What changed in this filing

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Item 1A. Risk Factors

2024-01-26 compared with 2023-01-26 · 79 added, 63 removed, 252 unchanged (36% of the section changed)

Risk Factors.

The following are what we believe to be the principal risks that could materially affect us and our businesses.

The following risks, which should be considered carefully with the information provided elsewhere in this Report, could materially adversely affect our business, financial condition or results of operations.

Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or results of operations.

Market and Economic Risks

Demand for homes we build may be adversely affected by a variety of macroeconomic factors beyond our control.

Demand for our homes is dependent on a variety of macroeconomic factors, such as employment levels, interest rates, changes in stock market valuations, consumer confidence, housing demand, availability of financing for home buyers, availability and prices of new homes compared to existing inventory, and demographic trends.

Demand for our homes is dependent on a variety of macroeconomic factors, such as employment levels, interest rates, changes in stock market valuations, consumer confidence, housing demand, availability and cost of financing for homebuyers, availability and prices of new homes compared to those of previously occupied homes, and demographic trends.

These factors can be significantly adversely affected by a variety of factors beyond our control.

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Our business strategies for our homebuilding and mortgage finance businesses may not increase our value.

We cannot assure you that our strategies for our core homebuilding and mortgage finance businesses, and any related initiatives or actions, will be successful.

Our strategies for our core homebuilding and mortgage finance businesses, and any related initiatives or actions, may not be successful.

Principal among our current strategies is continuing to reduce the inventory of land we own (i.e., to become a land lighter company), and to control a greater portion of the land we expect to use through options or other contractual arrangements.

We cannot provide assurance that this strategy, or other strategies we will follow, will increase our value.

It is possible that the land lighter or other strategies will reduce, rather than increase, the value and profitability of our core businesses.

A continuing downturn in the homebuilding market could adversely affect our operations.

During fiscal 2022, the housing market weakened in response to the Federal Reserve’s aggressive increase in interest rates in an effort to curtail inflation.

possible that the land lighter or other strategies will reduce, rather than increase, the value and profitability of our core businesses.

The market for new homes is cyclical, and a continuing downturn in the homebuilding market could adversely affect our operations.

The residential homebuilding industry is sensitive to changes in economic conditions and other factors, such as the level of employment, consumer confidence, consumer income, product affordability, availability of financing, inflation, and interest rate levels.

As a result, over the years, demand for new homes has been cyclical, with multi-year periods of high demand followed by multi-year periods of low demand.

During fiscal 2022 and 2023, the housing market weakened throughout the country in response to the Federal Reserve’s aggressive increase in interest rates in an effort to curtail inflation.

A number of our markets experienced significant market softening that required us to make substantial price reductions.

It is possible that a continued downturn could result in a further decline in demand for new homes with resulting write downs in the carrying value of our land inventory and write offs of costs of land purchase options we decide not to exercise.

Supply shortages and inflation could adversely affect our profitability.

In an inflationary environment, we may be precluded from raising home prices enough to keep up with the rate of inflation, which could reduce our profit margins.

Moreover, in an inflationary environment, our cost of capital, labor and materials can increase and the purchasing power of our cash resources can decline, which can have an adverse impact on our business or financial results.

During fiscal 2022, we experienced increased costs of materials and labor caused both by supply shortages and inflation.

We were able to maintain satisfactory margins by applying stringent cost controls and by raising prices.

However, declining demand for new homes as the year progressed is requiring us to reduce, rather than increase, prices.

Inflation could adversely affect our profitability.

Weak demand may preclude us from raising home prices enough to keep up with the rate of inflation, which could reduce our profit margins.

In addition, in an inflationary environment, our cost of capital, labor and materials can increase and the purchasing power of our cash resources can decline, which can have an adverse impact on our business or financial results.

During fiscal 2023, we experienced an increase in the inflation rate.

Even with shifts in macroeconomic factors in the current fiscal year and adjusting to the recent inflationary environment, as a result of our production volume, an increase in deliveries, and by applying stringent cost controls, we were able to achieve satisfactory margins.

However, declining demand for new homes as the year progressed often required us to reduce, rather than increase, prices.

On the other hand, it is beginning to relieve supply shortages.

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Further increase in mortgage interest rates could reduce potential buyers’ ability or desire to obtain financing with which to buy homes.

