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Item 7. Management’s Discussion and Analysis

2020-11-19 compared with 2019-11-21 · 176 added, 179 removed, 140 unchanged (72% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Forward-Looking Statements

This Annual Report on Form 10-K and other materials we have filed or may file with the Securities and Exchange Commission contain “forward-looking statements” within the meaning of the federal securities laws.

These forward-looking statements are identified by their use of terms and phrases such as “believe,” “anticipate,” “could,” “estimate,” “likely,” “intend,” “may,” “plan,” “expect,” and similar expressions, including references to assumptions.

These statements reflect our current views with respect to future events and are subject to risks and uncertainties.

We note that a variety of factors and uncertainties could cause our actual results to differ significantly from the results discussed in the forward-looking statements.

Factors and uncertainties that might cause such differences include, but are not limited to:

the effect of D.R.

Horton’s controlling level of ownership on us and the holders of our securities;

our ability to realize the potential benefits of the strategic relationship with D.R.

the effect of our strategic relationship with D.R.

Horton on our ability to maintain relationships with our vendors and customers;

demand for new housing, which can be affected by a number of factors including the availability of mortgage credit, job growth and fluctuations in interest rates;

competitive actions by other companies;

accuracy of estimates and other assumptions related to investment in and development of real estate, the expected timing and pricing of land and lot sales and related cost of real estate sales;

our ability to comply with our debt covenants, restrictions and limitations;

our ability to hire and retain key personnel;

changes in governmental policies, laws or regulations and actions or restrictions of regulatory agencies;

general economic, market or business conditions where our real estate activities are concentrated;

our ability to achieve our strategic initiatives;

our ability to obtain future entitlement and development approvals;

our ability to obtain or the availability of surety bonds to secure our performance related to construction and development activities and the pricing of bonds;

obtaining reimbursements and other payments from governmental districts and other agencies and timing of such payments;

the levels of resale housing inventory in our projects and the regions in which they are located;

fluctuations in costs and expenses, including impacts from shortages in materials or labor;

the opportunities (or lack thereof) that may be presented to us and that we may pursue;

the strength of our information technology systems and the risk of cybersecurity breaches;

the conditions of the capital markets and our ability to raise capital to fund expected growth.

Other factors, including the risk factors described in Item 1A of this Annual Report on Form 10-K, may also cause actual results to differ materially from those projected by our forward-looking statements.

New factors emerge from time to time and it is not possible for us to predict all such factors, nor can we assess the impact of any such factor on our business or the extent to which any factor, or combination of factors, may cause results to differ materially from those contained in any forward-looking statement.

Any forward-looking statement speaks only as of the date on which such statement is made, and, except as required by law, we expressly disclaim any obligation or undertaking to disseminate any updates or revisions to any forward-looking statement to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events.

Our Operations

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Our alignment with and support from D.R.

Horton provides us an opportunity to grow our business into a national, well-capitalized residential lot developer selling lots to D.R.

Horton has allowed us to grow our business into a national, well-capitalized residential lot developer selling lots to D.R.

Horton and other homebuilders.

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Horton has significant influence in guiding our strategic direction and operations.

Our strategy is focused on making investments in land acquisition and development to expand our residential lot development business across a geographically diversified national platform.

Our strategy is focused on making investments in land acquisition and development to expand our residential lot development business across a geographically diversified national platform and consolidating market share in the fragmented U.S.

lot development industry.

We are primarily investing in short duration, phased development projects that generate returns similar to production-oriented homebuilders.

This strategy is a unique, lower-risk business model that we expect will produce more consistent returns than other public and private land developers.

We also make short-term investments in finished lots (lot banking) and undeveloped land with the intent to sell these assets within a short time period, primarily to D.R.

Horton, utilizing available capital prior to its deployment into longer term lot development projects.

Change in Fiscal Year

Following the Merger, we changed our fiscal year-end from December 31 to September 30, effective January 1, 2018.

Following our merger with D.R.

Horton, we changed our fiscal year-end from December 31 to September 30, effective January 1, 2018.

This change aligned our fiscal year-end reporting calendar with D.R.

Our results of operations, cash flows, and all transactions impacting stockholders' equity presented in this Form 10-K are for the fiscal year ended September 30, 2019 , the nine months ended September 30, 2018 and our fiscal year 2017 , which is for the twelve months ended December 31, 2017 , unless otherwise noted.

This Form 10-K also includes an unaudited statement of operations for the comparable stub period of January 1, 2017 to September 30, 2017 (See Note 17 — Transition Period Comparative Data ).

Business Segments

Historically, we managed our operations through our real estate segment, mineral resources segment (previously referred to as oil and gas) and other segment (previously referred to as other natural resources).

During the first quarter of fiscal 2019, we began managing our operations through one real estate segment.

As such, the operating results of our real estate segment are consistent with our consolidated operating results and no separate disclosure is required as of and for the fiscal year ended September 30, 2019 .

Our real estate segment is our core business and generated all of our revenues in fiscal 2019 .

The real estate segment primarily acquires land and develops infrastructure for single-family residential communities.

