What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-04-23 compared with 2021-01-27 · 88 added, 59 removed, 146 unchanged (50% of the section changed)

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Our Operations

We are a residential lot development company with operations in 51 markets in 21 states as of December 31, 2020.

We are a residential lot development company with operations in 54 markets in 22 states as of March 31, 2021.

In October 2017, we became a majority-owned subsidiary of D.R.

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Our lot sales pace declined throughout late March and April 2020 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 fiscal 2020 and the first quarter of fiscal 2021.

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

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 severity 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 due to C-19 or otherwise, 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.

However, as economic activity and housing market conditions began to improve, our lot sales pace increased during the last half of fiscal 2020 and has remained strong throughout the first half of fiscal 2021.

We believe we are well positioned to effectively operate through 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

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Results of Operations

The following tables and related discussion set forth key operating and financial data as of and for the three months ended December 31, 2020 and 2019.

The following tables and related discussion set forth key operating and financial data as of and for the three and six months ended March 31, 2021 and 2020.

Operating Results

Components of income before taxes were as follows:

Three Months Ended December 31,

Three Months Ended March 31, Six Months Ended March 31,

2021 2020 2021 2020

(In millions)

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Equity in earnings of unconsolidated ventures (0.1) (0.3) (0.3) (0.8)

Loss on sale of assets — 0.1

Gain on sale of assets — (0.3) — (0.1)

Interest and other income (0.5) (1.8) (0.8) (3.4)

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Residential lots sold consist of:

Three Months Ended December 31,

Three Months Ended March 31, Six Months Ended March 31,

2021 2020 2021 2020

Development projects 3,174 1,272 6,276 2,678

Lot banking projects 414 679 879 1,695

Average sales price per lot (a)

3,588 1,951 7,155 4,373

Average sales price per lot (1)

$ 78,100 $ 79,700 $ 82,100 $ 85,600

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

_______________

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

Revenues consist of:

Three Months Ended December 31,

Three Months Ended March 31, Six Months Ended March 31,

2021 2020 2021 2020

(In millions)

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Lot banking projects

Decrease (increase) in contract liabilities

Residential tract sales — 30.0

Other 0.1 0.1

29.3 57.0 64.9 157.9

(Increase) decrease in contract liabilities (0.2) 0.8 — (0.6)

280.2 156.4 587.1 373.5

Tract sales and other 6.9 2.7 7.1 32.9

$ 287.1 $ 159.1 $ 594.2 $ 406.4

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 the three months ended December 31, 2020, we sold 3,389 residential lots to D.R.

In the three months ended March 31, 2021, we sold 3,358 residential lots to D.R.

Horton for $265.6 million compared to 1,906 residential lots sold to D.R.

Horton for $151.2 million in the prior year period.

At December 31, 2020, our lot position consisted of 77,500 residential lots, of which approximately 52,300 were owned and 25,200 were controlled through purchase contracts.

Of our total owned residential lots, approximately 18,300 are under contract to sell to D.R.

Additionally, D.R.

Horton has the right of first offer on approximately 16,600 of these lots based on executed purchase and sale agreements.

At December 31, 2020, lots owned included approximately 4,900 that are fully developed, of which approximately 1,300 are related to lot banking.

At December 31, 2020, we had approximately 600 lots under contract to sell to builders other than D.R.

In the three months ended December 31, 2020, we sold 178 residential lots to builders other than D.R.

In the six months ended March 31, 2021, we sold 6,747 residential lots to D.R.

Horton for $559.6 million compared to 4,296 residential lots sold to D.R.

Horton for $366.8 million in the prior year period.

In the three months ended March 31, 2021, we sold 230 residential lots to builders other than D.R.

Horton for $14.8 million compared to 45 residential lots sold to builders other than D.R.

Horton for $4.4 million in the prior year period.

Residential tract sales in the three months ended December 31, 2019 consist of 580 residential tract acres sold to third parties for $22.8 million and 36 residential tract acres sold to D.R.

In the six months ended March 31, 2021, we sold 408 residential lots to builders other than D.R.

Horton for $27.6 million compared to 77 residential lots sold to builders other than D.R.

Horton for $7.4 million in the prior year period.

Tract sales and other revenue in the three and six months ended March 31, 2021 primarily consisted of 11 tract acres sold to third parties for $1.4 million and 14 tract acres sold to D.R.

Horton for $3.0 million.

Cost of sales in the three months ended December 31, 2020 increased as compared to the prior year period primarily due to the increase in the number of lots sold.

Cost of sales related to residential tract sales in the three months ended December 31, 2019 was $21.5 million.

Tract sales and other revenue in the three months ended March 31, 2020 primarily consisted of 8 tract acres sold to a third party for $2.5 million.

Tract sales and other revenue in the six months ended March 31, 2020 primarily consisted of 588 acres sold to third parties for $25.3 million and 36 residential tract acres sold to D.R.

Horton for $7.2 million.

Cost of sales in the three and six months ended March 31, 2021 increased as compared to the prior year periods primarily due to the increases in the number of lots sold.

