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Item 7. Management’s Discussion and Analysis

2023-11-17 compared with 2022-11-17 · 69 added, 73 removed, 212 unchanged (40% 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."

Business Segment

Our Operations

We are a residential lot development company with operations in 54 markets in 22 states as of September 30, 2023.

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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.

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

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 persisted through the end of the second quarter of fiscal 2023 as mortgage interest rates increased substantially and inflationary pressures remained elevated.

In the second half of fiscal 2023, demand for finished lots improved as homebuilders increased their pace of new home starts to better match the stronger demand for new homes, particularly at affordable price points.

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 are challenging, we may have to reduce selling prices or may not be able to offset cost increases with higher selling prices.

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

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Operating Results

Components of income before taxes were as follows:

Components of income before income taxes were as follows:

Year Ended September 30,

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Interest and other income (13.6) (1.0)

Loss on extinguishment of debt — 18.1

Income before income taxes $ 221.6 $ 235.8

Residential lots sold consist of:

Residential lots sold consisted of:

Year Ended September 30,

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

Revenues consist of:

Revenues consisted of:

Year Ended September 30,

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Lot banking projects — 33.5

Decrease (increase) in contract liabilities 1.8 (5.6)

Decrease in contract liabilities — 1.8

1,275.7 1,455.5

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Total revenues $ 1,436.9 $ 1,519.1

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 $1.2 billion in fiscal 2021.

In fiscal 2022, we sold 2,796 residential lots to customers other than 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.

Residential lots sold and residential lot sales revenues in fiscal 2023 decreased compared to the prior year primarily as a result of the moderation in demand for finished lots that persisted throughout the first half of the current fiscal year as homebuilders had reduced their pace of new home starts to better match the moderation of housing demand caused by increases in mortgage interest rates and elevated inflationary pressures.

Residential lot sales to D.R.

Horton and customers other than D.R.

Horton, before deferred development projects, consisted of:

Year Ended September 30,

Residential lots sold to D.R.

Horton 12,249 14,895

Residential lots sold to customers other than D.R.

Horton 1,791 1,942

14,040 16,837

Residential lot revenues from lot sales to D.R.

Horton and customers other than D.R.

Horton, before deferred development projects and changes in contract liabilities, consisted of:

Year Ended September 30,

(In millions)

Revenues from lot sales to D.R.

Horton $ 1,094.7 $ 1,230.0

Revenues from lot sales to customers other than D.R.

Horton 181.0 223.7

$ 1,275.7 $ 1,453.7

In fiscal 2022, we sold 854 deferred development lots to customers other than D.R.

Horton for a total transaction price of $64.1 million.

In fiscal 2023 and 2022, we recognized $29.0 million and $26.8 million of revenues as a result of our progress towards completion of our remaining unsatisfied performance obligations on these deferred development projects.

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 in fiscal 2023 and 2022 included 252 and 943 lots that were sold for $28.2 million and $131.1 million, respectively, to a lot banker who expects to sell those lots to D.R.

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.

Tract sales and other revenue in fiscal 2023 primarily consisted of 820 tract acres sold to D.R.

Horton for $114.1 million and 68 tract acres sold to customers other than D.R.

Horton for $12.8 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.

Tract sales and other revenue in fiscal 2022 primarily consisted of 512 tract acres sold to customers other than D.R.

Horton for $35.7 million.

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 in fiscal 2023 decreased compared to fiscal 2022 primarily due to the decrease in the number of lots sold.

Cost of sales related to tract sales and other revenues in fiscal 2023 and 2022 was $95.1 million and $20.3 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.

As a result of this process, we recorded real estate impairment charges of $19.4 million and $3.8 million during fiscal 2023 and 2022, respectively.

During fiscal 2023 and 2022, land purchase contract deposit and pre-acquisition cost write-offs related to land purchase contracts that we terminated or expect to terminate were $4.6 million and $8.7 million, respectively.

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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.

Interest incurred was $32.8 million and $32.9 million in fiscal 2023 and 2022.

Interest charged to cost of sales in fiscal 2023 was 2.4% of total cost of sales (excluding impairments and land option charges) compared to 2.9% of total cost of sales in fiscal 2022.

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

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SG&A expense as a percentage of revenues was 6.8% and 6.2% in fiscal 2023 and 2022, respectively.

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

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

Our business operations employed 303 and 291 employees at September 30, 2023 and 2022, respectively.

