What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-07-23 compared with 2021-04-23 · 67 added, 72 removed, 162 unchanged (46% of the section changed)

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Our Operations

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

We are a residential lot development company with operations in 55 markets in 22 states as of June 30, 2021.

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

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

During March 2020, the impacts of the COVID-19 pandemic (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 of the 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 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 has remained strong throughout the first half of fiscal 2021.

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

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.

However, multiple disruptions in the supply chain, combined with the improvement in economic conditions and strong demand for residential lots, have resulted in shortages in certain construction materials and tightness in the labor market, which has caused our development cycles to lengthen in certain markets.

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 and six months ended March 31, 2021 and 2020.

The following tables and related discussion set forth key operating and financial data as of and for the three and nine months ended June 30, 2021 and 2020.

Operating Results

Components of income before taxes were as follows:

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

Components of income before income taxes were as follows:

Three Months Ended June 30, Nine Months Ended June 30,

2021 2020 2021 2020

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Selling, general and administrative expense 16.9 11.2 48.7 32.8

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

Equity in loss (earnings) of unconsolidated ventures — 0.1 (0.2) (0.6)

Gain on sale of assets — — — (0.1)

Interest and other income (0.3) (0.8) (1.2) (4.2)

Loss on extinguishment of debt 18.1 — 18.1 —

Income before income taxes $ 21.1 $ 10.3 $ 87.9 $ 46.1

Residential lots sold consist of:

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

Three Months Ended June 30, Nine Months Ended June 30,

2021 2020 2021 2020

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Revenues consist of:

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

Three Months Ended June 30, Nine Months Ended June 30,

2021 2020 2021 2020

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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 March 31, 2021, we sold 3,358 residential lots to D.R.

In the three months ended June 30, 2021, we sold 3,719 residential lots to D.R.

Horton for $300.4 million compared to 1,991 residential lots sold to D.R.

Horton for $159.3 million in the prior year period.

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

In the nine months ended June 30, 2021, we sold 10,466 residential lots to D.R.

Horton for $860.0 million compared to 6,287 residential lots sold to D.R.

Horton for $526.0 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.

In the three months ended June 30, 2021, we sold 139 residential lots to builders other than D.R.

Horton for $10.8 million compared to 32 residential lots sold to builders other than D.R.

Horton for $2.3 million in the prior year period.

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

In the nine months ended June 30, 2021, we sold 547 residential lots to builders other than D.R.

Horton for $38.4 million compared to 109 residential lots sold to builders other than D.R.

Horton for $9.8 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.

Tract sales and other revenue in the three months ended June 30, 2021 primarily consisted of 7 tract acres sold to D.R.

Horton for $3.0 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.

Tract sales and other revenue in the nine months ended June 30, 2021 primarily consisted of 11 tract acres sold to third parties for $1.4 million and 21 tract acres sold to D.R.

Horton for $6.0 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.

Tract sales and other revenue in the three months ended June 30, 2020 primarily consisted of 30 tract acres sold to D.R.

Horton for $13.4 million.

Tract sales and other revenue in the nine months ended June 30, 2020 primarily consisted of 588 acres sold to third parties for $25.3 million and 66 tract acres sold to D.R.

Horton for $20.6 million.

Cost of sales in the three and nine months ended June 30, 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 $3.1 million and $7.4 million in the three and nine months ended June 30, 2021, respectively, compared to $12.8 million and $36.7 million in the three and nine months ended June 30, 2020.

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

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.

SG&A expense in the three and nine months ended June 30, 2021 was $16.9 million and $48.7 million compared to $11.2 million and $32.8 million in the prior year periods.

SG&A expense as a percentage of revenues was 5.4% in both the three and nine months ended June 30, 2021 compared to 6.3% and 5.6% in the prior year periods.

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

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

Our business operations employed 232 and 128 employees at June 30, 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.

Loss on extinguishment of debt of $18.1 million in the three and nine months ended June 30, 2021 was due to the redemption of our $350 million principal amount of 8.0% senior notes due 2024 in May 2021.

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

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 income tax expense for the three and nine months ended June 30, 2021 was $5.2 million and $21.5 million compared to $0.2 million and $8.9 million in the prior year periods.

Our effective tax rate was 24.6% and 24.5% for the three and nine months ended June 30, 2021 compared to 1.9% and 19.3% in the prior year periods.