Our real estate segment generates its revenues principally from sales of residential single-family finished lots to local, regional and national homebuilders.

We have other business activities which were presented in our other segment in prior periods.

The assets and results of operations of these business activities are immaterial and are included in our real estate segment in the current year.

Additionally, as of and for the fiscal year ended September 30, 2019 , all assets and results of operations have been included in the real estate segment.

In prior periods, certain costs and assets were not allocated to the segments.

During the first quarter of fiscal 2019, we began evaluating the results of operations of our real estate segment based on income from continuing operations before income taxes.

As a result, all of our results of operations have been allocated to the real estate segment for the fiscal year ended September 30, 2019 .

This change in the measure of segment profit (loss) was adopted prospectively and the prior period segment results have not been adjusted to conform to the current year.

In prior periods, segment earnings (loss) consist of operating income, equity in earnings (loss) of unconsolidated ventures, gain on sales of assets, interest income and net income (loss) attributable to noncontrolling interests.

Items not allocated to segments in prior periods consist of general and administrative expense, stock-based and long-term incentive compensation, gain on sale of timberland assets, interest expense, and other corporate interest and other income.

The accounting policies of the segments are the same as those described in Note 1 — Summary of Significant Accounting Policies .

Our revenues are derived from our U.S.

operations and all of our assets are located in the U.S.

In fiscal 2019 , D.R.

Horton accounted for $326.6 million of our real estate revenues.

Our results of operations, cash flows, and all transactions impacting stockholders' equity presented in this Form 10-K are for the fiscal years ended September 30, 2020 and 2019 and for the nine months ended September 30, 2018, unless otherwise noted.

This Form 10-K also includes an unaudited statement of operations for the comparable stub period of January 1, 2017 to September 30, 2017.

During the latter part of March 2020, the impacts of C-19 and the related widespread reductions in economic activity began to temporarily affect our business operations and the demand for our residential lots.

However, residential construction is designated an essential business as part of critical infrastructure in almost all municipalities across the U.S.

where we operate.

We have implemented operational protocols to comply with social distancing and other health and safety standards as required by federal, state and local government agencies, taking into consideration guidelines of the Centers for Disease Control and Prevention and other public health authorities.

Our lot sales pace declined throughout late March and April as homebuilders slowed their purchases of lots to adjust to expected lower levels of home sales orders as a result of the pandemic.

However, as economic activity and housing market conditions began to improve, our lot sales pace increased during the last half of our fiscal year.

Although our lot sales pace has improved, we remain cautious as to the impact C-19 may have on our operations and on the overall economy in the future.

There is significant uncertainty regarding the extent to which and how long C-19 and its related effects will impact the U.S.

economy, capital markets and demand for our lots.

The extent to which C-19 impacts our operational and financial performance will depend on future developments, including the duration and spread of C-19 and the impact on our customers, trade partners and employees, all of which are highly uncertain and cannot be predicted.

If economic and housing market conditions are adversely affected for a prolonged period, we may be required to evaluate our real estate for potential impairment.

These evaluations could result in impairment charges which could be significant.

We believe we are well positioned to effectively operate during changing economic conditions due to our low net leverage and strong liquidity position, our low overhead model and our strategic relationship with D.R.

Business Segment

We manage our operations through our real estate segment which is our core business and generates substantially all of our revenues.

The real estate segment primarily acquires land and develops infrastructure for single-family residential communities and generates revenues from sales of residential single-family finished lots to local, regional and national homebuilders.

We have other business activities for which the related assets and operating results are immaterial, and therefore, are included in our real estate segment.

Results of Operations

The following tables and related discussion set forth key operating and financial data as of and for the fiscal year ended September 30, 2019 and the nine months ended September 30, 2018.

For similar operating and financial data and discussion of our results for the nine months ended September 30, 2018 compared to our results for the twelve months ended December 31, 2017, refer to Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under Part II of our annual report on Form 10-K for the transition period ended September 30, 2018, which was filed with the SEC on November 16, 2018.

Real estate segment results for the fiscal year ended September 30, 2019 were as follows:

September 30, 2019

(In millions)

Cost of sales

Selling, general and administrative expense

Equity in earnings of unconsolidated ventures

Gain on sale of assets

Interest expense

Interest and other income

Income from continuing operations before taxes

Segment results for the nine months ended September 30, 2018 were as follows:

Nine Months Ended September 30, 2018

Items Not Allocated

The following tables and related discussion set forth key operating and financial data as of and for the fiscal years ended September 30, 2020 and 2019.

For similar operating and financial data and discussion of our results for the fiscal year ended September 30, 2019 compared to our results for the nine months ended September 30, 2018, refer to Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under Part II of our annual report on Form 10-K for the fiscal year ended September 30, 2019, which was filed with the SEC on November 21, 2019.

Operating Results

Components of pre-tax income were as follows:

Year Ended September 30,

(In millions)

Revenues $ 931.8 $ 428.3

Cost of sales 813.7 362.7

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Gain on sale of assets (0.1) (3.0)

Interest expense

Interest and other income (4.9) (5.5)

Income (loss) from continuing operations before taxes

Net income attributable to noncontrolling interests

Income (loss) from continuing operations before taxes attributable to Forestar Group Inc.