Housing has been considerably impacted by the more than doubling of mortgage interest rates in 2022, and the Federal Reserve Board has said it intends to continue to increase its benchmark interest rate in 2023.

Housing has been considerably impacted by the more than doubling of mortgage interest rates in 2022, and continued increases in 2023.

When interest rates increase, the cost of owning a new home increases, which usually reduces the number of potential buyers who can afford, or are willing, to purchase homes we build.

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If a contagious disease causes significant negative impacts to economic conditions or consumer confidence, our results of operations, financial condition and cash flows could be materially adversely impacted.

Current and threatened conflicts could affect demand for the homes we build.

There currently are ongoing conflicts in Ukraine and Israel.

While we do not acquire essential components of the homes we build from either of those countries and while as of November 30, 2023, neither of these conflicts has had a material direct impact on our consolidated financial performance, the conflicts are still ongoing, and there are many risks and uncertainties in relation to those conflicts that are outside of our control.

For example, these conflicts have already led and could lead to further market disruptions, including significant volatility in commodity prices, credit and capital markets, as well as supply chain interruptions.

In addition, the closure of or limitation on the use of significant shipping routes as a result of these conflicts may result in interruptions to the supply of certain key raw materials worldwide, thereby, among other things,

increasing their cost.

If either or both conflicts escalate further or if additional countries join either conflict, that may lead potential homebuyers to decide not to invest in new homes at this time, which could have a material impact on our business operations and financial performance.

Operational Risks

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While safety is a priority on our land development and construction sites, we cannot always control the way work is performed by subcontractors, including whether they comply with laws and regulations designed to maximize the safety of construction workers.

Any failure in health and safety performance may result in penalties for non-compliance with relevant regulatory requirements, may result in our subcontractors having difficulty attracting the workers they need and may result in a negative impact to our reputation.

Failures in health and safety performance on our worksites may result in penalties for non-compliance with relevant regulatory requirements in our subcontractors having difficulty attracting the workers they need and in a negative impact to our reputation.

Products supplied to us and work done by subcontractors can expose us to risks that could adversely affect our business.

We rely on subcontractors to perform the actual construction of our homes, and in many cases, to select and obtain building materials.

Despite our detailed specifications and quality control procedures, in some cases, subcontractors may use improper construction processes or defective materials.

Despite our detailed specifications and quality control procedures, in some cases, subcontractors may use

improper construction processes or defective materials.

Defective products widely used by the homebuilding industry can result in the need to perform extensive repairs to large numbers of homes.

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Depending on the stage of development a land parcel is in when we acquire it, these may include costs of preparing land, finishing and entitling lots, installing roads, sewers, water systems and other utilities, and taxes and other costs related to ownership of the land on which we plan to build homes.

If the rate at which we sell and deliver homes slows, or if we delay the opening of new home communities, we may incur increased pre-construction costs and it may take longer for us to recover our costs.

Increased interest rates could increase the cost of the homes we build.

Increased interest rates could increase our cost of building homes.

Our business requires us to finance much of the cost of developing our residential communities.

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The interest on borrowings under the Credit Facility is at rates based on prevailing short-term rates from time to time.

In 2022, the Federal Reserve steadily raised benchmark interest rates and said it intends to continue doing so in 2023.

At November 30, 2022, we had no borrowings under the Credit Facility.

However, if in the future we have a need for significant borrowings under the Credit Facility and

interest rates continue to increase, that would increase the cost of the homes we build, which either would make those homes more expensive for homebuyers, which is likely to reduce demand, or would lower our operating margins, or both.

In 2022 and 2023, the Federal Reserve steadily raised benchmark interest rates.

At November 30, 2023, we had no borrowings under our Credit Facility.

However, if in the future we have a need for significant borrowings under our Credit Facility and interest rates continue be high, that would increase the cost of the homes we build, which either would make those homes more expensive for homebuyers, which is likely to reduce demand, or would lower our operating margins, or both.

Increases in the rate of cancellations of home sale agreements could have an adverse effect on our business.

Our backlog reflects agreements of sale with our homebuyers for homes that have not yet been delivered.

We usually have received a deposit from our home buyer for each home reflected in our backlog, and generally we have the right to retain the deposit if the homebuyer does not complete the purchase.