Cost of sales related to tract sales and other revenue was $4.2 million in both the three and six months ended March 31, 2021 compared to $2.4 million and $23.5 million in the three and six months ended March 31, 2020, respectively.

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

SG&A expense in the three months ended December 31, 2020 was $15.5 million compared to $10.5 million in the prior year period.

SG&A expense as a percentage of revenues was 5.0% and 4.2% in the three months ended December 31, 2020 and 2019, respectively.

SG&A expense in the three and six months ended March 31, 2021 was $16.3 million and $31.8 million compared to $11.2 million and $21.7 million in the prior year periods.

SG&A expense as a percentage of revenues was 5.7% and 5.4% in the three and six months ended March 31, 2021 compared to 7.0% and 5.3% in the prior year periods.

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

Our business operations employed 179 and 88 employees at December 31, 2020 and 2019, respectively.

Equity in earnings of unconsolidated ventures in both periods reflects our share of earnings in ventures that we account for using the equity method.

Our business operations employed 205 and 121 employees at March 31, 2021 and 2020, respectively.

Equity in earnings of unconsolidated ventures in all periods reflects our share of earnings in 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 for the three months ended December 31, 2020 and 2019 was $7.1 million and $5.4 million, respectively and our effective tax rate was 24.3% in both periods.

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

At December 31, 2020, we had deferred tax liabilities, net of deferred tax assets, of $6.4 million.

Our income tax expense for the three and six months ended March 31, 2021 was $9.2 million and $16.3 million compared to $3.3 million and $8.7 million in the prior year periods.

Our effective tax rate was 24.5% and 24.4% for the three and six months ended March 31, 2021 compared to 24.1% and 24.3% in the prior year periods.

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

At March 31, 2021, we had deferred tax liabilities, net of deferred tax assets, of $6.1 million.

The deferred tax assets were partially offset by a valuation allowance of $1.3 million, resulting in a net deferred tax liability of $7.4 million.

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Any reversal of the valuation allowance in future periods will impact our effective tax rate.

Land and Lot Position

Our land and lot position as of at March 31, 2021 and September 30, 2020 is summarized as follows:

2021 September 30,

Lots owned 58,700 42,400

Lots controlled under land and lot purchase contracts 25,800 18,100

Total lots owned and controlled 84,500 60,500

At March 31, 2021, our lot position consisted of approximately 84,500 residential lots, of which 58,700 were owned and 25,800 were controlled through purchase contracts.

Of our total owned residential lots, approximately 20,400 are under contract to sell to D.R.

Additionally, D.R.

Horton has the right of first offer on approximately 16,700 of these lots based on executed purchase and sale agreements.

At March 31, 2021, lots owned included approximately 4,800 that are fully developed, of which approximately 1,000 are related to lot banking.

At March 31, 2021, we had approximately 700 lots under contract to sell to builders other than D.R.

Liquidity and Capital Resources

At December 31, 2020, we had $237.4 million of cash and cash equivalents and $339.5 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 December 31, 2020, our ratio of debt to total capital (debt divided by stockholders’ equity plus debt) was 42.3% compared to 42.4% at September 30, 2020 and 35.9% at December 31, 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 31.8% compared to 22.1% at September 30, 2020 and 9.7% at December 31, 2019.

At March 31, 2021, we had $167.2 million of cash and cash equivalents and $334.0 million of available borrowing capacity on our revolving credit facility.

After giving effect to the redemption of our 2024 notes which is scheduled for May 2021, we have no senior note maturities until fiscal 2026.

We believe we are well positioned to effectively operate through 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 March 31, 2021, our ratio of debt to total capital (debt divided by stockholders’ equity plus debt) was 41.0% compared to 42.4% at September 30, 2020 and 43.4% at March 31, 2020.

Our ratio of net debt to total capital (debt net of unrestricted cash divided by stockholders’ equity plus debt net of unrestricted cash) was 34.1% compared to 22.1% at September 30, 2020 and 19.5% at March 31, 2020.

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

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

There were no borrowings or repayments under the facility during the three months ended December 31, 2020.

At December 31, 2020, there were no borrowings outstanding and $40.5 million of letters of credit issued under the revolving credit facility, resulting in available capacity of $339.5 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 maturity date of the facility is October 2, 2022.

There were no borrowings or repayments under the facility during the six months ended March 31, 2021.

At March 31, 2021, there were no borrowings outstanding and $46.0 million of letters of credit issued under the revolving credit facility, resulting in available capacity of $334.0 million.

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

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A failure to comply with these financial covenants could allow the lending banks to terminate the availability of funds under the revolving credit facility or cause any outstanding borrowings to become due and payable prior to maturity.

At December 31, 2020, we were in compliance with all of the covenants, limitations and restrictions of our revolving credit facility.

At March 31, 2021, we were in compliance with all of the covenants, limitations and restrictions of our revolving credit facility.

In April 2021, the revolving credit facility was amended to extend its maturity date from October 2, 2022 to April 16, 2025.

