What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-07-20 compared with 2022-04-22 · 77 added, 61 removed, 172 unchanged (45% of the section changed)

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Our Operations

We are a residential lot development company with operations in 53 markets in 23 states as of March 31, 2022.

We are a residential lot development company with operations in 52 markets in 22 states as of June 30, 2022.

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

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

Horton and other homebuilders.

Horton and other customers.

As our controlling shareholder, D.R.

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

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

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

lot development industry.

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

We are primarily investing in short duration, phased development projects.

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

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

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.

Throughout the nine months ended June 30, 2022, demand for our residential lots remained strong.

However, municipality delays, disruptions in the supply chain for certain construction materials and tightness in the labor market have caused our development cycles to lengthen in certain markets.

We expect to see a moderation in demand as mortgage interest rates have increased substantially and inflationary pressures have remained elevated.

Although these pressures may persist for some time, 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 six months ended March 31, 2022 and 2021.

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, 2022 and 2021.

Operating Results

Components of income before income taxes were as follows:

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

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

2022 2021 2022 2021

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Interest and other income (0.2) (0.3) (0.2) (1.2)

Loss on extinguishment of debt — 18.1 — 18.1

Income before income taxes $ 52.7 $ 21.1 $ 169.4 $ 87.9

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,

2022 2021 2022 2021

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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,

2022 2021 2022 2021

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— 36.5 27.3 101.4

(Increase) decrease in contract liabilities (0.5) (0.2) 1.6 —

Decrease (increase) in contract liabilities 0.5 (3.9) 2.1 (3.9)

295.1 307.4 1,108.2 894.5

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Total revenues $ 308.5 $ 312.9 $ 1,137.7 $ 907.1

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 March 31, 2022, we sold 4,771 residential lots to D.R.

Horton for $390.2 million compared to 3,358 residential lots sold to D.R.

Horton for $265.6 million in the prior year period.

In the six months ended March 31, 2022, we sold 8,785 residential lots to D.R.

Residential lots sold and residential lot sales revenues in the three months ended June 30, 2022 decreased compared to the prior year period primarily due to the decrease in lots sold from lot banking projects compared to the prior year period.

In the three months ended June 30, 2022, we sold 3,038 residential lots to D.R.

Horton for $257.6 million compared to 3,719 residential lots sold to D.R.

Horton for $300.4 million in the prior year period.

In the three months ended March 31, 2022, we sold 1,017 residential lots to customers other than D.R.

In the three months ended June 30, 2022, we sold 435 residential lots to customers other than D.R.

Horton for $46.5 million, inclusive of the $9.4 million total transaction price of the deferred development lot sales, compared to 139 residential lots sold to customers other than D.R.

Horton for $10.8 million in the prior year period.

In the six months ended March 31, 2022, we sold 1,519 residential lots to customers other than D.R.

Horton for $148.1 million, inclusive of the $54.7 million total transaction price of the deferred development lot sales, compared to 408 residential lots sold to customers other than D.R.

Residential lots sold and residential lot sales revenues in the nine months ended June 30, 2022 increased compared to the prior year period as we have grown our business primarily through our strategic relationship with D.R.

In the nine months ended June 30, 2022, we sold 11,823 residential lots to D.R.

Horton for $975.7 million compared to 10,466 residential lots sold to D.R.

Horton for $860.0 million in the prior year period.

In the three and six months ended March 31, 2022, deferred development lot sales represent 787 undeveloped and partially developed lots that were sold to a customer other than D.R.

In the nine months ended June 30, 2022, we sold 1,954 residential lots to customers other than D.R.

Horton for $194.6 million, inclusive of the $64.1 million cumulative transaction price of the deferred development lot sales, compared to 547 residential lots sold to customers other than D.R.

Horton for $38.4 million in the prior year period.

In the three months ended June 30, 2022, deferred development lot sales include 67 undeveloped and partially developed lots that were sold to a customer other than D.R.

Horton for a total transaction price of $9.4 million.

We will complete the development of these lots as part of the transaction.

We received $26.0 million in cash at closing with the remainder due as we complete development of the lots.

In the three and six months ended March 31, 2022, we recognized revenue of $12.5 million related to this transaction.

The remaining revenue will be recognized over time as we complete our development obligations.

Tract sales and other revenue in the six months ended March 31, 2022 primarily consisted of 38 tract acres sold to third parties for $3.5 million.

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.

As part of the transaction, we are obligated to complete the development of these lots.

We received $4.6 million in cash at closing with the remainder due as development of the lots is completed.

