Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Executive Overview and Outlook
Market Conditions
During the second quarter of fiscal 2023, we delivered sequentially stronger sales results as homebuyer traffic and demand improved relative to the first quarter of fiscal 2023. Although affordability remains challenging for many, homebuyers seem to be adjusting to the current market and higher mortgage interest rates. While we expect uncertainty in market conditions to continue throughout fiscal 2023, we believe the long-term housing market outlook remains positive, supported by a demographic shift towards homeownership and a multimillion unit housing deficit that has accumulated over the past decade.
We are focused on adjusting prices, features, and incentives to align with the current market. Further, we continue to strive to reduce build costs through re-negotiation and re-bidding of construction jobs, reduce cycle times, and prudently manage our overhead costs.
For the remainder of fiscal 2023, we plan to continue to invest in land strategically, gradually increase our active communities, and continue to use lot option agreements to position our business for longer-term growth, while focusing on the appropriate balance between pursuing growth opportunities, controlling risk, and maintaining a strong liquidity position.
Overview of Results for Our Fiscal Second Quarter
The following is a summary of our performance against certain key operating and financial metrics during the quarter ended March 31, 2023:
•During the quarter ended March 31, 2023, sales per community per month was 3.2 compared to 3.6 in the prior year quarter, and our net new orders were 1,181, down 8.5% from 1,291 in the prior year quarter. Although sales pace decreased compared to prior year quarter, it remained within our historical normal range for the second fiscal quarter. Furthermore, we delivered sequentially stronger sales pace in excess of normal seasonality, reflecting an improved sales environment as the market stabilized.
•During the quarter ended March 31, 2023, our average active community count of 123 was up 3.6% from 119 in the prior year quarter. We ended the quarter with an active community count of 121, compared to 119 at the prior year quarter end. We have been working to grow community counts by increasing investments in new communities strategically. We invested $113.0 million and $132.6 million in land acquisition and land development during quarters ended March 31, 2023 and March 31, 2022, respectively.
•Cancellation rate for the quarter ended March 31, 2023 was 18.6%, up from 12.2% in the prior year quarter but down sequentially from 37.1% in the prior fiscal quarter. Although cancellation rates were higher compared to the prior year quarter, they were well within our historical normal range and significantly lower than cancellation rates in the prior fiscal quarter, reflecting an improvement in buyer sentiment as mortgage interest rates stabilized.
•Our Average Selling Price (ASP) for homes closed during the quarter ended March 31, 2023 was $509.9 thousand, up 8.4% from $470.5 thousand in the prior year quarter. The year-over-year increase in closing ASP was primarily driven by price appreciation during the prior fiscal year before interest rates rose. However, our closing ASP and backlog ASP were down sequentially from the prior fiscal quarter as anticipated.
•Homebuilding gross margin for the quarter ended March 31, 2023 was 18.7%, down from 23.5% in the prior year quarter. Homebuilding gross margin, excluding impairments, abandonments, and interest for the quarter ended March 31, 2023, was 22.0%, down from 26.8% in the prior year quarter but remained strong by historical standards. We believe our margins are beginning to stabilize as homebuyers are adapting to the current housing market while we are continuing to reduce build costs.
•As of March 31, 2023, our land position includes 23,820 controlled lots, up 1.3% from 23,516 as of March 31, 2022. Excluding land held for future development and land held for sale lots, we controlled 23,091 active lots, up 1.6% from the prior year quarter. As of March 31, 2023, we controlled 12,460 lots, or 54.0% of our total active lots through option agreements compared to 11,551 lots, or 50.8% of our total active lots under option agreements as of March 31, 2022.
•SG&A for the quarter ended March 31, 2023 was 11.2% of total revenue, down from 12.2% in the prior year quarter. The decrease in SG&A as a percentage of total revenue was primarily due to higher revenue and lower incentive compensation, partially offset by higher commissions and sales and marketing costs for the quarter ended March 31, 2023 compared to the prior year quarter. We remain focused on prudently managing overhead costs.
Seasonal and Quarterly Variability
Our homebuilding operating cycle historically has reflected escalating new order activity in the second and third fiscal quarters and increased closings in the third and fourth fiscal quarters. However, these seasonal patterns may be impacted or reduced by a variety of factors, including periods of economic downturn, which result in decreased revenues and closings. Accordingly, our financial results for the three and six months ended March 31, 2023 may not be indicative of our full year results.
RESULTS OF CONTINUING OPERATIONS:
The following table summarizes certain key income statement metrics for the periods presented:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| March 31, | | March 31, |
$ in thousands | 2023 | | 2022 | | 2023 | | 2022 |
Revenue: | | | | | | | |
Homebuilding | $ | 542,007 | | | $ | 507,208 | | | $ | 986,091 | | | $ | 953,937 | |
Land sales and other | 1,901 | | | 1,298 | | | 2,745 | | | 8,718 | |
Total | $ | 543,908 | | | $ | 508,506 | | | $ | 988,836 | | | $ | 962,655 | |
Gross profit: | | | | | | | |
Homebuilding | $ | 101,588 | | | $ | 119,402 | | | $ | 186,702 | | | $ | 212,706 | |
Land sales and other | 1,308 | | | 348 | | | 1,962 | | | 4,444 | |
Total | $ | 102,896 | | | $ | 119,750 | | | $ | 188,664 | | | $ | 217,150 | |
Gross margin: | | | | | | | |
Homebuilding(a) | 18.7 | % | | 23.5 | % | | 18.9 | % | | 22.3 | % |
Land sales and other(b) | 68.8 | % | | 26.8 | % | | 71.5 | % | | 51.0 | % |
Total | 18.9 | % | | 23.5 | % | | 19.1 | % | | 22.6 | % |
Commissions | $ | 18,305 | | | $ | 16,578 | | | $ | 32,410 | | | $ | 32,391 | |
General and administrative expenses (G&A) | $ | 42,779 | | | $ | 45,530 | | | $ | 83,427 | | | $ | 83,297 | |
SG&A (commissions plus G&A) as a percentage of total revenue | 11.2 | % | | 12.2 | % | | 11.7 | % | | 12.0 | % |
G&A as a percentage of total revenue | 7.9 | % | | 9.0 | % | | 8.4 | % | | 8.7 | % |
Depreciation and amortization | $ | 3,020 | | | $ | 3,031 | | | $ | 5,533 | | | $ | 5,912 | |
Operating income | $ | 38,792 | | | $ | 54,611 | | | $ | 67,294 | | | $ | 95,550 | |
Operating income as a percentage of total revenue | 7.1 | % | | 10.7 | % | | 6.8 | % | | 9.9 | % |
Effective tax rate(c) | 12.8 | % | | 18.4 | % | | 13.5 | % | | 17.2 | % |
Inventory impairments and abandonments | $ | 111 | | | $ | 935 | | | $ | 301 | | | $ | 935 | |
| | | | | | | |
Loss on extinguishment of debt, net | $ | — | | | $ | (164) | | | $ | (515) | | | $ | (164) | |
(a) Excluding impairments, abandonments, and interest amortized to cost of sales, homebuilding gross margin was 22.0% and 26.8% for the three months ended March 31, 2023 and 2022, respectively, and 22.1% and 25.6% for the six months ended March 31, 2023 and 2022. Please see "Homebuilding Gross Profit and Gross Margin" section below for a reconciliation of homebuilding gross profit and the related gross margin excluding impairments and abandonments and interest amortized to cost of sales to homebuilding gross profit and gross margin, the most directly comparable GAAP measure.