In some cases, however, a homebuyer may cancel the agreement of sale and receive a complete or partial refund of the deposit for reasons such as state and local laws, the homebuyer’s inability to obtain mortgage financing, their inability to sell their current home or our inability to complete and deliver the home within the specified time.

With the weakening of the housing market, we have experienced an increase in cancellation rates.

If there is a further downturn in the housing market, or if mortgage financing becomes less available than it currently is, more homebuyers may cancel their agreements of sale with us, which would have an adverse effect on our business and results of operations.

We usually have received a deposit from our homebuyer for each home reflected in our backlog, and generally we have the right to retain the deposit if the homebuyer does not complete the purchase.

In some cases, however, a homebuyer may cancel the agreement of sale and receive a complete or partial refund of the deposit for reasons such as state and local laws, the homebuyer’s inability to obtain mortgage financing, the homebuyer's inability to sell their current home or our inability to complete and deliver the home within the specified time.

With the increase in interest rates, we have experienced an increase in cancellation rates.

If there is a weakening of the housing market, or if mortgage financing becomes less available or more expensive than it currently is, more homebuyers may cancel their agreements of sale with us, which would have an adverse effect on our business and results of operations.

Our success to a substantial extent depends on our ability to acquire land that is suitable for residential homebuilding and meets our land investment criteria.

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Should suitable lots or land become less available, the number of homes we could build and sell could be reduced, and the cost of land could be increased, perhaps substantially, which could adversely impact our results of operations.

We could be hurt by refusals of owners of land to honor options or contracts to sell the land to us.

We could be hurt if land banks are not able to raise necessary investor funds or if we are unable to create and maintain relationships with land banks.

As part of our land acquisition strategy, we have refined our relationships with strategic land banks with a view toward using land banks to gain future access to land without having to own it.

If we are unable to identify or to develop and maintain the necessary relationships with suitable land banks in the future, we will not be able to fully implement our strategy.

Most land banks are funds that use financial investor capital to finance land acquisitions.

If returns to investors in land banks are not sufficient to attract investor funds and land banks are not able to identify alternative sources of funding, we would no longer have access to land banks and instead might have to purchase our land directly from landowners.

This would significantly impair our ability to carry out our strategy of reducing our inventory of owned land.

We could be hurt by refusals of owners of land to honor options or contracts to sell land to us.

We have made a strategic decision to increase the portion of our potential land inventory that we control through options or contracts and reduce the portion we own.

This substantially reduces our investment in land.

However, if landowners who are parties to the options or contracts were to refuse to honor them, we could lose access to land at the time we want to use it in our homebuilding activities.

However, if landowners who are parties to the options or contracts, possibly including land banks, were to refuse to honor them, we could lose access to land at the time we want to use it in our homebuilding activities.

The loss of the services of members of our senior management or a significant number of our operating employees could negatively affect our business.

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While the majority of our homebuyers obtain their mortgage financing from our Financial Services segment, others obtain mortgage financing from banks and other independent lenders.

Disruptions in the mortgage markets and increased government regulation could adversely affect the ability of potential homebuyers to obtain financing for home purchases, making it difficult for them to purchase our homes.

Disruptions in the mortgage markets or increased government regulation could adversely affect the ability of potential homebuyers to obtain financing for home purchases, making it difficult for them to purchase our homes.

Among other things, changes made by Fannie Mae, Freddie Mac, Ginnie Mae and FHA/VA to sponsored mortgage programs, as well as changes made in recent years by private mortgage insurance companies, have reduced the ability of a number of potential homebuyers to qualify for mortgages.

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It is not clear how, if Fannie Mae, Freddie Mac and Ginnie Mae were to curtail their secondary market mortgage loan purchases, the liquidity they provide would be replaced.

There is a substantial possibility that substituting an alternate source of liquidity would

increase mortgage interest rates, which would increase the buyers' effective costs of paying for the homes we sell, and therefore could reduce demand for our homes and adversely affect our results of operations.

There is a substantial possibility that substituting an alternate source of liquidity would increase mortgage interest rates, which would increase the buyers' effective costs of paying for the homes we sell, and therefore could reduce demand for our homes and adversely affect our results of operations.

Changes in tax laws could increase the cost of owning a home.

