---

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

SCHEDULE 14A

 

Proxy Statement Pursuant to Section 14(a) of the

Securities Exchange Act of 1934

(Amendment No. )

 

Filed by the Registrant ☒

Filed by a Party other than the Registrant ☐

 

Check the appropriate box:

 

☒	Preliminary Proxy Statement
☐	Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))
☐	Definitive Proxy Statement
☐	Definitive Additional Materials
☐	Soliciting Material under §240.14a-12

 

Hovnanian Enterprises, Inc.

(Name of Registrant as Specified in its Charter)

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

 

Payment of Filing Fee (Check all boxes that apply):
☒	No fee required.
☐	Fee paid previously with preliminary materials.
☐	Fee computed on table in exhibit required by Item 25(b) per Exchange Act Rules 14a-6(i)(1) and 0-11.

 

---

 

PRELIMINARY PROXY STATEMENT - SUBJECT TO COMPLETION DATED JANUARY 16, 2024 In accordance with Rule 14a-6(d) under Regulation 14A, please be advised that Hovnanian Enterprises, Inc. intends to release definitive copies of this proxy statement to security holders on or about February 2, 2024.                         PROXY STATEMENT 2024                                   HOVNANIAN ENTERPRISES, INC. 90 Matawan Road, Fifth Floor, Matawan, N.J. 07747 Tel: (732) 747-7800

 

 

 

 

PROXY STATEMENT

2024

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

THANK YOU for 2023

 

2

 

 

3

 

 

DEAR SHAREHOLDER,

 

February      , 2024

In accordance with the Securities and Exchange Commission’s rule allowing companies to furnish proxy materials to their shareholders over the Internet, the Company is primarily furnishing proxy materials to our shareholders of Class A Common Stock and registered shareholders of Class B Common Stock over the Internet, rather than mailing paper copies of the materials (including our Annual Report to Shareholders for fiscal 2023) to those shareholders. If you received only a Notice Regarding the Availability of Proxy Materials (the “Notice”) by mail or electronic mail, you will not receive a paper copy of the proxy materials unless you request one. Instead, the Notice will instruct you as to how you may access and review the proxy materials on the Internet. The Notice will also instruct you as to how you may access your proxy card to vote over the Internet, by telephone or by mail. If you received a Notice by mail or electronic mail and would like to receive a paper copy of our proxy materials, free of charge, please follow the instructions included in the Notice. A request for a paper copy must be made by March 7, 2024 in order to facilitate a timely delivery.   We anticipate that the Notice will first be mailed to our shareholders on or about February 2, 2024. All shareholders of record of Class B Common Stock who hold in nominee name have been sent a full set of proxy materials, including a proxy card.   Attached to this letter are a Notice of Annual Meeting of Shareholders and a Proxy Statement, which describe the business to be conducted at the meeting. We will also report on matters of current interest to our shareholders.   It is important that your shares be represented and voted at the meeting. Therefore, we urge you to complete, sign, date and return the enclosed proxy card or, if applicable, register your vote via the Internet or by telephone according to the instructions on the proxy card. If you attend the meeting, you may still choose to vote your shares personally even though you have previously designated a proxy.   We sincerely hope you will be able to attend and participate in the Company’s 2024 Annual Meeting of Shareholders. We welcome the opportunity to meet with many of you and give you a firsthand report on the progress of your Company.   Sincerely yours,     Ara K. Hovnanian Chairman of the Board

 

5

 

PROXY VOTING METHODS

 

If at the close of business on January 22, 2024, you were a shareholder of record or held shares through a broker or bank, you may vote your shares as described below or you may vote in person at the Annual Meeting of Shareholders.   To reduce our administrative and postage costs, we would appreciate if shareholders of Class A Common Stock and registered shareholders of Class B Common Stock would please vote over the Internet or by telephone, both of which are available 24 hours a day. You may revoke your proxies at the times and in the manners described on page 19 of the Proxy Statement. If you are a shareholder of record or hold shares through a broker or bank and are voting by proxy, your vote must be received by 11:59 p.m. (Eastern Time) on March 20, 2024 to be counted unless otherwise noted below.   Your Vote is Important — Thank You for Voting

 

6

 

TO VOTE BY PROXY:

 

Shareholders of Class A Common Stock
& Shareholders of Class B Common Stock:

 

	BY INTERNET   Go to the website at www.proxyvote.com and follow the instructions, 24 hours a day, seven days a week.   You will need the 16-digit Control Number included on your Notice to obtain your records and to create an electronic voting instruction form.
	BY TELEPHONE   From a touch-tone telephone, dial (800) 690-6903 and follow the recorded instructions, 24 hours a day, seven days a week.   You will need the 16-digit Control Number included on your Notice in order to vote by telephone.
	BY MAIL   Request a proxy card from us by following the instructions on your Notice. When you receive the proxy card, mark your selections on the proxy card. Date and sign your name exactly as it appears on your proxy card. Mail the proxy card in the postage-paid envelope that will be provided to you. Mailed proxy cards must be received no later than March 20, 2024 to be counted for the 2024 Annual Meeting of Shareholders.		*Additional Information for Shareholders of Class B Common Stock Held in Nominee Name: Shares of Class B Common Stock held in nominee name will be entitled to ten votes per share only if the beneficial owner voting instruction card and the nominee proxy card relating to such shares are properly completed, mailed and received not less than three nor more than 20 business days prior to March 21, 2024.

 

7

 

 

 

 

NOTICE IS HEREBY GIVEN

 

The Annual Meeting of Shareholders of Hovnanian Enterprises, Inc. will be held on Thursday, March 21, 2024, at the offices of Bilzin Sumberg Baena Price & Axelrod LLP, 1450 Brickell Avenue, 23rd Floor, Miami, FL 33131 at 9:00 a.m., Eastern Time.

 

FOR THE FOLLOWING MATTERS:

 

	01   The election of the directors named herein of the Company for the ensuing year, to serve until the next Annual Meeting of Shareholders of the Company, and until their respective successors may be elected and qualified;		02   The ratification of the selection of Deloitte & Touche LLP, an independent registered public accounting firm, to examine the financial statements of the Company for the year ending October 31, 2024;
	03   The approval of the Third Amended and Restated 2020 Hovnanian Enterprises, Inc. Stock Incentive Plan;		04   The approval of the compensation of the Company’s named executive officers in a non-binding, advisory vote;
	05   The approval of an amendment to the Company’s stockholder rights plan; and		06   The transaction of such other business as may properly come before the meeting and any adjournment thereof.

 

The Board of Directors recommends that you vote FOR each of the nominees listed in proposal 1 and FOR proposals 2, 3, 4 and 5.

 

9

 

 

Only shareholders of record at the close of business on January 22, 2024 are entitled to notice of, and to vote at, the Annual Meeting of Shareholders. Accompanying this Notice is a proxy statement, proxy card(s) and the Company’s Annual Report for the fiscal year ended October 31, 2023.

 

To ensure your shares are voted, you may vote your shares over the Internet, by telephone or by requesting a paper proxy card to complete, sign and return by mail. Shares of Class B Common Stock held in nominee name will be entitled to ten votes per share only if the beneficial owner voting instruction card and the nominee proxy card relating to such shares are properly completed, mailed and received not less than three nor more than 20 business days prior to March 21, 2024. These voting procedures are described on pages 6 and 7 and on the proxy card.

 

All shareholders are urged to attend the meeting in person or by proxy. Shareholders who do not expect to attend the meeting are requested to complete, sign and date the enclosed proxy card and return it promptly, or, if applicable, to register their vote via the Internet or by telephone according to the instructions on pages 6 and 7 and on the proxy card. 

 

By order of the Board of Directors,

 

 

ELIZABETH D. TICE

Secretary

 

February , 2024

 

10

 

 

TO

NOTE

 

________________

 

If you are a shareholder of record and you plan to attend the Annual Meeting of Shareholders, please mark the appropriate box on your proxy card or, if applicable, so indicate when designating a proxy via the Internet or by telephone. If your shares are held by a bank, broker or other intermediary and you plan to attend, please send written notice to Hovnanian Enterprises, Inc., 90 Matawan Road, Fifth Floor, Matawan, New Jersey 07747, Attention: Elizabeth D. Tice, Secretary, and enclose evidence of your ownership (such as a letter from the bank, broker or other intermediary confirming your ownership or a bank or brokerage firm account statement). The names of all those planning to attend will be placed on an admission list held at the registration desk at the entrance to the meeting. In order to be admitted to the Annual Meeting of Shareholders, you will need a form of personal identification (such as a driver’s license) along with your Notice, proxy card or proof of Common Stock ownership. If your shares are held beneficially in the name of a bank, broker or other holder of record and you wish to be admitted to the Annual Meeting of Shareholders, you must present proof of your ownership of our Common Stock, such as a bank or brokerage account statement. If you do not plan to attend the Annual Meeting of Shareholders, please designate a proxy by mail or, if applicable, via the Internet or by telephone. If you choose to vote by mail, please complete, sign and date the enclosed proxy card(s) and return it promptly so that your shares will be voted. If you have received a hard copy of the proxy materials, the enclosed envelope requires no postage if mailed in the United States.

 

11

 

TABLE of CONTENTS

 

 

TABLE of CONTENTS

 

		18	General
		22	Voting Rights & Security Ownership of Certain Beneficial Owners & Management
	PROPOSAL I	26	Election of Directors
		44	Meetings of the Board of Directors & Committees of the Board of Directors
	PROPOSAL II	50	Ratification of the Selection of an Independent Registered Public Accounting Firm
	PROPOSAL III	52	Approval of The Third Amended & Restated 2020 Hovnanian Enterprises, Inc. Stock Incentive Plan
	PROPOSAL IV	70	Advisory Vote on Executive Compensation
	PROPOSAL V	76	Approval of an Amendment to the Company’s Stockholder Rights Plan
		84	The Compensation Committee
	COMPENSATION DISCUSSION & ANALYSIS	90
		91	Executive Summary
		104	Compensation Philosophy & Objectives

 

 

TABLE of CONTENTS

 

		112	Fiscal 2023 Compensation Elements & Compensation Mix
		115	Details of Compensation Elements
		136	Actions for Fiscal 2024
		137	Tax Deductibility & Accounting Implications
		138	Timing & Pricing of Equity Awards
		139	Stock Ownership Guidelines & Delayed Delivery Periods
	EXECUTIVE COMPENSATION	142
		142	Summary Compensation Table
		146	Grants of Plan-Based Awards in Fiscal 2023
		148	Outstanding Equity Awards at Fiscal 2023 Year-End
		154	Option Exercises & Stock Vested in Fiscal 2023
		156	Nonqualified Deferred Compensation for Fiscal 2023
		160	Potential Payments Upon Termination or Change-in-Control
		164	Pay Ratio Disclosure
		166	Pay Versus Performance

 

 

TABLE of CONTENTS

 

		171	Non-Employee Director Compensation
		174	The Audit Committee
		177	The Audit Committee Report
		179	Fees Paid to Principal Accountant
		180	Principal Accountant Independence
		180	Corporate Governance
		182	Board Oversight of Risk Management
		186	Environmental, Social & Governance (ESG) Practices
		192	Leadership Structure
		192	Certain Relationships & Related Transactions
		196	Important Notice Regarding the Availability of Proxy Materials for the Shareholder Meeting to be Held on March 21, 2024
		197	General
		199	Shareholder Proposals for the 2025 Annual Meeting

 

 

TABLE of CONTENTS

 

	APPENDIX A		Third Amended and Restated 2020 Hovnanian Enterprises, Inc. Stock Incentive Plan
	APPENDIX B-1		Stockholder Rights Plan
	APPENDIX B-2		Stockholder Rights Plan Amendment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

GENERAL

 

 

PROXY STATEMENT

 

GENERAL

 

HOVNANIAN  ENTERPRISES, INC .   90 Matawan Road,  Fifth Floor,  Matawan, N.J. 07747

The accompanying proxy is solicited on behalf of the Board of Directors (the “Board”) of Hovnanian Enterprises, Inc. (the “Company”, “we”, “us” or “our”) for use at the 2024 Annual Meeting of Shareholders (the “2024 Annual Meeting”) referred to in the foregoing Notice and at any adjournment thereof.   Shares represented by properly executed proxies that are received or executed in time and not revoked will be voted in accordance with the specifications provided thereon. If no specifications are made in an executed proxy, the persons named in the accompanying proxy card(s) will vote the shares represented by such proxies (1) for the Board of Directors’ slate of directors, (2) for the ratification of the selection of Deloitte & Touche LLP, an independent registered public accounting firm, to examine the financial statements of the Company for the fiscal year ending October 31, 2024, (3) for the approval of the Third Amended and Restated 2020 Hovnanian Enterprises, Inc. Stock Incentive Plan, (4) for the approval, in a non-binding, advisory vote, of the compensation of the Company’s named executive officers, (5) for the approval of an amendment to the Company’s stockholder rights plan and (6) on any other matters as recommended by the Board of Directors, unless contrary instructions are given.   Any person may revoke a previously designated proxy before it is exercised. If you voted by Internet, telephone or mail and are a shareholder of record, you may change your vote and revoke your proxy by (1) delivering written notice of revocation to Elizabeth Tice, Secretary, Hovnanian Enterprises, Inc., 90 Matawan Road, Fifth Floor, Matawan, N.J. 07747, provided such notice of revocation is received no later than March 20, 2024, (2) voting again by Internet or telephone at a later time before the closing of voting facilities at 11:59 p.m. (Eastern Time) on March 20, 2024, (3) submitting a properly signed proxy card with a later date that is received no later than March 21, 2024 prior to voting at the meeting or (4) revoking your proxy and voting in person at the 2024 Annual Meeting. If you hold your shares in street name, you may submit new voting instructions by contacting your bank, broker or other nominee. You may also change your vote or revoke your proxy in person at the 2024 Annual Meeting if you obtain a signed proxy from the record holder (bank, broker or other nominee) giving you the right to vote the applicable shares. Please note that attendance at the 2024 Annual Meeting will not by itself revoke a proxy.

 

 

We will bear the costs of soliciting proxies from the holders of our Class A Common Stock and Class B Common Stock (collectively, the “Common Stock”). We are initially soliciting these proxies by mail and electronic mail, but solicitation may be made by our directors, officers and selected other employees telephonically, electronically or by other means of communication. Directors, officers and employees who help us in the solicitation will not be specially compensated for those services, but they may be reimbursed for their out-of-pocket expenses incurred in connection with the solicitation. Brokerage houses, nominees, fiduciaries and other custodians will be requested to forward soliciting materials to beneficial owners and will be reimbursed for their reasonable out-of-pocket expenses incurred in sending proxy materials to beneficial owners.

  

 

 

 

VOTING RIGHTS 

& SECURITY OWNERSHIP 

of CERTAIN BENEFICIAL

OWNERS & MANAGEMENT

 

	The Board of Directors has set January 22, 2024 as the record date for the 2024 Annual Meeting. As of the close of business on the record date, the outstanding voting securities of the Company consisted of            shares of Class A Common Stock, each share entitling the holder thereof to one vote, and             shares of Class B Common Stock, each share entitling the holder thereof to ten votes if specified ownership criteria have been timely met. Other than as set forth in the table below, there are no persons known to the Company to be the beneficial owners of shares representing more than 5% of either the Company’s Class A Common Stock or Class B Common Stock, which represent the classes of the Company’s voting stock.
	The following table sets forth, as of January 22, 2024, (1) the Class A Common Stock and Class B Common Stock of the Company beneficially owned by holders of more than 5% of either the Class A Common Stock or the Class B Common Stock of the Company and (2) the Class A Common Stock, Class B Common Stock and Depositary Shares of the Company beneficially owned by each Director, each nominee for Director, each executive officer named in the tables set forth under “Executive Compensation” beginning on page 142 (the “named executive officers”) and all Directors and executive officers as a group. Currently none of the Directors and executive officers own any shares of 7.625% Series A Preferred Stock.

 

 

		Class A Common Stock (1)				Class B Common Stock (1)
		Amount and Nature of Beneficial Ownership		Percent of Class (2)		Amount and Nature of Beneficial Ownership		Percent of Class (2)
Directors, Nominees for Director, Named Executive Officers & Directors and Executive Officers as a Group
Ara K. Hovnanian (3)
Robert B. Coutts
Miriam Hernandez-Kakol
Edward A. Kangas
Joseph A. Marengi
Brad G. O’Connor
Vincent Pagano Jr.
Robin Stone Sellers
J. Larry Sorsby (4)
All Directors and executive officers as a group (9 persons)
Holders of More Than 5%
Kevork S. Hovnanian Family Limited Partnership (5)
Hovnanian Family 2012 L.L.C. (6)
Trusts for Kevork S. Hovnanian’s Family (7)
Alexander Hovnanian, including as Trustee of the Trusts for Ara Hovnanian’s Family (8)

 

 

 

 

 

DELINQUENT SECTION 16(A) REPORTS

 

 

PROPOSAL I

—Election of Directors

 

 

 

ELECTION of DIRECTORS

 

 

BOARD of DIRECTORS

 

 

Name	Age		Company Affiliation	Year First Became a Director
Ara K. Hovnanian	66		President, Chief Executive Officer, Chairman of the Board & Director	1981
Robert B. Coutts	73		Independent Director	2006
Miriam Hernandez-Kakol	70		Independent Director	2022
Edward A. Kangas	79		Lead Independent Director	2002
Joseph A. Marengi	70		Independent Director	2006
Vincent Pagano Jr.	73		Independent Director	2013
Robin Stone Sellers	71		Independent Director	2018
J. Larry Sorsby	68		Director	1997

 

COMPOSITION

 

The Board of Directors seeks to ensure that the Board of Directors is composed of members whose particular experience, qualifications, attributes and skills, when taken together, will allow the Board of Directors to satisfy its oversight responsibilities effectively. As discussed below under “Corporate Governance and Nominating Committee” beginning on page 46, a slate of Directors to be nominated for election at the annual shareholders’ meeting each year is approved by the Board of Directors after recommendation by the Corporate Governance and Nominating Committee. In the case of a vacancy on the Board of Directors (other than one resulting from removal by shareholders), the Corporate Governance and Nominating Committee will identify individuals believed to be qualified candidates to serve on the Board of Directors and shall review the candidates who have met those qualifications with the Company’s Chairman, who will determine if the candidate is eligible for recommendation by the Corporate Governance and Nominating Committee to the full Board of Directors. If recommended, the Board of Directors will then approve a director nominee to fill the vacancy on the Board of Directors.

 

 

COMPOSITION

 

COMPOSITION

 

  

Board of Directors’ Experience Matrix

Ara K. Hovnanian**

Robert B. Coutts

Miriam Hernandez-Kakol

Edward A. Kangas*

Joseph A. Marengi

Vincent Pagano Jr.

Robin Stone Sellers

J. Larry Sorsby**

Enterprise Leadership Experience as a senior executive of a large commercial organization.

✓

✓

✓

✓

✓

✓

✓

✓

Homebuilding/Real Estate Professional experience in acquiring, managing or selling of residential real estate.

✓

✓

✓

✓

Financial Professional experience in preparing, auditing or evaluating financial statements or in the management of commercial investments.

✓

✓

✓

✓

✓

✓

✓

✓

Technology/Cybersecurity Experience in the management of technology applications and/or cybersecurity risk.

✓

✓

✓

Public Company Experience serving as a director of another public company.

✓

✓

✓

✓

Risk Management Experience with the implementation of strategic risk plans and/or the management of the associated risks.

✓

✓

✓

✓

✓

✓

✓

✓

Human Capital Experience in attracting, developing and retaining of talent and/or succession planning.

✓

✓

✓

✓

✓

✓

✓

✓

Sales & Marketing Experience in the operation and management of sales and marketing strategies, branding and consumer trends.

✓

✓

✓

✓

✓

✓

Corporate Governance Experience in corporate governance for a public company.

✓

✓

✓

✓

✓

✓

 

*Lead Independent Director **Non-Independent Director

 

 

 

 

 

BOARD of DIRECTORS

 

 

NOMINEES’ BIOGRAPHIES

 

 

 

 

ARA K. 

