Exhibit 99.a

 

 

 

 

 

 

 

 

 

 

 

Consolidated Financial Statements   GTIS-HOV Holdings V LLC As Of October 31, 2020 And 2019 And For The Years Ended October 31, 2020, 2019 And 2018 With Independent Auditors’ Report

 

 

 

GTIS-HOV Holdings V LLC

 

Consolidated Financial Statements

 

As Of October 31, 2020 And 2019 And For The

Years Ended October 31, 2020, 2019 And 2018

 

Contents

 

Independent Auditors' Report	1
Consolidated Financial Statements
Consolidated Balance Sheets	2
Consolidated Statements of Operations	3
Consolidated Statements of Changes in Members’ Equity	4
Consolidated Statements of Cash Flows	5
Notes to Consolidated Financial Statements	6-11

 

 

INDEPENDENT AUDITORS' REPORT

 

To the Members of
GTIS-HOV Holdings V LLC
Matawan, New Jersey

 

We have audited the accompanying consolidated financial statements of GTIS-HOV Holdings V LLC and its subsidiaries (the "Company"), which comprise the consolidated balance sheets as of October 31, 2020 and 2019, and the related consolidated statements of operations, changes in members' equity, and cash flows for each of the three years in the period ended October 31, 2020, and the related notes to the consolidated financial statements.

 

Management's Responsibility for the Consolidated Financial Statements.

 

Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

 

Auditors' Responsibility

 

Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.

 

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the Company's preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

 

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

 

Opinion

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of GTIS-HOV Holdings V LLC and its subsidiaries as of October 31, 2020 and 2019, and the results of their operations and their cash flows for each of the three years in the period ended October 31, 2020, in accordance with accounting principles generally accepted in the United States of America.

 

/s/ Deloitte & Touche LLP

 

New York, New York

December 22, 2020

 

 

 

GTIS-HOV Holdings V LLC

Consolidated Balance Sheets

(Dollars in Thousands)

 

		October 31,
		2020				2019
Assets
Cash and cash equivalents		$	10,082			$	14,234
Restricted cash			2,503				2,760
Receivables and deposits			1,125				1,618
Inventories:
Land and land development			25,620				36,440
Construction in process			7,617				25,487
Consolidated inventory not owned			3,309				-
Total inventories			36,546				61,927
Prepaid expenses			1,470				3,232
Total assets		$	51,726			$	83,771
Liabilities and Members’ equity
Notes payable, net of debt issuance costs		$	4,440			$	15,244
Liabilities from inventory not owned, net of debt issuance costs			2,610				-
Accounts payable and other liabilities			12,968				13,510
Customers’ deposits			1,902				1,980
Accrued interest			-				53
Total liabilities			21,920				30,787
Commitments and contingencies (Note 5)
Members’ equity			29,806				52,984
Total liabilities and members’ equity		$	51,726			$	83,771

 

See notes to consolidated financial statements.

 

 

GTIS-HOV Holdings V LLC

Consolidated Statements of Operations

(Dollars in Thousands)

 

		Year Ended October 31, 2020				Year Ended October 31, 2019				Year Ended October 31, 2018
Revenue:
Sale of homes		$	98,961			$	220,440			$	326,527
Other revenue			101				672				747
Total revenue			99,062				221,112				327,274
Expenses:
Direct costs:
Land and land development			33,178				70,916				111,811
Construction			38,718				88,076				128,058
Other			4,554				9,863				15,417
Direct cost of sales			76,450				168,855				255,286
Cost of sales interest			3,688				9,276				15,427
Indirect cost of sales:
Construction and service overhead			3,286				5,272				6,907
Inventory impairment loss and land option write-off			-				-				722
Other			1,501				2,888				4,140
Total indirect cost of sales			4,787				8,160				11,769
Selling, general and administrative expense			6,956				15,622				23,722
Interest expense			259				241				5,264
Net income		$	6,922			$	18,958			$	15,806

 

See notes to consolidated financial statements.