Currently, there are significant income tax benefits from owning a home, including deductibility of interest on mortgage loans incurred to finance home purchases.

If federal or state tax laws are changed to eliminate or reduce any of these income tax benefits or if personal income tax rates were to increase, the after-tax cost of homeownership could measurably increase and diminish consumer interest in buying a home, with a resulting adverse effect on our revenues.

Our Financial Services segment can be adversely affected by reduced demand for our homes.

Approximately 99% of the residential mortgage loans made by our Financial Services segment in 2022 were made to buyers of homes we built.

Therefore, a decrease in the demand for our homes or an increase in cash used by home buyers would adversely affect the revenues of this aspect of our business.

100% of the residential mortgage loans made by our Financial Services segment in 2023 were made to buyers of homes we built.

Therefore, a decrease in the demand for our homes or an increase in cash used by homebuyers would adversely affect the revenues of this aspect of our business.

If our ability to sell mortgages into the secondary market is impaired, that could significantly reduce our ability to sell homes unless we are willing to become a long-term investor in loans we originate.

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The indentures governing our senior notes do not restrict our incurrence of future secured or unsecured debt, and the agreement governing our Credit Facility allows us to incur a substantial amount of future unsecured debt.

We reduced our outstanding senior notes during fiscal 2022 by $575 million, but we still have a significant amount outstanding.

We reduced our outstanding senior notes during fiscal 2023 by $1.1 billion, but we still have a significant amount outstanding.

Sales of senior debt into the capital markets has, until recently, been a significant source of funding for our operations and acquisitions.

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• We may be more vulnerable to general adverse economic and homebuilding industry conditions;

• We may have to pay higher interest rates upon refinancing indebtedness as a result of the increase in interest rates, thereby reducing our earnings and cash flows;

• We may have to pay higher interest rates upon refinancing indebtedness as a result of the increase in market interest rates, thereby reducing our earnings and cash flows;

• We may find it difficult, or may be unable, to obtain additional financing to fund future working capital, capital expenditures and other general corporate requirements that would be in our best long-term interests;

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• We may have a competitive disadvantage relative to other companies in our industry, if any, that are less leveraged;

• We may be required to sell debt or equity securities or sell some of our core assets, possibly on unfavorable terms, in order to meet payment obligations.

• We may be required to sell debt or equity securities or sell some of our core assets, possibly on unfavorable terms, in order to meet debt payment obligations.

Our access to capital and our ability to obtain additional financing could be affected if there was a downgrade of our credit ratings.

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For a number of years, a substantial portion of our access to capital has been through the issuance of senior notes, of which we have approximately $2.5 billion outstanding, net of debt issuance costs, as of November 30, 2023.

Among other things, we have often relied on proceeds of debt issuances to pay the principal of existing senior notes when they mature.

Among other things, we have often relied on proceeds of debt issuances to pay the principal of existing

senior notes when they mature.

Negative changes in the ratings of our senior notes could make it difficult for us to sell senior notes in the future and could result in more stringent covenants and higher interest rates with regard to new senior notes we issue.

Our Financial Services segment, including LMF Commercial, has warehouse facilities that mature in fiscal year 2023, and if we could not renew or replace these facilities, we probably would have to reduce our mortgage lending and origination activities.

During 2024, we will have to replace or renew a total of $3.7 billion of warehouse lines used by Financial Services, including LMF Commercial, as they mature.

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Several of the joint ventures in which we participate will in the relatively near future be required to repay, refinance, renegotiate or extend their borrowings.

If any of those joint ventures are unable to do this, we could be required to provide at

least a portion of the funds the joint ventures need to be able to repay the borrowings and to finance the activities for which they were incurred, which could adversely impact our financial position.

If any of those joint ventures are unable to do this, we could be required to provide at least a portion of the funds the joint ventures need to be able to repay the borrowings and to finance the activities for which they were incurred, which could adversely impact our financial position.

Regulatory Risks

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The impact of those statutes, rules and regulations can increase our homebuyers’ costs of financing, and our cost of doing business, as well as restricting our homebuyers’ access to some types of loans.

Our obligation to comply with the laws and regulations under which we operate, and our need to ensure that our associates, subcontractors and other agents comply with these laws and regulations, could result in delays in construction and land development, cause us to incur substantial costs and prohibit or restrict land development and homebuilding activity in

certain areas in which we operate.