HOVNANIAN

 

President, Chief Executive Officer, 

Chairman of the Board & Director

 

 

NOMINEES’ BIOGRAPHIES

 

 

			Mr. Coutts retired from the position of Executive Vice President of Lockheed Martin Corporation (NYSE), which he held from 2000 to 2008. Previously, Mr. Coutts was President and Chief Operating Officer of the former Electronics Sector of Lockheed Martin from 1998 to 2000. He was elected an officer by the Board of Directors of Lockheed Martin in December 1996. Mr. Coutts held management positions with General Electric Corporation (NYSE) from 1972 to 1993 and was with GE Aerospace when it became part of Lockheed Martin in 1993. Mr. Coutts is the retired Chairman of Sandia Corporation, a subsidiary of Lockheed Martin Corporation, served on the Board of Directors, Compensation Committee and Corporate Governance Committee of Stanley Black and Decker (NYSE) and currently serves on the Board of Directors of Siemens Government Technologies, Inc., where he is Chairman of the Compensation Committee. Mr. Coutts is a member of the Board of the Baltimore Symphony Orchestra and on the investment committee of Wesley Theological Seminary. He was elected as a Director of Hovnanian Enterprises, Inc. in March 2006 and is a member of the Company’s Audit Committee and Compensation Committee.
	ROBERT B. COUTTS
	Independent Director

			Ms. Hernandez-Kakol retired from the position of Senior Partner and Global Head of Management Consulting Practice of KPMG LLP, which she held from May 2019 to October 2021. She has served on the Toyota Financial Services Bank (TFSB) Board since September 2022 and is a member of TFSB’s Audit, Risk and Community Reconstruction Act committees. In January 2023 she was elected to the LPGA Foundation Board. Ms. Hernandez-Kakol is NACD Directorship Certified®. Previously, she led the Global Customer and Operations practice at KPMG from 2015 to 2019. Prior to KPMG, Ms. Hernandez-Kakol was at BearingPoint from 2003 to 2008 as Managing Director and Senior Vice President. She rejoined KPMG in 2008, holding various partner roles. She also held various positions at Telcordia Technologies from 1988 to 1999. Ms. Hernandez-Kakol has served on the board of Junior Achievement of NJ, the Hispanic Information Technology Executive Council (HITEC), KPMG’s Women’s Advisory Board and the STEM Committee of the National Academy Foundation. Ms. Hernandez-Kakol was elected as a Director of Hovnanian Enterprises, Inc. in January 2022 and is a member of the Company’s Audit Committee and a member of the Compensation Committee.
	MIRIAM HERNANDEZ-KAKOL
	Independent Director

 

 

NOMINEES’ BIOGRAPHIES

 

 

			Mr. Kangas was the Global Chairman and Chief Executive Officer of Deloitte from December 1989 to May 2000, when he retired. He served as the Chairman of the Board of Deutsche Bank USA Corporation from 2015 to 2022. He served as Lead Director at United Technologies from 2010 to 2018. He was on the Board of Directors of IntelSat (NYSE) from 2012 to 2022, Tenet Healthcare Corporation (NYSE) from 2003 to 2019, Intuit from 2007 to 2016, AllScripts, Inc. (Nasdaq) from 2008 to 2012 and Vivus Inc. (Nasdaq) from 2018 to 2020. Mr. Kangas is a former Chairman of the Board of the National Multiple Sclerosis Society. Mr. Kangas was elected as a Director of Hovnanian Enterprises, Inc. in September 2002, is Lead Independent Director of the Company’s Board of Directors, Chairman of the Company’s Audit Committee and a member of the Company’s Compensation Committee and Corporate Governance and Nominating Committee.
	EDWARD A. KANGAS
	Lead Independent Director

			Mr. Marengi, from July 2007 to March 2012, served as a Venture Partner for Austin Ventures. Prior to that, Mr. Marengi served as senior vice president for the Commercial Business Group of Dell Inc. (Nasdaq). In this role, Mr. Marengi was responsible for the Dell units serving medium business, large corporate, government, education and healthcare customers in the United States. Mr. Marengi joined Dell in July 1997 from Novell Inc. (Nasdaq), where he was president and chief operating officer. Mr. Marengi also served on the Boards of Directors of Quantum Corporation (NYSE) from 2008 to 2013 and Entorian Technologies, Inc. (formerly, the OTC Markets) from 2008 to 2012. Mr. Marengi was elected to the Board of Directors of Hovnanian Enterprises, Inc. in March 2006 and is the Chairman of the Company’s Compensation Committee and a member of the Company’s Audit Committee and Corporate Governance and Nominating Committee.
	JOSEPH A. MARENGI
	Independent Director

 

 

NOMINEES’ BIOGRAPHIES

 

 

			Mr. Pagano was a partner at the law firm of Simpson Thacher & Bartlett LLP until his retirement at the end of 2012. He was the head of the firm’s capital markets practice from 1999 to 2012 and, before that, administrative partner of the firm from 1996 to 1999. He was a member of the firm’s executive committee during nearly all of the 1996 - 2012 period. He serves on the Board of Directors of Cheniere Energy Partners GP, LLC, the general partner of Cheniere Energy Partners (NYSE MKT), where he is chairman of the Conflicts Committee and a member of the Audit Committee, and also served on the Board of Directors of L3 Technologies, Inc. (NYSE) from 2013 until L3’s merger with Harris Corporation in 2019, where he was chairman of the Nominating and Corporate Governance Committee and a member of the Audit Committee. Mr. Pagano was elected to the Board of Directors of Hovnanian Enterprises, Inc. in March 2013, is the Chairman of the Company’s Corporate Governance and Nominating Committee and is a member of the Company’s Audit Committee.
	VINCENT PAGANO JR.
	Independent Director

 

			Ms. Sellers most recently served as Chief Executive Officer of Christie’s International Real Estate from 2012 through 2014. As CEO of Christie’s, Ms. Sellers was responsible for all aspects of the company’s business, including its global sales, marketing strategy, new development projects and finance groups. Ms. Sellers was CEO of Crossroads Property Strategies from 2008 to 2012 and head of real estate and a partner at McKinsey & Company from 1989 through 2007. From 1978 through 1989, Ms. Sellers practiced law in the real estate departments of two major New York City law firms. Ms. Sellers is a member of the Board of Advisors of the Weitzman School of Design at the University of Pennsylvania, is a member of the Board of Directors of Forbes Global Properties, a private real estate marketing firm, where she was Chair of the Board from 2019 through 2023. She is also the founder of First Chance, an organization that pays bail for indigent women in Palm Beach County, Florida. Ms. Sellers was elected to the Board of Directors of Hovnanian Enterprises, Inc. in June 2018 and is a member of the Company’s Audit Committee and Corporate Governance and Nominating Committee.
	ROBIN STONE SELLERS
	Independent Director

 

 

NOMINEES’ BIOGRAPHIES

 

 

			Mr. Sorsby retired in October 2023 from the positions of Chief Financial Officer of Hovnanian Enterprises, Inc. which he held since 1996 and Executive Vice President which he held since November 2000. Previously, Mr. Sorsby was also Senior Vice President from March 1991 to November 2000. He was elected as a Director of the Company in 1997. From 2013 through 2023, he served as Chairman of the Board of Visitors for Urology at The Children’s Hospital of Philadelphia (“CHOP”) and also served on the Foundation Board of Advisors at CHOP from 2015 through 2023.
	J. LARRY SORSBY
	Director

 

 

 

 

 

 

MEETINGS of the BOARD of DIRECTORS & COMMITTEES of the  BOARD OF DIRECTORS

 

 

MEETINGS & COMMITTEES

 

During the year ended October 31, 2023, the Board of Directors held six meetings. In addition, Directors considered Company matters and had communications with the Chairman of the Board of Directors and others outside of formal meetings. During the fiscal year ended October 31, 2023, each current Director attended 100% of the meetings of the Board of Directors and five of six Directors attended 100% of the Committee meetings on which each Director served, with one Director attending 94% of such meetings. The Company’s Corporate Governance Guidelines (“Governance Guidelines”) provide that directors are expected to attend the Annual Meeting of Shareholders. All of the current members of the Board of Directors attended the Annual Meeting of Shareholders held on March 28, 2023.

 

AUDIT COMMITTEE

 

The members of the Audit Committee of the Board of Directors during the fiscal year ended October 31, 2023 were Mr. Kangas, Mr. Coutts, Ms. Hernandez-Kakol, Mr. Marengi, Mr. Pagano and Ms. Sellers. The Board of Directors has determined that all of the members of the Audit Committee meet the standards for independence in our Corporate Governance Guidelines (the “Governance Guidelines”), which are available on the Company’s website at www.khov.com under “Investor Relations”, “Corporate Governance”, and the independence requirements mandated by the NYSE listing standards. During the fiscal year ended October 31, 2023, the Audit Committee met on twelve occasions.

 

The Audit Committee is currently chaired by Mr. Kangas and is responsible for reviewing and approving the scope of the annual audit undertaken by the Company’s independent registered public accounting firm and meeting with them to review the results of their work as well as their recommendations. The Audit Committee selects the Company’s independent registered public accounting firm and also approves and reviews their fees. The Audit Committee is also responsible for the oversight of the Company’s Internal Audit Department. The Vice President of Internal Audit for the Company reports directly to the Audit Committee on, among other things, the Company’s compliance with certain Company procedures which are designed to enhance management’s understanding of operating issues and the results of the Audit Department’s annual audits of the various aspects of the Company’s business. For additional information related to the Audit Committee, see “The Audit Committee” beginning on page 174. The duties and responsibilities of the Audit Committee are set forth in its charter, which is available at www.khov.com under “Investor Relations”, “Corporate Governance.”

 

 

 

 

MEETINGS & COMMITTEES

 

COMPENSATION COMMITTEE

 

The members of the Compensation Committee of the Board of Directors during the fiscal year ended October 31, 2023 were Mr. Marengi, Mr. Coutts, Ms. Hernandez-Kakol and Mr. Kangas. The Board of Directors has determined that all of the members of the Compensation Committee meet the standards for independence in our Governance Guidelines and the independence requirements mandated by the rules of the NYSE and SEC. In addition, all members of the Compensation Committee qualify as “Non-Employee Directors” for purposes of Rule 16b-3 under Exchange Act.

 

The Compensation Committee is currently chaired by Mr. Marengi and is responsible for reviewing salaries, bonuses and other forms of compensation for the Company’s senior executives, key management employees and non-employee Directors and is active in other compensation and personnel areas as the Board of Directors from time to time may request. For a discussion of the criteria used and factors considered by the Compensation Committee in reviewing and determining executive compensation, see “The Compensation Committee” and “Compensation Discussion and Analysis” below. During the fiscal year ended October 31, 2023, the Compensation Committee met on five occasions. The duties and responsibilities of the Compensation Committee are set forth in its charter, which is available at www.khov.com under “Investor Relations”, “Corporate Governance.”

 

CORPORATE GOVERNANCE & NOMINATING COMMITTEE

 

The members of the Corporate Governance and Nominating Committee of the Board of Directors are Messrs. Pagano, Kangas and Marengi and Ms. Sellers. The Board of Directors has determined that all of the members of the Corporate Governance and Nominating Committee meet the standards for independence in our Governance Guidelines and the independence requirements mandated by the NYSE listing standards. During the fiscal year ended October 31, 2023, the Corporate Governance and Nominating Committee met on four occasions.

 

 

 

 

The Corporate Governance and Nominating Committee is currently chaired by Mr. Pagano. The Corporate Governance and Nominating Committee is responsible for corporate governance matters, reviewing and recommending nominees for the Board of Directors, succession planning, ESG and cybersecurity risk oversight and other Board-related policies. The Corporate Governance and Nominating Committee also oversees the annual performance evaluation of the Board of Directors and its committees to determine if the Board and its committees are functioning effectively, the Board of Directors’ periodic review of the Governance Guidelines and compliance with the Company’s Related Person Transaction Policy. With respect to the annual performance evaluation, the Company’s Governance Guidelines require that each Director annually prepares an assessment of each Board committee on which such Director serves as well as of the full Board of Directors as to the effectiveness of each such committee and the full Board of Directors and any recommendations for improvement. The results of the self-evaluation are reported to the Board.

 

In conducting its nomination function, among other factors, the Corporate Governance and Nominating Committee generally considers the size of the Board of Directors best suited to fulfill its responsibilities, the Board of Directors’ overall membership composition to ensure the Board of Directors has the requisite expertise and consists of persons with sufficiently diverse backgrounds, the independence of non-employee directors and possible conflicts of interest of existing and potential members of the Board of Directors, as more fully described under “Proposal 1—Election of Directors—Board of Directors—Composition” above.

 

The Company does not have a specific policy regarding shareholder nominations of potential directors to the Board of Directors, other than through the process described under “Shareholder Proposals for the 2025 Annual Meeting” below. The Corporate Governance and Nominating Committee will consider director candidates recommended by shareholders in the same manner as it considers candidates recommended by others, including the Board of Directors. Possible nominees to the Board of Directors may be suggested by any Director and given to the Corporate Governance and Nominating Committee. The Corporate Governance and Nominating Committee may seek potential nominees and engage search consultants to assist it in identifying potential nominees. The Corporate Governance and Nominating Committee’s charter provides that it shall consider all factors it considers appropriate, including the benefits of racial and gender diversity. The Corporate Governance and Nominating Committee recommends to the Board of Directors a slate of nominees for the Board of Directors for inclusion in the matters to be voted upon at each Annual Meeting. The Company’s Restated By-laws provide that Directors need not be shareholders. Vacancies on the Board of Directors, other than those resulting from removal by shareholders, may be filled by action of the Board of Directors.

 

 

 

 

MEETINGS & COMMITTEES

 

The duties and responsibilities of the Corporate Governance and Nominating Committee are set forth in its charter, which is available at www.khov.com under “Investor Relations”, “Corporate Governance”, and the Governance Guidelines are available at the same website address under “Investor Relations”, “Corporate Governance/Guidelines.”

 

STRATEGY COMMITTEE

 

Effective November 1, 2023, the Board established the Strategy Committee. The Strategy Committee is responsible for setting the agenda for discussions by, and providing other assistance to, the Board of Directors with respect to identifying and setting strategic goals and the methods to achieve such goals, identifying opportunities to create value for the Company’s stockholders, evaluating and executing strategic transactions, and recommending strategy related topics for the Board of Directors’ meetings.

 

The members of the Strategy Committee of the Board of Directors are Messrs. Hovnanian, Sorsby and Kangas. The Strategy Committee is currently chaired by Mr. Hovnanian. Since the Strategy Committee was not formed until after fiscal 2023, the Committee did not meet during the fiscal year ended October 31, 2023. The duties and responsibilities of the Strategy Committee are set forth in its charter, which is available at www.khov.com under “Investor Relations”, “Corporate Governance.”

 

 

 

 

VOTE REQUIRED

 

The election of the nominees to the Company’s Board of Directors for the ensuing year, to serve until the next Annual Meeting of Shareholders of the Company, and until their respective successors are elected and qualified, requires that each director be elected by the affirmative vote of a majority of the votes cast by the shareholders of Class A Common Stock and Class B Common Stock, voting together, represented in person or by proxy at the 2024 Annual Meeting. In determining whether each director has received the requisite number of affirmative votes, abstentions and broker non-votes will have no impact on such matter because such shares are not considered votes cast.

 

Mr. Hovnanian and others with voting power over the shares held by the members of the family of Kevork S. Hovnanian (the “Hovnanian Family”) and various trusts and entities established for the benefit of the Hovnanian Family have informed the Company that they intend to vote in favor of the nominees named in this proposal. Because of their collective voting power, these nominees are assured election.

 

Our Board of Directors recommends that shareholders vote FOR the election of the nominees named in this proposal to the Company’s Board of Directors.

 

 

 

 

 

PROPOSAL II

 

The selection of an independent registered public accounting firm to audit financial statements of the Company to be made available or transmitted to shareholders and to be filed with the SEC for the fiscal year ending October 31, 2024 is submitted to this 2024 Annual Meeting for ratification. Deloitte & Touche LLP has been selected by the Audit Committee of the Company to audit such financial statements. In the event that the shareholders fail to ratify the appointment, the Audit Committee will consider the view of the shareholders in determining its selection of the Company’s independent registered public accounting firm for the subsequent fiscal year. Even if the selection is ratified, the Audit Committee may, in its discretion, direct the appointment of a new independent registered public accounting firm at any time if the Audit Committee determines that such a change would be in the best interests of the Company and its shareholders.

 

The Company has been advised that representatives of Deloitte & Touche LLP will attend the 2024 Annual Meeting to respond to appropriate questions and will be afforded the opportunity to make a statement if the representatives so desire.

 

VOTE REQUIRED

 

Ratification of the selection of Deloitte & Touche LLP as the Company’s independent registered public accounting firm to examine financial statements of the Company for the year ending October 31, 2024 requires the affirmative vote of a majority of the votes cast by the shareholders of Class A Common Stock and Class B Common Stock, voting together, represented in person or by proxy at the 2024 Annual Meeting. In determining whether the proposal has received the requisite number of affirmative votes, abstentions will have no impact on such matter because such shares are not considered votes cast.

 

Mr. Hovnanian and others with voting power over the shares held by the Hovnanian Family and various trusts and entities established for the benefit of the Hovnanian Family have informed the Company that they intend to vote in favor of this proposal. Because of their collective voting power, this proposal is assured passage.

 

Our Board of Directors recommends that shareholders vote FOR the ratification of the selection of Deloitte & Touche LLP as the Company’s independent registered public accounting firm for the year ending October 31, 2024.

 

 

 

 

 

PROPOSAL III

 

Shareholders are being asked to consider and approve a proposal to further amend and restate the Second Amended and Restated 2020 Hovnanian Enterprises, Inc. Stock Incentive Plan (as proposed to be amended, the “Amended Plan”). The Amended Plan, if approved, will permit the Company to continue making equity-based and other incentive awards to its employees, directors and consultants in a manner intended to properly incentivize such individuals by aligning their interest with the interests of the Company’s shareholders. The Company has been granting equity-based incentive awards under the existing Second Amended and Restated 2020 Hovnanian Enterprises, Inc. Stock Incentive Plan (the “Existing Plan”), however, the Company presently has insufficient shares of Common Stock (“Shares”) remaining available for future grants under the Existing Plan to make equity grants at a level that would be commensurate with the Company’s past practices and performance. As of the January 22, 2024 record date for the 2024 Annual Meeting, approximately       Shares (the “Remaining Reserve”) remained available for future grants of awards under the Existing Plan. The proposed Amended Plan will have a reserve of up to       Shares for future grants, which represents an increase of 300,000 Shares above the current Remaining Reserve and an increase of 1,150,000 Shares above the initial reserve of 565,000 Shares that had been initially approved under the 2020 Hovnanian Enterprises, Inc. Stock Incentive Plan when it was originally adopted in 2020 (the “Original Plan”). The Amended Plan is substantially identical to the Existing Plan, except for the contemplated Share reserve increase. The number and type of awards that may be granted under the Amended Plan are not determinable at this time as the Compensation Committee or the Board, as applicable, will make these determinations in its sole discretion.

 

The principal purpose of the proposed Amended Plan is to facilitate the ability to grant contemplated long-term performance awards to key employees, directors and consultants of the Company. As described below under “Compensation Discussion and Analysis,” equity-based awards have historically formed a significant portion of our total compensation in order to align key employees’ and directors’ interests with those of our shareholders. Our ability to make equity-based awards helps us attract, retain and motivate key employees and directors as well as foster long-term value-creation.

 

The Company’s Board of Directors has approved the adoption of the Amended Plan and, if the Amended Plan is approved by shareholders at the 2024 Annual Meeting, it will become immediately effective as of the date of the 2024 Annual Meeting. If shareholders do not approve the Amended Plan, the Existing Plan will continue to remain in effect according to its terms, and we may continue to make awards (subject to the Remaining Reserve) under the Existing Plan.

 

For a discussion of the Amended Plan, see “Material Features of the Amended Plan” below. The Amended Plan is set forth in Appendix A hereto.

 

 

 

 

BURN RATE AND DILUTION ANALYSIS

 

In reaching our conclusion as to the appropriateness of the additional share proposal, we reviewed key metrics that are typically used to evaluate such proposals. One such metric many investors use is a calculation that quantifies how quickly a company uses its shareholder capital. The total number of Shares issuable under awards we have granted under the Existing Plan, as a percentage of our annual weighted average Shares outstanding (commonly referred to as the “burn rate”), has been on average 3.1% over the last three completed fiscal years.

 

As applicable for the performance-based awards, this calculation is based on the amount of Shares issuable at the actual level of performance under awards as of the dates they were vested, except for market share unit (“MSU”) grants that are not subject to financial performance conditions in addition to the stock price performance conditions and which are included at target as of the dates they were granted and subsequently adjusted to reflect actual earnings levels above target based on actual stock price performance achievement. In addition to burn rate, many investors look at the economic effect of dilution. Assuming all Shares of the Company being requested to be included as the share reserve under the Amended Plan pursuant to this proposal were fully dilutive as of January 22, 2024, the dilutive effect of the increased number of shares above the Remaining Reserve on all outstanding Shares would be approximately       %.