(b) Calculated as land sales and other gross profit divided by land sales and other revenue.
(c) Calculated as tax expense for the period divided by income from continuing operations. Our income tax expenses are not always directly correlated to the amount of pre-tax income for the associated period due to a variety of factors, including, but not limited to, the impact of tax credits and permanent differences. For the three and six months ended March 31, 2023, our effective tax rate was impacted by, among other factors, $5.6 million and $8.6 million of energy efficiency tax credits claimed, respectively, compared to $3.0 million and $6.2 million of such credits claimed during the three and six months ended March 31, 2022, respectively.
EBITDA: Reconciliation of Net Income to Adjusted EBITDA
Reconciliation of Adjusted EBITDA to total company net income, the most directly comparable GAAP measure, is provided for each period discussed below. Management believes that Adjusted EBITDA assists investors in understanding and comparing the operating characteristics of homebuilding activities by eliminating many of the differences in companies' respective capitalization, tax position, and level of impairments. These EBITDA measures should not be considered alternatives to net income determined in accordance with GAAP as an indicator of operating performance.
The following table reconciles our net income to Adjusted EBITDA for the periods presented:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | Six Months Ended March 31, | | LTM Ended March 31,(a) |
in thousands | 2023 | | 2022 | | 23 vs 22 | | 2023 | | 2022 | | 23 vs 22 | | 2023 | | 2022 | | 23 vs 22 |
Net income | $ | 34,707 | | | $ | 44,672 | | | $ | (9,965) | | | $ | 59,038 | | | $ | 79,557 | | | $ | (20,519) | | | $ | 200,185 | | | $ | 165,053 | | | $ | 35,132 | |
Expense from income taxes | 5,092 | | | 10,071 | | | (4,979) | | | 9,225 | | | 16,531 | | | (7,306) | | | 45,961 | | | 26,246 | | | 19,715 | |
Interest amortized to home construction and land sales expenses and capitalized interest impaired | 17,291 | | | 16,083 | | | 1,208 | | | 31,066 | | | 30,863 | | | 203 | | | 72,261 | | | 75,230 | | | (2,969) | |
Interest expense not qualified for capitalization | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 212 | | | (212) | |
EBIT | 57,090 | | | 70,826 | | | (13,736) | | | 99,329 | | | 126,951 | | | (27,622) | | | 318,407 | | | 266,741 | | | 51,666 | |
Depreciation and amortization | 3,020 | | | 3,031 | | | (11) | | | 5,533 | | | 5,912 | | | (379) | | | 12,981 | | | 13,083 | | | (102) | |
EBITDA | 60,110 | | | 73,857 | | | (13,747) | | | 104,862 | | | 132,863 | | | (28,001) | | | 331,388 | | | 279,824 | | | 51,564 | |
Stock-based compensation expense | 1,678 | | | 2,424 | | | (746) | | | 3,258 | | | 4,532 | | | (1,274) | | | 7,204 | | | 10,639 | | | (3,435) | |
Loss on extinguishment of debt | — | | | 164 | | | (164) | | | 515 | | | 164 | | | 351 | | | 42 | | | 1,626 | | | (1,584) | |
Inventory impairments and abandonments(b) | 111 | | | 935 | | | (824) | | | 301 | | | 935 | | | (634) | | | 1,890 | | | 1,323 | | | 567 | |
| | | | | | | | | | | | | | | | | |
Severance expenses | 224 | | | — | | | 224 | | | 335 | | | — | | | 335 | | | 335 | | | — | | | 335 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Adjusted EBITDA | $ | 62,123 | | | $ | 77,380 | | | $ | (15,257) | | | $ | 109,271 | | | $ | 138,494 | | | $ | (29,223) | | | $ | 340,859 | | | $ | 293,412 | | | $ | 47,447 | |
(a) "LTM" indicates amounts for the trailing 12 months.
(b) In periods during which we impaired certain of our inventory assets, capitalized interest that is impaired is included in the line above titled "Interest amortized to home construction and land sales expenses and capitalized interest impaired."
Homebuilding Operations Data
The following table summarizes new orders and cancellation rates by reportable segment for the periods presented:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, |
| New Orders, net | | Cancellation Rates |
| 2023 | | 2022 | | 23 vs 22 | | 2023 | | 2022 |
West | 631 | | | 832 | | | (24.2) | % | | 20.2 | % | | 12.1 | % |
East | 296 | | | 284 | | | 4.2 | % | | 18.0 | % | | 9.8 | % |
Southeast | 254 | | | 175 | | | 45.1 | % | | 15.1 | % | | 16.3 | % |
Total | 1,181 | | | 1,291 | | | (8.5) | % | | 18.6 | % | | 12.2 | % |
| | | | | | | | | |
| Six Months Ended March 31, |
| New Orders, net | | Cancellation Rates |
| 2023 | | 2022 | | 23 vs 22 | | 2023 | | 2022 |
West | 879 | | | 1,487 | | | (40.9) | % | | 28.6 | % | | 12.4 | % |
East | 416 | | | 520 | | | (20.0) | % | | 20.0 | % | | 11.7 | % |
Southeast | 368 | | | 425 | | | (13.4) | % | | 21.0 | % | | 11.1 | % |
Total | 1,663 | | | 2,432 | | | (31.6) | % | | 25.0 | % | | 12.0 | % |
Net new orders for the quarter ended March 31, 2023 decreased to 1,181, down 8.5% from the quarter ended March 31, 2022. The decrease in net new orders compared to the prior year quarter was driven by a 11.7% decrease in sales pace from 3.6 sales per community per month in the prior year quarter to 3.2, partially offset by a 3.6% increase in average active community count from 119 in the prior year quarter to 123. Although sales pace decreased and cancellation rates increased across reportable segments from the prior year quarter, the current quarter metrics were generally within our historical normal ranges and reflected significant improvements sequentially from the prior fiscal quarter.
Net new orders for the six months ended March 31, 2023 decreased to 1,663, down 31.6% from the quarter ended March 31, 2022. This was primarily attributed to low sale pace and historically high cancellation rates we experienced during our fiscal first quarter as a result of a significant decline in the housing market conditions at the time. As discussed above, we have seen improvements during the current fiscal quarter with sales pace and cancellation rates beginning to return to historical normal ranges.
The table below summarizes backlog units by reportable segment as well as the aggregate dollar value and ASP of homes in backlog as of March 31, 2023 and 2022:
| | | | | | | | | | | | | | | | | | |
| As of March 31, | |
| 2023 | | 2022 | | 23 vs 22 | |
Backlog Units: | | | | | | |
West | 995 | | | 1,872 | | | (46.8) | % | |
East | 435 | | | 634 | | | (31.4) | % | |
Southeast | 428 | | | 615 | | | (30.4) | % | |
Total | 1,858 | | | 3,121 | | | (40.5) | % | |
Aggregate dollar value of homes in backlog (in millions) | $ | 987.2 | | | $ | 1,583.5 | | | (37.7) | % | |
ASP in backlog (in thousands) | $ | 531.3 | | | $ | 507.4 | | | 4.7 | % | |
Backlog reflects the number of homes for which the Company has entered into a sales contract with a customer but has not yet delivered the home. The aggregate dollar value of homes in backlog as of March 31, 2023 decreased 37.7% compared to March 31, 2022 due to a 40.5% decrease in backlog units, partially offset by a 4.7% increase in the ASP of homes in backlog.
