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Item 7. Management’s Discussion and Analysis

2021-11-18 compared with 2020-11-19 · 107 added, 114 removed, 202 unchanged (52% of the section changed)

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

Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to promote an understanding of our financial condition, results of operations, liquidity and certain other factors that may affect future results.

MD&A is provided as a supplement to, and should be read in conjunction with our consolidated financial statements and notes to those statements that appear elsewhere in this Form 10-K.

This section generally discusses the results of operations for fiscal 2021 compared to 2020.

For similar operating and financial data and discussion of our fiscal 2020 results compared to our fiscal 2019 results, 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, 2020, which was filed with the SEC on November 19, 2020.

The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs.

Actual results could differ materially from those discussed in the forward-looking statements.

Factors that could cause or contribute to any differences include, but are not limited to, those discussed under the caption “Forward-Looking Statements” and under Item 1A — “Risk Factors.”

Our Operations

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

Our alignment with and support from D.R.

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

Through our alignment with and support from D.R.

Horton, we have grown our business into a national, well-capitalized residential lot developer selling finished lots to D.R.

Horton and other homebuilders.

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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.

We also make strategic 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 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 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.

Beginning in 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.

Residential construction was 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.

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

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.

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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The following tables and related discussion set forth key operating and financial data as of and for the fiscal years ended September 30, 2021 and 2020.

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:

Components of income before taxes were as follows:

Year Ended September 30,

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Interest and other income (1.2) (4.9)

Loss on extinguishment of debt 18.1 —

Income before income taxes $ 146.6 $ 78.1

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Lot banking projects 1,694 3,057

15,915 10,373

Average sales price per lot (a)

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Lot banking projects

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

(Increase) decrease in contract liabilities (5.6) 2.3

1,293.1 880.3

Tract sales and other $ 32.7 $ 51.5

Total revenues $ 1,325.8 $ 931.8

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 2021, we sold 14,839 residential lots to D.R.

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

Horton for $1.2 billion compared to 10,164 residential lots sold to D.R.

Horton for $859.7 million in fiscal 2020.

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, 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 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.

In fiscal 2021, we sold 1,076 residential lots to customers other than D.R.

Horton for $86.5 million compared to 209 residential lots sold for $18.3 million in fiscal 2020.

Tract sales and other revenue in fiscal 2021 primarily consisted of 85 tract acres sold to D.R.

Horton for $25.9 million and 12 tract acres sold to third parties for $1.6 million.

Tract sales and other revenue in fiscal 2020 primarily consisted of 602 tract acres sold to third parties for $25.5 million and 143 tract acres sold to D.R.

Horton for $25.6 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.

Cost of sales in fiscal 2021 increased compared to fiscal 2020 primarily due to the increase in the number of lots sold.

Cost of sales related to tract sales and other revenues in fiscal 2021 and 2020 was $27.0 million and $40.6 million, respectively.

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

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Our business operations employed 250 and 143 employees at September 30, 2021 and 2020, 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.

Equity in earnings of unconsolidated ventures in fiscal 2021 and 2020 reflects our share in ventures that we account for using the equity method.

Gain on sale of assets in fiscal 2021 consists of a gain of $2.5 million associated with the reduction of our remaining obligation in connection with the Cibolo Canyons Special Improvement District issuance of bonds in 2014.

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

Loss on extinguishment of debt of $18.1 million in fiscal 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 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 income tax expense was $36.1 million and $16.4 million in fiscal 2021 and 2020, respectively, and our effective tax rate was 24.6% and 21.0% in those respective 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 allowed the Company to carryback a portion of its fiscal 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 both years includes an expense for state income taxes and nondeductible expenses and a benefit related to noncontrolling interests.

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The deferred tax assets were offset by a valuation allowance of $1.2 million, resulting in a net deferred tax liability of $24.4 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.

At September 30, 2020, deferred tax liabilities, net of deferred tax assets, were $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.

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.

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

In October 2017, D.R.

Horton acquired 75% of our common stock, resulting in an ownership change under Section 382 of the Internal Revenue Code.

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

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.

We had no unrecognized tax benefits at September 30, 2021 and 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.