 

When evaluating our burn rate and shareholder dilution as described above and related analysis and recommendations by Institutional Shareholder Services (“ISS”), we believe that shareholders should take into consideration the following relevant factors:

 

The dollar value of our annual equity grants is market standard for a company with our level of revenue and EBIT performance. However, due to our debt level, our award levels may appear disproportionate when compared to our market capitalization. Accordingly, if ISS used our enterprise value (which accounts for debt) instead of market capitalization to calculate our Shareholder Value Transfer (“SVT”), we would be more in line with ISS benchmarks.

 

 

 

 

In 2019 and 2020, ISS compared us to Non-Russell 3000 companies with higher burn rate benchmarks. Beginning in 2021, ISS started comparing us to Russell 3000 companies which resulted in our burn rate benchmarks falling dramatically. However, due to the lag in reporting performance awards in the burn rate, our 2019 and 2020 grants which were made under higher burn rate benchmarks are now being reflected in our burn rate analysis even though we are being measured against a lower benchmark. Accordingly, under ISS’ evaluation protocols, our award levels that were appropriate when granted are nevertheless adversely impacting our analysis now.

 

Because we traditionally net settle our equity awards to satisfy tax withholding, ISS’ burn rate and dilution calculations are artificially high as their calculations are based on gross shares rather than net shares issued.

 

Our burn rate includes time-based MSUs at deemed target level performance when granted. Any incremental shares earned over target are added to the burn rate calculation in the year earned. However, in certain years our MSUs paid out at less than target level, without a corresponding reduction adjustment to our burn rate.

 

Our Board of Directors recommends that shareholders vote FOR the approval of the Amended Plan.

 

 

 

 

MATERIAL FEATURES OF THE AMENDED PLAN

 

The following is a brief summary of the material features of the Amended Plan. Because this is only a summary, it does not contain all the information about the Amended Plan that may be important to you and is qualified in its entirety by the full text of the Amended Plan as set forth in Appendix A hereto.

 

PURPOSE

 

The purpose of the Amended Plan is to aid the Company and its affiliates in recruiting and retaining key employees, directors and consultants of outstanding ability and to motivate those employees, directors and consultants to exert their best efforts on behalf of the Company and its affiliates by providing incentives through the granting of “Awards”, which consist of options, stock appreciation rights or other stock-based Awards (including performance-based Awards) granted pursuant to the Amended Plan. All employees, directors and consultants of the Company and its affiliates are eligible to participate in the Amended Plan if they are selected by the Compensation Committee of the Board of Directors (the “Committee”) to participate in the Amended Plan (any such individual, a “Participant”). For the fiscal year ended October 31, 2023, approximately 81 employees, 6 directors (includes non-employee directors only) and no consultants were selected by the Committee to participate in the Existing Plan. The Company anticipates that future participation by employees and directors under the Amended Plan will be similar to their historical participation under the Existing Plan.

 

 

 

 

 

ADMINISTRATION

 

The Amended Plan is generally administered by the Committee, which may delegate its duties and powers in whole or in part to any subcommittee thereof consisting solely of at least two individuals who are each intended to be “Non-Employee Directors” within the meaning of Rule 16b-3 under the Exchange Act and “independent directors” within the meaning of the applicable rules, if any, of any national securities exchange on which shares of Common Stock of the Company are listed or admitted to trading; provided, however, that any action permitted to be taken by the Committee may be taken by the Board of Directors in its discretion. Additionally, if the Company’s Chief Executive Officer is serving as a member of the Board of Directors, the Board of Directors may by specific resolution constitute the Chief Executive Officer as a “committee of one” with the authority to grant Awards covering up to 40,000 Shares per fiscal year to certain non-executive officer Participants.

 

AWARDS

 

Awards are determined (“granted”) by the Committee and are subject to the terms and conditions stated in the Amended Plan and to such other terms and conditions, not inconsistent therewith, as the Committee shall determine. Under the terms of the Amended Plan, vesting of (or lapsing of restrictions on) an Award at the time of grant may not occur any more rapidly than on the first anniversary of the grant date for such Award (or the date of commencement of employment or service, in the case of a grant made in connection with a Participant’s commencement of employment or service), other than (i) in connection with a Change in Control (as defined in the Amended Plan) or (ii) as a result of a Participant’s death, retirement, disability or involuntary termination of employment without cause; provided, that such minimum vesting condition will not be required on Awards covering, in the aggregate, a number of Shares not to exceed 5% of the Absolute Share Limit, as defined and described below under “Limitations.” However, the Committee retains the ability under the Amended Plan to waive terms and conditions applicable to an Award after the time of grant (including with respect to the ability to accelerate or waive vesting conditions) in connection with a Participant’s death or disability. Any stock options or stock appreciation rights granted must have a per share exercise price that is not less than 100% of the fair market value of the Company’s Common Stock underlying such awards on the date an award is granted (other than in the case of awards granted in substitution of previously granted awards). The maximum term for stock options and stock appreciation rights granted under the Amended Plan is ten years from the initial date of grant.

 

 

 

 

EFFECT OF CERTAIN EVENTS ON AMENDED PLAN AND AWARDS

 

In the event of any change in the outstanding Shares of Common Stock by reason of any stock dividend or split, reorganization, recapitalization, merger, consolidation, spin-off, combination or exchange of Shares or other corporate exchange or change in capital structure, any distribution to shareholders of Common Stock other than regular cash dividends or any similar event, the Committee in its sole discretion and without liability to any person shall make such substitution or adjustment, if any, as it deems to be equitable, as to (1) the number or kind of Common Stock or other securities that may be issued as set forth in the Amended Plan or pursuant to outstanding Awards, (2) the exercise price relating to outstanding options or stock appreciation rights, (3) the maximum number or amount of Awards that may be granted to a Participant during a fiscal year and/or (4) any other affected terms of such Awards. Except as otherwise provided in an Award agreement, in the event of a Change in Control, (1) outstanding Awards will be subject to “double-triggered” vesting protection in the event that the Participant is involuntarily terminated without “cause” or terminates for “good reason” within the two year period following such Change in Control, (2) any service-based vesting condition will be deemed fully satisfied if the Company’s Shares cease to be publicly traded on a national securities exchange and (3) performance-based vesting conditions with respect to Awards will be deemed achieved based on the Share price in effect immediately prior to the Change in Control (in the case of vesting conditions linked to Share price) or based on deemed target level performance achievement (in the case of other performance-vesting conditions). Additionally, in the event that the Company or other surviving entity following the Change in Control will not be assuming outstanding Awards following the Change in Control, vesting of outstanding Awards will be automatically accelerated and such Awards will then be canceled in exchange for a payment in cash or other property equal to the value thereof as determined by the Committee which, in the case of options and stock appreciation rights, may equal the excess, if any, of value of the consideration to be paid in the Change in Control transaction to holders of the same number of Shares of Common Stock of the Company subject to such options or stock appreciation rights (or, if no consideration is paid in any such transaction, the fair market value of the Shares of Common Stock of the Company subject to such options or stock appreciation rights) over the aggregate exercise price of such options or stock appreciation rights.

 

 

 

 

LIMITATIONS

 

The Amended Plan provides that the total number of Shares of Common Stock of the Company that may be issued under the Amended Plan is 1,715,000 (the “Absolute Share Limit”). The number of Shares covered by Awards granted under the Amended Plan and awards that were outstanding under the Company’s 2012 Amended and Restated Stock Incentive Plan (the “2012 Plan”) as of the date the Existing Plan was initially approved by shareholders that terminate or lapse without the payment of consideration will be available for future grants under the Amended Plan. The Amended Plan also provides that the maximum number of Shares subject to Awards granted during a calendar year to any non-employee director serving on the Board, taken together with any cash fees paid to such non-employee director during such calendar year, shall not exceed $600,000 in total value (calculating the value of any such Awards based on the grant date fair value of such Awards for financial reporting purposes).

 

No Award may be granted under the Amended Plan after the tenth anniversary of January 24, 2020 (i.e., the date when the Board of Directors initially adopted the Original Plan), but Awards theretofore granted may be extended beyond that date.

 

The Amended Plan generally prohibits the Company from taking actions that would constitute a “repricing” of stock options or stock appreciation rights (for example, lowering exercise prices for outstanding Awards). Additionally, the Amended Plan precludes the payment of dividends or dividend equivalent rights on Awards unless and until the corresponding Award has vested in accordance with its terms.

 

 

 

 

AMENDMENT AND TERMINATION

 

The Committee may amend, alter or discontinue the Amended Plan, but no amendment, alteration or discontinuation shall be made which, (a) without the approval of the shareholders of the Company, would (except as provided in the Amended Plan in connection with adjustments in certain corporate events), increase the total number of Shares of Common Stock of the Company reserved for the purposes of the Amended Plan or change the maximum number of Shares of Common Stock of the Company for which Awards may be granted to any Participant or amend the prohibitions on repricing set forth above or (b) without the consent of a Participant, would materially impair any of the rights or obligations under any Award theretofore granted to such Participant under the Amended Plan; provided, however, that the Committee may amend the Amended Plan in such manner as it deems necessary to permit the granting of Awards meeting the requirements of the Internal Revenue Code of 1986, as amended (the “Code”), or other applicable laws. The Committee may not amend, alter or discontinue the provisions relating to a Change in Control after the occurrence of a Change in Control.

 

CLAWBACK/FORFEITURE

 

Any Awards granted under the Amended Plan may be subject to reduction, cancellation, forfeiture or recoupment to the extent required by applicable law or listed company rules, to the extent otherwise provided in an Award agreement at the time of grant or as determined pursuant to the Company’s recoupment policy.

 

NONTRANSFERABILITY OF AWARDS

 

Unless otherwise determined by the Committee, an Award shall not be transferable or assignable by the Participant otherwise than by will or by the laws of descent and distribution. Notwithstanding the foregoing, and subject to the conditions stated in the Amended Plan, a Participant may transfer an option (other than an option that is also an incentive stock option granted pursuant to the Amended Plan) or stock appreciation right in whole or in part by gift or domestic relations order to a family member of the Participant. Under no circumstances will the Committee permit the transfer of an Award for value.

 

 

 

CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES

 

Stock Options

 

An employee to whom an incentive stock option (“ISO”) that qualifies under Section 422 of the Code is granted will not recognize income at the time of grant or exercise of such option. No federal income tax deduction will be allowable to the Company upon the grant or exercise of such ISO. However, upon the exercise of an ISO, special alternative minimum tax rules apply for the employee.

 

When the employee sells Shares acquired through the exercise of an ISO more than one year after the date of transfer of such Shares and more than two years after the date of grant of such ISO, the employee will normally recognize a long-term capital gain or loss equal to the difference, if any, between the sale prices of such Shares and the option price. If the employee does not hold such Shares for this period, when the employee sells such Shares, the employee will recognize ordinary compensation income and possibly capital gain or loss in such amounts as are prescribed by the Code and regulations thereunder, and the Company will generally be entitled to a federal income tax deduction in the amount of such ordinary compensation income.

 

An employee to whom an option that is not an ISO (a “non-qualified option”) is granted will not recognize income at the time of grant of such option. When such employee exercises a non-qualified option, the employee will recognize ordinary compensation income equal to the excess, if any, of the fair market value as of the date of a non-qualified option exercise of the Shares the employee receives, over the option exercise price. The tax basis of such Shares will be equal to the exercise price paid plus the amount includable in the employee’s gross income, and the employee’s holding period for such Shares will commence on the day after which the employee recognized taxable income in respect of such Shares. Any subsequent sale of the Shares by the employee will result in long- or short-term capital gain or loss, depending on the applicable holding period. Subject to applicable provisions of the Code and regulations thereunder, the Company will generally be entitled to a federal income tax deduction in respect of the exercise of non-qualified options in an amount equal to the ordinary compensation income recognized by the employee. Any such compensation includable in the gross income of an employee in respect of a non-qualified option will be subject to appropriate federal, state, local and foreign income and employment taxes.

 

 

 

Restricted Stock

 

Unless an election is made by the Participant under Section 83(b) of the Code, the grant of an Award of restricted stock will have no immediate tax consequences to the Participant. Generally, upon the lapse of restrictions (as determined by the applicable restricted stock agreement between the Participant and the Company), a Participant will recognize ordinary income in an amount equal to the product of (a) the fair market value of a share of Common Stock of the Company on the date on which the restrictions lapse, less any amount paid with respect to the Award of restricted stock, multiplied by (b) the number of Shares of restricted stock with respect to which restrictions lapse on such date. The Participant’s tax basis will be equal to the sum of the amount of ordinary income recognized upon the lapse of restrictions and any amount paid for such restricted stock. The Participant’s holding period will commence on the date on which the restrictions lapse.

 

A Participant may make an election under Section 83(b) of the Code within 30 days after the date of transfer of an Award of restricted stock to recognize ordinary income on the date of award based on the fair market value of Common Stock of the Company on such date. An employee making such an election will have a tax basis in the Shares of restricted stock equal to the sum of the amount the employee recognizes as ordinary income and any amount paid for such restricted stock, and the employee’s holding period for such restricted stock for tax purposes will commence on the date after such date.

 

With respect to Shares of restricted stock upon which restrictions have lapsed, when the employee sells such Shares, the employee will recognize capital gain or loss consistent with the treatment of the sale of Shares received upon the exercise of non-qualified options, as described above.

 

Stock Units

 

A Participant to whom a restricted stock unit (“RSU”) is granted generally will not recognize income at the time of grant (although the Participant may become subject to employment taxes when the right to receive Shares becomes “vested” due to retirement eligibility or otherwise). Upon delivery of Shares of Common Stock of the Company in respect of an RSU, a Participant will recognize ordinary income in an amount equal to the product of (a) the fair market value of a Share of Common Stock of the Company on the date on which the Common Stock of the Company is delivered, multiplied by (b) the number of Shares of Common Stock of the Company delivered.

 

 

 

Other Stock-based Awards

 

With respect to other stock-based Awards paid in cash or Common Stock, Participants will generally recognize income equal to the fair market value of the Award on the date on which the Award is delivered to the recipient.

 

Code Section 409A

 

Section 409A (“Section 409A”) of the Code generally sets forth rules that must be followed with respect to covered deferred compensation arrangements in order to avoid the imposition of an additional 20% tax (plus interest) upon the service provider who is entitled to receive the deferred compensation. Certain Awards that may be granted under the Amended Plan may constitute “deferred compensation” within the meaning of and subject to Section 409A. While the Committee intends to administer and operate the Amended Plan and establish terms (or make required amendments) with respect to Awards subject to Section 409A in a manner that will avoid the imposition of additional taxation under Section 409A upon a Participant, there can be no assurance that additional taxation under Section 409A will be avoided in all cases. In the event the Company is required to delay delivery of Shares or any other payment under an Award in order to avoid the imposition of an additional tax under Section 409A, the Company will deliver such Shares (or make such payment) on the first day that would not result in the Participant incurring any tax liability under Section 409A. The Committee may amend the Amended Plan and outstanding Awards to preserve the intended benefits of Awards granted under the Amended Plan and to avoid the imposition of an additional tax under Section 409A.

 

 

 

 

General

 

Ordinary income recognized by virtue of the exercise of non-qualified options, the lapse of restrictions on restricted stock or RSUs or payments made in cash or Shares of Common Stock of the Company is subject to applicable tax withholding as required by law.

 

The Company generally will be entitled to a federal tax deduction to the extent permitted by the Code at the time and in the amount that ordinary income is recognized by Participants.

 

The discussion set forth above does not purport to be a complete analysis of all potential tax consequences relevant to recipients of options or other Awards or to their employers or to describe tax consequences based on particular circumstances. It is based on federal income tax law and interpretational authorities as of the date of this proxy statement, which are subject to change at any time.

 

STOCK AWARDS PREVIOUSLY GRANTED UNDER THE EXISTING PLAN

 

The following table sets forth information as of January 22, 2024, on the awards granted under the Existing Plan since its adoption and after giving effect to Shares forfeited and reincluded in the Existing Plan pool. The closing price of the Class A Common Stock on the NYSE on January 22, 2024 (the record date for the 2024 Annual Meeting) was $       per Share (Shares of Class B Common Stock convert on a one-for-one basis to Shares of Class A Common Stock).

 

	Stock Option	Restricted Stock	Total of All Columns
	Grants	Unit Grants*	in Table
Name & Position	# of shares covered	# of shares covered	# of shares covered
Ara K. Hovnanian President, Chief Executive Officer and Chairman of the Board	—	543,341	543,341
Brad G. O’Connor Senior Vice President, Chief Accounting Officer and Treasurer	—	62,788	62,788
Current Executive Officers as a Group	—	606,129	606,129
Robert B. Coutts, Director	—	12,456	12,456
Miriam Hernandez-Kakol, Director	—	3,597	3,597
Edward A. Kangas, Independent Lead Director	—	14,236	14,236
Joseph A. Marengi, Director	—	14,236	14,236
Vincent Pagano Jr., Director	—	12,456	12,456
Robin Stone Sellers, Director	—	12,456	12,456
J. Larry Sorsby, Director	—	227,546	227,546
Current Non-Executive Directors as a Group	—	296,983	296,983
All Employees, including All Current Officers who are not Executive Officers, as a Group	—	363,083	363,083

 

*

Includes all full value shares granted under the Existing Plan in fiscal 2020 through fiscal 2023, which consist of restricted stock units (“RSUs”), the maximum number of shares that are potentially issuable under the Performance Share Units (the “PSUs”) granted in fiscal 2023 and the maximum number of shares that are potentially issuable under the 2022 Long Term Incentive Program and 2023 Long Term Incentive Program. Also includes the maximum number of shares that are potentially issuable under the 2024 Long Term Incentive Program which were granted in fiscal 2024.

 

EQUITY COMPENSATION PLAN INFORMATION

 

The following table provides information as of October 31, 2023 with respect to compensation plans (including individual compensation arrangements) under which our equity securities are authorized for issuance.

 

					Number of
					Securities
					Remaining
					Available for
	Number of	Number of		Weighted	Future
	Class A	Class B	Weighted		Issuance
	Common	Common	Average	Average	Under Equity
	Stock	Stock	Exercise	Exercise	Compensation
	Securities	Securities	Price	Price	Plans
	to be issued	to be issued	of outstanding	of outstanding	excluding
	upon exercise	upon exercise	Class A	Class B	securities
	of outstanding	of outstanding	Common	Common	reflected
	options,	options,	Stock options,	Stock options,	in
	warrants and	warrants and	warrants and	warrants and	columns (a)
	rights (1) (4)	rights (1) (4)	rights (2)	rights (3)	(5)
Plan Category	(a)	(a)	(b)	(b)	(c)
Equity compensation plans approved by security holders	702,551	680,211	$37.40	$29.98	325,534
Equity compensation plans NOT approved by security holders	—	—	—	—	—
TOTAL	702,551	680,211	$37.40	$29.98	325,534

ADDITIONAL EQUITY COMPENSATION PLAN INFORMATION

 

The following is the Company’s overhang information, which measures the number of Shares subject to equity-based awards outstanding but unexercised or unvested, as of January 22, 2024, for all of the Company’s existing equity compensation plans, as well as certain other information relating to outstanding awards under the plans:

 

Stock options outstanding:

 

Weighted average exercise price of outstanding stock options: $

 

Weighted average remaining contractual term of outstanding stock options:       years

 

Full value stock awards outstanding (including performance-based stock awards based on achieving the actual outcome, where known, or the maximum potential outcome, where the performance period has not ended):

 

Shares available for future grants of awards (including performance-based stock awards based on achieving the actual outcome, where known, or the maximum outcome, where the performance period has not ended):

 

Total Shares of Common Stock outstanding:

 

REGISTRATION WITH THE SEC

 

If the Amended Plan as described in this Proposal 3 is approved by shareholders, the Company will file a Registration Statement on Form S-8 with the SEC with respect to the additional Shares of the Company’s Common Stock to be registered pursuant to the Amended Plan as soon as reasonably practicable following shareholder approval.

 

VOTE REQUIRED

 

Adoption of the Amended Plan requires approval by a majority of the votes cast by the shareholders of Class A Common Stock and Class B Common Stock, voting together, represented in person or by proxy at the 2024 Annual Meeting. Broker non-votes will not count as votes cast “for” or “against” the proposal to adopt the Amended Plan and will have no effect on the outcome of the proposal.

 

Mr. Hovnanian and others with voting power over the shares held by the Hovnanian Family and various trusts and entities established for the benefit of the Hovnanian Family have informed the Company that they intend to vote in favor of this proposal. Because of their collective voting power, this proposal is assured passage.

 

Our Board of Directors recommends that shareholders vote FOR the approval of the Amended Plan.