Homebuilding Revenue, Average Selling Price, and Closings
The table below summarizes homebuilding revenue, ASP of our homes closed, and closings by reportable segment for the periods presented:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, |
| Homebuilding Revenue | | Average Selling Price | | Closings |
$ in thousands | 2023 | | 2022 | | 23 vs 22 | | 2023 | | 2022 | | 23 vs 22 | | 2023 | | 2022 | | 23 vs 22 |
West | $ | 328,961 | | | $ | 302,887 | | | 8.6 | % | | $ | 521.3 | | | $ | 455.5 | | | 14.4 | % | | 631 | | | 665 | | | (5.1) | % |
East | 119,869 | | | 128,424 | | | (6.7) | % | | 507.9 | | | 509.6 | | | (0.3) | % | | 236 | | | 252 | | | (6.3) | % |
Southeast | 93,177 | | | 75,897 | | | 22.8 | % | | 475.4 | | | 471.4 | | | 0.8 | % | | 196 | | | 161 | | | 21.7 | % |
Total | $ | 542,007 | | | $ | 507,208 | | | 6.9 | % | | $ | 509.9 | | | $ | 470.5 | | | 8.4 | % | | 1,063 | | | 1,078 | | | (1.4) | % |
| | | | | | | | | | | | | | | | | |
| Six Months Ended March 31, |
| Homebuilding Revenue | | Average Selling Price | | Closings |
$ in thousands | 2023 | | 2022 | | 23 vs 22 | | 2023 | | 2022 | | 23 vs 22 | | 2023 | | 2022 | | 23 vs 22 |
West | $ | 603,283 | | | $ | 559,379 | | | 7.8 | % | | $ | 528.7 | | | $ | 441.2 | | | 19.8 | % | | 1,141 | | | 1,268 | | | (10.0) | % |
East | 205,900 | | | 242,711 | | | (15.2) | % | | 526.6 | | | 488.4 | | | 7.8 | % | | 391 | | | 497 | | | (21.3) | % |
Southeast | 176,908 | | | 151,847 | | | 16.5 | % | | 486.0 | | | 457.4 | | | 6.3 | % | | 364 | | | 332 | | | 9.6 | % |
Total | $ | 986,091 | | | $ | 953,937 | | | 3.4 | % | | $ | 520.1 | | | $ | 454.9 | | | 14.3 | % | | 1,896 | | | 2,097 | | | (9.6) | % |
Three Months Ended March 31, 2023 as compared to 2022
West Segment: Homebuilding revenue increased by 8.6% for the three months ended March 31, 2023 compared to the prior year quarter due to a 14.4% increase in ASP, partially offset by a 5.1% decrease in closings. The decrease in closings was primarily due to lower beginning backlog, partially offset by a higher backlog conversion rate compared to the prior year quarter.
East Segment: Homebuilding revenue decreased by 6.7% for the three months ended March 31, 2023 compared to the prior year quarter due to a 6.3% decrease in closings as well as a 0.3% decrease in ASP. The decrease in closings was primarily due to lower beginning backlog, partially offset by a higher backlog conversion rate compared to the prior year quarter.
Southeast Segment: Homebuilding revenue increased by 22.8% for the three months ended March 31, 2023 compared to the prior year quarter due to a 21.7% increase in closings as well as a 0.8% increase in ASP. The increase in closings was primarily due to higher backlog conversion rate, partially offset by lower beginning backlog compared to the prior year quarter.
Six Months Ended March 31, 2023 as compared to 2022
West Segment: Homebuilding revenue increased by 7.8% for the six months ended March 31, 2023 compared to the six months ended March 31, 2022 due to an increase in ASP of 19.8%, partially offset by a 10.0% decrease in closings. The decrease in closings was primarily due to lower beginning backlog, partially offset by a higher backlog conversion rate compared to the prior year period.
East Segment: Homebuilding revenue decreased by 15.2% for the six months ended March 31, 2023 compared to the six months ended March 31, 2022 due to a 21.3% decrease in closings, partially offset by a 7.8% increase in ASP. The decrease in closings was primarily due to lower beginning backlog, partially offset by a higher backlog conversion rate compared to the prior year period.
Southeast Segment: Homebuilding revenue increased by 16.5% compared to the six months ended March 31, 2022 due to a 9.6% increase in closings as well as a 6.3% increase in ASP. The increase in closings was was primarily due to higher backlog conversion rate, partially offset by lower beginning backlog compared to the prior year period.
Homebuilding Gross Profit and Gross Margin
The following tables present our homebuilding (HB) gross profit and gross margin by reportable segment and in total. In addition, such amounts are presented excluding inventory impairments and abandonments and interest amortized to cost of sales (COS). Homebuilding gross profit is defined as homebuilding revenue less home cost of sales (which includes land and land development costs, home construction costs, capitalized interest, indirect costs of construction, estimated warranty costs, closing costs, and inventory impairments and abandonment charges).
