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Item 7. Management’s Discussion and Analysis

2024-11-19 compared with 2023-11-17 · 54 added, 35 removed, 246 unchanged (27% of the section changed)

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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.

Demand for residential lots, particularly at affordable price points, remained strong during fiscal 2024, and our revenues increased 5% from the prior year period.

The supply of new and existing homes at affordable price points remains limited, and low resale supply continues to support the demand for new construction.

Demographics supporting housing demand remain favorable despite elevated mortgage rates and inflationary pressures, and homebuilders have continued to adjust to current market conditions by using incentives and price adjustments.

While the disruptions in the supply chain for certain construction materials and tightness in the labor market have largely subsided, delays in receiving the necessary approvals from municipalities are still extending development cycle times, and development costs remain elevated.

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, 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.

We believe we are well-positioned to consolidate market share in the highly fragmented lot development industry because of our low net leverage and strong liquidity position, low overhead model, geographically diverse lot portfolio that is focused on affordable price points and strategic relationship with D.R.

We plan to remain disciplined when investing in land opportunities and to remain focused on managing our lot sales pace and lot pricing at each community to optimize the return on our investments.

Results of Operations

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Selling, general and administrative expense 118.5 97.7

Equity in earnings of unconsolidated ventures — (1.2)

Gain on sale of assets (9.5) (1.6)

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15,068 14,040

Deferred development projects — 854

14,040 17,691

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.

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

Revenues consisted of:

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Total revenues $ 1,509.4 $ 1,436.9

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 lots sold and residential lot sales revenues in fiscal 2024 increased compared to the prior year period primarily due to improved demand for finished lots as homebuilders increased their pace of new home starts to better match the stronger demand for new homes, particularly at affordable price points.

Residential lot sales to D.R.

Horton and customers other than D.R.

Horton, before deferred development projects, consisted of:

Horton consisted of:

Year Ended September 30,

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$ 1,456.4 $ 1,275.7

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.

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Horton at a future date.

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

Horton for a total transaction price of $63.9 million.

In fiscal 2024 and 2023, we recognized $8.1 million and $29.0 million of revenues as a result of our progress towards completion of our remaining unsatisfied performance obligations on these deferred development projects.

At September 30, 2024, all performance obligations related to these deferred development lot sales have been fully satisfied.

Tract sales and other revenue in fiscal 2024 primarily consisted of $19.0 million of revenue recognized related to land banking contracts with D.R.

Horton as well as 64 tract acres sold to customers other than D.R.

Horton for $11.8 million.

Tract sales and other revenue sold to customers other than D.R.

Horton in fiscal 2024 included 12 tract acres sold for $5.1 million to a third party who expects to sell the tract to D.R Horton at a later date.

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

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Horton for $12.8 million.

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

Cost of sales in fiscal 2024 increased compared to fiscal 2023 primarily due to the increase in the number of lots sold.

Cost of sales related to tract sales and other revenues in fiscal 2024 and 2023 was $17.4 million and $95.1 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 $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.

As a result of this process, no impairment charges were recorded during fiscal 2024.

During fiscal 2023 we recorded non-cash impairment charges of $19.4 million.

During fiscal 2024, and 2023, land purchase contract deposit and pre-acquisition cost write-offs related to land purchase contracts that we have terminated or expect to terminate were $4.1 million and $4.6 million.

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

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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.

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.

The gain on sale of assets in fiscal 2024 is the result of $9.5 million of excess hotel occupancy and sales and use tax revenues collected from the Cibolo Canyons Special Improvement District.

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

Our income tax expense was $66.7 million and $54.7 million in fiscal 2024 and 2023, respectively, and our effective tax rate was 24.7% for both years.

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

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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, 2023 and September 30, 2022.

We had no unrecognized tax benefits at September 30, 2024 and 2023.

Land and Lot Position

Our land and lot position at September 30, 2024 and 2023 is summarized as follows:

September 30, 2023 September 30, 2022

Lots owned 57,800 52,400

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At September 30, 2024, there were no borrowings outstanding and $32.8 million of letters of credit issued under the revolving credit facility, resulting in available capacity of $377.2 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 is guaranteed by our wholly-owned subsidiaries that are not immaterial subsidiaries and 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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Other Note Payable

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.

