What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-01-28 compared with 2021-07-23 · 69 added, 91 removed, 138 unchanged (54% of the section changed)

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Our Operations

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

We are a residential lot development company with operations in 55 markets in 23 states as of December 31, 2021.

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

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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.

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.

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 nine months 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.

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.

During 2020, the impacts of the COVID-19 pandemic significantly disrupted economic activity and temporarily affected our business operations and the demand for our residential lots.

As economic activity resumed, housing market conditions and demand for residential lots improved and has remained strong throughout fiscal 2021 and into fiscal 2022.

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

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.

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 nine months ended June 30, 2021 and 2020.

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

Operating Results

Components of income before income taxes were as follows:

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

2021 2020 2021 2020

Three Months Ended December 31,

(In millions)

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Selling, general and administrative expense 21.5 15.5

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

Equity in earnings of unconsolidated ventures (1.1) (0.2)

Gain on sale of assets (0.5) —

Interest and other income — (0.3)

Loss on extinguishment of debt 18.1 — 18.1 —

Income before income taxes $ 53.5 $ 29.2

Residential lots sold consist of:

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

2021 2020 2021 2020

Three Months Ended December 31,

Development projects 4,381 3,102

Lot banking projects 135 465

3,858 2,023 11,013 6,396

Average sales price per lot (1)

Average sales price per lot (a)

$ 89,000 $ 86,000

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

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

Revenues consist of:

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

2021 2020 2021 2020

Three Months Ended December 31,

(In millions)

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Lot banking projects

36.5 37.1 101.4 195.0

(Increase) decrease in contract liabilities (3.9) 2.8 (3.9) 2.1

307.4 164.4 894.5 537.9

Decrease in contract liabilities 2.1 0.2

Tract sales and other 3.5 0.1

$ 312.9 $ 177.9 $ 907.1 $ 584.3

Total revenues $ 407.6 $ 307.1

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

In the three months ended December 31, 2021, we sold 4,014 residential lots to D.R.

Horton for $328.0 million compared to 3,389 residential lots sold to D.R.

Horton for $294.0 million in the prior year period.

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 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.

In the three months ended December 31, 2021, we sold 502 residential lots to customers other than D.R.

Horton for $74.0 million compared to 178 residential lots sold to customers other than D.R.

Horton for $12.8 million in the prior year period.

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 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.

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.

Tract sales and other revenue in the three months ended December 31, 2021 primarily consisted of 38 tract acres sold to third parties for $3.5 million.

Cost of sales in the three months ended December 31, 2021 increased as compared to the prior year period primarily due to the increase in the number of lots sold.

Cost of sales related to tract sales and other revenues in the three months ended December 31, 2021 was $2.7 million.

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

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.

SG&A expense in the three months ended December 31, 2021 was $21.5 million compared to $15.5 million in the prior year period.

SG&A expense as a percentage of revenues was 5.3% and 5.0% in the three months ended December 31, 2021 and 2020, respectively.

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

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.

Our business operations employed 271 and 179 employees at December 31, 2021 and 2020, 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.

Gain on sale of assets in the three months ended December 31, 2021 consists of a gain of $0.5 million associated with the sale of an investment.

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

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

Our income tax expense for the three months ended December 31, 2021 and 2020 was $13.0 million and $7.1 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, 2021, we had deferred tax liabilities, net of deferred tax assets, of $23.0 million.

The deferred tax assets were partially offset by a valuation allowance of $1.2 million, resulting in a net deferred tax liability of $24.2 million.

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

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 at June 30, 2021 and September 30, 2020 is summarized as follows:

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

2021 September 30,

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Total lots owned and controlled 103,300 97,000

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.

At December 31, 2021, our lot position consisted of 103,300 residential lots, of which approximately 65,700 were owned and 37,600 were controlled through purchase contracts.

Of our total owned residential lots, approximately 20,000 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 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.

Horton has the right of first offer on approximately 18,300 of our owned residential lots based on executed purchase and sale agreements.

At December 31, 2021, our lots owned included approximately 4,900 lots that were fully developed, of which approximately 200 are related to lot banking.

At December 31, 2021, we had approximately 1,000 lots under contract to sell to customers other than D.R.

Liquidity and Capital Resources

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.

At December 31, 2021, we had $162.5 million of cash and cash equivalents and $343.7 million of available borrowing capacity on our revolving credit facility.

We have no senior note maturities until fiscal 2026.

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%.

At December 31, 2021, our ratio of debt to total capital (debt divided by stockholders’ equity plus debt) was 40.0% compared to 41.0% at September 30, 2021 and 42.3% at December 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 33.9% compared to 35.2% at September 30, 2021 and 31.8% at December 31, 2020.

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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Bank Credit Facility

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.

We have a $410 million senior unsecured revolving credit facility 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 is 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.

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.

There were no borrowings or repayments under the facility in the three months ended December 31, 2021.

At December 31, 2021, there were no borrowings outstanding and $66.3 million of letters of credit issued under the revolving credit facility, resulting in available capacity of $343.7 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 June 30, 2021, we were in compliance with all of the covenants, limitations and restrictions of our revolving credit facility.

At December 31, 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.

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

Our $400 million principal amount of 3.85% senior notes (the "2026 notes") 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.

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

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.

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.

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

At June 30, 2021, we were in compliance with all of the limitations and restrictions associated with our senior note obligations.

At December 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 June 30, 2021.

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

Our other note payable of $12.5 million 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, 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.

We have an effective shelf registration statement, filed with the Securities and Exchange Commission in October 2021, registering $750 million of equity securities, of which $300 million was reserved for sales under our at-the-market equity offering program that became effective in November 2021.

In the three months ended December 31, 2021, we issued 84,547 shares of common stock under our at-the-market equity offering program for proceeds of $1.7 million, net of commissions and other issuance costs totaling $0.1 million.

At December 31, 2021, $748.2 million remained available for issuance under the shelf registration statement, of which $298.2 million was reserved for sales under the at-the-market equity offering program.

Operating Cash Flow Activities

In the three months ended December 31, 2021, net cash provided by operating activities was $5.8 million compared to $158.7 million of cash used in operating activities in the three months ended December 31, 2020.

The cash provided by operating activities in the current period was primarily the result of the net income generated in the period and increases in liabilities and other accrued expenses, partially offset by the increase in our real estate.

The cash used in operating activities in the prior year period was primarily due to the increase in real estate.

Investing Cash Flow Activities

In the three months ended December 31, 2021, net cash provided by investing activities was $3.2 million compared to $2.0 million in the three months ended December 31, 2020.

The cash provided by investing activities in the current period consists primarily of cash received from the sale of an investment.

Additionally, cash provided by investing activities in both periods includes distributions received from our unconsolidated ventures.

Financing Cash Flow Activities

In the three months ended December 31, 2021, net cash used in financing activities was $0.1 million compared to $0.2 million in the three months ended December 31, 2020.

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 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.

At December 31, 2021, we had outstanding letters of credit of $66.3 million under the revolving credit facility and surety bonds of $528.2 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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We have no material third-party guarantees.

Operating Cash Flow Activities

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 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 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

There have been no significant changes in our critical accounting policies or estimates from those disclosed in our 2020 Annual Report on Form 10-K.

There have been no material changes in our critical accounting policies or estimates from those disclosed in our 2021 Annual Report on Form 10-K.

New and Pending Accounting Pronouncements

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• 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.

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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