Reconciliation of homebuilding gross profit and the related gross margin excluding impairments and abandonments and interest amortized to cost of sales to homebuilding gross profit and gross margin, the most directly comparable GAAP measure, is provided for each period discussed below. Management believes that this information assists investors in comparing the operating characteristics of homebuilding activities by eliminating many of the differences in companies' respective level of impairments and level of debt. These measures should not be considered alternatives to homebuilding gross profit and gross margin determined in accordance with GAAP as an indicator of operating performance.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2023 |
$ in thousands | HB Gross Profit | | HB Gross Margin | | Impairments & Abandonments (I&A) | | HB Gross Profit excluding I&A | | HB Gross Margin excluding I&A | | Interest Amortized to COS (Interest) | | HB Gross Profit excluding I&A and Interest | | HB Gross Margin excluding I&A and Interest |
West | $ | 71,390 | | | 21.7 | % | | $ | 111 | | | $ | 71,501 | | | 21.7 | % | | $ | — | | | $ | 71,501 | | | 21.7 | % |
East | 26,062 | | | 21.7 | % | | — | | | 26,062 | | | 21.7 | % | | — | | | 26,062 | | | 21.7 | % |
Southeast | 19,985 | | | 21.4 | % | | — | | | 19,985 | | | 21.4 | % | | — | | | 19,985 | | | 21.4 | % |
Corporate & unallocated(a) | (15,849) | | | | | — | | | (15,849) | | | | | 17,291 | | | 1,442 | | | |
Total homebuilding | $ | 101,588 | | | 18.7 | % | | $ | 111 | | | $ | 101,699 | | | 18.8 | % | | $ | 17,291 | | | $ | 118,990 | | | 22.0 | % |
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2022 |
$ in thousands | HB Gross Profit | | HB Gross Margin | | Impairments & Abandonments (I&A) | | HB Gross Profit excluding I&A | | HB Gross Margin excluding I&A | | Interest Amortized to COS (Interest) | | HB Gross Profit excluding I&A and Interest | | HB Gross Margin excluding I&A and Interest |
West | $ | 81,849 | | | 27.0 | % | | $ | 12 | | | $ | 81,861 | | | 27.0 | % | | $ | — | | | $ | 81,861 | | | 27.0 | % |
East | 33,673 | | | 26.2 | % | | — | | | 33,673 | | | 26.2 | % | | — | | | 33,673 | | | 26.2 | % |
Southeast | 17,510 | | | 23.1 | % | | 483 | | | 17,993 | | | 23.7 | % | | — | | | 17,993 | | | 23.7 | % |
Corporate & unallocated(a) | (13,630) | | | | | — | | | (13,630) | | | | | 16,083 | | | 2,453 | | | |
Total homebuilding | $ | 119,402 | | | 23.5 | % | | $ | 495 | | | $ | 119,897 | | | 23.6 | % | | $ | 16,083 | | | $ | 135,980 | | | 26.8 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended March 31, 2023 |
$ in thousands | HB Gross Profit | | HB Gross Margin | | Impairments & Abandonments (I&A) | | HB Gross Profit excluding I&A | | HB Gross Margin excluding I&A | | Interest Amortized to COS (Interest) | | HB Gross Profit excluding I&A and Interest | | HB Gross Margin excluding I&A and Interest |
West | $ | 130,752 | | | 21.7 | % | | $ | 147 | | | $ | 130,899 | | | 21.7 | % | | $ | — | | | $ | 130,899 | | | 21.7 | % |
East | 42,583 | | | 20.7 | % | | 154 | | | 42,737 | | | 20.8 | % | | — | | | 42,737 | | | 20.8 | % |
Southeast | 38,486 | | | 21.8 | % | | — | | | 38,486 | | | 21.8 | % | | — | | | 38,486 | | | 21.8 | % |
Corporate & unallocated (a) | (25,119) | | | | | — | | | (25,119) | | | | | 31,066 | | | 5,947 | | | |
Total homebuilding | $ | 186,702 | | | 18.9 | % | | $ | 301 | | | $ | 187,003 | | | 19.0 | % | | $ | 31,066 | | | $ | 218,069 | | | 22.1 | % |
| | | | | | | | | | | | | | | |
| Six Months Ended March 31, 2022 |
$ in thousands | HB Gross Profit | | HB Gross Margin | | Impairments & Abandonments (I&A) | | HB Gross Profit excluding I&A | | HB Gross Margin excluding I&A | | Interest Amortized to COS (Interest) | | HB Gross Profit excluding I&A and Interest | | HB Gross Margin excluding I&A and Interest |
West | $ | 144,776 | | | 25.9 | % | | $ | 12 | | | $ | 144,788 | | | 25.9 | % | | $ | — | | | $ | 144,788 | | | 25.9 | % |
East | 59,207 | | | 24.4 | % | | — | | | 59,207 | | | 24.4 | % | | — | | | 59,207 | | | 24.4 | % |
Southeast | 33,545 | | | 22.1 | % | | 483 | | | 34,028 | | | 22.4 | % | | — | | | 34,028 | | | 22.4 | % |
Corporate & unallocated (a) | (24,822) | | | — | | | — | | | (24,822) | | | | | 30,863 | | | 6,041 | | | |
Total homebuilding | $ | 212,706 | | | 22.3 | % | | $ | 495 | | | $ | 213,201 | | | 22.3 | % | | $ | 30,863 | | | $ | 244,064 | | | 25.6 | % |
(a) Corporate and unallocated includes capitalized interest and capitalized indirect costs expensed to homebuilding cost of sale related to homes closed, as well as capitalized interest and capitalized indirect costs impaired in order to reflect projects in progress assets at fair value.
Three Months Ended March 31, 2023 as compared to 2022
Our homebuilding gross profit decreased by $17.8 million to $101.6 million for the three months ended March 31, 2023, compared to $119.4 million in the prior year quarter. The decrease in homebuilding gross profit was primarily driven by a decrease in gross margin of 480 basis points to 18.7%, partially offset by an increase in homebuilding revenue of $34.8 million. As shown in the tables above, the comparability of our gross profit and gross margin was slightly impacted by impairment and abandonment charges which decreased by $0.4 million, and interest amortized to homebuilding cost of sales which increased by $1.2 million period-over-period (refer to Note 4 and Note 5 of the notes to the condensed consolidated financial statements in this Form 10-Q for additional details). When excluding the impact of impairment and abandonment charges and interest amortized to homebuilding cost of sales, homebuilding gross profit decreased by $17.0 million compared to the prior year quarter, while homebuilding gross margin decreased by 480 basis points to 22.0%. The year-over-year deterioration in gross margin for the three months ended March 31, 2023 was primarily driven by an increase in price concessions and closing cost incentives.
West Segment: Compared to the prior year quarter, homebuilding gross profit decreased by $10.5 million due to lower gross margin, partially offset by an increase in homebuilding revenue. Homebuilding gross margin, excluding impairments and abandonments, decreased to 21.7%, down from 27.0% in the prior year quarter. The decrease in gross margin was driven by an increase in price concessions and closing cost incentives.
East Segment: Compared to the prior year quarter, homebuilding gross profit decreased by $7.6 million due to a decrease in homebuilding revenue as well as lower gross margin. Homebuilding gross margin, excluding impairments and abandonments, decreased to 21.7%, down from 26.2% in the prior year quarter. The decrease in gross margin was driven by an increase in price concessions and closing cost incentives.
Southeast Segment: Compared to the prior year quarter, homebuilding gross profit increased by $2.5 million due to an increase in homebuilding revenue, partially offset by lower gross margin. Homebuilding gross margin, excluding impairments and abandonments, decreased to 21.4%, down from 23.7% in the prior year quarter. The decrease in gross margin was driven by an increase in prices concessions and closing cost incentives.
Six Months Ended March 31, 2023 as compared to 2022
Our homebuilding gross profit decreased by $26.0 million to $186.7 million for the six months ended March 31, 2023, from $212.7 million in the prior year period. The decrease in gross profit was primarily driven by a decrease in gross margin of 340 basis points to 18.9%, partially offset by an increase in homebuilding revenue of $32.2 million. Similar to the three-month period discussed above, the comparability of our gross profit and gross margin for the six-month period was slightly impacted by impairment and abandonment charges which decreased by $0.2 million, and interest amortized to homebuilding cost of sales which increased by $0.2 million period-over-period (refer to Note 4 and Note 5 of the notes to the condensed consolidated financial statements in this Form 10-Q for additional details). When excluding the impact of impairment and abandonment charges and interest amortized to homebuilding cost of sales, homebuilding gross profit decreased by $26.0 million compared to the prior year period, while homebuilding gross margin decreased by 350 basis points to 22.1%. The year-over-year deterioration in gross margin for the six months ended March 31, 2023 was primarily driven by an increase in price concessions and closing cost incentives.
West Segment: Compared to the prior year period, homebuilding gross profit decreased by $14.0 million due to lower gross margin, partially offset by an increase in homebuilding revenue. Homebuilding gross margin, excluding impairments and abandonments, decreased to 21.7%, down from 25.9% in the prior year period. The decrease in gross margin was primarily driven by an increase in price concessions and closing cost incentives.
