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Item 2. Management’s Discussion and Analysis

2023-01-25 compared with 2022-07-20 · 97 added, 128 removed, 121 unchanged (65% of the section changed)

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Our Operations

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.

Through our alignment with and support from D.R.

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

Horton and other customers.

Forestar Group Inc.

is a national, well-capitalized residential lot development company with operations in 52 markets in 20 states as of December 31, 2022.

We are focused primarily on making investments in land acquisition and development to sell finished single-family residential lots to homebuilders.

Our common stock is listed on the New York Stock Exchange (NYSE) under the ticker symbol “FOR.” The terms “Forestar,” the “Company,” “we” and “our” used herein refer to Forestar Group Inc., a Delaware corporation, and its predecessors and subsidiaries.

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

Horton") by virtue of a merger with a wholly-owned subsidiary of D.R.

Immediately following the merger, D.R.

Horton owned 75% of the Company's outstanding common stock.

As of December 31, 2022, D.R.

Horton owned approximately 63% of the Company's outstanding common stock.

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 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.

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.

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

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.

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

The real estate segment primarily acquires land and installs infrastructure for single-family residential communities, and its revenues generally come 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 within our real estate segment.

Our real estate segment conducts a wide range of project planning and management activities related to the entitlement, acquisition, community development and sale of residential lots.

We generally secure entitlements while the land is under contract by creating plans that meet the needs of the markets where we operate, and we aim to have all entitlements secured before closing on the investment.

Moving land through the entitlement and development process creates significant value.

We primarily invest in entitled short-duration projects that can be developed in phases, enabling us to complete and sell lots at a pace that matches market demand, consistent with our focus on maximizing capital efficiency and returns.

We occasionally make short-term strategic investments in finished lots (lot banking) and undeveloped land (land banking) with the intent to sell these assets within a short time period to utilize available capital prior to its deployment into longer-term lot development projects.

Our customers are primarily local, regional and national homebuilders.

The lots we deliver in our communities are primarily for entry-level, first-time move-up and active adult homes.

Entry-level and first-time move-up homebuyers are the largest segments of the new home market.

We also market some of our communities towards build-to-rent operators.

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

In the fourth quarter of fiscal 2022, we began to see weakening demand that has persisted through the end of this quarter 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, if market conditions continue to be 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.

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, 2022 and 2021.

The following tables and related discussion set forth key operating and financial data as of and for the three months ended December 31, 2022 and 2021.

Operating Results

Components of income before income taxes were as follows:

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

2022 2021 2022 2021

Three Months Ended December 31,

(In millions)

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Interest and other income (1.7) —

Loss on extinguishment of debt — 18.1 — 18.1

Income before income taxes $ 27.9 $ 53.5

Residential lots sold consist of:

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

2022 2021 2022 2021

Residential lots sold consisted of:

Three Months Ended December 31,

Development projects 2,263 4,381

Lot banking projects — 135

3,406 3,858 12,923 11,013

Deferred development projects 67 — 854 —

3,473 3,858 13,777 11,013

Average sales price per lot (a)

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

Revenues consist of:

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

2022 2021 2022 2021

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

Revenues consisted of:

Three Months Ended December 31,

(In millions)

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Development projects $ 204.0 $ 393.0

$ 294.6 $ 274.8 $ 1,078.8 $ 797.0

Lot banking projects — 9.0

— 36.5 27.3 101.4

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

295.1 307.4 1,108.2 894.5

Decrease in contract liabilities 2.7 2.1

Deferred development projects 6.7 —

303.0 307.4 1,128.6 894.5

Tract sales and other 3.3 3.5

Total revenues $ 216.7 $ 407.6

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 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.

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.

Residential lots sold and residential lot sales revenues have decreased compared to the prior year primarily as a result of weakening demand for finished lots as homebuilders have reduced their pace of new home starts to better match the moderation of housing demand caused by increases in mortgage rates and elevated inflationary pressures.

In the three months ended December 31, 2022, we sold 2,094 residential lots to D.R.

Horton for $187.1 million compared to 4,014 residential lots sold to D.R.

Horton for $328.0 million in the prior year period.

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.

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.

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.

In the three months ended December 31, 2022, we sold 169 residential lots to customers other than D.R.

Horton for $16.8 million, compared to 502 residential lots sold for $74.0 million in the prior year period.

Lots sold to customers other than D.R.

Horton in the three months ended December 31, 2021 included 243 lots that were sold for $30.9 million to a lot banker who expected to sell those lots to D.R.

Horton at a future date.

In the three months ended December 31, 2022, we recognized $6.7 million of revenues as a result of our progress towards completion of our remaining unsatisfied performance obligations on deferred development projects.

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

Cost of sales in the three months ended December 31, 2022 decreased compared to the prior year period primarily due to the decrease in the number of lots sold.

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, there were no real estate impairment charges recorded for the three months ended December 31, 2022 and 2021.