Real Estate Revenues and Cost of Sales

We are a residential lot development company with operations in 51 markets and 20 states as of September 30, 2019 .

Our real estate segment primarily acquires land and develops infrastructure for single-family residential communities.

Our real estate segment revenues are principally derived from the sales of residential single-family lots that we have developed.

Our real estate segment also makes short-term investments in finished lots (lot banking) and undeveloped land with the intent to sell these assets within a short time period, primarily to D.R.

Horton, utilizing available capital prior to its deployment into longer term lot development projects.

Income before income taxes $ 78.1 $ 45.7

Residential lots sold consist of:

September 30, 2019

Nine Months Ended

September 30, 2018

Year Ended September 30,

Development projects 7,316 2,610

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$ 84,600 $ 84,200

(a) Excludes any impact from change in contract liabilities or deferred revenue.

_______________

(a) Excludes any impact from change in contract liabilities.

Revenues consist of:

September 30, 2019

Nine Months Ended

September 30, 2018

Year Ended September 30,

(In millions)

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Development projects

$ 616.3 $ 218.8

Lot banking projects

Change in contract liabilities or deferred revenue

Decrease in contract liabilities 2.3 4.0

Residential tract sales 48.6 55.8

Commercial tract sales 2.5 18.5

Other 0.4 2.3

$ 931.8 $ 428.3

Residential lots sold and residential lot sales revenues have increased as we have grown our business primarily through our strategic relationship with D.R.

In fiscal 2020, we sold 10,164 residential lots to D.R.

Horton for $311.7 million .

In the nine months ended September 30, 2018 , we sold 642 residential lots to D.R.

Horton for $43.6 million .

At September 30, 2019 , our lot position consisted of 38,300 residential lots, of which approximately 29,700 were owned and 8,600 were controlled through option purchase contracts.

Of our total owned and controlled residential lots, approximately 12,800 are under contract to sell to D.R.

Horton for $859.7 million compared to 3,728 residential lots sold to D.R.

Horton for $311.7 million in fiscal 2019.

At September 30, 2020, our lot position consisted of 60,500 residential lots, of which approximately 42,400 were owned and 18,100 were controlled through purchase contracts.

Of our total owned residential lots, approximately 14,000 are under contract to sell to D.R.

Additionally, D.R.

Horton has the right of first offer on approximately 16,400 of these lots based on executed purchase and sale agreements.

At September 30, 2019 , lots owned included approximately 4,400 that are fully developed, of which approximately 2,100 are related to lot banking.

At September 30, 2020, lots owned included approximately 5,000 lots that are fully developed, of which approximately 1,400 are related to lot banking.

At September 30, 2020, we had approximately 400 lots under contract to sell to builders other than D.R.

Residential tract sales in fiscal 2019 principally consists of 63 residential tract acres sold to a third party for approximately $44.2 million as well as the sale of 290 residential tract acres to D.R.

Horton for approximately $10.9 million .

In conjunction with a residential tract sale to a third party, we paid D.R.

Horton a fee of approximately $2.1 million to terminate an existing purchase and sale agreement whereby D.R.

Horton had the option to purchase the property from us at a fixed price.

Commercial tract sales principally consist of the sale of tracts to commercial developers that specialize in the construction and operation of income producing properties such as apartments, retail centers, or office buildings.

The commercial tract sales revenues in fiscal 2019 relate primarily to the sale of 49 acres from a consolidated venture for $17.7 million .

Cost of real estate sales in fiscal 2019 increased as compared to the prior period primarily due to the increase in the number of lots sold.

Residential tract sales in fiscal 2020 consist of 594 residential tract acres sold to third parties for $23.0 million and 143 residential tract acres sold to D.R.

Horton for $25.6 million.

Residential tract sales in fiscal 2019 primarily consist of 63 residential tract acres sold to a third party for $44.2 million and 290 residential tract acres sold to D.R.

Horton for $10.9 million.

Commercial tract sales generally relate to the sale of tracts to commercial developers that specialize in the construction and operation of income producing properties such as apartments, retail centers, or office buildings.

Commercial tract sales in fiscal 2020 consist of 8 commercial tract acres sold to a third party for $2.5 million.

Commercial tract sales in fiscal 2019 primarily consist of 49 commercial tract acres sold by a consolidated venture for $17.7 million.

Cost of sales in fiscal 2020 increased as compared to fiscal 2019 primarily due to the increase in the number of lots sold.

Cost of sales related to residential and commercial tract sales in fiscal 2020 and 2019 was $40.6 million and $50.8 million, respectively.

Selling, General and Administrative (SG&A) Expense and Other Income Statement Items

SG&A expense for fiscal year 2019 was $28.9 million compared to $19.4 million during the nine months ended September 30, 2018 .

Our SG&A expenses primarily consist of employee compensation and related costs.

Our business operations employed 78 and 40 employees at September 30, 2019 and September 30, 2018 .