East Segment: Compared to the prior year period, homebuilding gross profit decreased by $16.6 million due to a decrease in homebuilding revenue as well as lower gross margin. Homebuilding gross margin, excluding impairments and abandonments, decreased to 20.8%, down from 24.4% in the prior year period. The decrease in gross margin was primarily driven by an increase in price concessions and closing cost incentives.
Southeast Segment: Compared to the prior year period, homebuilding gross profit increased by $4.9 million due to an increase in homebuilding revenue, partially offset by lower gross margin. Homebuilding gross margin, excluding impairments and abandonments, decreased to 21.8%, down from 22.4% in the prior year period. The decrease in gross margin was primarily driven by an increase in price concessions and closing cost incentives, partially offset by changes in product and community mix.
Measures of homebuilding gross profit and gross margin after excluding inventory impairments and abandonments, interest amortized to cost of sales, and other non-recurring items are not GAAP financial measures. These measures should not be considered alternatives to homebuilding gross profit and gross margin determined in accordance with GAAP as an indicator of operating performance.
In particular, the magnitude and volatility of non-cash inventory impairments and abandonment charges for the Company and other homebuilders have been significant historically and, as such, have made financial analysis of our industry more difficult. Homebuilding metrics excluding these charges, as well as interest amortized to cost of sales and other similar presentations by analysts and other companies, are frequently used to assist investors in understanding and comparing the operating characteristics of homebuilding activities by eliminating many of the differences in companies' respective level of impairments and levels of debt. Management believes these non-GAAP measures enable holders of our securities to better understand the cash implications of our operating performance and our ability to service our debt obligations as they currently exist and as additional indebtedness is incurred in the future. These measures are also useful internally, helping management to compare operating results and to measure cash available for discretionary spending.
In a given period, our reported gross profit is generated from both communities previously impaired and communities not previously impaired. In addition, as indicated above, certain gross profit amounts arise from recoveries of prior period costs, including warranty items that are not directly tied to communities generating revenue in the period. Home closings from communities previously impaired would, in most instances, generate very low or negative gross margins prior to the impact of the previously recognized impairment. Gross margin for each home closing is higher for a particular community after an impairment because the carrying value of the underlying land was previously reduced to the present value of future cash flows as a result of the impairment, leading to lower cost of sales at the home closing. This improvement in gross margin resulting from one or more prior impairments is frequently referred to in the aggregate as the “impairment turn” or “flow-back” of impairments within the reporting period. The amount of this impairment turn may exceed the gross margin for an individual impaired asset if the gross margin for that asset prior to the impairment would have been negative. The extent to which this impairment turn is greater than the reported gross margin for the individual asset is related to the specific historical cost basis of that individual asset.
The asset valuations that result from our impairment calculations are based on discounted cash flow analyses and are not derived by simply applying prospective gross margins to individual communities. As such, impaired communities may have gross margins that are somewhat higher or lower than the gross margins for unimpaired communities. The mix of home closings in any particular quarter varies to such an extent that comparisons between previously impaired and never impaired communities would not be a reliable way to ascertain profitability trends or to assess the accuracy of previous valuation estimates. In addition, since any amount of impairment turn is tied to individual lots in specific communities, it will vary considerably from period to period. As a result of these factors, we review the impairment turn impact on gross margin on a trailing 12-month basis rather than a quarterly basis as a way of considering whether our impairment calculations are resulting in gross margins for impaired communities that are comparable to our unimpaired communities. For the trailing 12-month period ended March 31, 2023, our homebuilding gross profit and margin was $506.1 million and 21.7%, respectively, on trailing 12-months of homebuilding revenue of $2.30 billion. Excluding interest amortized to cost of sales and inventory impairments and abandonments of $72.7 million, our homebuilding gross profit and margin for the trailing 12-month period ended March 31, 2023 were $578.9 million and 24.8%, respectively. For the same trailing 12-month period, homebuilding gross margin was as follows in those communities that have previously been impaired, which represented 105 and 2.3% of total closings during this period:
| | | | | |
Homebuilding Gross Margin from previously impaired communities: | |
Pre-impairment turn gross margin | 2.9 | % |
Impact of interest amortized to COS related to these communities | 2.4 | % |
Pre-impairment turn gross margin, excluding interest amortization | 5.3 | % |
Impact of impairment turns | 23.5 | % |
Gross margin (post impairment turns), excluding interest amortization | 28.8 | % |
For further discussion of our impairment policies, refer to Note 4 of the notes to the condensed consolidated financial statements in this Form 10-Q.
Land Sales and Other Revenue and Gross Profit
Land sales relate to land and lots sold that do not fit within our homebuilding programs and strategic plans. We also have other revenue related to title examinations provided for our homebuyers in certain markets. The following tables summarize our land sales and other revenue and related gross profit by reportable segment for the periods presented:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Land Sales and Other Revenue | | Land Sales and Other Gross Profit |
| Three Months Ended March 31, | | Three Months Ended March 31, |
in thousands | 2023 | | 2022 | | 23 vs 22 | | 2023 | | 2022 | | 23 vs 22 |
West | $ | 1,452 | | | $ | 605 | | | $ | 847 | | | $ | 972 | | | $ | 15 | | | $ | 957 | |
East | 202 | | | 511 | | | (309) | | | 151 | | | 199 | | | (48) | |
Southeast | 247 | | | 182 | | | 65 | | | 185 | | | 134 | | | 51 | |
| | | | | | | | | | | |
Total | $ | 1,901 | | | $ | 1,298 | | | $ | 603 | | | $ | 1,308 | | | $ | 348 | | | $ | 960 | |
| | | | | | | | | | | |
| | | |
| | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Land Sales and Other Revenue | | Land Sales and Other Gross Profit |
| Six Months Ended March 31, | | Six Months Ended March 31, |
in thousands | 2023 | | 2022 | | 23 vs 22 | | 2023 | | 2022 | | 23 vs 22 |
West | $ | 1,945 | | | $ | 1,779 | | | $ | 166 | | | $ | 1,354 | | | $ | 493 | | | $ | 861 | |
East | 361 | | | 4,393 | | | (4,032) | | | 274 | | | 3,606 | | | (3,332) | |
Southeast | 439 | | | 2,546 | | | (2,107) | | | 334 | | | 345 | | | (11) | |
| | | | | | | | | | | |
Total | $ | 2,745 | | | $ | 8,718 | | | $ | (5,973) | | | $ | 1,962 | | | $ | 4,444 | | | $ | (2,482) | |
| | | | | | | | | | | |
For the three months ended March 31, 2023, land sales and other revenue increased by $0.6 million to $1.9 million, and land sales and other gross profit increased by $1.0 million to $1.3 million compared to the prior year quarter due to an increase in land sales closings. For the six months ended March 31, 2023, land sales and other revenue decreased by $6.0 million to $2.7 million, and land sales and other gross profit decreased by $2.5 million to $2.0 million compared to the prior year period due to a decrease in land sales closings. Future land and lot sales will depend on a variety of factors, including local market conditions, individual community performance, and changing strategic plans.
