The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included in this quarterly report and with our annual report on Form 10-K for the fiscal year ended September 30, 2019. Some of the information contained in this discussion and analysis constitutes forward-looking statements that involve risks and uncertainties. Actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to these differences include, but are not limited to, those described in the "Forward-Looking Statements" section following this discussion.

Our Operations

We are a residential lot development company with operations in 51 markets in 20 states as of December 31, 2019. In October 2017, we became a majority-owned subsidiary of D.R. Horton, Inc. Our alignment with and support from D.R. Horton provides us an opportunity to grow our business into a national, well-capitalized residential lot developer selling lots to D.R. Horton and other homebuilders. As our controlling shareholder, D.R. Horton has significant influence in guiding our strategic direction and operations. Our strategy is focused on making investments in land acquisition and development to expand our residential lot development business across a geographically diversified national platform. We are primarily investing in short duration, phased development projects that generate returns similar to production-oriented homebuilders. This strategy is a unique, lower-risk business model that we expect will produce more consistent returns than other public and private land developers. We also make 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.

Business Segment

We manage our operations through our real estate segment. Our real estate segment 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. Our real estate segment generates its revenues principally 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 results of operations are immaterial and therefore are included in our real estate segment.




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Results of Operations

The following tables and related discussion set forth key operating and financial data as of and for the three months ended December 31, 2019 and 2018.

Operating Results

Components of pre-tax income were as follows:


                                                  Three Months Ended December 31,
                                                      2019                  2018
                                                           (In millions)
Revenues                                      $          247.2         $        38.5
Cost of sales                                            216.6                  30.7
Selling, general and administrative expense               10.5                   5.7
Equity in earnings of unconsolidated ventures             (0.5 )                (0.6 )
Loss (gain) on sale of assets                              0.1                  (0.9 )
Interest and other income                                 (1.7 )                (1.3 )
Income before income taxes                    $           22.2         $         4.9



Lot Sales

Residential lots sold consist of:


                                       Three Months Ended December 31,
                                               2019                    2018
Development projects                        1,406                         462
Lot banking projects                        1,016                          56
                                            2,422                         518

Average sales price per lot (a) $          90,300                    $ 74,000

_____________________

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



Revenues

Revenues consist of:
                                   Three Months Ended December 31,
                                       2019                  2018
                                            (In millions)
Residential lot sales:
Development projects           $          117.7         $        36.1
Lot banking projects                      100.9                   2.2
Change in contract liabilities             (1.5 )                (3.6 )
                                          217.1                  34.7
Residential tract sales                    30.0                     -
Commercial tract sales                        -                   3.5
Other                                       0.1                   0.3
                               $          247.2         $        38.5




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Residential lots sold and residential lot sales revenues have increased as we have grown our business primarily through our strategic relationship with D.R. Horton. In the three months ended December 31, 2019, we sold 2,390 residential lots to D.R. Horton for $215.6 million, compared to 455 residential lots sold to D.R. Horton for $32.6 million in the prior year period. At December 31, 2019, our lot position consisted of 44,500 residential lots, of which approximately 32,200 were owned and 12,300 were controlled through option purchase contracts. Of our total owned and controlled residential lots, approximately 12,700 are under contract to sell to D.R. Horton. Additionally, D.R. Horton has the right of first offer on approximately 12,900 of these lots based on executed purchase and sale agreements. At December 31, 2019, lots owned included approximately 4,100 that are fully developed, of which approximately 1,900 are related to lot banking. At December 31, 2019, we had approximately 200 lots under contract to sell to builders other than D.R. Horton.

Residential tract sales in the three months ended December 31, 2019 consists of approximately 580 residential tract acres sold to third parties for $22.8 million and approximately 36 residential tract acres to D.R. Horton for $7.2 million.

In the three months ended December 31, 2018 we sold approximately 20 commercial tract acres to third parties for $3.5 million.

Cost of sales in the three months ended December 31, 2019 increased as compared to the prior year period primarily due to the increases in the number of lots sold. Cost of sales related to residential tract sales in the three months ended December 31, 2019 was $21.5 million.

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

SG&A expense in the three months ended December 31, 2019 was $10.5 million compared to $5.7 million in the prior year period. Our SG&A expenses primarily consist of employee compensation and related costs. Our business operations employed 88 and 45 employees at December 31, 2019 and 2018, respectively.