In December 2023, we issued a note payable of $9.9 million 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 December 2025.

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 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.

We had 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.

In fiscal 2024, we issued 546,174 shares of common stock issued under our at-the-market equity offering program for proceeds of $19.7 million, net of commissions and other issuance costs totaling $0.4 million.

In September 2024, we filed a new shelf registration statement, which became effective in October 2024, registering $750 million of equity securities.

At the time of filing the new registration statement, $728.1 million of equity securities remained available for issuance under our prior registration statement, which has since expired.

Our at-the-market program expired in October 2024, and we anticipate entering into a new at-the-market equity offering program under our September 2024 shelf registration statement.

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 2024, net cash used in operating activities was $158.4 million, which was primarily the result of the increase in real estate, partially offset by net income generated in the period and the increases in earnest money on sales contracts, accrued development costs and accounts payable and other accrued liabilities.

In fiscal 2023, net cash provided by operating activities was $364.1 million, which was primarily the result of net income generated in the period 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.

Investing Cash Flow Activities

In fiscal 2024, net cash provided by investing activities was $7.3 million compared to $0.3 million in fiscal 2023.

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.

Cash provided by investing activities in fiscal 2024 included $9.5 million of excess hotel occupancy and sales and use tax revenues collected from the Cibolo Canyons Special Improvement District.

Financing Cash Flow Activities

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.

In fiscal 2024, net cash provided by financing activities was $16.3 million compared to $13.2 million of cash used in financing activities in fiscal 2023.

The cash provided by financing activities in fiscal 2024 primarily consisted of the issuance of common stock under our at-the-market equity offering program for net proceeds of $19.7 million.

The cash used in financing activities in fiscal 2023 primarily consisted of the repayment of our other note payable.

Critical Accounting Policies and Estimates

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Cost of sales includes applicable land and lot acquisition, land development and related costs (both incurred and estimated to be incurred) allocated to each residential lot in the project.

Any changes to the estimated total development costs subsequent to the initial lot sales are generally allocated to the remaining lots.

Any changes to the estimated total development costs subsequent to the initial home or lot closings in a community are generally allocated on a pro-rata basis to the remaining homes or lots in the community associated with the relevant development activity.

We receive earnest money deposits from homebuilders for purchases of developed lots.

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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 November 2023, the Financial Accounting Standards Board (FASB) issued ASU 2023-07, “Segment Reporting - Improvements to Reportable Segment Disclosures,” which is intended to improve reportable segment disclosures.

The ASU expands public entities’ segment disclosures by requiring disclosure of significant segment expenses that are regularly provided to the chief operating decision maker and included within each reported measure of segment profit or loss.

It also requires disclosure of the amount and description of the composition of other segment items and interim disclosures of a reportable segment’s profit or loss and assets.

The standard is effective for our annual periods beginning in fiscal 2025 and interim periods beginning in the first quarter of fiscal 2026 on a retrospective basis to all periods presented.

This standard will impact our disclosures but will not impact our consolidated financial statements.

In December 2023, the FASB issued ASU 2023-09, “Income Taxes - Improvements to Income Tax Disclosures,” which requires disclosure of disaggregated income taxes paid, prescribes standard categories for the components of the effective tax rate reconciliation and modifies other income tax related disclosures.

The standard is effective for us beginning October 1, 2025, with early adoption permitted.

We are currently evaluating the impact of this standard on our consolidated financial statements and related disclosures.

In November 2024, the FASB issued ASU 2024-03, “Income Statement - Reporting Comprehensive Income - Expense Disaggregation Disclosures,” which requires disclosure of certain costs and expenses on an interim and annual basis in the notes to the financial statements.

The standard is effective for our annual periods beginning in fiscal 2028 and interim periods beginning in the first quarter of fiscal 2029, with early adoption permitted.

We are currently evaluating the impact this standard will have on our disclosures.

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