Operating Income
The table below summarizes operating income by reportable segment for the periods presented:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | Six Months Ended March 31, |
in thousands | 2023 | | 2022 | | 23 vs 22 | | 2023 | | 2022 | | 23 vs 22 |
West | $ | 45,513 | | | $ | 58,103 | | | $ | (12,590) | | | $ | 82,870 | | | $ | 100,827 | | | $ | (17,957) | |
East | 16,244 | | | 24,072 | | | (7,828) | | | 25,506 | | | 43,931 | | | (18,425) | |
Southeast | 11,517 | | | 10,007 | | | 1,510 | | | 22,196 | | | 18,207 | | | 3,989 | |
| | | | | | | | | | | |
Corporate and unallocated(a) | (34,482) | | | (37,571) | | | 3,089 | | | (63,278) | | | (67,415) | | | 4,137 | |
Operating income | $ | 38,792 | | | $ | 54,611 | | | $ | (15,819) | | | $ | 67,294 | | | $ | 95,550 | | | $ | (28,256) | |
(a) Includes amortization of capitalized interest, capitalization and amortization of indirect costs, impairment of capitalized interest and capitalized indirect costs, expenses related to numerous shared services functions that benefit all segments but are not allocated to the operating segments, and certain other amounts that are not allocated to our operating segments.
Our operating income decreased by $15.8 million to $38.8 million for the three months ended March 31, 2023, compared to operating income of $54.6 million for the three months ended March 31, 2022, driven primarily by the previously discussed decrease in gross profit, partially offset by lower SG&A expense of $1.0 million, or 1.6% decrease, compared to the prior year quarter. SG&A as a percentage of total revenue decreased by 100 basis points quarter-over-quarter from 12.2% to 11.2% primarily due to higher revenue and lower incentive compensation, partially offset by higher commissions and sales and marketing costs for the three months ended March 31, 2023 compared to the prior year quarter.
Our operating income decreased by $28.3 million to $67.3 million for the six months ended March 31, 2023, compared to operating income of $95.6 million for the six months ended March 31, 2022, driven primarily by the previously discussed decrease in gross profit. Dollar value of SG&A remained relatively flat with higher sales and marketing costs largely offset by lower incentive compensation year-over-year. SG&A as a percentage of total revenue decreased by 30 basis points year-over-year from 12.0% to 11.7% primarily due to higher revenue for the six months ended March 31, 2023 compared to the prior year period.
Three Months Ended March 31, 2023 as compared to 2022
West Segment: The $12.6 million decrease in operating income compared to the prior year quarter was primarily due to lower gross profit previously discussed, as well as higher commission expense on higher homebuilding revenue, higher sales and marketing expenses, and higher other G&A expenses, partially offset by lower incentive compensation.
East Segment: The $7.8 million decrease in operating income compared to the prior year quarter was primarily due to the lower gross profit previously discussed, as well as higher sales and marketing expenses, partially offset by lower commissions expense on lower homebuilding revenue, lower incentive compensation, and lower other G&A expenses.
Southeast Segment: The $1.5 million increase in operating income compared to the prior year quarter was primarily due to the higher gross profit previously discussed, as well as lower sales and marketing expenses and lower incentive compensation, partially offset by higher commissions expense on higher homebuilding revenue, and higher other G&A expenses.
Corporate and Unallocated: Our Corporate and unallocated results include amortization of capitalized interest, capitalization and amortization of indirect costs, impairment of capitalized interest and capitalized indirect costs, expenses for various shared services functions that benefit all segments but are not allocated, including information technology, treasury, corporate finance, legal, branding and national marketing, and certain other amounts that are not allocated to our operating segments. For the three months ended March 31, 2023, corporate and unallocated net expenses decreased by $3.1 million from the prior year quarter primarily due to lower incentive compensation and lower G&A costs, partially offset by higher amortization of capitalized interest and capitalized indirect costs to cost of sales.
Six Months Ended March 31, 2023 as compared to 2022
West Segment: The $18.0 million decrease in operating income compared to the prior year period was primarily due to the decrease in gross profit previously discussed, as well as higher commissions expense on higher homebuilding revenue, higher sales and marketing expenses, and higher other G&A expenses, partially offset by lower incentive compensation.
East Segment: The $18.4 million decrease in operating income compared to the prior year period was primarily due to the decrease in gross profit previously discussed as well as higher sales and marketing expenses, partially offset by lower commission expenses on lower homebuilding revenue, lower incentive compensation, and lower other G&A expenses.
Southeast Segment: The $4.0 million increase in operating income compared to the prior year period was primarily due to the increase in gross profit previously discussed, as well as lower sales and marketing expenses, lower incentive compensation, and lower other G&A expenses, partially offset by higher commissions expense on higher homebuilding revenue.
Corporate and Unallocated: For the six months ended March 31, 2023, corporate and unallocated net costs decreased by $4.1 million over the prior year period. The decrease was primarily due to lower incentive compensation and lower G&A costs, partially offset by higher amortization of capitalized interest and capitalized indirect costs to cost of sales.
Below operating income, we had one noteworthy year-over-year fluctuation for the three and six months ended March 31, 2023 compared to the prior period. Specifically, we experienced an increase in other income, net, primarily attributable to a year-over-year increase in external interest received due to higher interest rates on operating cash bank accounts.
Income Taxes
Our income tax assets and liabilities and related effective tax rate are affected by a variety of factors, including, but not limited to, tax credits, permanent differences and other discrete items. A comparison of our effective tax rates should also consider the changes in valuation allowance in periods when a change occurs. As such, our income tax expense/benefit is not always directly correlated to the amount of pre-tax income or loss for the associated periods.
We recognized income tax expense from continuing operations of $5.1 million and $9.2 million for the three and six months ended March 31, 2023, compared to $10.1 million and $16.5 million for the three and six months ended March 31, 2022. Income tax expense for the six months ended March 31, 2023 was primarily driven by income tax expense on earnings from continuing operations, permanent differences and the discrete tax expense related to stock-based compensation activity in the period, partially offset by the generation of additional federal tax credits and interest received with the refund of our alternative minimum tax credit. Income tax expense for the six months ended March 31, 2022 was primarily driven by income tax expense on earnings from continuing operations and permanent differences, partially offset by the generation of additional federal tax credits and the discrete tax benefit related to stock-based compensation activity in the period. Refer to Note 10 of the notes to the condensed consolidated financial statements included in this Form 10-Q for further discussion of our income taxes.
Liquidity and Capital Resources
Our sources of liquidity include, but are not limited to, cash from operations, proceeds from Senior Notes, the Unsecured Facility and other bank borrowings, the issuance of equity and equity-linked securities, and other external sources of funds. Our short-term and long-term liquidity depends primarily upon our level of net income, working capital management (cash, accounts receivable, accounts payable and other liabilities), and available credit facilities.