During the three months ended June 30, 2022, we recognized revenue of $1.1 million related to this transaction and revenue of $6.8 million related to previous deferred development lot sales.

In the nine months ended June 30, 2022, deferred development lot sales include 854 undeveloped and partially developed lots that were sold to customers other than D.R.

Horton for a cumulative transaction price of $64.1 million.

As part of these transactions, we are obligated to complete the development of the lots.

In the nine months ended June 30, 2022, we received $33.6 million in cash related to deferred development transactions with the remainder due as development of the lots is completed.

In the nine months ended June 30, 2022, we recognized revenue of $20.4 million related to deferred development transactions.

The remaining revenue will be recognized over time as our development obligations are completed.

Tract sales and other revenue in the three months ended June 30, 2022 primarily consists of 12 tract acres sold to a third party for $5.1 million.

Tract sales and other revenues in the nine months ended June 30, 2022 primarily consists of 50 tract acres sold to third parties for $8.5 million.

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

Horton for $3.0 million.

Cost of sales in the three and six months ended March 31, 2022 increased as compared to the prior year periods primarily due to the increase in the number of lots sold.

In the three months ended March 31, 2022, we recorded a non-cash impairment charge of $3.8 million which is included within cost of sales.

Tract sales and other revenue in the nine months ended June 30, 2021 primarily consists 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 months ended June 30, 2022 decreased as compared to the prior year periods primarily due to the decrease in the number of lots sold.

Cost of sales in the nine months ended June 30, 2022 increased as compared to the prior year periods primarily due to the increase in the number of lots sold.

Cost of sales in the nine months ended June 30, 2022 includes a non-cash impairment charge of $3.8 million.

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

SG&A expense in the three and six months ended March 31, 2022 was $24.3 million and $45.8 million compared to $16.3 million and $31.8 million in the prior year periods.

SG&A expense as a percentage of revenues was 5.8% and 5.5% in the three and six months ended March 31, 2022 compared to 5.7% and 5.4% in the prior year periods.

SG&A expense in the three and nine months ended June 30, 2022 was $24.1 million and $69.9 million compared to $16.9 million and $48.7 million in the prior year periods.

SG&A expense as a percentage of revenues was 7.8% and 6.1% in the three and nine months ended June 30, 2022 compared to 5.4% in both prior year periods.

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

Our business operations employed 309 and 205 employees at March 31, 2022 and 2021, respectively.

Our business operations employed 312 and 232 employees at June 30, 2022 and 2021, 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.

Gain on sale of assets in the six months ended March 31, 2022 consists of a gain of $0.5 million associated with the sale of an investment.

Gain on sale of assets in the three and nine months ended June 30, 2022 consists of a gain of $2.7 million associated with the refinancing of the Cibolo Canyons Special Improvement District (CCSID) bonds originally issued in 2014.

The refinancing partially reduced our remaining obligation in connection with the bonds.

Gain on sale of assets in the nine months ended June 30, 2022 also includes 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 six months ended March 31, 2022 was $15.4 million and $28.4 million compared to $9.2 million and $16.3 million in the prior year periods.

Our effective tax rate was 24.4% and 24.3% for the three and six months ended March 31, 2022 compared to 24.5% and 24.4% in the prior year periods.

Our income tax expense for the three and nine months ended June 30, 2022 was $13.0 million and $41.4 million compared to $5.2 million and $21.5 million in the prior year periods.

Our effective tax rate was 24.7% and 24.4% for the three and nine months ended June 30, 2022 compared to 24.6% and 24.5% in the prior year periods.

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

At March 31, 2022, we had deferred tax liabilities, net of deferred tax assets, of $21.9 million.

At June 30, 2022, we had deferred tax liabilities, net of deferred tax assets, of $24.5 million.

The deferred tax assets were partially offset by a valuation allowance of $1.1 million, resulting in a net deferred tax liability of $25.6 million.

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Land and Lot Position

Our land and lot position at March 31, 2022 and September 30, 2021 is summarized as follows:

Our land and lot position at June 30, 2022 and September 30, 2021 is summarized as follows:

2022 September 30,

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Total lots owned and controlled 97,000 97,000

At March 31, 2022, our lot position consisted of 96,500 residential lots, of which approximately 64,200 were owned and 32,300 were controlled through purchase contracts.

Of our total owned residential lots, approximately 19,100 were under contract to sell to D.R.

Additionally, D.R.

Horton has the right of first offer on approximately 17,600 of our owned residential lots based on executed purchase and sale agreements.