Our effective tax rate for the three and nine months ended June 30, 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, which allowed us to carryback a portion of our 2018 NOL.

The carryback provisions resulted 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 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.

At June 30, 2021, we had deferred tax liabilities, net of deferred tax assets, of $8.5 million.

The deferred tax assets were partially offset by a valuation allowance of $1.3 million, resulting in a net deferred tax liability of $9.8 million.

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

The valuation allowance for both periods 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.

The valuation allowance for both periods 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.

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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Land and Lot Position

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

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

2021 September 30,

Lots owned 64,200 42,400

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

Lots controlled through land and lot purchase contracts 32,400 18,100

Total lots owned and controlled 96,600 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.

At June 30, 2021, our lot position consisted of approximately 96,600 residential lots, of which 64,200 were owned and 32,400 were controlled through purchase contracts.

Of our total owned residential lots, approximately 21,500 were under contract to sell to D.R.

Additionally, D.R.

Horton has the right of first offer on approximately 17,900 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.

At June 30, 2021, lots owned included approximately 4,400 that were fully developed, of which approximately 600 are related to lot banking.

At June 30, 2021, we had approximately 900 lots under contract to sell to builders other than D.R.

Liquidity and Capital Resources

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.

At June 30, 2021, we had $116.0 million of cash and cash equivalents and $349.8 million of available borrowing capacity on our revolving credit facility.

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.

At June 30, 2021, our ratio of debt to total capital (debt divided by stockholders’ equity plus debt) was 42.1% compared to 42.4% at September 30, 2020 and 43.1% at June 30, 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 37.8% compared to 22.1% at September 30, 2020 and 25.2% at June 30, 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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Bank Credit Facility

We have a $380 million senior unsecured revolving credit facility with an uncommitted accordion feature that could increase the size of the facility to $570 million, subject to certain conditions and availability of additional bank commitments.

In April 2021, our senior unsecured revolving credit facility was amended to increase its capacity 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.

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.

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

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 maturity date of the facility was extended to April 16, 2025.

Borrowings and repayments under the facility were $25 million each during the nine months ended June 30, 2021.

At June 30, 2021, there were no borrowings outstanding and $60.2 million of letters of credit issued under the revolving credit facility, resulting in available capacity of $349.8 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 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.

At June 30, 2021, we were in compliance with all of the covenants, limitations and restrictions of our revolving credit facility.

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.

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

In April 2021, we issued $400 million principal amount of 3.85% senior notes that mature May 15, 2026 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 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 net proceeds from this issuance were primarily used to redeem our $350 million principal amount of 8.0% senior notes due April 15, 2024 on May 7, 2021.

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

We recognized an $18.1 million loss on extinguishment of debt upon the redemption of the notes.

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%.

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 March 31, 2021, we were in compliance with all of the limitations and restrictions associated with our senior note obligations.

At June 30, 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 March 31, 2021.

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

Other Note Payable

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Issuance of Common Stock

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.

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

During the three and nine months ended June 30, 2021, we issued 0.4 million and 1.4 million shares of common stock under our at-the-market equity offering program for proceeds of $9.3 million and $32.6 million, respectively, net of commissions and other issuance costs.

At June 30, 2021, $361.0 million remained available for issuance under the shelf registration statement, of which $66.7 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 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.

At June 30, 2021, we had outstanding letters of credit of $60.2 million under the revolving credit facility and surety bonds of $436.6 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 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.

In the nine months ended June 30, 2021, net cash used in operating activities was $340.6 million compared to $205.7 million in the nine months ended June 30, 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 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.

In the nine months ended June 30, 2021, net cash provided by investing activities was $1.7 million compared to $3.1 million in the nine months ended June 30, 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 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.

In the nine months ended June 30, 2021, net cash provided by financing activities was $60.6 million compared to $175.4 million in the nine months ended June 30, 2020.

Cash provided by financing activities in the nine months ended June 30, 2021 was primarily the result of proceeds from the issuance of $400 million principal amount of 3.85% senior notes and the issuance of common stock under our at-the-market equity offering program for net proceeds of $32.6 million, which were partially offset by the redemption of our $350 million principal amount of 8.0% senior notes and the related call premium of $14.0 million.

Net proceeds in the prior year period primarily consisted of 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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Horton on our ability to maintain relationships with our customers;

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

• the impact of COVID-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;

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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