to 12 months. Construction costs for residential buildings represented approximately 57.7% of our homebuilding cost of sales for the three months ended January 31, 2023.

For the first quarter of fiscal 2023, elevated inflation continues to create economic uncertainty and have an impact on interest rates, which in turn adversely impacted our home sales.

### Critical Accounting Policies

As disclosed in our Annual Report on Form 10-K for the fiscal year ended October 31, 2022, our most critical accounting policies relate to inventories, unconsolidated joint ventures, warranty and construction defect reserves and income taxes. Since October 31, 2022, there have been no significant changes to those critical accounting policies.

### Safe Harbor Statement

All statements in this Quarterly Report on Form 10-Q that are not historical facts should be considered as “Forward-Looking Statements” within the meaning of the “Safe Harbor” provisions of the Private Securities Litigation Reform Act of 1995. Such statements involve known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Such forward-looking statements include but are not limited to statements related to the Company's goals and expectations with respect to its financial results for future financial periods. Although we believe that our plans, intentions and expectations reflected in, or suggested by, such forward-looking statements are reasonable, we can give no assurance that such plans, intentions or expectations will be achieved. By their nature, forward-looking statements: (i) speak only as of the date they are made, (ii) are not guarantees of future performance or results and (iii) are subject to risks, uncertainties and assumptions that are difficult to predict or quantify. Therefore, actual results could differ materially and adversely from those forward-looking statements as result of a variety of factors. Such risks, uncertainties and other factors include, but are not limited to:

- Changes in general and local economic, industry and business conditions and impacts of a significant homebuilding downturn;
- 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;
- Adverse weather and other environmental conditions and natural disasters;
- The seasonality of the Company’s business;
- The availability and cost of suitable land and improved lots and sufficient liquidity to invest in such land and lots;
- Reliance on, and the performance of, subcontractors;
- Regional and local economic factors, including dependency on certain sectors of the economy, and employment levels affecting home prices and sales activity in the markets where the Company builds homes;
- Increases in cancellations of agreements of sale;
- Increases in inflation;
- Changes in tax laws affecting the after-tax costs of owning a home;
- Legal claims brought against us and not resolved in our favor, such as product liability litigation, warranty claims and claims made by mortgage investors;
- Levels of competition;
- Utility shortages and outages or rate fluctuations;
- Information technology failures and data security breaches;
- Negative publicity;
- High leverage and restrictions on the Company’s operations and activities imposed by the agreements governing the Company’s outstanding indebtedness;
- Availability and terms of financing to the Company;
- The Company’s sources of liquidity;
- Changes in credit ratings;
- Government regulation, including regulations concerning development of land, the home building, sales and customer financing processes, tax laws and the environment;
- Operations through unconsolidated joint ventures with third parties;
- Significant influence of the Company’s controlling stockholders;
- Availability of net operating loss carryforwards;
- Loss of key management personnel or failure to attract qualified personnel; and
- 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.

Certain risks, uncertainties and other factors are described in detail in Part I, Item 1 “Business” and Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended October 31, 2022. Except as otherwise required by applicable securities laws, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, changed circumstances or any other reason after the date of this Quarterly Report on Form 10-Q.

## Market risk

As filed, 1,779 characters.

Substantially all of our long-term debt requires fixed interest payments and we have limited exposure to variable rates. In connection with our mortgage operations, mortgage loans held for sale and the associated mortgage warehouse lines of credit under our Master Repurchase Agreements are subject to interest rate risk; however, such obligations reprice frequently and are short-term in duration. In addition, we hedge the interest rate risk on mortgage loans by obtaining forward commitments from private investors. Accordingly, the interest rate risk from mortgage loans is not significant. We do not use financial instruments to hedge interest rate risk except with respect to mortgage loans. The following table sets forth as of January 31, 2023, our long-term debt obligations, principal cash flows by scheduled maturity, weighted-average interest rates and estimated fair value (“FV”).

*(Dollars in thousands)*

| Long term debt(1): | Long Term Debt as of January 31, 2023 by Fiscal Year of Maturity Date 2023 | 2024 | 2025 | 2026 | 2027 | Thereafter | Total | FV at 1/31/23 |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Fixed rate | $- | $- | $- | $943,683 | $39,551 | $171,618 | $1,154,852 | $1,111,716 |
| Weighted average interest rate | -% | -% | -% | 10.10% | 5.00% | 7.37% | 9.52% |  |

|  |  |
| ---: | --- |
| (1) | Does not include: |
|  | ● the mortgage warehouse lines of credit made under our Master Repurchase Agreements; |
|  | ● $133.9 million of nonrecourse mortgages secured by inventory, which have various maturities spread over the next two to three years and are paid off as homes are delivered; and |
|  | ● our $125.0 million Secured Credit Facility under which there were no borrowings outstanding as of January 31, 2023. |

## Controls and procedures

As filed, 1,485 characters.

The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company’s reports under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosures. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. The Company’s management, with the participation of the Company’s chief executive officer and chief financial officer, has evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of January 31, 2023. Based upon that evaluation and subject to the foregoing, the Company’s chief executive officer and chief financial officer concluded that the design and operation of the Company’s disclosure controls and procedures are effective to accomplish their objectives.

There was no change in the Company’s internal control over financial reporting that occurred during the quarter ended January 31, 2023 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

Filed Mar 6, 2023.
Source: SEC EDGAR, the filing index for accession 0001437749-23-005546. Last ingested by Listed: Nov 4, 2026, 18:01 ET. No prices; not investment advice.