Land and Lot Position

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

September 30,

Lots owned 64,400 42,400

Lots controlled through land lot purchase contracts 32,600 18,100

Total lots owned and controlled 97,000 60,500

At September 30, 2021, our lot position consisted of 97,000 residential lots, of which approximately 64,400 were owned and 32,600 were controlled through purchase contracts.

Of our total owned residential lots, approximately 21,000 are under contract to sell to D.R.

Additionally, D.R.

Horton has the right of first offer on approximately 18,200 of our owned residential lots based on executed purchase and sale agreements.

At September 30, 2021, our lots owned included approximately 5,300 lots that are fully developed, of which approximately 300 are related to lot banking.

At September 30, 2021, we had approximately 800 lots under contract to sell to customers other than D.R.

Liquidity and Capital Resources

Our strategic relationship with D.R.

Horton has provided us with an opportunity for substantial growth.

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, 2021, we had $153.6 million of cash and cash equivalents and $349.7 million of available borrowing capacity on our revolving credit facility.

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Our ratio of net debt to total capital (debt net of unrestricted cash divided by stockholders’ equity plus debt net of unrestricted cash) was 35.2% compared to 22.1% at September 30, 2020.

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

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

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

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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

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

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.

Borrowings and repayments under the facility were $58.0 million each during fiscal 2021.

At September 30, 2021, there were no borrowings outstanding and $60.3 million of letters of credit issued under the revolving credit facility, resulting in available capacity of $349.7 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, 2021, we were in compliance with all of the covenants, limitations and restrictions of our revolving credit facility.

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.

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

The notes represent senior unsecured obligations that rank equally in right of payment to all existing and future senior unsecured indebtedness and may be redeemed prior to maturity, subject to certain limitations and premiums defined in the respective indenture.

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

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

On or after May 15, 2023, the 2026 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 2026 notes can be redeemed at par on or after May 15, 2025 through maturity.

The annual effective interest rate of the 2026 notes after giving effect to the amortization of financing costs is 4.1%.

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.

The net proceeds from this issuance were primarily used to redeem all of 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 such notes.

We also have outstanding $300 million principal amount of 5.0% senior notes (the "2028 notes"), which mature March 1, 2028 with interest payable semi-annually.

On or after March 1, 2023, the 2028 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 2028 notes can be redeemed at par on or after March 1, 2026 through maturity.

The annual effective interest rate of the 2028 notes after giving effect to the amortization of financing costs is 5.2%.

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 governing our 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 applicable series of 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 such 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;

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

Other Note Payable

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.

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.

At September 30, 2021, we had 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.

In fiscal 2021, we issued 1.4 million shares of common stock under our at-the-market equity offering program for proceeds of $33.4 million, net of commissions and other issuance costs totaling $1.0 million.

At September 30, 2021, $359.9 million remained available for issuance under the shelf registration statement, of which $65.6 million was reserved for sales under our at-the-market equity offering program.

In October 2021, after the expiration of the existing registration statement and at-the market equity offering program, a new shelf registration statement became effective registering $750 million of equity securities.

We anticipate entering into a new at-the-market equity offering program under this new shelf registration statement.

Operating Cash Flow Activities

In fiscal 2021, net cash used in operating activities was $303.1 million, compared to $168.4 million in fiscal 2020.

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

The cash used in operating activities in both years is the result of our investment in the acquisition and development of our real estate.

Investing Cash Flow Activities

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.

In fiscal 2021, net cash provided by investing activities was $1.0 million, compared to $5.0 million in fiscal 2020.

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

Financing Cash Flow Activities

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.

In fiscal 2021, net cash provided by financing activities was $61.4 million, consisting primarily 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 $33.4 million, which were partially offset by the early 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 primarily consisted of the issuance of our $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.

Contractual Obligations and Off-Balance Sheet Arrangements

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Operating leases (2) 8.3 1.9 3.9 2.5 —

Performance bond (3) 2.5 2.5 — — —

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

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(3) The performance bond and standby letter of credit were provided in support of a bond issuance by Cibolo Canyons Special Improvement District (CCSID).

In 2014, we received $50.6 million from CCSID principally related to its issuance of $48.9 million Hotel Occupancy Tax (HOT) and Sales and Use Tax Revenue Bonds.