Net changes in cash, cash equivalents, and restricted cash are as follows for the periods presented:
| | | | | | | | | | | | | |
| Six Months Ended March 31, | | |
in thousands | 2023 | | 2022 | | |
Net cash provided by (used in) operating activities | $ | 40,268 | | | $ | (58,130) | | | |
Net cash used in investing activities | (7,774) | | | (6,036) | | | |
Net cash used in financing activities | (5,172) | | | (12,729) | | | |
Net increase (decrease) in cash, cash equivalents, and restricted cash | $ | 27,322 | | | $ | (76,895) | | | |
Operating Activities
Net cash provided by operating activities was $40.3 million for the six months ended March 31, 2023. The primary drivers of operating cash flows are typically cash earnings and changes in inventory levels, including land acquisition and development spending. Net cash provided by operating activities during the period was primarily driven by cash inflows from income before income taxes of $68.4 million, which included $10.8 million of non-cash charges. This was partially offset by a net increase in non-inventory working capital balances of $36.6 million and an increase in inventory of $2.3 million resulting from land acquisition, land development and house construction spending.
Net cash used in operating activities was $58.1 million for the six months ended March 31, 2022, primarily driven by an increase in inventory of $174.2 million resulting from land acquisition, land development and house construction spending to support continued growth. This was partially offset by cash inflows from income before income taxes of $96.1 million, which included $11.2 million of non-cash charges and a net decrease in non-inventory working capital balances of $8.8 million.
Investing Activities
Net cash used in investing activities for the six months ended March 31, 2023 and 2022 was $7.8 million and $6.0 million, respectively, primarily driven in both periods by capital expenditures for model homes and information systems infrastructure.
Financing Activities
Net cash used in financing activities for the six months ended March 31, 2023 was $5.2 million, primarily driven by debt issuance costs for the Unsecured Facility (see Note 6), and tax payments for stock-based compensation awards vesting.
Net cash used in financing activities for the six months ended March 31, 2022 was $12.7 million, primarily driven by the repurchase of a portion of our 2027 Senior Notes, and tax payments for stock-based compensation awards vesting.
Financial Position
As of March 31, 2023, our liquidity position consisted of $240.8 million in cash and cash equivalents and $265.0 million of remaining capacity under the Unsecured Facility, compared to $163.9 million in cash and cash equivalents and $250.0 of remaining capacity under the Secured Facility as of March 31, 2022. Meanwhile, we invested $113.0 million and $132.6 million in land acquisition and land development during quarters ended March 31, 2023 and March 31, 2022, respectively.
While we believe we possess sufficient liquidity, we are mindful of potential short-term or seasonal requirements for enhanced liquidity that may arise to operate and grow our business. As of the date of this report, we believe we have adequate capital resources and sufficient access to external financing sources to satisfy our current and reasonably anticipated requirements for funds to conduct our operations and meet other needs in the ordinary course of our business.
At times, we may also engage in capital markets, bank loan, project debt or other financial transactions, including the repurchase of debt or potential new issuances of debt or equity securities to support our business needs. The amounts involved in these transactions, if any, may be material. In addition, as necessary or desirable, we may adjust or amend the terms of and/or expand the capacity of the Facility, or enter into additional letter of credit facilities, or other similar facility arrangements, in each case with the same or other financial institutions, or allow any such facilities to mature or expire.
Debt
We generally fulfill our short-term cash requirements with cash generated from our operations and available borrowings. Additionally, our Unsecured Facility provides working capital and letter of credit capacity of $265.0 million. As of March 31, 2023, no borrowings and no letters of credit were outstanding under the Unsecured Facility, resulting in a remaining capacity of $265.0 million.
We have also entered into a number of stand-alone, cash secured letter of credit agreements with banks. These combined facilities provide for letter of credit needs collateralized by either cash or assets of the Company. We currently have $33.1 million of outstanding letters of credit under these facilities.
In the future, we may from time to time seek to continue to retire or purchase our outstanding debt through cash repurchases or in exchange for other debt securities, in open market purchases, privately-negotiated transactions, or otherwise. In addition, any material variance from our projected operating results could require us to obtain additional equity or debt financing. There can be no assurance that we will be able to complete any of these transactions in the future on favorable terms or at all. See Note 6 of the notes to the condensed consolidated financial statements in this Form 10-Q for additional details related to our borrowings.
Supplemental Guarantor Information
As discussed in Note 6 of the notes to the condensed consolidated financial statements in this Form 10-Q, the Company's obligations to pay principal and interest under certain debt agreements are guaranteed on a joint and several basis by substantially all of the Company's subsidiaries. Some of the immaterial subsidiaries do not guarantee the Senior Notes. The guarantees are full and unconditional. Summarized financial information is not presented for Beazer Homes USA, Inc. and the guarantor subsidiaries on a combined basis as the assets, liabilities and results of operations of the combined issuer and guarantors of the guaranteed security are not materially different than corresponding amounts presented in the condensed consolidated financial statements of the parent company.
Credit Ratings
Our credit ratings are periodically reviewed by rating agencies. In July 2022, S&P reaffirmed the Company’s corporate credit rating of B and the Company's positive outlook. In October 2022, Moody's upgraded the ratings for our senior unsecured notes from B3 to B2, reaffirmed the Company's issuer corporate family rating of B2 and returned the Company's outlook from stable to positive. These ratings and our current credit condition affect, among other things, our ability to access new capital. Negative changes to these ratings may result in more stringent covenants and higher interest rates under the terms of any new debt. Our credit ratings could be lowered, or rating agencies could issue adverse commentaries in the future, which could have a material adverse effect on our business, financial condition, results of operations, and liquidity. In particular, a weakening of our financial condition, including any further increase in our leverage or decrease in our profitability or cash flows, could adversely affect our ability to obtain necessary funds, could result in a credit rating downgrade or change in outlook, or could otherwise increase our cost of borrowing.
Stock Repurchases and Dividends Paid
In May 2022, the Company's Board of Directors approved a share repurchase program that authorizes the Company to repurchase up to $50.0 million of its outstanding common stock. This share repurchase program replaced the prior share repurchase program, authorized in the first quarter of fiscal 2019 of up to $50.0 million of common stock repurchases, pursuant to which $12.0 million of the capacity remained prior to the replacement of the program. All shares have been retired upon repurchase. No share repurchases were made during the three and six months ended March 31, 2023 and 2022. As of March 31, 2023, the remaining availability of the new share repurchase program was $41.8 million.
The indentures under which our Senior Notes were issued contain certain restrictive covenants, including limitations on the payment of dividends. There were no dividends paid during the three and six months ended March 31, 2023 or 2022.
Off-Balance Sheet Arrangements and Aggregate Contractual Commitments
Lot Option Agreements
In addition to purchasing land directly, we control a portion of our land supply through lot option agreements with land developers and land bankers, which generally require the payment of cash or the posting of a letter of credit or surety bond for the right to acquire lots during a specified period of time at a certain price. In recent years, we have focused on increasing our lot option agreement usage to minimize risk as we grow our land position. As of March 31, 2023, we controlled 23,820 lots, which includes 272 lots of land held for future development and 457 lots of land held for sale. Of the 23,091 active lots, we controlled 12,460 of these lots, or 54.0%, through option agreements, as compared to 11,551 lots controlled, or 50.8% of our total active lots, through option agreements as of March 31, 2022. Lot option agreements allow us to position for future growth while providing us with the flexibility to respond to changes in market conditions by renegotiating the terms of the options prior to exercise or terminating the agreement.