At September 30, 2019 , we had ownership interests in four ventures that we accounted for using the equity method.

The decrease in equity in earnings in fiscal 2019 compared to the nine months ended September 30, 2018 is primarily the result of lower sales activity within our ventures as they wind down.

Gain on sale of assets in fiscal 2019 consists of a gain of $1.5 million associated with the reduction of our remaining obligation in connection with the Cibolo Canyons Special Improvement District (CCSID) issuance of bonds in 2014.

As our obligation expires over time, our liability is reduced and gains are recognized.

Gain on sale of assets in fiscal 2019 also includes a gain of $1.5 million of excess hotel occupancy and sales and use tax revenues from CCSID.

Gain on sale of assets in the nine months ended September 30, 2018 primarily included gains of $14.6 million related to the sale of our interest in a multifamily venture near Denver, $2.0 million related to the sale of our interest in a venture in Atlanta and $0.7 million related to our strategic sale of assets to Starwood Land, L.P (Starwood).

The decrease in interest expense in fiscal 2019 compared to the prior year period was due to an increase in our active real estate development projects which resulted in the capitalization of all interest costs to real estate inventory in the current year.

Interest and other income principally represents interest earned on our cash deposits.

Our effective tax rate from continuing operations was 21% for fiscal 2019 and (57)% for the nine months ended September 30, 2018 .

The effective tax rate for both years includes an expense for state income taxes and non-deductible expenses, reduced by a tax benefit related to noncontrolling interests.

The effective tax rate for the nine months ended September 30, 2018 also includes a benefit for the release of our federal valuation allowance and a portion of our state valuation allowance associated with our deferred tax assets.

At September 30, 2019 and 2018 , deferred tax assets, net of deferred tax liabilities, were $20.7 million and $30.3 million , offset by a valuation allowance of $3.3 million and $3.4 million for the portion of the deferred tax assets that we have determined is more likely than not to be unrealizable.

The valuation allowance was recorded because it is more likely than not that a portion of our state deferred tax assets, primarily net operating loss (NOL) carryforwards, will not be realized because we are no longer operating in some states or the NOL carryforward periods are too brief to realize the related deferred tax asset.

SG&A expense in fiscal 2020 was $45.7 million compared to $28.9 million in fiscal 2019.

SG&A expense as a percentage of revenues was 4.9% and 6.7% in fiscal 2020 and 2019, respectively.

Our SG&A expense primarily consists of employee compensation and related costs.

Our business operations employed 143 and 78 employees at September 30, 2020 and 2019, respectively.

Equity in earnings of unconsolidated ventures at September 30, 2020 and 2019 reflects our share of earnings in four ventures that we account for using the equity method.

Interest and other income primarily represents interest earned on our cash deposits.

Our income tax expense was $16.4 million and $9.4 million in fiscal 2020 and 2019, respectively, and our effective tax rate was 21% in both years.

Our effective tax rate for fiscal 2020 includes a tax benefit of $2.3 million related to the net operating loss (NOL) carryback provisions of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), which allow the Company to carryback a portion of its fiscal 2018 NOL.

The carryback provisions result in the recognition of previously unrecognized tax benefits and the revaluation of deferred tax assets due to the utilization of NOLs at a higher tax rate in the carryback period.

Our effective tax rate for both years includes an expense for state income taxes and nondeductible expenses and a benefit related to noncontrolling interests.

At September 30, 2020, we had deferred tax liabilities, net of deferred tax assets, of $4.2 million.

The deferred tax assets were offset by a valuation allowance of $1.5 million, resulting in a net deferred tax liability of $5.7 million.

At September 30, 2019, deferred tax assets, net of deferred tax liabilities, were $20.7 million, partially offset by a valuation allowance of $3.3 million.

The valuation allowance for both years was recorded because it is more likely than not that a portion of our state deferred tax assets, primarily NOL carryforwards, will not be realized because we are no longer operating in some states or the NOL carryforward periods are too brief to realize the related deferred tax asset.

The current year decrease in the valuation allowance is primarily attributable to the write-off of state deferred tax assets for NOLs, which are not expected to be utilized, resulting in no impact to state tax expense.

We will continue to evaluate both the positive and negative evidence in determining the need for a valuation allowance on our deferred tax assets.

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Section 382 limits our ability to use certain tax attributes and built-in losses and deductions in a given year.

Our tax attributes or built-in losses and deductions that were limited in 2018 or 2019 are expected to be fully utilized in future years with the exception of some state NOL carryforwards.

Our unrecognized tax benefits totaled $1.6 million at September 30, 2019 , all of which would affect our effective tax rate, if recognized.

Other segment results for the nine months ended September 30, 2018 were as follows:

Nine Months Ended

September 30, 2018

(In millions)

Cost of sales

Selling, general and administrative expense

Gain on sale of assets

Segment earnings

The gain on sale of assets during the nine months ended September 30, 2018 is due to the sale of non-core water interests in Texas, Louisiana, Georgia and Alabama for $10.5 million , which generated a gain of $9.2 million .