Budget reductions by state and local governmental agencies may increase the time it takes to obtain required approvals and therefore may aggravate the delays we encounter.

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We can be injured by improper acts of persons over whom we do not have control.

Although we expect all of our associates (i.e., employees), officers and directors to comply at all times with all applicable laws, rules and regulations, there may be instances in which subcontractors or others through whom we do business engage in practices that do not comply with applicable laws, regulations or governmental guidelines.

Although we expect all of our associates, officers and directors to comply at all times with all applicable laws, rules and regulations, there may be instances in which subcontractors or others through whom we do business engage in practices that do not comply with applicable laws, regulations or governmental guidelines.

When we learn of practices that do not comply with applicable laws or regulations, including practices relating to homes, buildings or multifamily rental properties we build or finance, we move actively to stop the non-complying practices as soon as possible and we have taken disciplinary action with regard to associates of ours who were aware of non-complying practices and did not take steps to address them, including in some instances terminating their employment.

However, regardless of the steps we take after we learn of practices that do not comply with applicable laws or regulations, we can in some instances be subject to fines or other governmental penalties, and our reputation can be injured, due to the practices having taken place.

However, regardless of the steps we take after we learn of practices that do not comply with applicable laws or regulations, we can in certain cases be subject to fines or other governmental penalties, and our reputation can be injured, due to the practices having taken place.

We could be held responsible for obligations of, and labor law violations by, our subcontractors and other contract parties.

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We do not have the ability to control what these contract parties pay their employees or the work rules they impose on their employees.

However, various governmental agencies have sought, and in the future may seek, to hold contract parties like us responsible for violations of wage and hour laws, workers’ compensation and other work-related laws by firms whose employees are performing contracted for services.

However, various governmental agencies have sought, and in the future may seek, to hold contract parties like us responsible for violations of

wage and hour laws, workers’ compensation and other work-related laws by firms whose employees are performing contracted for services.

While the future of joint employer liability remains uncertain, if we were deemed to be a joint employer of our subcontractors’ employees, we could become responsible for collective bargaining obligations of, and labor law violations by, our subcontractors.

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Risk Related to Planned Spin-Off

Our planned spin-off of some of our businesses may not achieve its goals.

We are in the process of transferring some of our non-homebuilding businesses into a newly formed company, Quarterra Group, Inc., and, subject to market conditions, we intend to distribute the stock of Quarterra to our stockholders.

Our hope is that doing that will result in the combined market value of our stock and Quarterra's stock exceeding what the market value of our stock would be if we continued to conduct the businesses that we will transfer to Quarterra.

However, there is no assurance that that will occur.

Among other things, making Quarterra a self-standing entity will lose some synergies from which the businesses it will own currently benefit.

Therefore, it is possible that after the separation, the combined market value of our stock and Quarterra's stock will be less, not more, than what the market value of our stock would be if we did not spin off Quarterra.

Our previously announced spin-off of some of our businesses may not occur within any particular time period or at all.

We previously announced that we planned to transfer some of our non-homebuilding businesses to a subsidiary, Quarterra Group, Inc.

(“Quarterra”), which had been formed for that purpose, and, subject to market conditions, to distribute the stock of Quarterra to our stockholders.

However, the timing of this spin-off is currently uncertain and will depend upon general economic and market conditions over which we have no control.

As a result, we may not be able to consummate this transaction within any particular time period or at all.

Risks Related to Ownership of our Stock

We have a stockholder who can exercise significant influence over matters that are brought to a vote of our stockholders.

Stuart Miller, our Executive Chairman, through family and personal holdings of Class B, and to a lesser extent Class A, common stock, has the power to cast approximately 36% of the votes that can be cast by the holders of all our outstanding Class A and Class B common stock combined.

Stuart Miller, our Executive Chairman and Co-Chief Executive Officer, through family and personal holdings of Class B, and to a lesser extent Class A, common stock, has the power to cast approximately 36% of the votes that can be cast by the holders of all our outstanding Class A and Class B common stock combined.

This gives Mr.

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Miller may be able to cause our stockholders to approve actions that are contrary to many of our other stockholders' desires.