These bonds are obligations solely of CCSID and are payable from HOT and sales and use taxes levied by CCSID.

To facilitate the issuance of the bonds, we provided a $6.8 million letter of credit to the bond trustee as security for certain debt service fund obligations in the event CCSID tax collections are not sufficient to support payment of the bonds in accordance with their terms.

To facilitate the issuance of the bonds, we provided a $6.8 million letter of credit to the bond trustee as security for certain debt service fund obligations of the CCSID.

The letter of credit must be maintained until the earlier of redemption of the bonds or scheduled bond maturity in 2034.

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.

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.

In addition to the letter of credit discussed above, we had outstanding letters of credit of $53.5 million under the revolving credit facility at September 30, 2021 and surety bonds outstanding of $479.3 million issued by third parties to secure performance under various contracts that are not included in our consolidated balance sheets.

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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However, during periods when market conditions are challenging, we may not be able to offset cost increases with higher selling prices.

Critical Accounting Policies

In preparing our financial statements, we follow generally accepted accounting principles, which in many cases require us to make assumptions, estimates, and judgments that affect the amounts reported.

Our significant accounting policies are included in Note 1 to the Consolidated Financial Statements.

Many of these principles are relatively straightforward.

There are, however, a few accounting policies that are critical because they are important in determining our financial condition and results of operations and involve significant assumptions, estimates and judgments that are difficult to determine.

We must make these assumptions, estimates and judgments currently about matters that are inherently uncertain, such as future economic conditions, operating results and valuations, as well as our intentions.

As the difficulty of estimation increases, the level of precision decreases, meaning actual results can, and probably will, differ from those currently estimated.

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 the Audit Committee of our Board of Directors.

Critical Accounting Policies and Estimates

General — A comprehensive enumeration of the significant accounting policies of Forestar Group Inc.

and subsidiaries is presented in Note 1 to the accompanying financial statements as of September 30, 2021 and 2020, and for the years ended September 30, 2021, 2020 and 2019.

Each of our accounting policies has been chosen based upon current authoritative literature that collectively comprises U.S.

Generally Accepted Accounting Principles (GAAP).

In instances where alternative methods of accounting are permissible under GAAP, we have chosen the method that most appropriately reflects the nature of our business, the results of our operations and our financial condition, and have consistently applied those methods over each of the periods presented in the financial statements.

The Audit Committee of our Board of Directors has reviewed and approved the accounting policies selected.

Accounting estimates are considered critical if both of the following conditions are met:

(1) the nature of the estimates or assumptions is material because of the levels of subjectivity and judgment needed to account for matters that are highly uncertain and susceptible to change and (2) the effect of the estimates and assumptions is material to the financial statements.

We have reviewed our accounting estimates, and none were deemed to be considered critical for the accounting periods presented.

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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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 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.

The guidance is effective for us beginning October 1, 2021 and 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.

The guidance was effective beginning March 12, 2020 and can be applied prospectively through December 31, 2022.In January 2021, the FASB issued ASU 2021-01, “Reference Rate Reform - Scope,” which clarified the scope and application of the original guidance.

We will adopt these standards when LIBOR is discontinued and do not expect them to have a material impact on our consolidated financial statements or related disclosures.

In October 2021, the FASB issued ASU 2021-08, which requires application of ASC 606, “Revenue from Contracts with Customers,” to recognize and measure contract assets and liabilities from contracts with customers acquired in a business combination.

ASU 2021-08 creates an exception to the general recognition and measurement principle in ASC 805 and will result in recognition of contract assets and contract liabilities consistent with those recorded by the acquiree immediately before the acquisition date.

The guidance is effective for us beginning October 1, 2023 and interim periods therein, with early adoption permitted.

We are currently evaluating the impact of this guidance on our consolidated financial position, results of operations and cash flows.

Forward-Looking Statements

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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;

• the impacts of weather conditions and natural disasters;

• health and safety incidents relating to our operations;

• supply shortages and other risks of acquiring land, construction materials and skilled labor;

• competitive conditions in our industry;

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

• our ability to achieve our strategic initiatives;

• continuing liabilities related to assets that have been sold;

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• our ability to hire and retain key personnel;

• the impact of significant inflation, higher interest rates or deflation;

• 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.

3 unchanged sentences

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