Our federal tax attributes or built-in losses and deductions that were limited in 2018 or 2019 have been fully utilized.

We had no unrecognized tax benefits at September 30, 2020 as a result of the recognition of $1.6 million of previously unrecognized tax benefits during fiscal 2020.

All of the $1.6 million of recognized tax benefits affected our effective tax rate and were attributable to the NOL carryback provisions of the CARES Act, allowing previously uncertain tax attributes to be recognized.

Liquidity and Capital Resources

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Horton has provided us with an opportunity for substantial growth.

Since the Merger, we have funded our growth with available cash, borrowings under our revolving credit facility and the issuance of senior unsecured notes and common stock.

At September 30, 2019 , our ratio of net debt to total capital (debt net of unrestricted cash divided by stockholders’ equity plus debt net of unrestricted cash) was 8.8% .

Since our merger with D.R.

Horton, we have funded our growth with available cash, borrowings under our revolving credit facility and the issuance of senior unsecured notes and common stock.

At September 30, 2020, we had $394.3 million of cash and cash equivalents and $344.0 million of available borrowing capacity on our revolving credit facility.

We have no senior note maturities until fiscal 2024.

We believe we are well positioned to effectively operate during changing economic conditions because of our low net leverage and strong liquidity position, our low overhead model and our strategic relationship with D.R.

At September 30, 2020, our ratio of debt to total capital (debt divided by stockholders’ equity plus debt) was 42.4% compared to 36.3% at September 30, 2019.

Our ratio of net debt to total capital (debt net of unrestricted cash divided by stockholders’ equity plus debt net of unrestricted cash) was 22.1% compared to 8.8% at September 30, 2019.

Over the long term, we intend to maintain our ratio of net debt to total capital at or below 40%.

We believe that the ratio of net debt to total capital is useful in understanding the leverage employed in our operations.

We believe that our existing cash resources and revolving credit facility will provide sufficient liquidity to fund our near-term working capital needs and debt obligations, including the maturity of $118.9 million principal amount of convertible senior notes in fiscal 2020 .

We believe that our existing cash resources and revolving credit facility will provide sufficient liquidity to fund our near-term working capital needs.

Our ability to achieve our long-term growth objectives will depend on our ability to obtain financing in sufficient amounts.

We regularly evaluate alternatives for managing our capital structure and liquidity profile in consideration of expected cash flows, growth and operating capital requirements and capital market conditions.

As market conditions permit, we may, at any time, be considering or preparing for the purchase or sale of our common stock, debt securities, convertible securities or a combination thereof.

We may, at any time, be considering or preparing for the purchase or sale of our debt securities, the sale of our common stock or a combination thereof.

However, due to the current economic uncertainties related to C-19, we may be limited in accessing the capital markets or the cost of accessing these markets could become more expensive.

Bank Credit Facility

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The facility also provides for the issuance of letters of credit with a sublimit equal to the greater of $100 million and 50% of the revolving credit commitment.

Borrowings under the revolving credit facility are subject to a borrowing base calculation based on the book value of our real estate assets and unrestricted cash.

Letters of credit issued under the facility reduce the available borrowing capacity.

At September 30, 2019 , there were no borrowings outstanding and $29.7 million of letters of credit issued under the revolving credit facility.

Borrowings under the revolving credit facility are subject to a borrowing base based on the book value of our real estate assets and unrestricted cash.

At September 30, 2019 , the borrowing base limited the available capacity under the revolving credit facility to $339.6 million .

Borrowings and repayments under the facility totaled $85 million each during fiscal 2019 .

In October 2019 , the revolving credit facility was amended to extend its maturity date from August 16, 2021 to October 2, 2022 .

The maturity date may be extended by up to one year on up to two additional occasions, subject to the approval of lenders holding a majority of the commitments.

At September 30, 2020, there were no borrowings outstanding and $36.0 million of letters of credit issued under the revolving credit facility, resulting in available capacity of $344.0 million.

The maturity date of the facility is October 2, 2022, which can be extended by up to one year on up to two additional occasions, subject to the approval of lenders holding a majority of the commitments.

The revolving credit facility includes customary affirmative and negative covenants, events of default and financial covenants.

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At September 30, 2020, we were in compliance with all of the covenants, limitations and restrictions of our revolving credit facility.

3.75% Convertible Senior Notes due 2020

At September 30, 2019 , the principal amount of the 3.75% convertible senior notes due March 2020 was $118.9 million and the unamortized debt discount was $2.0 million .

The effective interest rate on the liability component was 8.0% and the carrying amount of the equity component was $16.8 million .

We intend to settle the principal amount of these notes in cash in 2020 , with any excess conversion value to be settled in shares of our common stock.

At September 30, 2019 and 2018 , we had $0.2 million and $0.7 million in unamortized deferred financing fees that were deducted from the carrying value of these notes.

8.0% Senior Notes due 2024

In April 2019 , we issued $350 million principal amount of 8.0% senior notes pursuant to Rule 144A and Regulation S under the Securities Act.

