What changed in this filing

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Item 7. Management’s Discussion and Analysis

2022-11-17 compared with 2021-11-18 · 76 added, 100 removed, 209 unchanged (46% of the section changed)

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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

Business Segment

We are a residential lot development company with operations in 53 markets in 21 states as of September 30, 2022.

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

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.

lot development industry.

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

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 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.

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.

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

We manage our operations through our real estate segment, which is our core business and generates substantially all of our revenues.

The real estate segment primarily acquires land and develops infrastructure for single-family residential communities and generates revenues from sales of residential single-family finished lots to local, regional and national homebuilders.

The real estate segment primarily acquires land and installs infrastructure for single-family residential communities and generates revenues from sales of residential single-family finished lots to local, regional and national homebuilders.

We have other business activities for which the related assets and operating results are immaterial and therefore, are included in our real estate segment.

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16,837 15,915

Deferred development projects 854 —

17,691 15,915

Average sales price per lot (a)

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

(a) Excludes lots sold from deferred development projects and any impact from change in contract liabilities.

Revenues consist of:

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Development projects $ 1,420.2 $ 1,182.6

$ 1,182.6 $ 616.3

Lot banking projects 33.5 116.1

(Increase) decrease in contract liabilities (5.6) 2.3

Decrease (increase) in contract liabilities 1.8 (5.6)

1,455.5 1,293.1

Deferred development projects 26.8 —

1,482.3 1,293.1

Tract sales and other 36.8 32.7

Total revenues $ 1,519.1 $ 1,325.8

Residential lots sold and residential lot sales revenues have increased as we have grown our business primarily through our strategic relationship with D.R.

Residential lots sold and residential lot sales revenues have increased primarily as a result of lots sales to customers other than D.R.

In fiscal 2022, we sold 14,895 residential lots to D.R.

Horton for $1.2 billion compared to 14,839 residential lots sold to D.R.

Horton for $859.7 million in fiscal 2020.

Horton for $1.2 billion in fiscal 2021.

In fiscal 2022, we sold 2,796 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 $287.8 million, inclusive of the $64.1 million cumulative transaction price of deferred development lot sales, compared to 1,076 residential lots sold for $86.5 million in fiscal 2021.

Lots sold to customers other than D.R.

Horton in fiscal 2022 included 943 lots that were sold for $131.1 million to a lot banker who expects to sell those lots to DR.

Horton at a future date.

Deferred development lot sales in fiscal 2022 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.

During fiscal 2022, we received $38.8 million in cash related to deferred development transactions with the remainder due as development of the lots is completed.

During fiscal 2022, we recognized revenue of $26.8 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 fiscal 2022 primarily consisted of 512 acres sold to third parties for $35.7 million.

Tract sales and other revenue in fiscal 2021 primarily consisted of 12 acres sold to third parties for $1.6 million and 85 acres sold to D.R.

Horton for $25.9 million.

Throughout the majority of fiscal 2022, demand for our residential lots remained strong.

More recently, we have seen weakening demand as mortgage interest rates have increased substantially and inflationary pressures have remained elevated.

We increase our land and lot sales prices when market conditions permit, and we attempt to offset cost increases in one component with savings in another.

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

Although these challenging market conditions may persist for some time, we believe we are well-positioned to operate effectively 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.

Cost of Sales, Real Estate Impairment and Land Option Charges and Interest Incurred

Cost of sales in fiscal 2022 increased compared to fiscal 2021 primarily due to the increase in the number of lots sold.

Cost of sales related to tract sales and other revenues in fiscal 2022 and 2021 was $20.3 million and $27.0 million, respectively.

Each quarter, we review the performance and outlook for all of our real estate for indicators of potential impairment and perform detailed impairment evaluations and analyses when necessary.

As a result of this process, we recorded real estate impairment charges of $3.8 million during fiscal 2022.

There were no real estate impairment charges recorded in fiscal 2021.

During fiscal 2022 and 2021, land purchase contract deposit and pre-acquisition cost write-offs related to land purchase contracts that we terminated or expect to terminate were $8.7 million and $3.0 million, respectively.

We capitalize interest costs throughout the development period (active real estate).

Capitalized interest is charged to cost of sales as the related real estate is sold to the buyer.

Interest incurred was $32.9 million and $41.5 million in fiscal 2022 and 2021, respectively.

Interest charged to cost of sales was 2.9% and 3.3% of total cost of sales (excluding real estate impairments and land option charges) in those years.

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

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Our business operations employed 291 and 250 employees at September 30, 2022 and 2021, respectively.

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.

We attempt to control our SG&A costs while ensuring that our infrastructure supports our operations;

however, we cannot make assurances that we will be able to maintain or improve upon the current SG&A expense as a percentage of revenues.

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 $57.0 million and $36.1 million in fiscal 2022 and 2021, respectively, and our effective tax rate was 24.2% and 24.6% 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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Any reversal of the valuation allowance in future periods will impact our effective tax rate.

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.

The Inflation Reduction Act of 2022 (“IRA”) was signed into law on August 16, 2022.

The tax related provisions of the IRA did not have a material impact on our financial statements and are not expected to have a material impact on our financial statements in the future.

We had no unrecognized tax benefits at September 30, 2022 and September 30, 2021.

Land and Lot Position

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Total lots owned and controlled 90,100 97,000

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.

Owned lots under contract to sell to D.R.

Horton 17,800 21,000

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

Horton 1,400 800

Total owned lots under contract 19,200 21,800

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

Horton based on executed purchase and sale agreements 18,900 18,200

Owned lots fully developed 5,500 5,300

Liquidity and Capital Resources

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We have no senior note maturities until fiscal 2026.