In the three months ended December 31, 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 $2.4 million and $0.6 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 $8.2 million in both the three months ended December 31, 2022 and 2021.

Interest charged to cost of sales was 3.0% of total cost of sales (excluding land purchase contract deposit and pre-acquisition cost write-offs) in the three months ended December 31, 2022 compared to 2.7% in the prior year period.

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

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

SG&A expense in the three months ended December 31, 2022 was $22.9 million compared to $21.5 million in the prior year period.

SG&A expense as a percentage of revenues was 10.6% in the three months ended December 31, 2022 compared to 5.3% in the prior year period.

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

Our business operations employed 277 and 271 employees at December 31, 2022 and 2021, respectively.

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.

Our income tax expense for the three months ended December 31, 2022 was $7.1 million compared to $13.0 million in the prior year period.

Our effective tax rate was 25.4% for the three months ended December 31, 2022 compared to 24.3% in the prior year period.

Our effective tax rate for both periods includes an expense for state income taxes and nondeductible expenses.

At December 31, 2022, we had deferred tax liabilities, net of deferred tax assets, of $33.7 million.

The deferred tax assets were partially offset by a valuation allowance of $1.0 million, resulting in a net deferred tax liability of $34.7 million.

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The deferred tax assets were partially offset by a valuation allowance of $1.0 million, resulting in a net deferred tax liability of $36.9 million.

The valuation allowance for both periods was recorded because it is more likely than not that a portion of our state deferred tax assets, primarily net operating loss (NOL) carryforwards, will not be realized because we are no longer operating in some states or the NOL carryforward periods are too brief to realize the related deferred tax asset.

The valuation allowance for both periods was recorded because it is more likely than not that a portion of our state deferred tax assets, primarily NOL carryforwards, will not be realized because we are no longer operating in some states or the NOL carryforward periods are too brief to realize the related deferred tax asset.

We will continue to evaluate both the positive and negative evidence in determining the need for a valuation allowance on our deferred tax assets.

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Land and Lot Position

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

2022 September 30,

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

December 31, 2022 September 30, 2022

Lots owned 61,500 61,800

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Liquidity and Capital Resources

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.

At December 31, 2022, we had $216.4 million of cash and cash equivalents and $366.2 million of available borrowing capacity on our revolving credit facility.

We have no senior note maturities until fiscal 2026.

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

At 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.

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 December 31, 2022, our ratio of debt to total capital (debt divided by stockholders’ equity plus debt) was 36.7% compared to 37.1% at September 30, 2022 and 40.0% at December 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 28.7% compared to 26.9% at September 30, 2022 and 33.9% at December 31, 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 largely depend on our ability to obtain financing in sufficient amounts.

Our ability to achieve our long-term growth objectives will 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.

Subject to market conditions 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.

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.

Bank Credit Facility

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.

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 total revolving credit commitments.

Borrowings under the revolving credit facility are subject to a borrowing base calculation based on the book value of our real estate assets and unrestricted cash.

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

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.

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

At December 31, 2022, there were no borrowings outstanding and $43.8 million of letters of credit issued under the revolving credit facility, resulting in available capacity of $366.2 million.

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

At December 31, 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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The annual effective interest rate of the 2026 notes after giving effect to the amortization of financing costs is 4.1%.

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

The indentures governing the senior notes require that, upon the occurrence of both a change of control and a rating decline (each as defined in the respective indenture), we offer to purchase the notes at 101% of their principal amount.

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 contain covenants that, among other things, restrict our ability and the ability of our restricted subsidiaries to pay dividends or distributions, repurchase equity, prepay subordinated debt and make certain investments;

The indentures governing our senior notes require that, upon the occurrence of both a change of control and a rating decline (as defined in each indenture), 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;

incur additional debt or issue mandatorily redeemable equity;

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

At December 31, 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 June 30, 2022.

All of the $30 million authorization was remaining at December 31, 2022.

Other Note Payable

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.

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, 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 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.

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.

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 November 2021.

In the three months ended December 31, 2022, we issued no shares of common stock under our at-the-market equity offering program.

At December 31, 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.

Operating Cash Flow Activities

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.

In the three months ended December 31, 2022, net cash used in operating activities was $49.8 million, which was primarily the result of the increase in our real estate and the decrease in accrued development costs, partially offset by the net income generated in the period.

In the three months ended December 31, 2021, net cash provided by operating activities was $5.8 million.

Investing Cash Flow Activities

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.

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

In the three months ended December 31, 2022, net cash provided by investing activities was $1.5 million compared to $3.2 million in the three months ended December 31, 2021.

The cash provided by investing activities in both periods consisted primarily of cash received from the sale of assets.

Financing Cash Flow Activities

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 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.

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.

In both the three months ended December 31, 2022 and 2021, net cash used in financing activities was $0.1 million.

Critical Accounting Policies and Estimates

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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-Q

Item 2. Management’s Discussion and Analysis