In February 2020, we issued $300 million principal amount of 5.0% senior notes pursuant to Rule 144A and Regulation S under the Securities Act.

The notes mature March 1, 2028 with interest payable semi-annually and represent senior unsecured obligations that rank equally in right of payment to all existing and future senior unsecured indebtedness.

The notes may be redeemed prior to maturity, subject to certain limitations and premiums defined in the indenture agreement.

On or after March 1, 2023, the notes may be redeemed at 102.5% of their principal amount plus any accrued and unpaid interest.

In accordance with the indenture, the redemption price decreases annually thereafter and the notes can be redeemed at par on or after March 1, 2026 through maturity.

The notes are guaranteed by each of our subsidiaries to the extent such subsidiaries guarantee our revolving credit facility.

The annual effective interest rate of the notes after giving effect to the amortization of financing costs is 5.2%.

We also have $350 million principal amount of 8.0% senior notes outstanding.

The notes mature April 15, 2024 with interest payable semi-annually and represent senior unsecured obligations that rank equally in right of payment to all existing and future senior unsecured indebtedness.

The notes may be redeemed prior to maturity, subject to certain limitations and premiums defined in the indenture agreement.

On or after April 15, 2021, the notes may be redeemed at 104% of their principal amount plus any accrued and unpaid interest.

In accordance with the indenture, the redemption price decreases annually thereafter and the notes can be redeemed at par on or after April 15, 2023 through maturity.

The notes are guaranteed by each of our subsidiaries to the extent such subsidiaries guarantee our revolving credit facility.

At September 30, 2019 , we had $6.2 million in unamortized deferred financing fees that were deducted from the carrying value of these notes.

The annual effective interest rate of the notes after giving effect to the amortization of financing costs is 8.5%.

The indenture governing the notes requires that, upon the occurrence of both a Change of Control and a Rating Decline (each as defined in the indenture), we offer to purchase the notes at 101% of their principal amount.

If we or our restricted subsidiaries dispose of assets, under certain circumstances, we will be required to either invest the net cash proceeds from such asset sales in its business within a specified period of time, repay certain senior secured debt or debt of its non-guarantor subsidiaries, or make an offer to purchase a principal amount of the notes equal to the excess net cash proceeds at a purchase price of 100% of their principal amount.

The indenture contains covenants that, among other things, restrict ability of us and our restricted subsidiaries to pay dividends or distributions, repurchase equity, prepay subordinated debt and make certain investments;

In March 2020, we repaid $118.9 million principal amount of our 3.75% convertible senior notes in cash at maturity.

The indentures governing the senior notes require that, upon the occurrence of both a change of control and a rating decline (each as defined in the indentures), we offer to purchase the notes at 101% of their principal amount.

If we or our restricted subsidiaries dispose of assets, under certain circumstances, we will be required to either invest the net cash proceeds from such asset sales in our business within a specified period of time, repay certain senior secured debt or debt of our non-guarantor subsidiaries, or make an offer to purchase a principal amount of the notes equal to the excess net cash proceeds at a purchase price of 100% of their principal amount.

The indentures contain covenants that, among other things, restrict the ability of us and our restricted subsidiaries to pay dividends or distributions, repurchase equity, prepay subordinated debt and make certain investments;

incur additional debt or issue mandatorily redeemable equity;

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At September 30, 2020, we were in compliance with all of the limitations and restrictions associated with our senior note obligations.

Effective April 30, 2020, our Board of Directors authorized the repurchase of up to $30 million of our debt securities.

The authorization has no expiration date.

All of the $30 million authorization was remaining at September 30, 2020.

Issuance of Common Stock

In September 2018, we filed a shelf registration statement with the SEC registering $500 million of equity securities.

On September 30, 2019 , we issued 6.0 million shares of our common stock for $17.50 per share in a public underwritten offering.

Net proceeds from this offering after deducting underwriting discounts and commissions and other expenses were $100.7 million .

As a result of the issuance, D.R.

Horton's ownership of our outstanding common shares decreased from 75% to approximately 66% .

Following the offering, $394.3 million remains available for issuance under the shelf registration statement.

We have an effective shelf registration statement filed with the SEC in September 2018 registering $500 million of equity securities.

As of September 30, 2020, $394.3 million remained available for issuance under the shelf registration statement, $100 million of which is reserved for sales under our at-the-market equity offering program discussed below.

In August 2020, we entered into an equity distribution agreement to issue and sell, from time to time, up to $100 million in aggregate offering price of our common stock through an at-the-market equity offering program.

As of September 30, 2020, no shares had been issued under the at-the-market equity offering program.

Operating Cash Flow Activities

In fiscal 2019 , net cash used in operating activities was $391.2 million compared to $283.0 million in the nine months ended September 30, 2018 .

The increase in net cash used in operating activities was principally due to higher real estate acquisition and development expenditures resulting from our strategy to grow into a national lot developer.

In fiscal 2020, net cash used in operating activities was $168.4 million compared to $391.2 million in fiscal 2019.

The cash used in operating activities in both years reflects our strategy of continuing to grow our land development operations.