 

 

PROPOSAL IV
	—Advisory Vote on Executive Compensation

 

 

PROPOSAL IV

 

In accordance with the requirements of Section 14A of the Exchange Act (which was added by the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”)) and the related rules of the SEC, we are including in these proxy materials a separate resolution subject to shareholder vote to approve, in a non-binding advisory vote, the compensation of our named executive officers (“NEOs”), as disclosed on pages 90 to 170.

 

In considering their vote, shareholders may wish to review with care the information on the Company’s compensation policies and decisions regarding the NEOs presented in “Compensation Discussion and Analysis” on pages 90 to 140, as well as the discussion regarding the Compensation Committee on pages 84 to 89.

 

As we discuss in the “Compensation Discussion and Analysis” section, the Board of Directors believes that the Company’s long-term success depends in large measure on the talents of the Company’s employees. The Company’s compensation system plays a significant role in the Company’s ability to attract, retain and motivate the highest quality associates in a difficult market. The principal underpinnings of the Company’s compensation system are an acute focus on performance, shareholder alignment, sensitivity to the relevant marketplace and a long-term orientation. 

 

The Compensation Committee ties increases or decreases in overall compensation to the achievement of key performance factors the Board of Directors believes are critical to the Company’s success during that period. The Committee seeks to motivate management to achieve improved financial performance of the Company through bonus plans that reward higher performance with increased bonuses and hold management accountable for financial performance that falls below targeted levels by paying reduced bonuses. In addition, the periodic long-term incentive programs adopted by the Company condition payouts on the achievement of targets for increasing profitability and earnings before interest and taxes (“EBIT”) Return on Investment and lowering or refinancing debt, reducing interest expense and achieving strategic initiatives over multi-year performance periods. Moreover, in recent years, the CEO and the Executive Vice President, Chief Financial Officer (the “CFO”) have received performance share units (“PSUs”), market share units (“MSUs”) and options, and the Senior Vice President, Chief Accounting Officer and Treasurer (the “CAO”) has received PSUs and options, which are tied to financial performance and/or stock price performance. The PSU awards are tied to financial performance conditions (for 2023, absolute EBIT levels and EBIT Return on Investment rank relative to the Peer Group), and half of the MSU awards have been subject to financial performance conditions in addition to the stock price performance conditions applicable to all of the MSU awards. As discussed in the “Compensation Discussion and Analysis” section, the rigor of the performance conditions related to the long-term incentive programs is demonstrated by the fact that, on average for LTIP awards granted during fiscal years 2018 through 2022, we have set the three-year cumulative pre-tax profit targets at 252% of what was achieved for the most recently-completed three-year periods at the time the LTIP awards were granted.

 

 

 

 

In recent years, the Committee has determined to weight the Company’s variable compensation programs toward rigorous performance conditions with metrics such as pretax profit, liquidity, shareholder value preservation, debt reduction, alternative capital raises, EBIT Return on Investment, gross margin and new communities opened. As context for basing the Company’s compensation programs on these metrics, the Committee considered that, at the point at which housing starts were at the lowest levels during the great housing recession in 2009, the Company had written off over $2.5 billion of asset value and, as a result, was significantly overleveraged. During this period, many homebuilders declared bankruptcy and certain others significantly diluted shareholders via new equity issuances or by selling their companies at extremely low valuations. Hovnanian’s management chose to preserve shareholder value by managing the Company for growth and taking creative steps to refinance and pay down its heavy debt load. From the beginning of 2009 through fiscal 2023, the Company has reduced its public debt by about $1.6 billion, including a $502 million debt reduction since October 31, 2020. Despite this reduction, the Company remains overleveraged, with interest rates on debt instruments significantly above its lower leveraged peers. Accordingly, the Company continues to have a large interest expense burden which causes profitability to be more challenging to achieve and makes it difficult to compare the Company with its peers on profitability alone. During the COVID-19 pandemic surge in housing demand in fiscal 2021 and the first half of fiscal 2022, even with an extraordinarily high interest burden compared to its peers, the Company achieved income before income taxes of over $189 million and $319 million in fiscal 2021 and fiscal 2022, respectively, as a result of its growth in deliveries and margin improvement. This improvement allowed the Company, for the first time since the great housing recession, to return to a return on average equity (“ROAE”) metric for bonus compensation during fiscal 2022. When measuring pure operating performance by the ratio of adjusted EBIT to investment, the Company has performed in the top half of its Peer Group for each of the four years ending with fiscal 2023. In addition, the Company continues to rank highest among its Peer Group in inventory turns.

 

 

 

 

The Compensation Committee’s policies and actions have included the following:

 

Selection of bonus metrics that correspond to the financial and strategic operational needs of the Company during the relevant period.

 

Focus on increasing profitability and EBIT Return on Investment and lowering or refinancing debt, reducing interest expense and achieving strategic initiatives over multi-year performance periods through periodic long-term incentive awards for all NEOs.

 

Practice of tying portions of equity awards to performance criteria. For example, in fiscal 2023, the CEO, CFO and CAO were granted PSUs, half of which are tied to absolute EBIT levels and half of which are tied to EBIT Return on Investment rank relative to the Peer Group. Additional details are described below under “Compensation Discussion and Analysis—Details of Compensation Elements—Stock Grants.”

 

Active management of both equity award levels and the number of shares available for new equity-based awards.

 

 

 

 

The text of the resolution in respect of this proposal is as follows:

 

“Resolved, that the compensation paid to the Company’s named executive officers as disclosed pursuant to Item 402 of Regulation S-K in the Proxy Statement relating to the Company’s Annual Meeting of Shareholders to be held on March 21, 2024, including the Compensation Discussion and Analysis, compensation tables and narrative discussion, is hereby approved.”

 

 

 

 

 

VOTE REQUIRED

 

The approval of the compensation paid to the Company’s named executive officers requires the affirmative vote of a majority of the votes cast by the shareholders of Class A Common Stock and Class B Common Stock, voting together, represented in person or by proxy at the 2024 Annual Meeting. In determining whether the proposal has received the requisite number of affirmative votes, abstentions and broker non-votes will have no impact on such matter because such shares are not considered votes cast.

 

Mr. Hovnanian and others with voting power over the shares held by the Hovnanian Family and various trusts and entities established for the benefit of the Hovnanian Family have informed the Company that they intend to vote in favor of this proposal. Because of their collective voting power, this proposal is assured passage.

 

Our Board of Directors recommends that shareholders vote FOR the approval of this resolution.

 

 

 

PROPOSAL V
	—Approval of an Amendment to the Company’s Stockholder Rights Plan

 

 

 

 

PROPOSAL V

 

We are seeking the approval by our stockholders of an amendment to the Company’s Rights Agreement with Computershare Trust Company, N.A., as successor rights agent, effective August 14, 2008 (the “Original Stockholder Rights Plan”), as amended by Amendment No. 1 to Rights Agreement, effective January 11, 2018 (“Amendment No. 1”), and by Amendment No. 2 to Rights Agreement, effective January 18, 2021 (“Amendment No. 2”, and the Original Stockholder Rights Plan as amended by Amendment No. 1 and Amendment No. 2, the “Stockholder Rights Plan”). On January 11, 2024, the Board approved a third amendment, effective January 11, 2024, to the Stockholder Rights Plan (the “Stockholder Rights Plan Amendment”, and the Stockholder Rights Plan, as amended by the Stockholder Rights Plan Amendment, the “Amended Stockholder Rights Plan”) as further described below. Stockholder approval of the Stockholder Rights Plan Amendment is required by August 14, 2025 or the Amended Stockholder Rights Plan will automatically expire on that date.

 

In 2008, the Company, with stockholder approval, took action designed to protect stockholder value by attempting to preserve the Company’s ability to use its net operating losses and built-in losses (“NOLs”) within the meaning of Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”). These actions included:

 

adopting an amendment to the Company’s Restated Certificate of Incorporation (the “NOL Protective Amendment”) which limits direct or indirect transfers of Class A Common Stock (see Paragraph Eighth of the Company’s Restated Certificate of Incorporation, filed as Exhibit 3.2 to the Company’s Current Report on Form 8-K filed with the SEC on March 29, 2019). The transfer restrictions contained in the NOL Protective Amendment are intended to prevent “ownership changes” as defined in Section 382 of the Code which could jeopardize the Company’s ability to use its NOLs; and

 

entering into the Original Stockholder Rights Plan. Because the transfer restrictions of the NOL Protective Amendment may not be enforceable in all circumstances, the Board believed it was in the best interest of the Company and its stockholders to also adopt the Original Stockholder Rights Plan to further protect the Company’s NOLs. The Original Stockholder Rights Plan was subsequently approved by the Company’s stockholders at a special stockholders meeting on December 5, 2008.

 

 

 

 

In 2018, the Company entered into Amendment No. 1, which, among other things, extended the initial expiration date to August 14, 2021. Amendment No. 1 was subsequently approved by the Company’s stockholders at its annual meeting on March 13, 2018. In 2021, the Company entered into Amendment No. 2, which, among other things, extended the initial expiration date to August 14, 2024. Amendment No. 2 was subsequently approved by the Company’s stockholders at its annual meeting on March 30, 2021.

 

By its terms, the Stockholder Rights Plan would have expired on August 14, 2024 unless action was taken to extend its term. The Board has concluded that it is still in the best interest of the Company and its stockholders to prevent limitations on the Company’s ability to use its approximately $688.3 million (pre-tax) federal net operating losses as of October 31, 2023 that expire between 2030 and 2038, and $15.7 million (pre-tax) federal net operating losses as of October 31, 2023 that have an indefinite carryforward period. Because the amount and timing of the Company’s future taxable income, if any, cannot be accurately predicted, the Company cannot estimate the exact amount of the NOLs that it can ultimately use to reduce its income tax liability. Although the Company is unable to quantify an exact value, it believes the NOLs are a valuable asset. The Board believes that the provisions of the NOL Protective Amendment and the Stockholder Rights Plan are important tools in avoiding adverse impacts from Section 382 limitations and protecting stockholder value. Therefore, on January 11, 2024, the Board approved the Stockholder Rights Plan Amendment, which:

 

extends the expiration date of the Stockholder Rights Plan until the earliest of (1) August 14, 2027, (2) the time at which the rights are redeemed pursuant to the Amended Stockholder Rights Plan, (3) the time at which the rights are exchanged pursuant to the Amended Stockholder Rights Plan, (4) the Board’s determination that the Amended Stockholder Rights Plan is no longer necessary for the preservation of the NOLs because of the repeal of Section 382 of the Code or any successor statute, (5) the beginning of a taxable year of the Company to which the Board determines that no tax benefits may be carried forward and (6) August 14, 2025 if stockholder approval of the Stockholder Rights Plan Amendment has not been obtained; and

 

 

 

 

changes the “Purchase Price” for each one ten-thousandth of a share of our Series B Junior Preferred Stock as described below under “−Summary Description of Amended Stockholder Rights Plan” from $171.85 to $802.00 (subject to adjustment as set forth in the Amended Stockholder Rights Plan) in light of the change in the trading price of the Company’s Class A Common Stock since the adoption of Amendment No. 2.

 

The Board has determined that it is advisable and in the Company’s best interests, and in the best interests of the Company’s stockholders, to approve the Stockholder Rights Plan Amendment which was adopted by the Board on January 11, 2024. Under the Amended Stockholder Rights Plan, stockholder approval of the Stockholder Rights Plan Amendment is required by August 14, 2025 or the Amended Stockholder Rights Plan will automatically expire on that date.

 

 

 

 

 

SUMMARY DESCRIPTION OF AMENDED STOCKHOLDER RIGHTS PLAN

 

The Amended Stockholder Rights Plan is intended to act as a deterrent to any person or group acquiring 4.9% or more of our outstanding Class A Common Stock (an “Acquiring Person”) without the approval of the Board. Stockholders who owned 4.9% or more of the Company’s outstanding Class A Common Stock as of the close of business on August 15, 2008 will not trigger the Amended Stockholder Rights Plan so long as they do not (1) acquire any additional shares of Class A Common Stock or (2) fall under 4.9% ownership of Class A Common Stock and then re-acquire 4.9% or more of the Class A Common Stock. The Amended Stockholder Rights Plan does not exempt any future acquisitions of Class A Common Stock by such persons. Any rights held by an Acquiring Person are void and may not be exercised. The Board may, in its sole discretion, exempt any person or group from being deemed an Acquiring Person for purposes of the Amended Stockholder Rights Plan.

 

The Rights.   The Board authorized the issuance of one right per each outstanding share of Class A Common Stock and Class B Common Stock payable to the Company’s stockholders of record as of August 15, 2008 and the issuance of one right per each share of Class A Common Stock and Class B Common Stock issued or delivered by the Company after such date but before the earlier of the Distribution Date (as defined below) and the Expiration Date (as defined below), which ratio of rights to shares is subject to adjustment in accordance with the Amended Stockholder Rights Plan and was automatically adjusted to give effect to the 1 for 25 reverse stock split effected on March 29, 2019. Subject to the terms, provisions and conditions of the Amended Stockholder Rights Plan, if the rights become exercisable, each right would initially represent the right to purchase from us one ten-thousandth of a share of our Series B Junior Preferred Stock for a purchase price of $802.00 (the “Purchase Price”). If issued, each one ten-thousandth of a share of Series B Junior Preferred Stock would give the stockholder approximately the same dividend, voting and liquidation rights as does one share of Class A Common Stock. However, prior to exercise, a right does not give its holder any rights as a stockholder, including without limitation any dividend, voting or liquidation rights.

 

Exercisability.   The rights will not be exercisable until the earlier of (1) 10 business days after a public announcement by us or an Acquiring Person that a person or group has become an Acquiring Person or the earlier date that a majority of the Board becomes aware of the existence of an Acquiring Person and (2) 10 business days after the commencement of a tender or exchange offer by a person or group if upon consummation thereof, such person or group would own 4.9% or more of the then-outstanding Class A Common Stock.

 

 

 

 

We refer to the date that the rights become exercisable as the “Distribution Date.” Until the Distribution Date, Class A Common Stock and Class B Common Stock certificates will evidence the rights and may contain a notation to that effect. Any transfer of shares of Class A Common Stock and/or Class B Common Stock prior to the Distribution Date will constitute a transfer of the associated rights. After the Distribution Date, the rights may be transferred other than in connection with the transfer of the underlying shares of Class A Common Stock or Class B Common Stock.

 

Subject to the terms, provisions and conditions of the Amended Stockholder Rights Plan, after the Distribution Date, each holder of a right, other than rights beneficially owned by any Acquiring Person (which will thereupon become void), will thereafter have the right to receive upon exercise of such right and payment of the then-current Purchase Price, that number of shares of Class A Common Stock or Class B Common Stock, as the case may be, having a then-current market value of two times the Purchase Price.

 

Exchange.   After the Distribution Date, the Board may exchange the rights (other than rights owned by an Acquiring Person which will have become void), in whole or in part, at an exchange ratio of one share of Class A Common Stock or Class B Common Stock, as the case may be, or a fractional share of Series B Junior Preferred Stock (or of a share of a similar class or series of the Company’s preferred stock having similar rights, preferences and privileges) of equivalent value, per right (subject to adjustment).

 

Expiration.   The rights and the Amended Stockholder Rights Plan will expire on the “Expiration Date”, which is the earliest of (1) August 14, 2027, (2) the time at which the rights are redeemed pursuant to the Amended Stockholder Rights Plan, (3) the time at which the rights are exchanged pursuant to the Amended Stockholder Rights Plan, (4) the Board’s determination that the Amended Stockholder Rights Plan is no longer necessary for the preservation of the NOLs because of the repeal of Section 382 of the Code or any successor statute, (5) the beginning of a taxable year of the Company to which the Board determines that no tax benefits may be carried forward and (6) August 14, 2025 if stockholder approval of the Stockholder Rights Plan Amendment has not been obtained.

 

Redemption.   At any time prior to the time an Acquiring Person becomes such, the Board may redeem the rights in whole, but not in part, at a price of $0.01 per right, subject to adjustment in accordance with the Amended Stockholder Rights Plan (the “Redemption Price”). The redemption of the rights may be made effective at such time, on such basis and with such conditions as the Board in its sole discretion may establish. Immediately upon any redemption of the rights, the right to exercise the rights will terminate and the only right of the holders of rights will be to receive the Redemption Price.

 

 

 

 

Anti-Dilution Provisions.   The Purchase Price, the number of shares of Series B Junior Preferred Stock issuable and the number of outstanding rights are subject to adjustment to prevent dilution that may occur as a result of certain events, including among others, a stock dividend, a stock split or combination or a reclassification of the shares of Series B Junior Preferred Stock or Class A Common Stock or Class B Common Stock. No adjustments to the Purchase Price of less than 1% are required to be made.

 

Amendments.   Before the Distribution Date, the Board may amend or supplement the Amended Stockholder Rights Plan without the consent of the holders of the rights. After the time that the rights have become no longer redeemable, the Board may amend or supplement the Amended Stockholder Rights Plan only to cure an ambiguity, to alter time period provisions, to correct defective or inconsistent provisions, or to make any additional changes to the Amended Stockholder Rights Plan that the Company deems necessary or desirable, but only to the extent that those changes do not adversely affect the interests of any rights holder (other than an Acquiring Person), and no such amendment may cause the rights to again become redeemable or cause the Amended Stockholder Rights Plan to again become amendable other than in accordance with this sentence.

 

The above description of the Amended Stockholder Rights Plan is qualified in its entirety by reference to the text of the Stockholder Rights Plan and the Stockholder Rights Plan Amendment, which are attached hereto as Appendix B-1 and Appendix B-2, respectively. You are urged to read carefully each of the Stockholder Rights Plan and the Stockholder Rights Plan Amendment in its entirety.

 

 

 

 

VOTE REQUIRED

 

Approval of the Stockholder Rights Plan Amendment requires the affirmative vote of a majority of the votes cast by the shareholders of Class A Common Stock and Class B Common Stock, voting together, represented in person or by proxy at the 2024 Annual Meeting. In determining whether the proposal has received the requisite number of affirmative votes, abstentions and broker non-votes will have no impact on such proposal because such shares are not considered votes cast. Mr. Hovnanian and others with voting power over the shares held by the Hovnanian Family and various trusts and entities established for the benefit of the Hovnanian Family have informed the Company that they intend to vote in favor of the proposal. Because of their collective voting power, this proposal is assured passage.

 

Our Board of Directors recommends that shareholders vote FOR the approval of the Stockholder Rights Plan Amendment.

 

 

 

 

 

 

The COMPENSATION COMMITTEE

 

 

 

 

 

The Compensation Committee of the Board of Directors (the “Committee”) is the principal overseer of the Company’s various policies and procedures related to executive compensation. The Committee meets at least four times a year and consults with outside compensation consultants as needed to assess industry trends and overall compensation issues. The Committee is governed by its charter, which is available at www.khov.com under “Investor Relations”, “Corporate Governance.”

 

AREAS OF RESPONSIBILITY

 

The Committee, in conjunction with the Board of Directors and with management’s input, shapes the Company’s executive compensation philosophy and objectives. In particular, the Committee is charged with:

 

Reviewing and approving, at least annually, the salaries, bonuses and other forms of compensation, including equity grants, for the Company’s executive officers;

 

Reviewing, at least annually, compensation paid to the Company’s non-employee Directors;

 

Participating in the review of compensation of other designated key employees of the Company;

 

Periodically reviewing the Company’s policies and procedures pertaining to the Company’s equity award plans and forms of equity grants to all employees and non-employee Directors, employee benefit plans (for example, the 401(k) plan and deferred compensation plans), severance agreements and executive perquisites;

 

 

 

 

Fostering good corporate governance practices as they relate to executive compensation;

 

Reviewing, at least annually, as part of the Board of Directors’ oversight responsibilities, the Company’s compensation program and reports from management regarding its assessment of whether there are any compensation risks that are reasonably likely to result in a material adverse effect on the Company (see “Oversight of Risk Management” below); in addition, the Committee regularly considers business and compensation risks as part of its process for establishing performance goals and determining incentive awards for each of the NEOs;

 

Reviewing and discussing with management the “Compensation Discussion and Analysis” (the “CD&A”) for inclusion in the Company’s annual proxy statement and annual report on Form 10-K and, based on that review and discussion, determining whether or not to recommend to the Board of Directors that the CD&A be included in the Company’s annual proxy statement; and

 

Preparing the compensation committee report on executive compensation for inclusion in the Company’s annual proxy statement, in accordance with applicable rules and regulations of the NYSE, SEC and other applicable regulatory bodies.

 

The Committee’s actions and procedures are discussed in more detail next and further below under “Compensation Discussion and Analysis.”