At March 31, 2022, our lots owned included approximately 5,100 lots that were fully developed and we had approximately 1,000 lots under contract to sell to customers other than D.R.

Owned lots under contract to sell to D.R.

Horton 19,300 21,000

Owned lots under contract to customers other than D.R.

Horton 1,000 800

Total owned lots under contract 20,300 21,800

Owned lots subject to right of first offer with D.R.

Horton based on executed purchase and sale agreements 19,100 18,200

Owned lots fully developed 5,300 5,300

Liquidity and Capital Resources

At March 31, 2022, we had $233.7 million of cash and cash equivalents and $349.5 million of available borrowing capacity on our revolving credit facility.

At June 30, 2022, we had $146.3 million of cash and cash equivalents and $354.0 million of available borrowing capacity on our revolving credit facility.

We have no senior note maturities until fiscal 2026.

At March 31, 2022, our ratio of debt to total capital (debt divided by stockholders’ equity plus debt) was 38.9% compared to 41.0% at both September 30, 2021 and March 31, 2021.

Our ratio of net debt to total capital (debt net of unrestricted cash divided by stockholders’ equity plus debt net of unrestricted cash) was 29.9% compared to 35.2% at September 30, 2021 and 34.1% at March 31, 2021.

At June 30, 2022, our ratio of debt to total capital (debt divided by stockholders’ equity plus debt) was 38.1% compared to 41.0% at September 30, 2021 and 42.1% at June 30, 2021.

Our ratio of net debt to total capital (debt net of unrestricted cash divided by stockholders’ equity plus debt net of unrestricted cash) at June 30, 2022 was 32.8% compared to 35.2% at September 30, 2021 and 37.8% at June 30, 2021.

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

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

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

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

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

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

There were no borrowings or repayments under the facility in the six months ended March 31, 2022.

At March 31, 2022, there were no borrowings outstanding and $60.5 million of letters of credit issued under the revolving credit facility, resulting in available capacity of $349.5 million.

There were no borrowings or repayments under the facility in the nine months ended June 30, 2022.

At June 30, 2022, there were no borrowings outstanding and $56.0 million of letters of credit issued under the revolving credit facility, resulting in available capacity of $354.0 million.

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

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

At March 31, 2022, we were in compliance with all of the covenants, limitations and restrictions of our revolving credit facility.

At June 30, 2022, 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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and allow to exist certain restrictions on the ability of subsidiaries to pay dividends or make other payments.

At March 31, 2022, we were in compliance with all of the limitations and restrictions associated with our senior note obligations.

At June 30, 2022, 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, 2022.

All of the $30 million authorization was remaining at June 30, 2022.

Other Note Payable

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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 six months ended March 31, 2022, 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.

We issued no shares of common stock under our at-the-market equity offering program in the three months ended March 31, 2022.

At March 31, 2022, $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.

We issued no shares of common stock under our at-the-market equity offering program in the three months ended June 30, 2022.

In the nine months ended June 30, 2022, 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 June 30, 2022, $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 six months ended March 31, 2022, net cash provided by operating activities was $76.6 million compared to $249.5 million of cash used in operating activities in the six months ended March 31, 2021.

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.

In the nine months ended June 30, 2022, net cash used in operating activities was $10.2 million compared to $340.6 million in the nine months ended June 30, 2021.

The cash used in operating activities in the current period was primarily the result of the increase in real estate partially offset by net income generated in the period.

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 six months ended March 31, 2022, net cash provided by investing activities was $2.2 million compared to $2.0 million in the six months ended March 31, 2021.

In the nine months ended June 30, 2022, net cash provided by investing activities was $1.6 million compared to $1.7 million in the nine months ended June 30, 2021.

The cash provided by investing activities in the current period consists primarily of cash received from the sale of an investment, partially offset by cash expenditures for property and equipment.

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Financing Cash Flow Activities

In the six months ended March 31, 2022, net cash provided by financing activities was $1.3 million compared to $20.4 million in the six months ended March 31, 2021.

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.

In the nine months ended June 30, 2022, net cash provided by financing activities was $1.3 million compared to $60.6 million in the nine months ended June 30, 2021.

Cash provided by financing activities in the prior year period 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.

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, 2022, we had outstanding letters of credit of $60.5 million under the revolving credit facility and surety bonds of $570.8 million, issued by third parties to secure performance under various contracts.

At June 30, 2022, we had outstanding letters of credit of $56.0 million under the revolving credit facility and surety bonds of $596.6 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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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