Investing Cash Flow Activities

In fiscal 2019 , net cash used in investing activities was $0.8 million compared to net cash provided by investing activities of $259.0 million in the nine months ended September 30, 2018 .

Cash provided by investing activities during the 2018 period includes net proceeds of $217.5 million from the strategic sale of assets to Starwood in February 2018 .

In fiscal 2020, net cash provided by investing activities was $5.0 million compared to $0.8 million used in investing activities in fiscal 2019.

The cash provided by investing activities in the current year is primarily the result of distributions received from our unconsolidated ventures.

Financing Cash Flow Activities

In fiscal 2019 , net cash provided by financing activities was $439.8 million compared to net cash used in financing activities of $4.0 million in the nine months ended September 30, 2018 .

Cash provided by financing activities during fiscal 2019 includes the issuance of $350 million principal amount of 8.0% senior notes due April 2024 and the issuance of common stock in September 2019 for net proceeds of $100.7 million .

Contractual Cash Obligations

In fiscal 2020, net cash provided by financing activities was $174.9 million, consisting primarily of proceeds from the issuance of $300 million principal amount of 5.0% senior notes, partially offset by the repayment of $118.9 million principal amount of our 3.75% convertible senior notes at maturity.

In fiscal 2019, net cash provided by financing activities was $439.8 million, consisting primarily of proceeds from the issuance of $350 million principal amount of 8.0% senior notes and the issuance of common stock for net proceeds of $100.7 million, while amounts drawn and repaid on the revolving credit facility totaled $85 million each.

Contractual Obligations and Off-Balance Sheet Arrangements

At September 30, 2020, contractual cash obligations consist of:

Payments Due by Period

> 3 - 5 Years

Total Less Than

1 Year 1 - 3 Years > 3 - 5 Years More Than

(In millions)

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Standby letter of credit (3) 6.8 6.8 — — —

Total $ 887.8 $ 53.5 $ 87.8 $ 409.0 $ 337.5

_______________

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We also entered into an agreement with the owner of the JW Marriott San Antonio Hill Country Resort & Spa to assign its senior rights to us in exchange for consideration provided by us, including a performance bond to be drawn if CCSID tax collections are not sufficient to support ad valorem tax rebates payable.

The performance bond decreases as CCSID makes annual ad valorem tax rebate payments, which obligation is scheduled to be retired in full by 2020.

The performance bond decreases as CCSID makes annual ad valorem tax rebate payments.

The performance bond and letter of credit are included in accrued expenses and other liabilities in our consolidated balance sheets.

In support of our residential lot development business, we issue letters of credit under our revolving credit facility and we have a surety bond program that provides financial assurance to beneficiaries related to the execution and performance of certain development obligations.

In addition to the letter of credit and performance bond discussed above, at September 30, 2020 we had outstanding letters of credit of $29.2 million under the revolving credit facility and surety bonds of $234.4 million issued by third parties to secure performance under various contracts that are not included in our consolidated balance sheets.

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We base our assumptions, estimates and judgments on a combination of historical experiences and other factors that we believe are reasonable.

We have reviewed the selection and disclosure of these critical accounting estimates with our Audit Committee.

We have reviewed the selection and disclosure of these critical accounting estimates with the Audit Committee of our Board of Directors.

Revenue Recognition — Real estate revenue and related profit are generally recognized at the time of the closing of a sale, when title to and possession of the property are transferred to the buyer.

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Generally, our unsatisfied remaining performance obligations are expected to have an original duration of less than one year.

Real Estate and Cost of Sales — Real estate includes the costs of direct land acquisition, land development and capitalized interest incurred during land development.

Real Estate and Cost of Sales — Real estate includes the costs of direct land and lot acquisition, land development, capitalized interest, and direct overhead costs incurred during land development.

All indirect overhead costs, such as compensation of management personnel and insurance costs are charged to selling, general and administrative expense as incurred.

Land and development costs are typically allocated to individual residential lots based on the relative sales value of the lot.

Cost of sales includes applicable land acquisition, land development and related costs (both incurred and estimated to be incurred) allocated to each residential lot in the development project.

Cost of sales includes applicable land and lot acquisition, land development and related costs (both incurred and estimated to be incurred) allocated to each residential lot in the project.

Any changes to the estimated total development costs subsequent to the initial lot sales are generally allocated to the remaining lots.

We receive earnest money deposits from homebuilders for purchases of developed lots.

These earnest money deposits are typically released to the homebuilders as lots are sold.

Earnest money deposits from D.R.

Horton are subject to mortgages that are secured by the real estate under contract with D.R.

These mortgages expire when the earnest money is released to D.R.

Horton as lots are sold.

We have agreements with certain utility or improvement districts to convey water, sewer and other infrastructure-related assets we have constructed in connection with projects within their jurisdiction and receive reimbursements for the cost of these improvements.

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The transfer is consummated and we generally receive payment when the districts have a sufficient tax base to support funding of their bonds.

The cost incurred by us in constructing these improvements, net of the amount expected to be collected in the future, is included in real estate.