 

 

 

COMPENSATION REVIEW PROCESS FOR THE NAMED EXECUTIVE OFFICERS

 

The Committee, in conjunction with the Board of Directors and with management’s input, is responsible for making decisions related to the overall compensation of the NEOs, excluding the CEO, whose compensation is determined solely by the Compensation Committee and the Board of Directors.

 

At least annually, the Committee establishes objective financial measures for determining bonus awards to the NEOs. The Committee also considers salary, employee benefits and discretionary bonus awards, if any, for the NEOs.

 

In determining overall compensation for the NEOs, the Committee may consult with other members of the Board of Directors, including the CEO and the CFO, rather than relying solely on the Company’s financial performance measures in determining their compensation. These individuals often provide the Committee with insight on the individual performance of executives (other than with respect to themselves). The CEO and CFO are not present for the Committee’s evaluation of their individual performance. The Committee also reviews and analyzes the compensation of the named executive officers of the Company’s peer group of nine publicly-traded homebuilding companies (the “Peer Group”), discussed further below. The Committee may engage outside compensation consultants in relation to various compensation issues. The Committee may also instruct a compensation consultant to provide assistance in fostering an overall compensation program that aligns with its compensation philosophy to guide, motivate, retain and reward its executives for the achievement of the Company’s financial performance, strategic initiatives and individual goals, including increased long-term shareholder value during a challenging business environment. Notwithstanding any input from compensation consultants and management, the Committee has the sole discretion to make all final decisions related to NEO compensation.

 

OUTSIDE COMPENSATION CONSULTANT

 

For fiscal 2023, the Committee engaged Frederic W. Cook & Co., Inc. (“FW Cook”) as the Committee’s outside compensation consultant to provide certain services related to executive and non-employee Director compensation. In fiscal 2023, FW Cook assisted the Committee with its review of the Company’s annual bonus, long-term incentive and equity compensation plans for the CEO and other NEOs as well as its review of the compensation program for the non-employee Directors and the Compensation Committee’s compensation risk assessment.

 

 

 

 

FW Cook does not provide any other services to the Company unless approved by the Committee, and no such other services were provided in fiscal 2023. After considering the relevant factors, the Company determined that no conflicts of interest have been raised in connection with the services FW Cook performed for the Committee in fiscal 2023.

 

The Committee’s primary objective in engaging FW Cook has been to obtain advice and feedback related to maintaining programs that provide competitive compensation opportunities for executives compared to the Peer Group. FW Cook also provided assistance to the Committee in fostering an overall compensation program as discussed above.

 

The Committee weighs the advice and feedback from its compensation consultant and the members of the Board of Directors, as well as the views of, and information gathered by, the members of management it has consulted in conjunction with its review of other information the Committee considers relevant, when making decisions or making recommendations to the full Board of Directors regarding executive compensation.

 

BOARD COMMUNICATION

 

The Company’s Board of Directors is updated at least quarterly on any compensation decisions or recommendations made by the Committee, and the Committee requests feedback from the Board of Directors regarding specific compensation issues as it deems necessary.

 

COMPENSATION COMMITTEE INTERLOCKS & INSIDER PARTICIPATION

 

During the fiscal year ended October 31, 2023, the members of the Committee were Mr. Marengi, Mr. Coutts, Ms. Hernandez-Kakol and Mr. Kangas, none of whom at any time has been an officer or employee of the Company or any of its subsidiaries and did not have any relationships requiring disclosure under Item 404(a) of Regulation S-K in this Proxy Statement. None of our executive officers served on the board of directors or compensation committee of any other entity that has or had one or more executive officers who served on our Board of Directors or our Compensation Committee during fiscal 2023.

 

 

 

 

COMPENSATION COMMITTEE REPORT

 

The Committee has reviewed and discussed the Compensation Discussion and Analysis provided below with the Company’s management. Based on this review and discussion, the Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this Proxy Statement and in the Company’s Annual Report on Form 10-K for the fiscal year ended October 31, 2023.

 

COMPENSATION COMMITTEE

 

Joseph A. Marengi, Chair 

Robert B. Coutts 

Miriam Hernandez-Kakol 

Edward A. Kangas

 

 

 

 

 

1. EXECUTIVE SUMMARY

 

BACKGROUND

 

In recent years, the Committee has determined to weight the Company’s variable compensation programs toward rigorous performance conditions with metrics such as pretax profit, liquidity, shareholder value preservation, debt reduction, alternative capital raises, EBIT Return on Investment, gross margin and new communities opened. As context for basing the Company’s compensation programs on these metrics, the Committee considered that, at the point at which housing starts were at the lowest levels during the great housing recession in 2009, the Company had written off over $2.5 billion of asset value and, as a result, was significantly overleveraged. During this period, many homebuilders declared bankruptcy and certain others significantly diluted shareholders via new equity issuances or by selling their companies at extremely low valuations. Hovnanian’s management chose to preserve shareholder value by managing the Company for growth and taking creative steps to refinance and pay down its heavy debt load. From the beginning of 2009 through fiscal 2023, the Company has reduced its public debt by about $1.6 billion, including a $502 million debt reduction since October 31, 2020. Despite this reduction, the Company remains overleveraged, with interest rates on debt instruments significantly above its lower leveraged peers. Accordingly, the Company continues to have a large interest expense burden which causes profitability to be more challenging to achieve and makes it difficult to compare the Company with its peers on profitability alone. During the COVID-19 pandemic surge in housing demand in fiscal 2021 and the first half of fiscal 2022, even with an extraordinarily high interest burden compared to its peers, the Company achieved income before income taxes of over $189 million and $319 million in fiscal 2021 and fiscal 2022, respectively, as a result of its growth in deliveries and margin improvement. This improvement allowed the Company, for the first time since the great housing recession, to return to a ROAE metric for bonus compensation during fiscal 2022. When measuring pure operating performance by the ratio of adjusted EBIT to investment, the Company has performed in the top half of its Peer Group for each of the four years ending with fiscal 2023. In addition, the Company continues to rank highest among its Peer Group in inventory turns.

COMPANY PERFORMANCE IN FISCAL 2023

 

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 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 quick-move-in homes (“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 interest rate buydown assistance, which is a tool we offer through our wholly-owned mortgage banking subsidiary, to help ease the impact of higher monthly payments from rising interest rates.

 

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 led 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, 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. Homebuilding gross margin percentage, before cost of sales interest expense and land charges, is a non-GAAP measure. See page 26 of the Company’s Annual Report on Form 10-K for the fiscal year ended October 31, 2023 for a reconciliation of this measure to homebuilding gross margin percentage, the most directly comparable GAAP measure.

 

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.

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 in 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 lower sales in the second half of fiscal 2022 and into the first quarter of fiscal 2023, as discussed above.

COMPANY STOCK PRICE RELATIVE TO PRE-TAX INCOME

 

The chart below illustrates that, while our operations have improved dramatically as demonstrated by the increase in pre-tax income to $256.0 million in fiscal 2023 compared to $55.4 million in fiscal 2020, our stock price, which increased to an average of $78.14 in October 2023 compared to an average of $34.21 in October 2020, has not benefited proportionally from that improvement.

 

 

 

(1)

Reflects the average closing price of a share of Class A Common Stock of

the Company for the last month of the fiscal year indicated.

BEST PRACTICES

 

Pay-for-Performance

 

The Compensation Committee ties increases or decreases in overall compensation to the achievement of key performance factors the Board of Directors believes are critical to the Company’s success during that period. The Committee seeks to motivate management to achieve improved financial performance of the Company through bonus plans that reward higher performance with increased bonuses and hold management accountable for financial performance that falls below targeted levels by paying reduced bonuses.

 

In addition, the periodic long-term incentive programs adopted by the Company conditions payouts on the achievement of targets for increasing profitability and EBIT Return on Investment, which differs from EBIT Return on Inventory, a metric used in the Company’s 2022 PSU program, in that it accounts for the Company’s investment in unconsolidated joint ventures, which the Compensation Committee views as appropriate because that is how the Company invests in certain communities, and lowering or refinancing debt, reducing interest expense and achieving strategic initiatives over multi-year performance periods. Moreover, in recent years, the CEO and CFO have received PSUs, MSUs and options, and the CAO has received PSUs and options, which are tied to financial performance and/or stock price performance. The PSU awards are tied to financial performance conditions (for 2023, absolute EBIT levels and EBIT Return on Investment rank relative to the Peer Group), and half of the MSU awards have been subject to financial performance conditions in addition to the stock price performance conditions applicable to all of the MSU awards. The rigor of the performance conditions related to the long-term incentive programs is demonstrated by the fact that, on average for LTIP awards granted during fiscal years 2018 through 2022, we have set the three-year cumulative pre-tax profit targets for the LTIPs at 252% of what was achieved for the most recently-completed three-year periods at the time the LTIP awards were granted.

 

Because the Summary Compensation Table uses accounting constructs to estimate values of long-term equity incentive awards at the time of grant, the Committee does not believe that it adequately measures CEO compensation for the purpose of assessing pay-for-performance alignment. These estimated values can differ significantly from the actual value that is ultimately earned from these awards. For this reason, the Committee also considers realizable pay, which captures the impact of the Company’s current share price performance on previously granted long-term incentive awards and helps the Committee assess the alignment of the Company’s compensation programs with the interests of its shareholders.

Emphasis on Long-Term Value Creation and Retention

 

The Committee seeks to align the interests of management with the long-term interests of the Company’s shareholders by granting a significant portion of their total compensation in the form of equity awards that increase or decrease in value as the Company’s financial performance and stock price improve or decline. The Committee also seeks to retain management by using compensation methods that require executives to be employed through various performance periods in order to receive financial benefits of certain equity grants.

 

Maintaining an Appropriate Peer Group

 

To retain and attract executive talent with industry-specific knowledge, in constructing the Peer Group, the Committee selects those companies that compete directly with the Company in the homebuilding industry, are of comparable complexity in operations to the Company and are generally in the markets in which the Company competes. The Committee believes that it is important to compare the Company to others in the homebuilding industry, even if certain of these peers have different financial profiles, because the Company competes with homebuilding industry peers for executive talent with industry-specific knowledge and experience. Further, the Company competes directly in all of its markets with most of the Peer Group companies for customers, land and trade partners. In some markets, the Company is larger than some of the Peer Group companies even though it may be smaller nationally. The Committee reviews the composition of the Peer Group on an annual basis and makes adjustments, if needed. In fiscal 2023, the Committee did not make any changes to the Peer Group. The Committee reviews the executive compensation of the Peer Group companies and seeks to award competitive target total direct compensation opportunities (the sum of base salary, annual bonus/ incentive awards and target long-term incentive awards) for our NEOs compared to the Peer Group.

No Employment Agreements with CEO or Former CFO

 

The Company does not maintain employment or other agreements for our Mr. Hovnanian or Mr. Sorsby that provide contractual rights upon termination of employment (other than upon death or disability) except for the vesting of long-term incentive and equity-based awards in the case of retirement or in connection with a qualifying termination in the case of a change in control. The Company does have a change in control severance agreement with Mr. O’Connor, as discussed in footnote (5) to the Potential Payments Upon Termination or Change-in-Control Table.

 

No Tax Gross-Ups or Defined Benefit Pension Plans for Any NEO.

 

Maintenance and Monitoring of Stock Ownership Guidelines

 

The Board of Directors has established stock ownership guidelines pursuant to which the CEO, CFO and COO (if any) are requested to achieve and maintain recommended minimum levels of stock ownership as set forth below under “Stock Ownership Guidelines.”

 

 

Clawback Policies

 

The Company has adopted an Incentive Compensation Clawback Policy that complies with Section 10D of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the listing standards of the New York Stock Exchange (“NYSE”). The Incentive Compensation Clawback Policy applies to the Company’s current and former executive officers subject to Section 16 of the Exchange Act (“Section 16 Officers”). Under this policy, the Company must recover erroneously awarded incentive-based compensation on a pre-tax basis, subject to limited exceptions, in the event the Company is required to prepare an accounting restatement. This policy requires recovery of erroneously awarded incentive compensation regardless of whether a Section 16 officer engaged in any misconduct or is otherwise at fault. This policy applies to incentive-based compensation awarded to a current or former Section 16 officer during the three completed fiscal years immediately preceding the date on which the Company is required to prepare an accounting restatement.

 

In addition to the SEC and NYSE compliant Incentive Compensation Clawback Policy, it is also the Company’s policy that, if we are required to restate our financial results due to material noncompliance by the Company with any financial reporting requirement under the securities laws as a result (directly or indirectly) of an executive officer’s misconduct, the Board of Directors will require, at its discretion and approval, the reimbursement and/or cancellation of any incentive-based compensation (including stock options awarded as compensation) in excess of the amount that would have been awarded based on the restated financial results. This policy applies to cash and equity incentive-based compensation awarded to the executive officer during the three-year period preceding the date on which the Company is required to prepare an accounting restatement based on erroneous data. In the past three years, the Company has primarily granted the NEOs equity that has performance conditions and would be subject to this policy.

Investor Engagement

 

During fiscal 2023, the Company conducted proactive investor outreach programs, including having its executives attend four investor conferences as well as other meetings with the investment community and meeting by teleconference or in person with more than 112 investors either one-on-one or in small groups. As a result, the Company’s executives met with institutional holders representing approximately 70% of shares held by our top ten shareholders that are actively managed funds. From time to time, Mr. Hovnanian and Mr. Sorsby, who are also members of the Board of Directors, and/or Mr. O’Connor participated in these investor outreach programs and reported their findings from the investor feedback to the Board of Directors. During such meetings, none of the investors with whom the Company engaged during fiscal 2023 raised concerns about the Company’s compensation practices, including the design and payouts under the Company’s annual bonus programs. In fact, in the numerous investor meetings we have held over the years, compensation has rarely if ever been raised by investors as an issue to be discussed.

 

 

COMPENSATION DECISIONS FOR FISCAL 2023

 

The Committee’s compensation decisions for fiscal 2023 reflected a conservative approach to fixed pay elements (base salary), the achievement of pre-established goals (annual bonuses) and long-term awards.

 

Base Salaries

 

For fiscal 2023, the Committee approved a 4.5% base salary increase, effective December 24, 2022, for Mr. O’Connor, which is in line with the Company’s ordinary course merit-based salary and cost of living increase practices. Upon Mr. Hovnanian and Mr. Sorsby’s recommendation, the Committee determined not to increase their respective base salaries for fiscal 2023. In addition, effective March 6, 2023, Messrs. Hovnanian, Sorsby and O’Connor voluntarily agreed to a 5% base salary decrease in light of staff reductions due to the slowdown in the housing market at that time. See “Details of Compensation Elements—Base Salaries” below for additional information.

 

Regular Annual Bonuses

 

Consistent with the achievement of specified financial objectives, fiscal 2023 annual bonuses were paid to all NEOs. The Committee considered investor support for prior annual bonus programs, their design and payouts when determining pay opportunities and setting performance metrics for fiscal 2023. Additional details are described under “Details of Compensation Elements—Annual Bonuses—Regular Bonuses” below.

Discretionary Bonuses

 

The Committee did not award discretionary bonuses to any NEO for fiscal 2023.

 

Long-Term Awards, including PSUs and participation in the Long-Term Incentive Program

 

As further described under “Details of Compensation Elements – Stock Grants,” for fiscal 2023, the Committee granted PSUs to the NEOs. The PSUs are tied to the specific financial performance conditions described below under “Details of Compensation Elements – Stock Grants.” The Committee also granted Long-Term Incentive Program (“LTIP”) awards to the NEOs in fiscal 2023 as further described below under “Details of Compensation Elements – Long-Term Incentive Programs.” The LTIP awards are tied to the achievement of specified financial and strategic performance conditions over a three-year performance period and are fully vested at the end of the performance period. The PSUs granted in fiscal 2023 are subject to time-based vesting conditions that extend beyond the performance period. The PSUs and LTIP awards are further subject to a mandatory two-year post-vesting delayed delivery.

 

2. COMPENSATION PHILOSOPHY & OBJECTIVES

The Committee, in conjunction with the Board of Directors and with senior management, has been instrumental in shaping the Company’s compensation philosophy and objectives because of its responsibilities and oversight of the Company’s various policies and procedures concerning executive compensation.

 

As context for setting the Company’s compensation programs, the Committee considered the Company’s strategic goals. As such, the Committee has weighted the Company’s variable compensation programs toward rigorous performance conditions with metrics such as pretax profit, liquidity, shareholder value preservation, debt reduction, alternative capital raises, EBIT Return on Investment, gross margin and new communities opened. As context for basing the Company’s compensation programs on these metrics, the Committee considered that, at the point at which housing starts were at the lowest levels during the great housing recession in 2009, the Company had written off over $2.5 billion of asset value and, as a result, was significantly overleveraged. During this period, many homebuilders declared bankruptcy and certain others significantly diluted shareholders via new equity issuances or by selling their companies at extremely low valuations. Hovnanian’s management chose to preserve shareholder value by managing the Company for growth and taking creative steps to refinance and pay down its heavy debt load. From the beginning of 2009 through fiscal 2023, the Company has reduced its public debt by about $1.6 billion, including a $502 million debt reduction since October 31, 2020. Despite this reduction, the Company remains overleveraged, with interest rates on debt instruments significantly above its lower leveraged peers. Accordingly, the Company continues to have a large interest expense burden which causes profitability to be more challenging to achieve and makes it difficult to compare the Company with its peers on profitability alone. During the COVID-19 pandemic surge in housing demand in fiscal 2021 and the first half of fiscal 2022, even with an extraordinarily high interest burden compared to its peers, the Company achieved income before income taxes of over $189 million and $319 million in fiscal 2021 and fiscal 2022, respectively, as a result of its growth in deliveries and margin improvement. This improvement allowed the Company, for the first time since the great housing recession, to return to a ROAE metric for bonus compensation during fiscal 2022. When measuring pure operating performance by the ratio of adjusted EBIT to investment, the Company has performed in the top half of its Peer Group for each of the four years ending with fiscal 2023. In addition, the Company continues to rank highest among its Peer Group in inventory turns.

 

The six primary objectives that the Committee considers in making compensation decisions are discussed below, as are our other philosophies and mechanisms for determining compensation. In making compensation-related decisions, the Committee also considered its role in promoting good corporate governance practices.

PRIMARY OBJECTIVES FOR THE COMPENSATION PROGRAM

 

The Company’s primary objectives for compensating its executives are as follows:

 

To offer compensation that guides, motivates, retains and rewards its executives for the achievement of the Company’s financial performance, strategic initiatives and individual goals (as applicable);

 

To fairly compensate its executives in a manner that is appropriate with respect to their individual performance, level of responsibilities, abilities and skills;

 

To align the executives’ interests with the interests of our shareholders;

To maintain competitive pay opportunities for its executives so that it retains its talent pool and, at the same time, has the ability to attract new and highly-qualified individuals to join the organization as it grows or in the event of succession or replacement of an executive;

To appropriately design the reward system in the context of a challenging business environment; and

 

Not to incentivize a level of risk through its compensation plans that is reasonably likely to have a material adverse effect on the Company.

TAILORED COMPENSATION

 

Consistent with these objectives, the Company’s compensation philosophy also takes into consideration the unique roles played by each of the NEOs. The Committee seeks to individually tailor their compensation packages to align their pay mix and pay levels with their contributions to, and positions within, the Company. Because the NEOs make executive decisions that influence the direction, stability and profitability of the Company, their overall compensation is intended to strongly align with the Company’s strategic goals and objective financial measures of the Company.

 

VARIABLE INCENTIVE COMPENSATION

 

The Company’s compensation philosophy emphasizes variable incentive compensation elements (bonus and long-term incentives), the value of which reflects the Company’s strategic, financial and stock performance.

 

For all NEOs, the Committee retains the flexibility to adjust incentive awards downward or to consider discretionary bonus awards in special circumstances as described below under “Details of Compensation Elements—Annual Bonus—Discretionary Bonuses.”

 

 

PEER GROUP CONSIDERATIONS

 

As context for setting the compensation levels for the Mr. Hovnanian and Mr. Sorsby for fiscal 2023, the Committee considered the compensation levels and practices of its Peer Group companies. Consistent with fiscal 2022, for fiscal 2023, the Company’s Peer Group included the following nine publicly-traded homebuilding companies:

 

 

	Beazer Homes USA, Inc.	M/I Homes, Inc.
	Century Communities, Inc.	Meritage Homes Corporation
	KB Home	Taylor Morrison Home Corporation
	LGI Homes, Inc.	TRI Pointe Group, Inc.
	M.D.C. Holdings, Inc.