We believe we are well positioned to effectively operate during changing economic conditions because of our low net leverage and strong liquidity position, our low overhead model and our strategic relationship with D.R.

We believe we are well positioned to operate effectively during changing economic conditions because of our low net leverage and strong liquidity position, our low overhead model and our strategic relationship with D.R.

At September 30, 2022, our ratio of debt to total capital (debt divided by stockholders’ equity plus debt) was 37.1% compared to 41.0% at September 30, 2021.

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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.

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

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 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.

There were no borrowings or repayments under the facility during fiscal 2022.

At September 30, 2022, there were no borrowings outstanding and $53.3 million of letters of credit issued under the revolving credit facility, resulting in available capacity of $356.7 million.

In October 2022, our senior unsecured revolving credit facility was amended to extend its maturity date to October 28, 2026.

The revolving credit facility is guaranteed by our wholly-owned subsidiaries that are not immaterial subsidiaries or have not been designated as unrestricted subsidiaries.

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

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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 (the "2026 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 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.

We also have $300 million principal amount of 5.0% senior notes (the "2028 notes") outstanding, 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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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.

The note is non-recourse, is secured by the underlying real estate and accrues interest at 4.0% per annum with interest payments due in October 2022 and at maturity in October 2023.

Issuance of Common Stock

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.

We have an effective shelf registration statement filed with the SEC 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 November 2021.

In fiscal 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 September 30, 2022, $748.2 million remained available for issuance under the shelf registration statement, of which $298.2 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 is the result of our investment in the acquisition and development of our real estate.

In fiscal 2022, net cash provided by operating activities was $108.7 million, which was primarily the result of net income generated in the year and increases in liabilities and other accrued expenses, partially offset by the increase in our real estate.

In fiscal 2021, net cash used in operating activities was $303.1 million, which was primarily the result of the increase in our real estate.

Investing Cash Flow Activities

In fiscal 2022, net cash provided by investing activities was $1.3 million compared to $1.0 million in fiscal 2021.

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

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.

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

Financing Cash Flow Activities

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

At September 30, 2021, contractual cash obligations consist of:

Payments Due by Period

Total Less Than

1 Year 1 - 3 Years 3 - 5 Years More Than

(In millions)

Debt — Principal (1) $ 712.5 $ — $ 12.5 $ 400.0 $ 300.0

Debt — Interest (1) 177.0 31.4 62.3 60.8 22.5

Operating leases (2) 8.3 1.9 3.9 2.5 —

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

Total $ 904.6 $ 40.1 $ 78.7 $ 463.3 $ 322.5

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(1) Debt represents principal and interest payments due on our senior notes and our revolving credit facility.

Because the balance of our revolving credit facility was zero at September 30, 2021, we did not assume any principal or interest payments related to this facility in future periods.

(2) Our operating leases are primarily for office space.

We lease office space in Arlington, Texas as our corporate headquarters and also lease office space in other locations to support our business operations.

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

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

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 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.

When we complete our performance obligations, the related letters of credit and bonds are generally released shortly thereafter, leaving us with no continuing obligations.

We have no material third-party guarantees.

We may be adversely affected during periods of high inflation, primarily because of higher financing, land and labor costs.

We attempt to offset cost increases in one component with savings in another, and we increase our land and lot sales prices when market conditions permit.

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

In fiscal 2022, net cash provided by financing activities was $1.2 million compared to $61.4 million in fiscal 2021.

Cash provided by financing activities in the prior year 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 $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.

Critical Accounting Policies and Estimates

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If indicators of impairment are present, we perform an impairment evaluation, which includes an analysis to determine if the undiscounted cash flows estimated to be generated by those assets are less than their carrying amounts.

These estimates of cash flows are significantly impacted by specific factors including estimates of the amounts and timing of future revenues and estimates of the amount of land development costs which, in turn, may be impacted by the following local market conditions:

These estimates of cash flows are significantly impacted by specific factors including estimates of the amount and timing of future revenues and estimates of the amount of land development costs which, in turn, may be impacted by the following local market conditions:

• supply and availability of land and lots;

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• local economic and demographic trends.

For those assets deemed to be impaired, an impairment charge is recorded to cost of sales for the amount by which the carrying amount of the assets exceeds the fair value of the assets.

For those assets deemed impaired, an impairment charge is recorded to cost of sales for the amount by which the carrying amount of the assets exceeds the fair value of the assets.

Our determination of fair value is primarily based on discounting the estimated cash flows at a rate commensurate with the inherent risks associated with the assets and related estimated cash flow streams.

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Pending Accounting Standards

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 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.In January 2021, the FASB issued ASU 2021-01, “Reference Rate Reform - Scope,” which clarified the scope and application of the original guidance.

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.

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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.

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 and cash flows.

Forward-Looking Statements

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Horton on our ability to maintain relationships with our customers;

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

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

• the effects of public health issues such as a major epidemic or pandemic, including the impact of COVID-19 on the economy and our business;

• 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;

• our ability to obtain or the availability of surety bonds to secure our performance related to construction and development activities and the pricing of bonds;

• the impact of governmental policies, laws or regulations and actions or restrictions of regulatory agencies;

• our ability to achieve our strategic initiatives;

• continuing liabilities related to assets that have been sold;

• the impact of governmental policies, laws or regulations and actions or restrictions of regulatory agencies;

• the cost and availability of property suitable for residential lot development;

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• our dependence on relationships with national, regional and local homebuilders;

• our ability to obtain or the availability of surety bonds to secure our performance related to construction and development activities and the pricing of bonds;

• competitive conditions in our industry;

• obtaining reimbursements and other payments from governmental districts and other agencies and timing of such payments;

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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-K

Item 7. Management’s Discussion and Analysis