The maturity date may be extended subject to the approval of lenders holding a majority of the commitments.

The revolving credit facility size was increased to $410 million with an uncommitted accordion feature that could increase the size of the facility to $600 million, subject to certain conditions and availability of additional bank commitments.

We have outstanding senior notes as described below that were issued pursuant to Rule 144A and Regulation S under the Securities Act of 1933, as amended.

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

Our $300 million principal amount of 5.0% senior notes mature March 1, 2028 with interest payable semi-annually.

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

Our $350 million principal amount of 8.0% senior notes mature April 15, 2024 with interest payable semi-annually.

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

Our $300 million principal amount of 5.0% senior notes mature March 1, 2028 with interest payable semi-annually.

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.

In April 2021, we issued $400 million principal amount of 3.85% senior notes that mature May 15, 2026 with interest payable semi-annually.

On or after May 15, 2023, the notes may be redeemed at 101.925% 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 May 15, 2025 through maturity.

The annual effective interest rate of the notes after giving effect to the amortization of financing costs is 4.1%.

A portion of the net proceeds from this issuance of the notes will be used to redeem the $350 million principal amount of 8.0% senior notes due April 15, 2024, and the remainder of the proceeds will be used for general corporate purposes.

In April 2021, we delivered notice for the full redemption of our $350 million principal amount of 8.0% senior notes outstanding.

The redemption price of $365.6 million includes a call premium of $14.0 million and accrued and unpaid interest of $1.6 million.

We expect to recognize a loss on extinguishment of debt upon the redemption of the notes.

The notes are scheduled to be redeemed May 7, 2021.

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 respective indenture), we offer to purchase the notes at 101% of their principal amount.

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and allow to exist certain restrictions on the ability of subsidiaries to pay dividends or make other payments.

At December 31, 2020, we were in compliance with all of the limitations and restrictions associated with our senior note obligations.

At March 31, 2021, 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 December 31, 2020.

All of the $30 million authorization was remaining at March 31, 2021.

Other Note Payable

Our other note payable of $12.5 million was issued as part of a transaction to acquire real estate for development.

We also have a note payable of $12.5 million that was issued as part of a transaction to acquire real estate for development.

The note is non-recourse and is secured by the underlying real estate, accrues interest at 4.0% per annum and matures in October 2023.

Issuance of Common Stock

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

At December 31, 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.

As of December 31, 2020, no shares had been issued under the at-the-market equity offering program.

We have an effective shelf registration statement filed with the SEC in September 2018, registering $500 million of equity securities, of which $100 million is reserved for sales under our at-the-market equity offering program that became effective August 2020.

During the three months ended March 31, 2021, we issued 1.0 million shares of common stock under our at-the-market equity offering program for proceeds of $23.3 million, net of commissions and other issuance costs.

At March 31, 2021, $370.6 million remained available for issuance under the shelf registration statement, of which $76.3 million is reserved for sales under our at-the-market equity offering program.

Contractual Obligations and Off-Balance Sheet Arrangements

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.

At December 31, 2020, we had outstanding letters of credit of $40.5 million under the revolving credit facility and surety bonds of $293.8 million, issued by third parties to secure performance under various contracts.

At March 31, 2021, we had outstanding letters of credit of $46.0 million under the revolving credit facility and surety bonds of $368.6 million, issued by third parties to secure performance under various contracts.

We expect that our performance obligations secured by these letters of credit and bonds will generally be completed in the ordinary course of business and in accordance with the applicable contractual terms.

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Operating Cash Flow Activities

In the three months ended December 31, 2020, net cash used in operating activities was $158.7 million compared to $11.6 million in the three months ended December 31, 2019.

In the six months ended March 31, 2021, net cash used in operating activities was $249.5 million compared to $123.8 million in the six months ended March 31, 2020.

The cash used in operating activities in both periods was primarily due to the increase in real estate as we continue to grow our land development operations.

Investing Cash Flow Activities

In the three months ended December 31, 2020, net cash provided by investing activities was $2.0 million compared to $3.1 million in the three months ended December 31, 2019.

In the six months ended March 31, 2021, net cash provided by investing activities was $2.0 million compared to $3.5 million in the six months ended March 31, 2020.

The cash provided by investing activities in both periods was primarily the result of distributions received from our unconsolidated ventures.

Financing Cash Flow Activities

In the three months ended December 31, 2020, net cash used in financing activities was $0.2 million compared to $1.0 million in the three months ended December 31, 2019.

In the six months ended March 31, 2021, net cash provided by financing activities was $20.4 million compared to $175.7 million in the six months ended March 31, 2020.

Cash provided by financing activities in the six months ended March 31, 2021 was primarily the result of the issuance of common stock under our at-the-market equity offering program for net proceeds of $23.3 million, partially offset by our purchase of the noncontrolling interest in one of our ventures.

The prior year amount consisted primarily of the net 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.

Critical Accounting Policies and Estimates

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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-Q

Item 2. Management’s Discussion and Analysis