 

 

GTIS-HOV Holdings V LLC

Consolidated Statements of Changes in Members’ Equity

(Dollars in Thousands)

 

For The Years Ended October 31, 2020, 2019 And 2018
		K. Hovnanian
		GT V				Hov V
		Investment,				Parallel				GTIS Hov V
		LLC				Blocker LLC				Co-Invest LP				Total
Balance at October 31, 2017		$	28,455			$	687			$	5,003			$	34,145
Net income			13,172				318				2,316				15,806
Balance at October 31, 2018			41,627				1,005				7,319				49,951
Net income			15,798				382				2,778				18,958
Distributions			(13,271	)			(320	)			(2,334	)			(15,925	)
Balance at October 31, 2019			44,154				1,067				7,763				52,984
Net income			5,768				139				1,015				6,922
Distributions			(25,083	)			(606	)			(4,411	)			(30,100	)
Balance at October 31, 2020		$	24,839			$	600			$	4,367			$	29,806

 

See notes to consolidated financial statements.

 

 

GTIS-HOV Holdings V LLC

Consolidated Statements of Cash Flows

(Dollars in Thousands)

 

		Year Ended October 31, 2020				Year Ended October 31, 2019				Year Ended October 31, 2018
Operating activities
Net income		$	6,922			$	18,958			$	15,806
Adjustments to reconcile net income to net cash provided by operating activities:
Inventory impairment loss and land option write-off			-				-				722
Amortization of deferred financing costs			64				739				619
Changes in operating assets and liabilities:
Receivables, deposits and prepaid expenses			2,255				2,294				2,294
Inventories			25,381				61,665				58,103
Accounts payable, other liabilities and accrued interest			(595	)			(10,341	)			(13,353	)
Customers’ deposits			(78	)			(3,620	)			(197	)
Net cash provided by operating activities			33,949				69,695				63,994
Financing activities
Member distributions			(30,100	)			(15,925	)			-
Proceeds from notes payable			22,101				41,351				55,227
Payments related to notes payable			(32,927	)			(96,654	)			(124,019	)
Proceeds from model sale leaseback financing program			2,650				-				-
Payments related to model sale leaseback financing program			-				(593	)			-
Deferred financing costs from model financing program and notes payable			(82	)			(89	)			(145	)
Net cash used in financing activities			(38,358	)			(71,910	)			(68,937	)
Net decrease in cash and cash equivalents and restricted cash			(4,409	)			(2,215	)			(4,943	)
Cash and cash equivalents and restricted cash balance, beginning of year			16,994				19,209				24,152
Cash and cash equivalents and restricted cash balance, end of year		$	12,585			$	16,994			$	19,209
Supplemental disclosures of cash flows:
Cash paid for interest, net of amounts capitalized		$	312			$	394			$	36,799
Reconciliation of cash and cash equivalents and restricted cash Cash and cash equivalents		$	10,082			$	14,234			$	16,774
Restricted cash			2,503				2,760				2,435
Total cash and cash equivalents and restricted cash		$	12,585			$	16,994			$	19,209

 

See notes to consolidated financial statements.

 

 

GTIS-HOV Holdings V LLC

 

Notes to Consolidated Financial Statements

 

As Of And For The Years Ended October 31, 2020, 2019 And 2018

 

 

1. Description of Business

 

GTIS-HOV Holdings V LLC (with its subsidiaries, the “Company”) is a residential home developer that markets its products in Arizona, California, Illinois, Maryland, New Jersey, South Carolina and Virginia. All construction activity is performed by subcontractors supervised by the Company.

 

On April 29, 2016, K. Hovnanian GT V Investment, LLC (“K-Hov”) (a subsidiary of K. Hovnanian Enterprises, Inc.) entered into a joint venture agreement with Hov V Parallel Blocker LLC and GTIS Hov V Co-Invest LP (collectively, “GTIS”) (both affiliates of GTIS Partners) to develop, construct, and sell residential communities. The Company purchased eight properties from other subsidiaries of K. Hovnanian Enterprises, Inc. and one property from a third party. All properties were purchased at fair value. During Fiscal 2017, the Company purchased one property from a subsidiary of K. Hovnanian Enterprises, Inc. and two properties from a third party.