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

Income Taxes

Our income tax expense for the three months ended December 31, 2019 and 2018 was $5.4 million and $1.0 million, respectively. Our effective tax rate was 24% for the three months ended December 31, 2019 compared to 21% in the prior year period. Our effective tax rate for both periods includes an expense for state income taxes and nondeductible expenses, and our tax rate in the prior year period included a tax benefit related to noncontrolling interests.

At December 31, 2019 and September 30, 2019, deferred tax assets, net of deferred tax liabilities, were $15.1 million and $20.7 million, offset by a valuation allowance of $3.3 million at both dates for the portion of the deferred tax assets that we have determined is more likely than not to be unrealizable. The valuation allowance 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. 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.

Our unrecognized tax benefits totaled $1.3 million at December 31, 2019, all of which would affect our effective tax rate, if recognized.



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Liquidity and Capital Resources

Our strategic relationship with D.R. Horton has provided us with an opportunity for substantial growth. Since our merger with D.R. Horton, we have funded our growth with available cash, borrowings under our revolving credit facility and the issuance of senior unsecured notes and common stock. At December 31, 2019, our ratio of debt to total capital (debt divided by stockholders' equity plus debt) was 35.9% compared to 36.3% at September 30, 2019 and 14.3% at December 31, 2018. At December 31, 2019, our ratio of net debt to total capital (debt net of unrestricted cash divided by stockholders' equity plus debt net of unrestricted cash) was 9.7% compared to 8.8% at September 30, 2019. Over the long term, we intend to maintain our ratio of net debt to total capital at or below 40%. We believe that the ratio of net debt to total capital is useful in understanding the leverage employed in our operations.

We believe that our existing cash resources and revolving credit facility will provide sufficient liquidity to fund our near-term working capital needs and debt obligations, including the maturity of $118.9 million principal amount of convertible senior notes in March 2020. 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. As market conditions permit, we may, at any time, be considering or preparing for the purchase or sale of our common stock, debt securities, convertible securities or a combination thereof.

Bank Credit Facility

We have a $380 million senior unsecured revolving credit facility with an uncommitted accordion feature that could increase the size of the facility to $570 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. Borrowings under the revolving credit facility are subject to a borrowing base 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. At December 31, 2019, there were no borrowings outstanding and $28.7 million of letters of credit issued under the revolving credit facility, resulting in available capacity of $351.3 million. There were no borrowings or repayments under the facility during the three months ended December 31, 2019.

In October 2019, the revolving credit facility was amended to extend its maturity date to October 2, 2022. The maturity date may be extended by up to one year on up to two additional occasions, subject to the approval of lenders holding a majority of the commitments.

The revolving credit facility includes customary affirmative and negative covenants, events of default and financial covenants. The financial covenants require a minimum level of tangible net worth, a minimum level of liquidity, and a maximum allowable leverage ratio. These covenants are measured as defined in the credit agreement governing the facility and are reported to the lenders quarterly. 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 December 31, 2019, we were in compliance with all of the covenants, limitations and restrictions of our revolving credit facility.

3.75% Convertible Senior Notes due 2020

At December 31, 2019, the principal amount of the 3.75% convertible senior notes due March 2020 was $118.9 million and the unamortized debt discount was $0.8 million. The effective interest rate on the liability component was 8.0% and the carrying amount of the equity component was $16.8 million. We intend to settle the principal amount of these notes in cash, with any excess conversion value to be settled in shares of our common stock. At December 31, 2019 and September 30, 2019, we had $0.1 million and $0.2 million in unamortized deferred financing fees that were deducted from the carrying value of these notes.




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8.0% Senior Notes due 2024

In April 2019, we issued $350 million principal amount of 8.0% senior notes pursuant to Rule 144A and Regulation S under the Securities Act. The notes mature April 15, 2024 with interest payable semi-annually and represent senior unsecured obligations that rank equally in right of payment to all existing and future senior unsecured indebtedness. The notes may be redeemed prior to maturity, subject to certain limitations and premiums defined in the indenture agreement. On or after April 15, 2021, the notes may be redeemed at 104% of their principal amount plus any accrued and unpaid interest. The redemption price decreases annually on a ratable basis to par by April 15, 2023 in accordance with the indenture. The notes are guaranteed by each of our subsidiaries to the extent such subsidiaries guarantee our revolving credit facility. At December 31, 2019 and September 30, 2019, we had $5.9 million and $6.2 million in unamortized deferred financing fees that were deducted from the carrying value of these notes. The annual effective interest rate of the notes after giving effect to the amortization of financing costs is 8.5%.