The Committee, in consultation with the Committee’s compensation consultant, FW Cook, and management, selected the companies in the Peer Group because of their comparable industry profiles, including, among other factors, revenue, adjusted total EBIT and enterprise value. The Committee did not become aware of any changes in the Peer Group or the Company’s characteristics that necessitated modification of the Peer Group for fiscal 2023. Further, to retain and attract executive talent with industry-specific knowledge, in constructing the Peer Group, the Committee selected those companies that compete directly with the Company in the homebuilding industry, are of comparable complexity in operations to the Company and are generally in the markets in which the Company competes. The Committee feels that it is important to compare the Company to others in the homebuilding industry, even if certain of these peers have different financial profiles, because the Company competes with homebuilding industry peers for executive talent with industry-specific knowledge and experience. In addition, the Company competes directly in all of its markets with most of the Peer Group companies for customers, land and trade partners. In some markets, the Company is larger than some of the Peer Group companies even though it may be smaller nationally. The Committee will continue to review the appropriateness of the Peer Group composition. For Mr. O’Connor with respect to fiscal 2023, the Committee placed equal or greater weight on its consideration of internal pay equity, an evaluation of individual performance contributions and other factors.

 

The Committee relies on Peer Group comparisons for the CEO and CFO positions and intends for Total Direct Compensation to be competitive with the Peer Group. Because of the limited compensation data reported for the CAO position by companies in the Peer Group, the Committee also reviews broad-based compensation survey data for the compensation of the CAO and considers internal pay relationships. The Committee does not consider the specific participants included in broad-based compensation survey data to be a material factor in its reviews. The Committee reviewed broad-based survey data in fiscal 2023 to assess current market trends with respect to compensation for Mr. O’Connor.

CONSIDERATION OF MARKET CONDITIONS

 

In determining overall compensation for all the NEOs, the Committee also takes into account leadership abilities and risk management contributions, which are especially critical during challenging market conditions. In addition, in establishing compensation levels, the Committee takes into consideration market pressures, both within and outside of the homebuilding industry.

 

When setting bonus formulas in December 2022, the Committee acknowledged the increase in inflation to 40-year high levels, the fact that mortgage rates had more than doubled since January 2022 and housing demand in the second half of 2022 had significantly decreased. As a result, the Committee determined to emphasize the importance of maintaining appropriate levels of liquidity, including the use of alternative capital raises by incorporating these metrics into the NEO’s bonus programs for fiscal 2023. The Committee also determined to maintain the existing ROAE bonus components for each NEO, subject to tiered bonus caps based on 2023 pre-tax profit, which were substantially lower than the maximum potential bonuses under their fiscal 2022 bonus formulas. In addition, the Committee determined that the PSUs granted to the NEOs would be tied to financial performance conditions. Specifically, half of these PSUs are tied to specific absolute EBIT levels for the four quarters ending April 30, 2024 and the other half of these PSUs are tied to EBIT Return on Investment rank relative to the Peer Group for the four most recently completed quarters as of April 30, 2024.

 

 

SAY-ON-PAY & SAY-ON-FREQUENCY VOTES

 

The Board of Directors thoughtfully considers the opinions expressed by shareholders through their votes, periodic meetings and other communications, and believes that shareholder engagement leads to enhanced governance practices. During fiscal 2023, the Company conducted proactive investor outreach programs, including having its executives attend four investor conferences as well as other meetings with the investment community and meeting by teleconference or in person with more than 112 investors either one-on-one or in small groups. As a result, the Company’s executives met with institutional holders representing approximately 70% of shares held by our top ten shareholders that are actively managed funds. None of these investors raised concerns about the Company’s compensation practices during such meetings. In fact, in the numerous investor meetings we have held over the years, compensation has rarely if ever been raised by investors as an issue to be discussed. Additionally, the Company periodically engages investors to discuss specific matters of importance to shareholders. The Company will continue to proactively engage shareholders and consider their concerns.

 

In addition, the Committee considered the result of the 2023 advisory, non-binding “say-on-pay” proposal in connection with the discharge of its responsibilities. A substantial majority of our shareholders (97.7% of the votes cast by shareholders of Class A Common Stock and Class B Common Stock, voting together) approved the compensation of our NEOs for fiscal 2022 described in our proxy statement for the 2023 Annual Meeting of Shareholders. The Committee views this level of shareholder support as an affirmation of our current pay philosophy and, as a result, no significant substantive changes were made to the structure of our executive compensation pay programs for fiscal 2023. The Committee will continue to consider the outcome of the Company’s say-on-pay votes when making future compensation decisions for the NEOs.

 

In light of the voting results with respect to the frequency of shareholder votes on executive compensation at the 2023 Annual Meeting of Shareholders at which a substantial majority of our shareholders (98.8% of the votes cast by shareholders of Class A Common Stock and Class B Common Stock, voting together) voted for “say-on-pay” proposals to occur every year, the Board of Directors decided that the Company would hold an advisory vote on the compensation of named executive officers every year.

3. FISCAL 2023 COMPENSATION ELEMENTS & COMPENSATION MIX

 

COMPENSATION ELEMENTS AT A GLANCE

 

There are five main compensation elements that support the Company’s compensation objectives, each of which is discussed in detail below.

 

Base salaries;

 

Annual bonuses;

 

Stock grants (for example, stock option, PSU and RSU awards);

 

Long-Term Incentive Programs (“LTIPs”) (described below) (payable in cash, stock and/or phantom shares); and

 

Other employee benefits, including limited perquisites.

COMPENSATION MIX

 

HOVNANIAN CEO PAY MIX

 

 

Fixed vs. Variable Compensation

 

A significant portion of executives’ “Total Direct Compensation” (which includes base salary, annual bonuses, stock grants and LTIP awards) opportunity consists of variable compensation – that is, the compensation ultimately realized is dependent on either Company or individual performance. Of the elements of Total Direct Compensation, base salary is fixed compensation, while annual bonuses, stock grants and LTIP awards are variable compensation. An important part of each NEO’s compensation package consists of equity awards, the ultimate realizable value of which is tied to the Company’s stock performance. These variable elements are intended to align the executives’ performance and interests with Company performance and long-term shareholder value.

 

The Committee intends for variable compensation to represent a significant percentage of the Total Direct Compensation opportunity for all NEOs consistent with its pay-for-performance philosophy. For example, variable compensation represented 87% and 90% of the CEO’s Total Direct Compensation opportunity in fiscal 2023 and fiscal 2022, respectively. In addition, the Committee intends for Total Direct Compensation to be competitive with the Peer Group. As further described below under “Details of Compensation Elements—Stock Grants,” for fiscal 2023, the Committee granted PSUs to the NEOs. The Committee also determined that the PSUs would be tied to financial performance conditions.

 

Long-Term vs. Short-Term Compensation

 

An important portion of each NEO’s Total Direct Compensation is long-term compensation, which may include stock options, PSUs, MSUs, RSUs and/or LTIP awards. Short-term compensation consists of base salary and the cash portion of annual bonus amounts. Long-term compensation is intended to foster long-term commitment by the executive, employee-shareholder alignment and improved long-term shareholder value. In fiscal 2023, the Committee adopted a LTIP for the NEOs and other key senior executives of the Company, as discussed below.

4. DETAILS of  COMPENSATION ELEMENTS

 

BASE SALARIES

 

Base salaries are intended to reward executives for their day-to-day contributions to the Company. The Committee believes that base salaries within the competitive range are necessary to retain the Company’s executive talent pool, and it set the fiscal 2023 base salaries of the NEOs at a level it believed to be necessary to retain such executive officers’ services. Base salaries of all the NEOs are reviewed annually by the Committee and are subject to adjustment based on factors that may include individual performance, change in responsibilities, average salary increases or decreases in the industry, compensation for similar positions in the Company’s Peer Group or broad-based compensation survey data if comparable data were unavailable from the Peer Group companies, as well as other factors, such as cost of living increases and internal pay relationships with other executives. For fiscal 2023, the Committee approved a 4.5% base salary increase, effective December 24, 2022, for Mr. O’Connor, which is in line with the Company’s ordinary course merit-based salary and cost of living increase practices. Upon Mr. Hovnanian and Mr. Sorsby’s recommendation, the Committee determined not to increase their respective base salaries for fiscal 2023. In addition, effective March 6, 2023, Messrs. Hovnanian, Sorsby and O’Connor voluntarily agreed to a 5% base salary decrease in light of staff reductions due to the slowdown in the housing market at that time. Based on discussions with FW Cook and Peer Group market data gathered by management, the Committee determined that, including these adjustments, the base salaries for the NEOs are within the competitive range necessary to retain the executive officers’ services.

ANNUAL BONUSES

 

Regular Bonuses

 

The Company provides each of the NEOs with an opportunity to earn annual bonuses, which are intended to reward executives for the attainment of short-term financial objectives and for which the relevant metrics and formula are assessed annually.

 

When it set bonus formulas in December 2022, the Committee considered the increase in inflation to 40-year high levels, the fact that mortgage rates had more than doubled since January 2022 and that housing demand in the second half of 2022 had significantly decreased. As a result, the Committee determined to emphasize the importance of maintaining appropriate levels of liquidity, including the use of alternative capital raises by incorporating these metrics into the NEO’s bonus programs for fiscal 2023. The Committee also determined to maintain the existing ROAE bonus components for each NEO, subject to tiered bonus caps based on 2023 Pre-tax Profit, which were substantially lower than the maximum potential bonuses under their fiscal 2022 bonus formulas. In particular, depending on the level of 2023 Pre-tax Profit achieved, the CEO’s 2023 bonus cap ranged from $2.8 million to $3.8 million, which represented a significant reduction from the CEO’s fiscal 2022 bonus cap of $12 million.

 

The Committee has discretion to reduce or eliminate the amount of any bonus amounts payable to any participant based on performance or any other factors the Committee deems appropriate. Bonus opportunities are intended to be competitive with industry-wide practices in order to retain and attract executive talent.

 

The following description provides detail as to the components used to determine each NEO’s fiscal 2023 annual bonus, namely (1) ROAE, (2) Pre-tax Profit, (3) Liquidity Balances and (4) Alternative Capital Raises, each as defined below. For additional context as to the Committee’s approach to setting the Company’s compensation programs, see also the above discussion under “Compensation Philosophy and Objectives.” Due to the large percentage of long-term compensation paid in the form of stock pursuant to PSUs and the LTIP programs, all bonuses for fiscal 2023 were paid 100% in cash.

ROAE is defined as net income available to common shareholders divided by average equity (total equity at the beginning of the fiscal year and at the end of each fiscal quarter during the year divided by five). Net income used in calculating ROAE excludes the impact of any items deemed by the Committee to be unusual or nonrecurring items and excludes losses from land impairments and gains or losses from debt repurchases/debt retirement such as call premiums and related issuance costs. For fiscal 2023, the Committee set rigorous ROAE goals which required the achievement of a 20% ROAE in order for the NEOs to earn their respective maximum ROAE bonuses. For reference, the average return on equity for the S&P 500 over the last 25 years was 15.92%.

 

“Pre-tax Profit” is defined as income (loss) before income tax expense and before income (loss) from unconsolidated joint ventures as reflected on the Company’s audited financial statements plus income (loss) before income tax expense for the Company’s unconsolidated joint ventures as reflected on their respective financial statements for the twelve months ended October 31, 2023, excluding the impact of any items deemed by the Committee to be unusual or nonrecurring items and excluding losses from land impairments and gains or losses from debt repurchases/debt retirement such as call premiums and related issuance costs.

 

The Liquidity Balances component of the NEOs’ bonus formulas was based on the number of fiscal 2023 quarter-ends in which Liquidity Balances were at or above $200 million. “Liquidity Balances” are defined as homebuilding cash and cash equivalents plus restricted cash that collateralizes letters of credit plus the available borrowing capacity under the Company’s revolving credit facility. This element of the bonus calculation directly correlates with the Company’s strategic goal of enhancing our liquidity in order to grow the Company in light of our challenges accessing the capital markets.

 

The Alternative Capital Raises component of the NEOs’ bonus formulas measured amounts raised by the Company or its unconsolidated joint ventures from alternative capital sources as determined by the Committee (including, but not limited to, financing by joint ventures, land banking transactions and non-recourse debt, but excluding SEC registered and 144A debt financing transactions) that were closed during fiscal 2023. This element of the bonus calculation directly correlates with the Company’s strategic goal of enhancing our liquidity through innovative sources of additional capital in order to grow the Company in light of our challenges accessing the capital markets.

 

The bonus formulas for the NEOs are illustrated by the following tables.

 

For the CFO and CAO, the bonuses are based on base salaries in effect prior to the voluntary 5% base salary decrease on March 6, 2023.

  

	CEO Bonus*	CFO Bonus*	CAO Bonus*
ROAE
	Percentage of	Percentage of	Percentage of
	Pre-tax Profit	Base Salary	Base Salary
0.00%	0.00%	0.00%	0.00%
5.00%	1.00%	50.00%	20.00%
10.00%	1.25%	100.00%	40.00%
15.00%	1.50%	215.00%	80.00%
20.00%	2.00%	330.00%	120.00%

 

Plus

 

Number of Fiscal	CEO	CFO	CAO
2023 Quarter-Ends	Bonus*	Bonus*	Bonus*
with Liquidity Balances	thousands	thousands	thousands
at or Above $200 million
1	$0.0	$0.0	$0.0
2	$700.0	$350.0	$100.0
3	$1,050.0	$525.0	$150.0
4	$1,400.0	$700.0	$200.0

 

 

Plus

 

Alternative Capital
Raises Closed During	CEO Bonus*	CFO Bonus*	CAO Bonus*
Fiscal 2023
millions	thousands	thousands	thousands
$100.0	$0.0	$0.0	$0.0
$125.0	$700.0	$350.0	$100.0
$150.0	$1,050.0	$525.0	$150.0
$200.0	$1,400.0	$700.0	$200.0

 

*The bonuses are interpolated on a linear basis between the points shown in the table and are subject to the caps described below.

 

Subject to the following Bonus Caps

 

	CEO	CFO	CAO
Pre-tax Profit	Bonus Cap**	Bonus Cap**	Bonus Cap**
millions	thousands	thousands	thousands
Less than $40.0	$2,800.0	$1,400.0	$400.0
$40.0	$3,300.0	$1,725.0	$450.0
$80.0 or More	$3,800.0	$2,050.0	$500.0

 

**The bonus caps are interpolated on a linear basis between the points shown in the table.

 

 

For fiscal 2023, the Company achieved the maximum performance levels for ROAE, Liquidity Balances and Alternative Capital Raises. Specifically, fiscal 2023 ROAE, Pre-tax Profit and Alternative Capital Raises as defined under the bonus formulas for the NEOs were 42.9%, $370.2 million and $342.3 million, respectively, and Liquidity Balances were above $200 million for all four fiscal quarter-ends. As a result, Messrs. Hovnanian, Sorsby and O’Connor earned cash bonuses equal to $3,800,000, $2,050,000 and $500,000, respectively, which represented their maximum potential bonuses. The fiscal 2023 bonus payouts for Messrs. Hovnanian, Sorsby and O’Connor were 45%, 21.5% and 14% lower, respectively, than their fiscal 2022 bonus payouts.

 

Discretionary Bonuses

 

The Committee has the authority to make discretionary bonus awards, which it considers under special circumstances, including exceptional contributions not reflected in the regular bonus measures, new hire sign-on bonuses and retention rewards. No discretionary bonus awards were granted to the NEOs in fiscal 2023.

  

STOCK GRANTS

 

The Committee may make grants of stock options, stock appreciation rights, MSUs, PSUs, restricted stock and RSUs, unrestricted shares of stock or stock-based awards settled in cash. In fiscal 2023, the Committee awarded PSUs to the NEOs.

 

Equity awards are intended to establish a strong commitment to maintain employment with the Company and to focus on creating long-term shareholder value. Because the ultimate value received by equity award recipients is directly tied to the Company’s stock price, such awards serve to link the interests of management and shareholders and to motivate executive officers to make decisions that will increase the long-term total return to shareholders. Certain of the equity awards also include financial performance conditions, which are intended to incentivize recipients to direct the Company to achieve specified financial performance goals. Additionally, grants under the Existing Plan include vesting and termination provisions that the Committee believes will encourage equity award recipients to remain long-term employees of the Company.

 

 

The Committee ultimately approves the size of the grants taking into account the recommendations of the CEO (other than for his own grant) and other criteria as determined by the Committee. The Committee considers the grant date value of awards as well as the number of shares to ensure that a significant portion of NEO compensation is tied to the Company’s stock price performance and shareholder value creation. The Committee will continue to determine the appropriate mix of equity and other award types based on the objectives of the compensation program, the Company’s business needs, the potential dilution impact and the pool of shares remaining available for grant under the Company’s shareholder-approved incentive plans.

 

Fiscal 2023 Equity Awards

 

In determining the fiscal 2023 equity awards for the NEOs, the Committee considered, without giving specific weight to any one factor, then-available information on Peer Group equity awards for the NEOs, the anticipated changes in equity award values across industries, the Company’s available share pool and the potential impact on shareholder dilution, the Company’s stock performance, the historical equity awards provided to each NEO, the desire to retain the employment of each NEO and the desire to continue to link a substantial portion of each NEO’s compensation with future Company performance. As previously discussed, the Committee’s outside compensation consultant, FW Cook, also assisted the Committee with respect to its review of the Company’s compensation program for the CEO and other NEOs, including its equity awards.

 

 

All equity awards granted to NEOs in fiscal 2023 were made in the form of rights to receive shares of Class A Common Stock, except for the CEO, who received his equity awards in the form of rights to receive shares of Class B Common Stock. In making such determination for the CEO, the Committee discussed the various reasons for making awards in Class B Common Stock and considered and evaluated the feedback gathered over time and reported to the Committee by senior human resources personnel about the diligence review thereof, which included discussions with the Company’s senior management and other associates and external parties, such as significant capital providers and joint venture partners and important suppliers and contractors with whom the Company continues to have significant business relationships. Such parties expressed that Hovnanian generational family ownership and control has high value in that it fosters strong engagement and it continues to be important to the Company’s business dealings and relationships and to attracting and retaining current and prospective employees. The Committee also reviewed an independent analysis and valuation of what premium or discount, if any, a Class B Common Stock share would have relative to a Class A Common Stock share, taking into account selected transactions and companies offering dual-class stock. Such analysis found, on average, no premium associated with high voting stock even when such stock retained its high vote status upon a sale, which is in contrast to Class B Common Stock which must be converted to Class A Common Stock upon a sale.

 

After such discussion and review and analysis thereof, the Committee determined that the value to the CEO of receiving Class B Common Stock was equal to the value if he had received Class A Common Stock and that making the CEO’s equity awards in the form of rights to receive shares of Class B Common Stock best served the Company’s and its shareholders’ interests by promoting continuity of direction and management and stability in the Company’s business and employee relationships through Hovnanian generational family ownership and control, which has been and continues to be critical to the growth and success of the Company. There was a less than 3.8% change in the percentage of Hovnanian shareholder votes controlled by Ara Hovnanian caused by the later of vesting or delivery, in fiscal 2023, of Class B Hovnanian Common Stock awards. 

 

 

The Committee decided to award PSUs to the NEOs in fiscal 2023 because it believes PSUs provide a clear linkage to shareholder value creation and balance retention and performance objectives. Of the PSUs awarded to the NEOs in fiscal 2023, half of the PSUs were tied to absolute EBIT levels, and the other half of the PSUs were tied to EBIT Return on Investment rank relative to the Peer Group as further discussed below. The absolute EBIT metric was chosen because the Committee determined that it supports the Company’s strategic goal of improving profitability and interest coverage. The relative EBIT Return on Investment metric was chosen because the Committee determined that it measures pure operating performance compared to the Peer Group on an equal basis because it neutralizes each company’s leverage. EBIT Return on Investment differs from EBIT Return on Inventory, a metric used in the Company’s 2022 PSU program, in that it accounts for the Company’s investment in unconsolidated joint ventures, which the Committee views as appropriate because that is how the Company invests in certain communities. If the performance conditions are met, the earned PSUs vest on the third anniversary of the grant date. The earned PSUs are further subject to a mandatory two-year post-vesting delayed delivery such that the PSU awards will not be completely distributed until five years following the grant date, or June 9, 2028.

 

Mr. Hovnanian: 

In fiscal 2023, Mr. Hovnanian received 31,202 target PSUs with a grant date fair value of $2,274,002 compared to 36,312 target PSUs in fiscal 2022 with a grant date fair value of $1,516,026.

 

Mr. Sorsby:

In fiscal 2023, Mr. Sorsby received 14,766 target PSUs with a grant date fair value of $1,076,146 compared to 17,184 target PSUs in fiscal 2022 with a grant date fair value of $717,432.