 

The Company is a limited-life entity. As the existing lots are developed, built on, and sold, operations will decline and cease when all the homes have been delivered. In accordance with the joint venture agreement, dissolution must ultimately occur no later than December 31, 2065. Capital was contributed by K-Hov and GTIS in the following proportion: 83.3333% by K-Hov; and 14.6551% and 2.0116% by GTIS. The joint venture agreement specifies how profits and losses and cash distributions are allocated to the investors. Also, in accordance with the joint venture agreement, K-Hov is the managing member, with all significant decisions shared equally by both members.

 

2. Summary of Significant Accounting Policies

 

Basis of Presentation

 

The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and include the Company’s accounts and those of its wholly owned subsidiaries after elimination of all intercompany balances and transactions.

 

 

GTIS-HOV Holdings V LLC

 

Notes to Consolidated Financial Statements (continued)

 

Cash and Cash Equivalents

 

The Company considers all highly liquid instruments with original maturities of three months or less when purchased to be cash equivalents. Cash includes deposits in checking accounts. Our cash and cash equivalents are held at financial institutions and may, at times, exceed insurable amounts. The Company believes that it mitigates the risk by depositing the cash and cash equivalents in major financial institutions.

 

Restricted Cash

 

Restricted cash includes cash collateralizing the per home warranty service dollars discussed below.

 

Inventories

 

Inventories are stated at cost unless the inventory is determined to be impaired, in which case the inventory is written down to its fair value. Inventories of houses include all direct costs of construction, plus capitalized costs, including construction administration, property taxes, interest, and legal fees that relate to development projects. Land, land development, and common facility costs are accumulated by development and are allocated to homes within each development based on buildable acres to product types within each community, which, along with direct construction costs, are allocated to each unit and relieved through cost of sales using the specific identification method.

 

Start-up costs incurred in connection with planned developments are expected to be recovered from the sale of homes and are capitalized. Management periodically reviews the feasibility of planned developments and expenses the costs of developments that are abandoned or which cannot be recovered through the realization of future sales revenue.

 

The Company records impairment losses on inventories related to communities under development when events and circumstances indicate they may be impaired and the Company will not be able to recover its recorded investment. For the years ended October 31, 2020 and 2019, the Company did not record any inventory impairments. For the year ended October 31, 2018, the Company recorded inventory impairment losses of $0.7 million.

 

“Consolidated inventory not owned” consists of certain model sale leasebacks that are included on the balance sheet in accordance with GAAP. Some of the assets acquired by the Company included certain model homes sold and leased back 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 this continued involvement, for accounting purposes in accordance with Accounting Standards Codification (“ASC”) 606-10, “Revenue from Contracts with Customers,” these sale and leaseback transactions are considered a financing transaction rather than a sale. During fiscal 2019, the last model home acquired by the Company was sold to a customer resulting in no balances in “Consolidated inventory not owned” and “Liabilities from inventory not owned.” During fiscal 2020, the Company sold and leased back certain of its model homes in one of its existing communities. Therefore, for purposes of the balance sheet, as of October 31, 2020, inventory of $3.3 million was recorded to “Consolidated inventory not owned,” with a corresponding amount of $2.6 million recorded to “Liabilities from inventories not owned.”

 

 

GTIS-HOV Holdings V LLC

 

Notes to Consolidated Financial Statements (continued)

 

Interest

 

Interest attributable to properties under development during the land development and home construction period is capitalized and expensed along with the associated cost of sales as the related inventories are sold. Interest incurred in excess of interest capitalized is expensed immediately.

 

Warranty Allowances

 

The Company warranties a home for most ordinary defects generally for the first year of ownership and for major structural defects for the first 10 years of ownership. All warranty services will be provided by and are the responsibility of an affiliate of K-Hov. The Company pays a fixed fee per house (varies for each community) at closing. These fees are deposited into restricted cash accounts maintained by the Company until approvals are granted which allow for reimbursement to be paid to such affiliate, K. Hovnanian JV Services Company, L.L.C., to cover the cost of the warranty services after they have been incurred. Additions and charges to the warranty reserve, which is included in Accounts payable and other liabilities on the accompanying consolidated balance sheets, were as follows:

 

 

 