The indenture governing the notes requires that, upon the occurrence of both a Change of Control and a Rating Decline (each as defined in the 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 indenture contains 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; incur liens on assets; merge or consolidate with another company or sell or otherwise dispose of all or substantially all of our assets; enter into transactions with affiliates; and allow to exist certain restrictions on the ability of subsidiaries to pay dividends or make other payments.

At December 31, 2019, we were in compliance with all of the limitations and restrictions associated with our senior note obligations.

Issuance of Common Stock

In September 2018, we filed a shelf registration statement with the SEC registering $500 million of equity securities. In September 2019, we issued 6.0 million shares of our common stock for $17.50 per share in a public underwritten offering. Net proceeds from this offering after deducting underwriting discounts and commissions and other expenses were $100.7 million. Following the offering, $394.3 million remains available for issuance under the shelf registration statement.

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 December 31, 2019, we had outstanding letters of credit of $28.7 million under the revolving credit facility and surety bonds of $170.4 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.




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Operating Cash Flow Activities

In the three months ended December 31, 2019, net cash used in operating activities was $11.6 million compared to $164.1 million in the three months ended December 31, 2018. The decrease in net cash used in operating activities was principally due to higher lot sales volume and net income in the current year, and a smaller increase in real estate assets in the current year.

Investing Cash Flow Activities

In the three months ended December 31, 2019, net cash provided by investing activities was $3.1 million compared to no net cash flows from investing activities in the three months ended December 31, 2018.

Financing Cash Flow Activities

In the three months ended December 31, 2019, net cash used in financing activities was $1.0 million compared to $0.6 million in the three months ended December 31, 2018.

Critical Accounting Policies and Estimates

There have been no significant changes in our critical accounting policies or estimates from those disclosed in our 2019 Annual Report on Form 10-K.

New and Pending Accounting Pronouncements

Please read Note 1-Basis of Presentation to the consolidated financial statements included in this Quarterly Report on Form 10-Q.




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Forward-Looking Statements

This Quarterly Report on Form 10-Q and other materials we have filed or may file with the Securities and Exchange Commission contain "forward-looking statements" within the meaning of the federal securities laws. These forward-looking statements are identified by their use of terms and phrases such as "believe," "anticipate," "could," "estimate," "likely," "intend," "may," "plan," "expect," and similar expressions, including references to assumptions. These statements reflect our current views with respect to future events and are subject to risks and uncertainties. We note that a variety of factors and uncertainties could cause our actual results to differ significantly from the results discussed in the forward-looking statements. Factors and uncertainties that might cause such differences include, but are not limited to: • the effect of D.R. Horton's controlling level of ownership on us and


          the holders of our securities;


•         our ability to realize the potential benefits of the strategic
          relationship with D.R. Horton;


•         the effect of our strategic relationship with D.R. Horton on our
          ability to maintain relationships with our vendors and customers;


•         demand for new housing, which can be affected by a number of factors
          including the availability of mortgage credit, job growth and
          fluctuations in interest rates;

• competitive actions by other companies;




•         accuracy of estimates and other assumptions related to investment in
          and development of real estate, the expected timing and pricing of land
          and lot sales and related cost of real estate sales;

• our ability to comply with our debt covenants, restrictions and limitations;

• our ability to hire and retain key personnel;




•         changes in governmental policies, laws or regulations and actions or
          restrictions of regulatory agencies;


•         general economic, market or business conditions where our real estate
          activities are concentrated;

• our ability to achieve our strategic initiatives;

• our ability to obtain future entitlement and development approvals;




•         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;


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


•         the levels of resale housing inventory in our projects and the regions
          in which they are located;


•         fluctuations in costs and expenses, including impacts from shortages in
          materials or labor;


•         the opportunities (or lack thereof) that may be presented to us and
          that we may pursue;


•         the strength of our information technology systems and the risk of
          cybersecurity breaches; and


•         the conditions of the capital markets and our ability to raise capital
          to fund expected growth.

Other factors, including the risk factors described in Item 1A of our 2019 Annual Report on Form 10-K, may also cause actual results to differ materially from those projected by our forward-looking statements. New factors emerge from time to time and it is not possible for us to predict all such factors, nor can we assess the impact of any such factor on our business or the extent to which any factor, or combination of factors, may cause results to differ materially from those contained in any forward-looking statement.

Any forward-looking statement speaks only as of the date on which such statement is made, and, except as required by law, we expressly disclaim any obligation or undertaking to disseminate any updates or revisions to any forward-looking statement to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events.




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