 

Mr. O’Connor: 

In fiscal 2023, Mr. O’Connor received 2,882 target PSUs with a grant date fair value of $210,040 compared to 3,354 target PSUs in fiscal 2022 with a grant date fair value of $140,030.

  

 

The number of PSUs tied to absolute EBIT levels which become earned PSUs shall equal the product of the target number of PSUs multiplied by the applicable Performance Multiplier set forth below. For this purpose, “EBIT” shall mean income (loss) before interest and income tax expense during the performance period as reflected on the Company’s audited financial statements for such performance period plus income (loss) before interest and income tax expense for the Company’s unconsolidated joint ventures as reflected on their respective financial statements for the twelve months ending April 30, 2024, excluding: (1) expense/income recorded during the performance period from any Phantom Share based awards related to changes in the stock price above or below the stock price at the date of grant; (2) the impact of any items deemed by the Committee to be unusual or nonrecurring items; and (3) losses from land impairments and gains or losses from debt repurchases/debt retirement such as call premiums and related issuance costs.

 

EBIT for the
4 Quarters Ending	Performance
April 30, 2024	Multiplier*
More than 7.7% below target	50%
Target	100%
15.4% above target	200%

 

*The applicable Performance Multiplier is interpolated on a linear basis between the points shown in the table.

 

The number of PSUs tied to EBIT Return on Investment rank relative to the Peer Group which become earned PSUs shall equal the product of the target number of PSUs multiplied by the applicable Performance Multiplier. The Performance Multiplier ranges from 50% to 200% depending on EBIT Return on Investment rank with the maximum multiplier requiring a rank in the top three. “EBIT Return on Investment” shall mean the quotient resulting from dividing EBIT by Average Investment. “EBIT” shall mean income (loss) before interest and income tax expense during the performance period as reflected on each company’s audited financial statements for such performance period, excluding losses from land impairments and gains or losses from debt repurchases/debt retirement such as call premiums and related issuance costs and, for Hovnanian Enterprises, Inc., excluding: (1) expense/income recorded during the performance period from any Phantom Share based awards related to changes in the stock price above or below the stock price at the date of grant and (2) the impact of any items deemed by the Committee to be unusual or nonrecurring items. “Average Investment” shall mean the average of the sum of the ending inventory, investment in unconsolidated joint ventures, investment in build for rent assets, definite life intangibles and goodwill balances from each company’s audited balance sheet, excluding capitalized interest and the impact of consolidated inventory not owned, for each of the five most recently completed consecutive fiscal quarters as of April 30, 2024.

 

 

Achievement under the 2022 PSUs

 

In fiscal 2022, the Committee granted PSUs to the NEOs because it believes PSUs provide a clear linkage to shareholder value creation and balance retention and performance objectives. Half of the fiscal 2022 PSUs were tied to absolute EBIT levels, while the other half of the PSUs were tied to EBIT Return on Inventory rank relative to the Peer Group, each as further discussed below. The absolute EBIT metric was chosen because the Committee determined that it supports the Company’s strategic goal of improving profitability and interest coverage. The relative EBIT Return on Inventory metric was chosen because the Committee determined that it measures pure operating performance compared to the Peer Group on a leverage neutral basis. Earned PSUs vest on the third anniversary of the grant date and are further subject to a mandatory two-year post-vesting delayed delivery such that the PSU awards will not be completely distributed until five years following the grant date, or June 10, 2027.

  

	Target 2022 PSUs	Target 2022 PSUs
	Tied to Absolute	Tied to Relative
	EBIT Levels	EBIT ROI Rank
Mr. Hovnanian	18,156	18,156
Mr. Sorsby	8,592	8,592
Mr. O’Connor	1,677	1,677

 

The number of PSUs tied to absolute EBIT levels which become earned PSUs shall equal the product of the target number of PSUs multiplied by the applicable Performance Multiplier set forth below. For a definition of “EBIT” used in relation to our 2022 PSUs please see our proxy statement relating to our 2023 annual shareholder meeting filed with the SEC on February 10, 2023.

 

 

EBIT for the 4 Quarters Ending	Performance
April 30, 2023	Multiplier*
$300 million or less (Threshold)	50%
$350 million (Target)	100%
$450 million or more (Maximum)	200%

 

*The applicable Performance Multiplier is interpolated on a linear basis between the points shown in the table.

  

The Company’s EBIT for the four quarters ending April 30, 2023 was $426.3 million, resulting in a payout of 176.3% of the target award. The earned PSUs vest on the third anniversary of the grant date and are further subject to a mandatory two-year post-vesting delayed delivery such that the PSU awards will not be completely distributed until five years following the grant date, or June 10, 2027.

 

The number of PSUs tied to EBIT Return on Inventory rank relative to the Peer Group which become earned PSUs shall equal the product of the target number of PSUs multiplied by the applicable Performance Multiplier as set forth below. For a definition of “EBIT Return on Inventory” used in relation to our 2022 PSUs please see our proxy statement relating to our 2023 annual shareholder meeting filed with the SEC on February 10, 2023.

 

Relative EBIT ROI Rank Compared to Peers
for Each Company’s 4 Most Recently Completed	Performance
Fiscal Quarters as of April 30, 2023	Multiplier*
Bottom Three (Threshold)	50%
Rank 6 (Target)	100%
Top Three (Maximum)	200%

 

*The applicable Performance Multiplier is interpolated on a linear basis between the points shown in the table.

  

Our relative EBIT Return on Inventory rank compared to our Peers for each company’s four most recently completed fiscal quarters as of April 30, 2023 was the highest, resulting in a payout of 200% of the target award. The earned PSUs vest on the third anniversary of the grant date and are further subject to a mandatory two-year post-vesting delayed delivery such that the PSU awards will not be completely distributed until five years following the grant date, or June 10, 2027.

 

 

LONG-TERM INCENTIVE PROGRAMS

 

2023 Long-Term Incentive Program

 

In fiscal 2023, the Company adopted a Long-Term Incentive Program (the “2023 LTIP”) under the Existing Plan to further aid the Company in retaining key employees and to motivate them to exert their best efforts on behalf of the Company. Specifically, the 2023 LTIP is entirely performance-based and is intended to incentivize achievement of specified relative EBIT Return on Investment goals as of October 31, 2025, specified levels of new community openings (including domestic joint ventures) in fiscal year 2025 with National Portfolio Plans that include Looks, which are plans that are used across our markets and include curated packages for customers to select, rather than a large number of a la carte options, and specified levels of public debt refinanced or reduced by October 31, 2025. The Committee chose these metrics to align and incentivize the NEOs to focus on attaining operating efficiencies, improving our bottom line and achieving our strategic goals. In particular, refinancing or reducing public debt as a financial measure incentivizes management to work towards improvement of our balance sheet.

 

Each of the NEOs is a participant in the 2023 LTIP. Award payouts, if any, will be determined based on actual performance for the full 36-month performance period and will be subject to holding requirements, as described below. This performance period commenced on November 1, 2022 (the beginning of fiscal 2023) and will end on October 31, 2025 (that is, the performance period covers fiscal 2023, 2024 and 2025). After the performance period, the LTIP share portion of the awards remain subject to a mandatory two-year post-vesting delayed delivery such that the awards will not be completely distributed until five years after the beginning of the performance period, or October 31, 2027. The LTIP phantom share portion of the awards will be distributed following the end of the performance period. Like MSU, PSU and other LTIP awards, in accordance with the Committee’s intentions, the payout under the 2023 LTIP will be determined based on the Company’s performance.

  

 

Award payouts, if any, will be based on a specific target multiple of each participant’s base salary in effect on January 1, 2023. The following describes the target multiple of base salary and form of payout for each NEO:

 

	Target Multiple
	of Base Salary	Payout Method
Mr. Hovnanian	1.35	50% shares/50% phantom shares
Mr. Sorsby	1.00	50% shares/50% phantom shares
Mr. O’Connor	0.75	50% shares/50% phantom shares

 

The Awards are reflected in the Summary Compensation Table as “Stock Awards” in fiscal 2023 even though the LTIP share portion remains subject to mandatory delayed delivery restrictions through fiscal 2027, as discussed above. Any cash-settled phantom shares that vest will be distributed at the end of the performance period, while the remaining PSU awards that vest, if any, are further subject to a mandatory two-year post-vesting delayed delivery such that the awards will not be completely distributed until October 31, 2027.

 

Potential award payouts range from 0% to 250% of the target award depending on performance against three metrics: (1) EBIT Return on Investment relative to the Peer Group for the four most recently completed fiscal quarters as of October 31, 2025, (2) the percent of new community openings, including domestic joint ventures, in fiscal 2025 that include National Portfolio plans with Looks, which are plans that are used across our markets and include curated packages for customers to select, rather than a large number of a la carte options, and (3) the refinancing or reduction of a specified level of the Company’s public bonds by October 31, 2025. For purposes of the LTIP, “EBIT Return on Investment” shall mean the quotient resulting from dividing EBIT by Average Investment. For purposes of the LTIP, “EBIT” shall mean income (loss) before interest and income tax expense during the performance period as reflected on each company’s audited financial statements for such performance period, excluding losses from land impairments and gains or losses from debt repurchases/debt retirement such as call premiums and related issuance costs and, for Hovnanian Enterprises, Inc., excluding: (1) expense/income recorded during the Performance Period from any Phantom Share based awards related to changes in the stock price above or below the stock price at the date of grant and (2) the impact of any items deemed by the Committee to be unusual or nonrecurring items. “Average Investment” shall mean the average for each of the 5 most recently completed consecutive fiscal quarters as of October 31, 2025 of the sum of the ending inventory, definite life intangibles and goodwill balances from each company’s audited balance sheet, excluding capitalized interest and the impact of consolidated inventory not owned.

 

 

Achievement under the 2021 Long-Term Incentive Program

 

In fiscal 2021, the Company adopted a Long-Term Incentive Program (the “2021 LTIP”) to further aid the Company in retaining key employees and to motivate them to exert their best efforts on behalf of the Company. Specifically, the 2021 LTIP was entirely performance-based and was intended to incentivize achievement of specified pre-tax profit goals as a measure of operational improvement and specified improvements in the Company’s annualized interest incurred based on outstanding homebuilding debt (“Annualized Interest Incurred”). The Committee chose these metrics to align and incentivize the NEOs to focus on gaining operating efficiencies and improving our bottom line. In particular, using annualized interest expense as a financial measure incentivizes management to work towards improvement of our balance sheet.

 

Each of the NEOs was a participant in the 2021 LTIP, and their award payouts were determined based on actual performance for the full 36-month performance period, subject to certain vesting requirements over an additional 24-month period, as described below. This performance period commenced on November 1, 2020 (the beginning of fiscal 2021) and ended on October 31, 2023 (that is, the performance period covered fiscal 2021, 2022 and 2023). After the performance period, the awards, as discussed further below, remain subject to vesting conditions during fiscal 2024 and 2025. Like MSU, PSU and other LTIP awards, in accordance with the Committee’s intentions, the payout under the 2021 LTIP was determined based on the Company’s performance.

 

 

Award payouts were based on a specific target multiple of the NEO’s base salary in effect on January 1, 2021. The following describes the target multiple of base salary and form of payout for each NEO:

 

	Target Multiple
	of Base Salary	Payout Method
Mr. Hovnanian	1.35	100% shares
Mr. Sorsby	1.00	100% shares
Mr. O’Connor	0.75	100% shares

 

The Awards were reflected in the Summary Compensation Table as “Stock Awards” in fiscal 2021 even though they remain subject to vesting restrictions during 2023, 2024 and 2025 and mandatory holding restrictions through fiscal 2025, 2026 and 2027, as discussed below.

 

For purposes of the 2021 LTIP, “Pre-tax Profit” is defined as income (loss) before income tax expense and before income (loss) from unconsolidated joint ventures as reflected on the Company’s audited financial statements plus income (loss) before income tax expense for the Company’s unconsolidated joint ventures as reflected on their respective financial statements for the thirty-six month period ending October 31, 2023, excluding the impact of any items deemed by the Committee to be unusual or nonrecurring items and excluding losses from land impairments and gains or losses from debt repurchases/debt retirement such as call premiums and related issuance costs. “Annualized Interest Incurred” is defined as the annualized interest due on the outstanding Homebuilding Debt as of October 31, 2023. “Homebuilding Debt” is defined as total (recourse) notes payable, including the outstanding balances at October 31, 2023 on any revolving credit agreements, and non-recourse property-specific debt, excluding accrued interest, as reflected on our consolidated audited balance sheet, less any debt that has an equity component such as debt convertible into equity, tangible equity units and/or exchangeable notes (not net debt).

 

 

The following table illustrates the percentage of the target award that would have been achieved at each performance level. Awards are interpolated on a linear basis between performance levels but will not be extrapolated above the maximum performance levels listed below:

 

Cumulative
Pre-tax
Profit for
Fiscal 2021
Through	Annualized Interest Incurred Based on Outstanding
Fiscal 2023	Homebuilding Debt at October 31, 2023
millions	$165.0 or more	$158.3	$151.7	$145.0	$138.3	$131.7	$125.0 or less
$475.0 or more	100% of target award	125% of target award	150% of target award	175% of target award	200% of target award	225% of target award	250% of target award
$350.0	75% of target award	100% of target award	125% of target award	150% of target award	175% of target award	200% of target award	225% of target award
$225.0	50% of target award	75% of target award	100% of target award	125% of target award	150% of target award	175% of target award	200% of target award
$100.0	0% of target award	15% of target award	30% of target award	45% of target award	60% of target award	75% of target award	90% of target award
Less than $100.0	0% of target award	0% of target award	0% of target award	0% of target award	0% of target award	0% of target award	0% of target award

   

 

For the period from fiscal 2021 through fiscal 2023, the Company achieved $918.5 million in cumulative Pre-tax Profit, and Annualized Interest Incurred was $114.5 million, resulting in a payout of 250% of the target award. As an additional condition of earning each portion of the award and as a retention inducement, following the performance period, a participant must also be employed through the vesting dates outlined below (other than in cases of death, disability, qualified retirement or specified termination following a change in control of the Company). Mr. Sorsby’s departure from the Company as of October 31, 2023 was deemed a qualified retirement such that he will receive these awards.

 

60% of the award vested on October 31, 2023 and
will be payable on October 31, 2025;

 

20% of the award will become vested on October 31, 2024
and would be payable in October 31, 2026; and

 

20% of the award will become vested on October 31, 2025
and would be payable in October 31, 2027.

 

 

 

 

OTHER EMPLOYEE BENEFITS

 

The Company provides additional employee benefits that the Committee believes enhance executive safety, efficiency and time that the executive is able to devote to Company affairs.

 

We do not believe that special perquisites or other personal benefits should play a major role in our executive compensation program. However, some NEOs are provided one or more of the following items: 

 

Auto allowance, including car maintenance and fuel expense;

  

Personal use of the Company’s automobiles and of the Company’s fractional aircraft share (limited to the CEO); 

 

Executive term life insurance; 

 

Annual Executive Physical Exam Program; 

 

Golf membership or country club fee reimbursement for personal use (limited to Messrs. Hovnanian and Sorsby); and 

 

Personal income tax preparation services (limited to the CEO). 

  

There are no tax gross-ups on any of the executive perquisites. The Committee annually reviews the elements and level of executive perquisites for the NEOs. In particular, in evaluating the appropriateness of these benefits for the CEO, the Committee takes into consideration the CEO’s security, health and safety and the degree to which he is required to travel to various Company locations and business functions on a daily basis. Based on its review, the Committee has requested that the CEO use Company-provided transportation to enhance his security and the efficient use of his time.

 

The Company makes a matching contribution to all participants, including the NEOs, in the Company’s 401(k) plans of up to 6% of eligible employee compensation, based on tenure. The Company also makes contributions to the executive deferred compensation plan (“EDCP”) for the NEOs and certain other members of senior leadership of the Company to provide up to 6% of earnings above the annual 401(k) limit for the calendar year, based on tenure. Calendar year contributions are credited in the subsequent fiscal year and reflected in the proxy statement for that year. Contributions credited in fiscal 2022 with respect to calendar year 2021 earnings were higher than anticipated due to a higher than expected increase in the Company’s stock value. Although, in light of this development, Mr. Hovnanian requested that his contribution based on calendar year 2021 earnings be reduced, such reduction was not possible because the contribution had already been credited to his EDCP account. Upon Mr. Hovnanian’s recommendation, the Committee determined to cap his contribution to be credited in fiscal 2023 based on calendar year 2022 earnings at $450,000. To limit contributions going forward, Mr. Hovnanian further recommended, and the Committee approved, changing the contribution formula for all participants to exclude equity and other long-term compensation beginning with contributions to be credited in fiscal 2024 based on calendar year 2023 earnings.

 

Specific benefits and the incremental costs of such benefits are described in detail in the footnotes to the Summary Compensation Table. The Company does not offer any defined benefit pension plans to its employees. 

5. ACTIONS for FISCAL 2024 

 

The Committee approved a base salary increase to $600,000, effective November 1, 2023, for Mr. O’Connor, in light of his promotion to Chief Financial Officer. Given the Company’s improved financial performance, effective December 23, 2023, the Committee restored Mr. Hovnanian’s salary to $1,150,000, which was his base salary prior to the voluntary decrease on March 6, 2023.

 

The Committee increased the alternative capital raises goals in the NEOs’ fiscal 2024 bonus plans to further enhance our liquidity in order to grow the Company. In light of his promotion, the Committee increased Mr. O’Connor’s fiscal 2024 bonus potential to align with his new position. Given the Company’s improved financial performance, the Committee raised the fiscal 2024 bonus cap for Mr. Hovnanian to $7 million, which is higher than his 2023 bonus cap but lower than his 2022 bonus cap.

 

The Committee also adopted a new Long-Term Incentive Program (the “2024 LTIP”). Each of the NEOs will be a participant in the 2024 LTIP, and their award payouts will be determined based on the Company’s achievement of specified levels of (1) EBIT Return on Investment relative to the Peer Group for the four most recently completed fiscal quarters as of October 31, 2026 and (2) Net Debt to Capital at October 31, 2026. At the end of the performance period, 50% of the awards, if any, which would be payable in cash-settled phantom shares will be distributed and the remaining 50% of the awards, if any, which would be payable in shares of Company stock, are further subject to a mandatory two-year post-vesting delayed delivery such that the awards will not be completely distributed until October 31, 2028. The performance period for the 2024 LTIP commenced on November 1, 2023 and will end on October 31, 2026. 

6. TAX DEDUCTIBILITY & ACCOUNTING IMPLICATIONS

 

As a general matter, the Committee takes into account the various tax and accounting implications of compensation. When determining amounts of equity grants to executives and employees, the Committee also examines the accounting cost associated with the grants.

 

7. TIMING & PRICING OF EQUITY AWARDS 

 

With the exception of grants related to new hires and promotions, PSUs, RSUs, MSUs and options are granted on the second Friday in June for all eligible employees. The Company’s practice of setting “fixed” equity award grant dates is designed to avoid the possibility that the Company could grant stock awards prior to the release of material, non-public information that is likely to result in an increase in its stock price or delay the grant of stock awards until after the release of material, non-public information that is likely to result in a decrease in the Company’s stock price. Exercise prices of stock options, when granted, are generally set at, and cannot be lower than, the closing price per share of the Company’s Class A Common Stock on the NYSE on the day of grant. 

 

8. STOCK OWNERSHIP GUIDELINES & DELAYED DELIVERY PERIODS 

 

STOCK OWNERSHIP GUIDELINES 

 

The Board of Directors has adopted stock ownership guidelines, which set forth recommended minimum amounts of stock ownership, directly or beneficially, for the CEO, CFO, COO (if any) and non-employee Directors. The Corporate Governance and Nominating Committee reviews adherence to the Company’s stock ownership guidelines on an annual basis, which guidelines are incorporated into the Company’s Governance Guidelines. The Company believes these guidelines further enhance the Company’s commitment to aligning the interests of our non-employee Directors and senior management with those of our shareholders.

 

Under the terms of the ownership guidelines, once the stock ownership guidelines are met, they are deemed satisfied for subsequent annual review periods, regardless of decreases in the Company’s stock price on the NYSE. 

 

SENIOR EXECUTIVE OFFICERS

 

The guidelines provide that the following senior executive officers of the Company are requested to achieve and maintain minimum stock ownership amounts as follows within five years after they become subject to the guidelines: 

 

CEO: 6 times current base salary 

 

CFO: 3 times current base salary 

 

COO (if any): 3 times current base salary 

As of October 31, 2023, Messrs. Hovnanian and Sorsby were in compliance with the guidelines.