The trading price of our Class B common stock has been substantially lower than that of our Class A common stock.

Our Class B common stock is less liquid than and has traded at a price substantially lower than that of our Class A common stock.

The only significant difference between our Class A common stock and our Class B common stock is that the Class B common stock entitles the holders to ten votes per share, while the Class A common stock entitles holders to only one vote per share.

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However, if the amounts we are required to pay as a result of claims against us substantially exceed the sums anticipated by our reserves, the need to pay those amounts could have an adverse effect on our results of operations for the periods when we are required to make the payments.

We could be subject to unexpected tax liabilities.

We have provisions and reserves for taxes that we believe are sufficient to reflect our future tax obligations.

However, it is possible that a taxing authority will successfully assert that we owe taxes that we do not believe that we owe and for which

we do not have a provision or reserves.

If the additional taxes are material, they could adversely affect our income tax provision in the period in which such determination is made and, consequently, our operating results and financial condition.

Information technology failures and data security breaches could harm our business.

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However, cyber intrusion efforts are becoming increasingly sophisticated, and it is possible that the controls we have installed could at some time be breached in a material respect.

Further, there has been a significant increase in work from remote locations since the start of the COVID-19 pandemic.

Increased use of remote work environments and virtual platforms may increase our risk of cyber-attack or data security breaches.

While, to date, we have not had a significant cybersecurity breach or attack that had a material impact on our business or results of operations, if we were to be subject to a material successful cyber intrusion, that could result in remediation or service restoration costs, increased cyber protection costs, lost revenues or loss of customers, litigation or regulatory actions by governmental authorities, increased insurance premiums, reputational damage and damage to our competitiveness, our stock price and our long-term stockholder value.

While, to date, we have not had a cybersecurity breach or attack that had a material impact on our business or results of operations, if we were to be subject to a material successful cyber-intrusion, that could result in remediation or service restoration costs, increased cyber protection costs, lost revenues or loss of customers, litigation or regulatory actions by governmental authorities, increased insurance premiums, reputational damage and damage to our competitiveness, our stock price and our long-term stockholder value.

Failure to maintain the security of personally identifiable information could adversely affect us .

In connection with our business we collect and retain personally identifiable information (e.g., information regarding our customers, suppliers and employees), and there is an expectation that we will adequately protect that information.

In connection with our business we collect and retain personally identifiable information (e.g., information regarding our customers, suppliers and employees), and our customers, suppliers and employees have an expectation that we will adequately protect that information.

regulatory environment surrounding information security and privacy is increasingly demanding.

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Also, we have to be aware of tax issues involved in doing business outside the United States or with people who are not residents of the United States, both under U.S.

tax laws and under the tax laws of the countries in which we do business.

tax laws and under the tax laws of the countries in which we do business or in which the non-residents reside.

We experience variability in our operating results on a quarterly basis.

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We have made investments in companies that are engaged in applying technology to improve the homebuilding industry and real estate related aspects of the financial services industry.

Our investments in Opendoor Technologies, Inc.

("Opendoor"), Sonder Holdings Inc., Sunnova, Hippo Holdings, Inc.

("Hippo"), SmartRent, Inc.

("SmartRent") and Blend Labs, Inc.

("Blend") are carried on our books at their fair values, which will change depending on the value of the Company’s share holdings on the last day of each quarter.

Our investments in Blend, Hippo, Opendoor, SmartRent, Sonder, and Sunnova, all of which have publicly traded shares of common stock are carried on our books at their fair values, which will change depending on the value of the Company’s shareholdings on the last day of each quarter.

As a result, the Company’s net earnings could be significantly affected by mark-to-market gains or losses on the Company’s investments.

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There is growing concern from many members of the scientific community and the general public that an increase in global average temperatures due to emissions of greenhouse gases and other human activities have caused, or will cause, significant changes in weather patterns and increase the frequency and severity of natural disasters.

Government mandates, standards or regulations intended to reduce greenhouse gas emissions or projected climate change impacts have resulted, and are likely to continue to result, in restrictions on land development in certain areas and increased energy, transportation and raw material costs.

material costs.

We have tried to reduce the effect of the homes we build on the climate by installing solar power systems and other energy saving devices in many of those homes.

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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 1A. Risk Factors