Each quarter, we review our real estate for indicators of potential impairment.

The cost incurred by us in constructing these improvements, net of the amount expected to be collected in the future, is included in our land development budgets and in the determination of lot costs.

Each quarter, we review the performance and outlook for all of our real estate for indicators of potential impairment.

We determine if impairment indicators exist by analyzing a variety of factors including, but not limited to, the following:

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If indicators of impairment are present, we perform an impairment evaluation, which includes an analysis to determine if the undiscounted cash flows estimated to be generated by those assets are less than their carrying amounts.

If so, impairment charges are recorded to cost of sales if the fair value of such assets is less than their carrying amounts.

These estimates of cash flows are significantly impacted by specific factors including estimates of the amounts and timing of future revenues and estimates of the amount of land development costs which, in turn, may be impacted by the following local market conditions:

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• local economic and demographic trends.

For those assets deemed to be impaired, the impairment to be recognized is measured as the amount by which the carrying amount of the assets exceeds the fair value of the assets.

For those assets deemed to be impaired, an impairment charge is recorded to cost of sales for the amount by which the carrying amount of the assets exceeds the fair value of the assets.

Our determination of fair value is primarily based on discounting the estimated cash flows at a rate commensurate with the inherent risks associated with the assets and related estimated cash flow streams.

When an impairment charge is determined, the charge is then allocated to each lot in the same manner as land and development costs are allocated to each lot.

There is significant uncertainty regarding the extent to which and how long C-19 and its related effects will impact the U.S.

economy, capital markets and demand for our lots.

If economic and housing market conditions are adversely affected for a prolonged period, we may be required to evaluate our real estate for potential impairment.

These evaluations could result in impairment charges that could be significant.

We rarely purchase land for resale.

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Pending Accounting Standards

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842).

This ASU requires lessees to put most leases on their balance sheets but recognize expenses on their income statements in a manner that is similar to today's accounting.

This guidance also eliminates today's real estate-specific provisions for all entities.

For lessors, the guidance modifies the classification criteria and the accounting for sales-type and direct financing leases.

The new standard requires a modified retrospective transition approach for all leases existing at, or entered into after, the date of initial application, with an option to use certain transition relief.

The guidance is effective for us beginning October 1, 2019 and will not have a material impact on our consolidated financial position, results of operations or cash flows.

In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-13, “Financial Instruments - Credit Losses,” which replaces the current incurred loss impairment methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information in determining credit loss estimates.

The guidance is effective for us beginning October 1, 2020 and is not expected to have a material impact on our consolidated financial position, results of operations or cash flows.

In December 2019, the FASB issued ASU 2019-12 related to simplifying the accounting for income taxes.

The guidance is effective for us beginning October 1, 2021, although early adoption is permitted.

We are currently evaluating the impact of this guidance, and it is not expected to have a material impact on our consolidated financial position, results of operations or cash flows.

In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform,” which provides optional expedients and exceptions for applying U.S.

GAAP to contracts, hedging relationships, and other transactions affected by the discontinuation of the London Interbank Offered Rate (LIBOR) or by another reference rate expected to be discontinued.

The guidance was effective beginning March 12, 2020 and can be applied prospectively through December 31, 2022.

We will adopt this standard when LIBOR is discontinued and do not expect it to have a material impact on our consolidated financial statements and related disclosures.

Forward-Looking Statements

These statements reflect our current views with respect to future events and are subject to risks and uncertainties.

We note that a variety of factors and uncertainties could cause our actual results to differ significantly from the results discussed in the forward-looking statements.

Factors and uncertainties that might cause such differences include, but are not limited to:

• the effect of D.R.

Horton’s controlling level of ownership on us and the holders of our securities;

• our ability to realize the potential benefits of the strategic relationship with D.R.

• the effect of our strategic relationship with D.R.

Horton on our ability to maintain relationships with our customers;

• the impact of C-19 on the economy and our business;

• the cyclical nature of the homebuilding and lot development industries and changes in economic, real estate and other conditions;

• competitive conditions in our industry;

• changes in our business strategy and our ability to achieve our strategic initiatives;

• continuing liabilities related to assets that have been sold;

• the impact of governmental policies, laws or regulations and actions or restrictions of regulatory agencies;

• the cost and availability of property suitable for residential lot development;

• general economic, market or business conditions where our real estate activities are concentrated;

• our dependence on relationships with national, regional and local homebuilders;

• our ability to obtain or the availability of surety bonds to secure our performance related to construction and development activities and the pricing of bonds;

• obtaining reimbursements and other payments from governmental districts and other agencies and timing of such payments;

• our ability to succeed in new markets;

• the conditions of the capital markets and our ability to raise capital to fund expected growth;

• our ability to manage and service our debt and comply with our debt covenants, restrictions and limitations;

• the volatility of the market price and trading volume of our common stock;

• our ability to hire and retain key personnel;

• the strength of our information technology systems and the risk of cybersecurity breaches and our ability to satisfy privacy and data protection laws and regulations.

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

What changed 10-K

Item 7. Management’s Discussion and Analysis