(In thousands)		Year Ended October 31, 2020				Year Ended October 31, 2019
Balance, beginning of period		$	2,776			$	2,123
Additions			588				1,457
Charges			(894	)			(804	)
Balance, end of period		$	2,470			$	2,776

 

 

GTIS-HOV Holdings V LLC

 

Notes to Consolidated Financial Statements (continued)

 

Advertising Costs

 

Advertising costs are expensed as incurred. Advertising costs expensed totaled $0.5 million, $1.4 million and $2.5 million in the years ended October 31, 2020, October 31, 2019 and October 31, 2018, respectively, and are included in Selling, general and administrative expense on the accompanying consolidated statements of operations.

 

Income Taxes

 

A limited liability company is not subject to the payment of federal or state income taxes, as the components of its income and expenses flow through directly to the members. Accordingly, no provision for income taxes has been reflected in the accompanying consolidated financial statements.

 

Use of Estimates

 

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates, and these differences could have a significant impact on the consolidated financial statements.

 

3. Related-Party Transactions

 

As the managing member of the Company, K-Hov provides certain services to the Company. In connection with providing these services, K-Hov receives fees, which are summarized as follows:

 

Administrative charge	4% of home sales revenue
Insurance charge	$6,840 per home sold – Arizona
	$6,679 per home sold – Illinois
	$6,605 per home sold – California
	$6,348 per home sold – Maryland
	$8,099 per home sold – New Jersey
	$6,605 per home sold – South Carolina
	$6,155 per home sold – Virginia

 

 

GTIS-HOV Holdings V LLC

 

Notes to Consolidated Financial Statements (continued)

 

Warranty services charge	$2,038 per home sold – Arizona
	$5,276 per home sold – California
	$1,559 per home sold – Illinois
	$5,564 per home sold – Maryland
	$3,597 per home sold – New Jersey
	$2,871 per home sold – South Carolina
	$5,036 per home sold – Virginia

 

 

The administrative and insurance charges are included in Selling, general and administrative expense and the warranty services charge is included in Indirect cost of sales – Other on the consolidated statements of operations.

 

The following table summarizes the related party fees incurred:

 

(In thousands)		Year Ended October 31, 2020				Year Ended October 31, 2019				Year Ended October 31, 2018
Administrative charge		$	3,840			$	8,580			$	12,736
Insurance charge		$	1,379			$	2,718			$	3,931
Warranty services charge		$	588			$	1,457			$	1,757

 

4. Notes Payable

 

The Company had a secured promissory note with a lender that is an affiliate of GTIS that would have matured on April 30, 2023. As of October 31, 2019, this note, and all accrued interest associated therewith, was paid in full. There was no accrued, unpaid interest as of October 31, 2019. Interest was payable monthly at a rate of 16% per annum, which could have been deferred and added to the unpaid principal balance, and thereafter, could be subject to interest at the note rate. The note was secured by all of the Company’s property and improvements, except for properties with separate secured loans described herein. The Company also had community-specific project financing in certain communities, secured by the related property and improvements. The total commitment for these loans as of October 31, 2020 and 2019 was $4.4 million and $62.0 million, respectively. Interest on amounts drawn is payable monthly at a rate of 6.0% and ranging from 5.75% to 8.75% per annum as of October 31, 2020 and October 31, 2019, respectively. As of October 31, 2020 and 2019, the total amount drawn on all loans was $4.4 million and $15.3 million, respectively.

 

 

GTIS-HOV Holdings V LLC

 

Notes to Consolidated Financial Statements (continued)

 

5. Commitments and Contingencies

 

The Company is not currently involved in any claims or legal actions arising in the ordinary course of its business. If the Company were to become involved in any, management would decide, based on the facts and circumstances at that time, if the ultimate disposition of these matters could have a material adverse effect on the Company’s consolidated financial statements and assess whether a contingent liability would be necessary.

 

6. Subsequent Events

 

The Company evaluated subsequent events that took place after October 31, 2020, through December 22, 2020, the date the consolidated financial statements were available to be issued. The Company is not aware of any subsequent events that require disclosure in or adjustments to the consolidated financial statements as of October 31, 2020.

 

******