 

See “Non-Employee Director Compensation” for information on the stock ownership guidelines for non-employee Directors. 

 

MANDATORY DELAYED DELIVERY PERIOD

 

The Compensation Committee of the Board of Directors of the Company has adopted a policy whereby equity awards granted to the company’s executive officers are subject to a mandatory two-year post-vesting delayed delivery period such that, even after vesting conditions for the applicable award are satisfied and the award is fully vested, delivery of the underlying shares is delayed until the second anniversary of the vesting date, other than equity awards that vest in connection with a qualified termination of employment occurring within two years following a change of control, as governed by the terms of the applicable award agreement. 

 

ANTI-HEDGING AND PLEDGING POLICIES

 

We have a securities trading policy that sets forth guidelines and restrictions applicable to employees’ and directors’ transactions involving our stock. Among other things, this policy prohibits our employees and directors from engaging in short-term or speculative transactions involving our stock, including purchasing our stock on margin, short sales of our stock (that is, selling stock that is not owned and borrowing shares to make delivery), buying or selling puts, calls or other derivatives related to our stock and arbitrage trading or day trading of our stock. In addition, our employees and directors are not allowed to pledge Company stock without the consent of the Company. 

  

EXECUTIVE COMPENSATION 

 

1. SUMMARY COMPENSATION TABLE

 

The following table summarizes the compensation for the fiscal years ended October 31, 2023, October 31, 2022 and October 31, 2021 of the CEO, CFO and CAO. These three individuals compose our named executive officers (“NEOs”).

 

												Non-Equity		Change in Pension Value and Nonqualified
Name and Principal Position		Year		Salary		Bonus		Stock Awards		Option Awards		Incentive Plan Compen- sation		Deferred Compen- sation Earnings		All Other Compen-sation		Total
				($) (1)		($)		($) (2)		($) (3)		($) (4)		($) (5)		($) (6)		($) (7)
Ara K. Hovnanian President, Chief Executive Officer and Chairman of the Board		2023		1,116,385				3,826,502				3,800,000		71,083		668,428		9,482,398
		2022		1,154,423		—		3,068,492		—		11,316,803		78,883		890,896		16,509,497
		2021		1,257,273		—		3,330,082		—		7,437,438		64,861		388,528		12,478,182
J. Larry Sorsby Executive Vice President, Chief Financial Officer		2023		923,841				1,867,863				2,050,000		94,902		675,815		5,612,421
		2022		790,607		—		1,509,133		—		4,469,122		94,489		493,915		7,357,266
		2021		762,338		—		1,482,319		—		3,501,250		70,497		177,486		5,993,890
Brad G. O’Connor Senior Vice President, Chief Accounting Officer and Treasurer		2023		488,037				589,626				500,000		22,791		185,029		1,785,483
		2022		483,650		—		503,235		—		1,430,918		21,473		106,243		2,545,519
		2021		466,230		—		490,905		—		752,500		17,619		62,004		1,789,258

In addition to the perquisites and other personal benefits listed below, the NEOs received the following other compensation in fiscal 2023: 

 

Fiscal 2023 All Other Compensation Other Than Perquisites 

(Supplemental Table) 

 

Name		Term Life Insurance Premiums		Company Contributions to the Executive’s Retirement Plan (401(k))		Company Contributions to the Executive Deferred Compensation Plan (EDCP)
		($)		($)		($) (a)
Ara K. Hovnanian		5,066		19,800		450,000
J. Larry Sorsby		4,814		19,800		598,691
Brad G. O’Connor		1,812		19,800		141,884

  

(a)  Reflects Company contributions to the EDCP accounts of the NEOs to make them whole for the fact that the 401(k) plan imposes limits on compensation that may be recognized for employer contribution purposes. Upon Mr. Hovnanian’s recommendation, the Committee determined to cap his contribution to be credited in fiscal 2023 based on calendar year 2022 earnings at $450,000. To limit contributions going forward, Mr. Hovnanian further recommended, and the Committee approved, changing the contribution formula for all participants to exclude equity and other long-term compensation beginning with contributions to be credited in fiscal 2024 based on calendar year 2023 earnings.

For fiscal 2023, total perquisites and other personal benefits, and those that exceeded the greater of $25,000 or 10% of total perquisites and other personal benefits for each NEO, were as follows:

 

Name		Total Perquisites and Description				Fiscal 2023 Perquisites that Exceeded the Greater of $25,000 or 10% of Total Perquisites
		Total Fiscal 2023 Perquisites ($)		Types of Perquisites (a)		Personal Use of the Company’s Fractional Aircraft Share ($) (b)		Auto Allowance, Car Maintenance and Fuel ($) (c)		Personal Income Tax Preparation ($)
Ara K. Hovnanian		193,562		(1) (2) (d) (4) (6) (7) (8)		113,952		N/A		42,052
J. Larry Sorsby		52,510		(3) (4) (6)		N/A		49,181		N/A
Brad G. O’Connor		21,533		(3) (4) (5)		N/A		N/A		N/A

 

2. GRANTS OF PLAN-BASED AWARDS IN FISCAL 2023

 

The following table summarizes the potential equity and non-equity incentive plan awards that could have been or could be earned by each of the NEOs at the defined levels of “Threshold,” “Target” and “Maximum” based on the performance-based awards granted to the NEOs in fiscal 2023. We did not grant any other plan-based awards in fiscal 2023.

 

Each of the following columns is described in the

footnotes below the table.  

 

Name		Type of Award		Grant Date		Estimated Future Payouts Under Non-Equity Incentive Plan Awards ($)						Estimated Future Payouts Under Equity Incentive Plan Awards (#)						Grant Date Fair Value of Stock Awards ($) (5)
						Threshold		Target		Maximum		Threshold		Target		Maximum
Ara K. Hovnanian		Bonus (1)				0		—		3,800,000
		LTIP Shares (2)		12/15/2022								0		21,563		53,908		776,268
		LTIP Phantom Shares (2)		12/15/2022								0		16,838		42,095		776,232
		PSUs (3)		6/9/2023								7,801		15,601		31,202		1,137,001
		PSUs (4)		6/9/2023								7,801		15,601		31,202		1,137,001
J. Larry Sorsby		Bonus (1)				0		—		2,050,000
		LTIP Shares (2)		12/15/2022								0		10,996		27,490		395,856
		LTIP Phantom Shares (2)		12/15/2022								0		8,587		21,468		395,861
		PSUs (3)		6/9/2023								3,692		7,383		14,766		538,073
		PSUs (4)		6/9/2023								3,692		7,383		14,766		538,073
Brad G. O’Connor		Bonus (1)				0		—		500,000
		LTIP Shares (2)		12/15/2022								0		5,272		13,180		189,792
		LTIP Phantom Shares (2)		12/15/2022								0		4,117		10,293		189,794
		PSUs (3)		6/9/2023								721		1,441		2,882		105,020
		PSUs (4)		6/9/2023								721		1,441		2,882		105,020

 

3. OUTSTANDING EQUITY AWARDS AT FISCAL 2023 YEAR - END

 

The following table shows all unexercised stock options, unvested RSUs, unearned and/or unvested MSUs and PSUs, unvested share portions of the 2021 LTIP, unearned share portions of the 2022 LTIP and 2023 LTIP and unearned phantom share portions of the 2023 LTIP held at the end of fiscal 2023 by the NEOs.

 

				Option Awards (1)								Stock Awards
Name		Grant Date		Number of Securities Underlying Unexercised Options Exercisable (#)		Number of Securities Underlying Unexercised Options Unexercisable (#)		Option Exercise Price ($)		Option Expiration Date		Number of Shares or Units of Stock that have not vested (#)		Market Value of Shares or Units of Stock that have not vested ($)		Equity Incentive Plan Awards: Number of Unearned Shares or other Rights that have not vested (#)		Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares or other Rights that have not vested ($)
Ara K. Hovnanian		6/10/2016		10,000 (2)		—		56.75		6/9/2026		—		—		—		—
		6/8/2018		10,000 (3)		—		61.00		6/7/2028		—		—		—		—
		6/14/2019		30,000 (4)		—		9.81		6/13/2029		—		—		—		—
		6/14/2019		—		—		—		—		—		—		18,000 (5)		1,250,640 (5)
		6/14/2019		—		—		—		—		—		—		9,000 (6)		625,320 (6)
		6/14/2019		—		—		—		—		—		—		9,000 (7)		625,320 (7)
		3/30/2021		—		—		—		—		— (8)		— (8)		—		—
		6/11/2021		—		—		—		—		— (9)		— (9)		—		—
		6/11/2021		—		—		—		—		— (10)		— (10)		—		—
		12/14/2021		—		—		—		—		—		—		45,415 (11)		3,155,434 (11)
		6/10/2022		—		—		—		—		— (12)		— (12)		—		—
		6/10/2022		—		—		—		—		— (13)		— (13)		—		—
		12/15/2022		—		—		—		—		—		—		21,563 (14)		1,498,197 (14)
		12/15/2022		—		—		—		—		—		—		16,838 (15)		1,169,904 (15)
		6/9/2023		—		—		—		—		—		—		31,202 (16)		2,167,915 (16)
		6/9/2023		—		—		—		—		—		—		31,202 (17)		2,167,915 (17)

 

 

				Option Awards (1)								Stock Awards
Name		Grant Date		Number of Securities Underlying Unexercised Options Exercisable (#)		Number of Securities Underlying Unexercised Options Unexercisable (#)		Option Exercise Price ($)		Option Expiration Date		Number of Shares or Units of Stock that have not vested (#)		Market Value of Shares or Units of Stock that have not vested ($)		Equity Incentive Plan Awards: Number of Unearned Shares or other Rights that have not vested (#)		Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares or other Rights that have not vested ($)
J. Larry Sorsby		6/10/2016		10,000 (2)		—		56.75		6/9/2026		—		—		—		—
		6/8/2018		10,000 (3)		—		61.00		6/7/2028		—		—		—		—
		6/14/2019		30,000 (4)		—		9.81		6/13/2029		—		—		—		—
		6/14/2019		—		—		—		—		—		—		5,100 (5)		354,348 (5)
		6/14/2019		—		—		—		—		—		—		2,550 (6)		177,174 (6)
		6/14/2019		—		—		—		—		—		—		2,550 (7)		177,174 (7)
		3/30/2021		—		—		—		—		— (8)		— (8)		—		—
		6/11/2021		—		—		—		—		— (9)		— (9)		—		—
		6/11/2021		—		—		—		—		— (10)		— (10)		—		—
		12/14/2021		—		—		—		—		—		—		15,440 (11)		1,072,771 (11)
		6/10/2022		—		—		—		—		— (12)		— (12)		—		—
		6/10/2022		—		—		—		—		— (13)		— (13)		—		—
		12/15/2022		—		—		—		—		—		—		3,665 (14)		254,644 (14)
		12/15/2022		—		—		—		—		—		—		2,862 (15)		198,852 (15)
		6/9/2023		—		—		—		—		—		—		14,766 (16)		1,025,942 (16)
		6/9/2023		—		—		—		—		—		—		14,766 (17)		1,025,942 (17)

 

 

				Option Awards (1)								Stock Awards
Name		Grant Date		Number of Securities Underlying Unexercised Options Exercisable (#)		Number of Securities Underlying Unexercised Options Unexercisable (#)		Option Exercise Price ($)		Option Expiration Date		Number of Shares or Units of Stock that have not vested (#)		Market Value of Shares or Units of Stock that have not vested ($)		Equity Incentive Plan Awards: Number of Unearned Shares or other Rights that have not vested (#)		Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares or other Rights that have not vested ($)
Brad G. O’Connor		6/13/2014		800		—		110.25		6/12/2024		—		—		—		—
		6/12/2015		800		—		66.75		6/11/2025		—		—		—		—
		6/10/2016		1,000		—		42.50		6/9/2026		—		—		—		—
		6/10/2016		2,000 (18)		—		42.50		6/9/2026		—		—		—		—
		6/9/2017		500		—		56.25		6/8/2027		—		—		—		—
		6/8/2018		1,000		—		48.75		6/7/2028		—		—		—		—
		6/14/2019		900		300		7.85		6/13/2029		—		—		—		—
		6/12/2020		—		—		—		—		3,500 (19)		243,180(19)		—		—
		3/30/2021		—		—		—		—		4,565 (8)		317,176 (8)		—		—
		6/11/2021		—		—		—		—		2,068 (9)		143,685 (9)		—		—
		6/11/2021		—		—		—		—		2,068 (10)		143,685 (10)		—		—
		12/14/2021		—		—		—		—		—		—		10,625 (11)		738,225 (11)
		6/10/2022		—		—		—		—		2,956 (12)		205,383 (12)		—		—
		6/10/2022		—		—		—		—		3,354 (13)		233,036 (13)		—		—
		12/15/2022		—		—		—		—		—		—		5,272 (14)		366,299 (14)
		12/15/2022		—		—		—		—		—		—		4,117 (15)		286,049 (15)
		6/9/2023		—		—		—		—		—		—		2,882 (16)		200,241 (16)
		6/9/2023		—		—		—		—		—		—		2,882 (17)		200,241 (17)

 

 

 

 

 

 

 

4. OPTION EXERCISES & STOCK VESTED IN FISCAL 2023

 

The following table discloses information with respect to stock options exercised by the NEOs in fiscal 2023 and stock awards held by them that vested or are treated as having vested in fiscal 2023:

 

		Option Awards				Stock Awards
Name		Number of Shares Acquired on Exercise (#)		Value Realized on Exercise ($)		Number of Shares Acquired on Vesting (#)		Value Realized on Vesting ($) (1)
Ara K. Hovnanian		—		—		173,228		13,599,064 (2)
J. Larry Sorsby		—		—		70,219		5,377,416 (3)
Brad G. O’Connor		—		—		14,662		1,067,033 (4)

 

 

 

 

5. NON QUALIFIED DEFERRED COMPENSATION FOR FISCAL 2023

 

The following table provides a summary of the NEOs’ participation in the Company’s nonqualified EDCP during fiscal 2023. In addition, the table provides, for Messrs. Hovnanian and Sorsby, information regarding the share portion of their 2018 LTIP awards, the phantom share portion of their 2019 LTIP awards and their 2020 and 2021 PSU awards that were considered to have vested in a prior year and their 2021 LTIP and 2022 PSU awards that are deemed to have vested due to retirement eligibility in fiscal 2023 but which will not be delivered until future years. For. Mr. O’Connor, the table also provides information regarding his 2021 LTIP award that vested in fiscal 2023 but which is subject to a mandatory two-year post-vesting delayed delivery period.

  

Name		Type		Executive Contributions in Last Fiscal Year ($)		Registrant Contributions in Last Fiscal Year ($) (1)		Aggregate Earnings in Last Fiscal Year ($) (2)		Aggregate Withdrawals/ Distributions ($) (3)		Aggregate Balance at Last Fiscal Year End ($) (4)
Ara K. Hovnanian		EDCP		—		450,000		128,547		316,103		1,544,968
		LTI		—		9,139,560		7,795,766		2,386,774		29,322,437
J. Larry Sorsby		EDCP		—		598,691		173,090		—		2,286,604
		LTI		—		4,113,720		3,769,710		971,010		13,803,480
Brad G. O’Connor		EDCP		—		141,884		41,777		—		519,507
		LTI		—		475,938		—		—		475,938

 

 

Narrative to the Nonqualified Deferred Compensation for Fiscal 2023 Table

 

The EDCP’s total account balance is equal to the “Company Contribution Account” balance. The “Company Contribution Account” balance consists of the annual Company “make-whole” contribution amounts under the plan. During calendar years 2022 and 2023, amounts in the “Company Contribution Account” balances were credited with earnings based on the weighted average yield on the Company’s then outstanding senior secured and unsecured notes as of the preceding December 1st, or 9.4% for calendar year 2022 and 9.5% for calendar year 2023. Following a termination of employment, a participant’s account balance in the EDCP will be paid in a lump sum or in annual installments of between two to 15 years, as further set forth in the EDCP and pursuant to the terms of the participant’s elections.

 

 

6 . POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE-IN-CONTROL

 

The following table summarizes payments and benefits that would be payable to each of the NEOs in the event of his termination of employment or upon the occurrence of a change-in-control (each a “triggering event”). For purposes of this table, the effective date of the triggering event is assumed to be October 31, 2023, the last day of fiscal 2023. The table does not include any payments that are described in the “Nonqualified Deferred Compensation for Fiscal 2023” table above. 

 

		Voluntary Termination				Involuntary Termination				Change in Control
Named Executive Officer		With or Without Good Reason										With Involuntary Termination Other Than for Cause or Termination with Good Reason
				Qualified Retirement		With or Without Cause		Death or Disability		Without Termination
Form of Compensation		($)		($)		($)		($)		($)		($)
Ara K. Hovnanian
Accelerated vesting of annual bonus awards (1)		—		—		—		—		—		—
Accelerated vesting of equity awards (2)		—		447,525		—		447,525		—		5,116,720
Accelerated vesting of LTIP awards (3)		—		—		—		—		—		3,930,275
Contractual disability/death payment (4)		—		—		—		10,000,000		—		—
Cash severance payment		—		—		—		—		—		—
Accrued and unpaid vacation (6)		—		—		—		—		—		—
TOTAL		—		447,525		—		10,447,525		—		9,046,995

 

		Voluntary Termination				Involuntary Termination				Change in Control
Named Executive Officer		With or Without Good Reason										With Involuntary Termination Other Than for Cause or Termination with Good Reason
				Qualified Retirement		With or Without Cause		Death or Disability		Without Termination
Form of Compensation		($)		($)		($)		($)		($)		($)
J. Larry Sorsby
Accelerated vesting of annual bonus awards (1)		—		—		—		—		—		—
Accelerated vesting of equity awards (2)		—		447,525		—		447,525		—		2,182,163
Accelerated vesting of LTIP awards (3)		—		—		—		—		—		882,604
Contractual disability/death payment		—		—		—		—		—		—
Cash severance payment		—		—		—		—		—		—
Accrued and unpaid vacation (6)
TOTAL		—		447,525		—		447,525		—		3,064,767
Brad G. O’Connor
Accelerated vesting of annual bonus awards (1)		—		—		—		—		—		—
Accelerated vesting of equity awards (2) (5)		—		—		—		987,457		—		1,187,698
Accelerated vesting of LTIP awards (3) (5)		—		—		—		487,126		—		1,434,764
Contractual disability/death payment		—		—		—		—		—		—
Cash severance payment (5)		—		—		—		—		—		967,018
Accrued and unpaid vacation (6)		34,136		34,136		34,136		34,136		—		34,136
TOTAL		34,136		34,136		34,136		1,508,719		—		3,623,616

 

For purposes of this table presentation, consideration of the forms of compensation or additional payments or

benefits to an NEO in the event of a triggering event includes:

 

 

 

7 . PAY RATIO DISCLOSURE

 

As required by Section 953(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 402(u) of Regulation S-K under the Securities Exchange Act of 1934, we are providing the following disclosure about the relationship of the median of the annual total compensation of our employees to the annual total compensation of Mr. Hovnanian, our President, Chief Executive Officer and Chairman of the Board.

 

For fiscal year 2023, 

 

The median of the annual total compensation of all of our employees, other than Mr. Hovnanian, was $128,806; 

 

Mr. Hovnanian’s total fiscal year compensation, as reported in the Total column of the 2023 Summary Compensation Table, was $9,482,398; and 

 

Based on this information, the ratio of the annual total compensation of Mr. Hovnanian to the median of the total fiscal year compensation of all employees was estimated to be 74 to 1. 

  

Identification of Median Employee

 

There have been no material changes in our employee population or employee compensation arrangements in our last two completed fiscal years that we believe would significantly impact our pay ratio disclosure. Accordingly, as permitted under the SEC’s disclosure rules, we are using the same median employee as we used for purposes of our 2021 pay ratio.

 

We selected October 31, 2021 as the date on which to determine our median employee. As of that date, we had approximately 1,806 employees. For purposes of identifying the median employee, we considered the Medicare gross wages from W-2s of all employees in the Company’s employee population, other than Mr. Hovnanian. To Medicare gross wages, we added non-taxable Section 125 “cafeteria plan” wages. In addition, we measured compensation for purposes of determining the median employee using the 12-month period ended October 31, 2021. We excluded from the ranking nineteen employees who received no compensation during that period because they were hired on or after October 18, 2021. In determining the annual total compensation of the median employee, we calculated such employee’s compensation in accordance with Item 402(c)(2)(x) of Regulation S-K as required pursuant to SEC executive compensation disclosure rules. This calculation is the same calculation used to determine total compensation for purposes of the 2021 Summary Compensation Table with respect to each of the named executive officers.