Acquisition of Devon Street Homes, L.P.

3 Months Ended

Mar. 31, 2024

Acquisition of Devon Street Homes, L.P. [Abstract]

Note 19 ‑ Acquisition of Devon Street Homes, L.P.:

On July 31, 2023 (the Acquisition Date), the Company acquired substantially all of the assets of Devon Street Homes, L.P. (Devon Street). Devon Street is a builder of single-family homes in Houston, Texas, and targets entry-level and first-time homebuyers. The acquisition of Devon Street allows the Company to expand its operations into the Houston, Texas market area. The Company funded the acquisition, with an estimated purchase price of approximately $83.9 million, primarily from cash on hand, availability under the Credit Facility and a three-year promissory note in the principal amount of $5.0 million payable to the seller. In addition to the purchase price, the agreement also contemplates two earnout payments that will be paid to the seller upon the achievement of certain gross margin targets and contracting for future lots. The preliminary estimate of goodwill arising from the acquisition primarily relates to acquired workforce, synergies, and economies of scale expected from combining the operations of Devon Street with the Company. Goodwill recognized is expected to be deductible for income tax purposes. The Company recognized transaction expense of approximately $0.8 million related to the acquisition of Devon Street during the year ended December 31, 2023.

The following table summarizes the estimated fair value of each class of consideration transferred or expected to be transferred in relation to the Devon Street acquisition as of the Acquisition Date (in thousands):

Cash consideration ⁽¹⁾	$	75,865
Seller note payable		5,000
Contingent consideration ⁽²⁾		3,000
Total estimated consideration to be paid	$	83,865

⁽¹⁾	The cash consideration was funded by $3.9 million of cash on hand and $72.0 million of draws on the Company’s Credit Facility.

⁽²⁾

The contingent consideration represents management’s estimate of the fair value of the future payment to be made to the former owner of Devon Street under the terms of the Gross Margin Earnout feature included in the executed Asset Purchase Agreement for the Devon Street acquisition. Per the terms of the Gross Margin Earnout feature, the seller is entitled to receive a one‑time payment in the first quarter of 2025 based on the newly established Houston division’s gross margin (as defined) for the year ending December 31, 2024. The payout will be determined in accordance with the Gross Margin Calculation Payout Grid and ranges from a minimum of zero to a maximum of $5.0 million.

The Company accounted for the Devon Street acquisition as a business combination, which requires assets acquired and liabilities assumed to be recorded at fair value as of the Acquisition Date. The preliminary fair values of the assets acquired and liabilities assumed, which are presented in the table below, and the related preliminary acquisition accounting, are based on management’s estimates and assumptions, as well as information compiled by management, including the books and records of Devon Street, as of the date these financial statements were available to be issued. The Company believes that the information gathered to date provides a reasonable basis for estimating the preliminary fair values of assets acquired and liabilities assumed. The Company’s estimates and assumptions are subject to change during the measurement period, not to exceed one year from the Acquisition Date. Any potential adjustments made could be material in relation to the values presented in the table below.

The following table summarizes the allocation of the preliminary purchase price as of the Acquisition Date (in thousands):

Real estate inventory	$	51,723
Deposits on real estate under option or contracts		7,438
Property and equipment, net		69
Goodwill		25,726
Other assets		324
Accounts payable		(857	)
Customer deposits		(181	)
Accrued expenses and other liabilities		(377	)
Fair value of consideration transferred	$	83,865

As discussed above, the Company’s acquisition accounting for the Devon Street acquisition is preliminary. The primary areas of the acquisition accounting that are not yet finalized include, but are not limited to, the following: (1) finalizing the review and valuation of the acquired tangible and intangible assets and liabilities (including the models, key assumptions, inputs, and estimates) and (2) finalizing the identification of the tangible and intangible assets acquired and liabilities assumed and identified. The Company will continue to evaluate these items until they are satisfactorily resolved and adjust the acquisition accounting accordingly within the allowable measurement period (not to exceed one year from the date of acquisition), as defined by ASC 805. During the fourth quarter of 2023, certain measurement period adjustments were made to the total estimated consideration to be paid and the allocation of the purchase price. These adjustments resulted in an increase in goodwill of $9.3 million.

The following presents the Company’s unaudited proforma consolidated home closing revenue and net income for the three months ended March 31, 2023 as if the Devon Street acquisition had occurred on January 1, 2022. This unaudited pro forma consolidated financial information is provided for informational purposes only and is not necessarily indicative of the operating results that would have occurred if the acquisition of Devon Street had been completed on January 1, 2022, nor is it indicative of the Company’s future results. As a result, actual results could differ materially from the unaudited pro forma consolidated financial information presented below.

	Pro Forma for the Three Months Ended March 31, 2023
	(In thousands)
Home closing revenue	$	183,443
Net income	$	29,477

The unaudited proforma consolidated financial information was prepared using the acquisition method of accounting and was based on the historical financial information of the Company and Devon Street. In order to reflect the occurrence of the acquisition on January 1, 2022, the unaudited proforma financial information includes adjustments to reflect the following: (i) the additional interest expense associated with new borrowings to finance the acquisition; (ii) incremental amortization expense based on the current preliminary fair values of inventory step-up; and (iii) the change in fair value for contingent consideration.