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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.

Our income tax expense was $54.7 million and $57.0 million in fiscal 2023 and 2022, respectively, and our effective tax rate was 24.7% and 24.2% in those respective years.

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

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

At September 30, 2023, we had deferred tax liabilities, net of deferred tax assets, of $49.8 million.

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

The deferred tax assets were partially offset by a valuation allowance of $0.9 million, resulting in a net deferred tax liability of $50.7 million.

At September 30, 2022, deferred tax liabilities, net of deferred tax assets, were $35.9 million.

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

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

The 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 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.

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

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, 2023 and September 30, 2022.

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Our land and lot position at September 30, 2023 and 2022 is summarized as follows:

September 30,

September 30, 2023 September 30, 2022

Lots owned 52,400 61,800

Lots controlled through land lot purchase contracts 28,300 32,600

Lots controlled through land and lot purchase contracts 26,800 28,300

Total lots owned and controlled 79,200 90,100

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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.

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 during fiscal 2022.

The maturity date of the facility is October 28, 2026.

At September 30, 2023, there were no borrowings outstanding and $27.7 million of letters of credit issued under the revolving credit facility, resulting in available capacity of $382.3 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.

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At September 30, 2023, 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.

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.

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

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

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.

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Other Note Payable

We also have a note payable of $12.5 million that was issued as part of a transaction to acquire real estate for development.

The note is non-recourse, 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.

In August 2023, we repaid the $12.5 million principal amount, together with accrued interest, of a note payable that was issued as part of a transaction to acquire real estate for development.

The note was non-recourse, was secured by the underlying real estate and accrued interest of 4.0% per annum.

Issuance of Common Stock

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.

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 fiscal 2023, there were no shares of common stock issued under our at-the-market equity offering program.

At September 30, 2023, $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 fiscal 2023, net cash provided by operating activities was $364.1 million, which was primarily the result of our net income generated in the year adjusted for impairments and land option charges and the decrease in real estate, partially offset by the decreases in accounts payable and other accrued liabilities, accrued development costs and earnest money deposits on sales contracts.

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 2023, net cash provided by investing activities was $0.3 million compared to $1.3 million in fiscal 2022.

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.

The cash provided by investing activities in both years consisted primarily of cash received from the sale of assets, partially offset by cash expenditures for property and equipment.

Additionally, cash provided by investing activities in the prior year includes distributions received from our unconsolidated ventures.

Financing Cash Flow Activities

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.

In fiscal 2023, net cash used in financing activities was $13.2 million compared to $1.2 million of cash provided by financing activities in the prior year.

The cash used in financing activities in the current year primarily consisted of the repayment of our other note payable.

Critical Accounting Policies and Estimates

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These earnest money deposits are typically released to the homebuilders as lots are sold.

Earnest money deposits from D.R.

Horton are subject to mortgages that are secured by the real estate under contract with D.R.

These mortgages expire when the earnest money is released to D.R.

Horton as lots are sold.

Earnest money deposits from customers are subject to mortgages that are secured by the real estate under contract.

These mortgages expire when the earnest money is released to homebuilders as lots are sold.

We have agreements with certain utility or improvement districts to convey water, sewer and other infrastructure-related assets we have constructed in connection with projects within their jurisdiction and receive reimbursements for the cost of these improvements.

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If the estimated fair value less costs to sell an asset is less than the current carrying value, the asset is written down to its estimated fair value less costs to sell.

The key assumptions relating to inventory valuations are impacted by local market and economic conditions, and are inherently uncertain.

The key assumptions relating to real estate valuations are impacted by local market and economic conditions, and are inherently uncertain.

Although our quarterly assessments reflect management’s best estimates, due to uncertainties in the estimation process, actual results could differ from such estimates.

Pending Accounting Standards

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.

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

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

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

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

We are currently evaluating the impact of this guidance, 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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• 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 effects of public health issues such as a major epidemic or pandemic on the economy and our business;

• the impacts of weather conditions and natural disasters;

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• 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 strength of our information technology systems and the risk of cybersecurity breaches and our ability to satisfy privacy and data protection laws and regulations;

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

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• our ability to hire and retain key personnel.

• 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.

Other factors, including the risk factors described in Item 1A of this Annual Report on Form 10-K, may also cause actual results to differ materially from those projected by our forward-looking statements.

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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