Under option agreements, purchase of the properties is contingent upon satisfaction of certain requirements by us and the sellers, and our liability is generally limited to forfeiture of the non-refundable deposits, letters of credit or surety bonds, and other non-refundable amounts incurred, which totaled approximately $152.0 million as of March 31, 2023. The total remaining purchase price, net of cash deposits, committed under all options was $789.3 million as of March 31, 2023. Subject to market conditions and our liquidity, we plan to further expand our use of option agreements to supplement our owned inventory supply.
We expect to exercise, subject to market conditions and seller satisfaction of contract terms, most of our option agreements. Various factors, some of which are beyond our control, such as market conditions, weather conditions, and the timing of the completion of development activities, will have a significant impact on the timing of option exercises or whether lot options will be exercised at all.
We have historically funded the exercise of lot options with operating cash flows. We expect these sources to continue to be adequate to fund anticipated future option exercises. Therefore, we do not anticipate that the exercise of our lot options will have a material adverse effect on our liquidity.
Letters of Credit and Surety Bonds
In connection with the development of our communities, we are frequently required to provide performance, maintenance, and other bonds and letters of credit in support of our related obligations with respect to such developments. The amount of such obligations outstanding at any time varies in accordance with our pending development activities. In the event any such bonds or letters of credit are drawn upon, we would be obligated to reimburse the issuer of such bonds or letters of credit. We had outstanding letters of credit and surety bonds of $33.1 million and $271.1 million, respectively, as of March 31, 2023, primarily related to our obligations to local governments to construct roads and other improvements in various developments.
Critical Accounting Estimates
Our critical accounting policies require the use of judgment in their application and in certain cases require estimates of inherently uncertain matters. Although our accounting policies are in compliance with accounting principles generally accepted in the United States of America (GAAP), a change in the facts and circumstances of the underlying transactions could significantly change the application of the accounting policies and the resulting financial statement impact. It is also possible that other professionals applying reasonable judgment to the same set of facts and circumstances could reach a different conclusion. As disclosed in our 2022 Annual Report, our most critical accounting policies relate to inventory valuation of projects in progress, warranty reserves, and income tax valuation allowances. There have been no significant changes to our critical accounting policies and estimates during the six months ended March 31, 2023 as compared to those described in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations included in our 2022 Annual Report on Form 10-K.
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q (Form 10-Q) contains forward-looking statements. These forward-looking statements represent our expectations or beliefs concerning future events or results, and it is possible that such events or results described in this Form 10-Q will not occur or be achieved. These forward-looking statements can generally be identified by the use of statements that include words such as "outlook," "may," "will," "strategy," "believe," "expect," "anticipate," "intend," "plan," "foresee," "likely," "goal," "target," "estimate," "project," "initial" or other similar words or phrases.
These forward-looking statements involve risks, uncertainties and other factors, many of which are outside of our control, that could cause actual results to differ materially from the results discussed in the forward-looking statements, including, among other things, the matters discussed in this Form 10-Q in the section captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Additional information about factors that could lead to material changes is contained in Part I, Item 1A— Risk Factors of our Annual Report on Form 10-K for the fiscal year ended September 30, 2022. These factors are not intended to be an all-inclusive list of risks and uncertainties that may affect the operations, performance, development and results of our business, but instead are the risks that we currently perceive as potentially being material. Such factors may include:
•the cyclical nature of the homebuilding industry and further deterioration in homebuilding industry conditions;
•continued increases in mortgage interest rates and reduced availability of mortgage financing due to, among other factors, recent and likely continued actions by the Federal Reserve to address sharp increases in inflation;
•other economic changes nationally and in local markets, including changes in consumer confidence, wage levels, declines in employment levels, and an increase in the number of foreclosures, each of which is outside our control and affects the affordability of, and demand for, the homes we sell;
•continued supply chain challenges negatively impacting our homebuilding production, including shortages of raw materials and other critical components such as windows, doors, and appliances;
•continued shortages of or increased costs for labor used in housing production, and the level of quality and craftsmanship provided by such labor;
•inaccurate estimates related to homes to be delivered in the future (backlog), as they are subject to various cancellation risks that cannot be fully controlled;
•financial institution disruptions, such as recent bank failures;
•potential negative impacts of the COVID-19 pandemic, which, in addition to exacerbating each of the risks listed above and below, may include a significant decrease in demand for our homes or consumer confidence generally with respect to purchasing a home, an inability to sell and build homes in a typical manner or at all, increased costs or decreased supply of building materials, including lumber, or the availability of subcontractors, housing inspectors, and other third-parties we rely on to support our operations, and recognizing charges in future periods, which may be material, for goodwill impairments, inventory impairments and/or land option agreement abandonments;
•factors affecting margins, such as adjustments to home pricing, increased sales incentives and mortgage rate buy down programs in order to remain competitive; decreased revenues; decreased land values underlying land option agreements; increased land development costs in communities under development or delays or difficulties in implementing initiatives to reduce our cycle times and production and overhead cost structures; not being able to pass on cost increases (including cost increases due to increasing the energy efficiency of our homes) through pricing increases;
•the availability and cost of land and the risks associated with the future value of our inventory, such as asset impairment charges we took on select California assets during the second quarter of fiscal 2019;
•our ability to raise debt and/or equity capital, due to factors such as limitations in the capital markets (including market volatility), adverse credit market conditions and financial institution disruptions, and our ability to otherwise meet our ongoing liquidity needs (which could cause us to fail to meet the terms of our covenants and other requirements under our various debt instruments and therefore trigger an acceleration of a significant portion or all of our outstanding debt obligations), including the impact of any downgrades of our credit ratings or reduction in our liquidity levels;
•market perceptions regarding any capital raising initiatives we may undertake (including future issuances of equity or debt capital);
•changes in tax laws or otherwise regarding the deductibility of mortgage interest expenses and real estate taxes;
•increased competition or delays in reacting to changing consumer preferences in home design;
•natural disasters or other related events that could result in delays in land development or home construction, increase our costs or decrease demand in the impacted areas;
•the potential recoverability of our deferred tax assets;
•increases in corporate tax rates;
•potential delays or increased costs in obtaining necessary permits as a result of changes to, or complying with, laws, regulations or governmental policies, and possible penalties for failure to comply with such laws, regulations or governmental policies, including those related to the environment;
•the results of litigation or government proceedings and fulfillment of any related obligations;
•the impact of construction defect and home warranty claims;
•the cost and availability of insurance and surety bonds, as well as the sufficiency of these instruments to cover potential losses incurred;
•the impact of information technology failures, cybersecurity issues or data security breaches;
•the impact of governmental regulations on homebuilding in key markets, such as regulations limiting the availability of water and electricity (including availability of electrical equipment such as transformers and meters);
•the success of our ESG initiatives, including our ability to meet our goal that by 2025 every home we build will be Net Zero Energy Ready, as well as the success of any other related partnerships or pilot programs we may enter into in order to increase the energy efficiency of our homes and prepare for a Net Zero future; and
•terrorist acts, protests and civil unrest, political uncertainty, acts of war or other factors over which the Company has no control.
Any forward-looking statement, including any statement expressing confidence regarding future outcomes, speaks only as of the date on which such statement is made and, except as required by law, we undertake no obligation to update 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. New factors emerge from time to time, and it is not possible to predict all such factors.