What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-07-30 compared with 2020-04-29 · 274 added, 263 removed, 591 unchanged (48% of the section changed)

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Our business operations consist of homebuilding, a majority-owned residential lot development company, financial services and other activities.

Our homebuilding operations are our core business and primarily include the construction and sale of single-family homes with sales prices generally ranging from $100,000 to more than $1,000,000, with an average closing price of $299,200 during the six months ended March 31, 2020.

Approximately 91% of our home sales revenue in the six months ended March 31, 2020 was generated from the sale of single-family detached homes, with the remainder from the sale of attached homes, such as townhomes, duplexes and triplexes.

Approximately 91% of our home sales revenue in the nine months ended June 30, 2020 was generated from the sale of single-family detached homes, with the remainder from the sale of attached homes, such as townhomes, duplexes and triplexes.

During fiscal 2018, we acquired 75% of the outstanding shares of Forestar Group Inc.

(Forestar) for $558.3 million in cash.

Forestar is a publicly traded residential lot development company listed on the New York Stock Exchange under the ticker symbol “FOR.” Forestar is a component of our homebuilding strategy to enhance operational and capital efficiency and returns by expanding relationships with land developers and increasing the portion of our land and lot position controlled under land purchase contracts.

At March 31, 2020, we owned 65% of Forestar’s outstanding common stock.

(Forestar), a publicly traded residential lot development company listed on the New York Stock Exchange under the ticker symbol “FOR.” Forestar is a component of our homebuilding strategy to enhance operational and capital efficiency and returns by expanding relationships with land developers and increasing the portion of our land and lot position controlled under land purchase contracts.

At June 30, 2020, we owned 65% of Forestar’s outstanding common stock.

Our financial services operations provide mortgage financing and title agency services to homebuyers in many of our homebuilding markets.

DHI Mortgage, our 100% owned subsidiary, provides mortgage financing services primarily to our homebuyers and generally sells the mortgages it originates and the related servicing rights to third-party purchasers.

DHI Mortgage, our 100% owned subsidiary, provides mortgage financing services primarily to our homebuyers and sells substantially all of the mortgages it originates and the majority of the related servicing rights to third-party purchasers.

DHI Mortgage originates loans in accordance with purchaser guidelines and sells substantially all of its mortgage production shortly after origination.

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After DHI Communities has completed construction and achieved a stabilized occupancy rate, the property is typically marketed for sale.

We currently have three projects under active construction and one project that is substantially complete.

In November 2019, DHI Communities sold a multi-family rental property for $61.5 million and recorded a gain on the sale of $31.2 million.

In February 2020, DHI Communities sold a multi-family rental property for $67.0 million and recorded a gain on the sale of $28.2 million.

At March 31, 2020 and September 30, 2019, our consolidated balance sheets included $202.8 million and $204.0 million, respectively, of assets owned by DHI Communities.

The combined assets of all of our subsidiaries engaged in other business activities totaled $333.4 million and $317.9 million at March 31, 2020 and September 30, 2019, respectively, and the combined pre-tax income of these subsidiaries was $28.0 million and $57.5 million in the three and six months ended March 31, 2020, respectively, compared to $27.5 million and $28.5 million in the prior year periods.

At June 30, 2020 and September 30, 2019, our consolidated balance sheets included $224.8 million and $204.0 million, respectively, of assets owned by DHI Communities.

The combined assets of all of our subsidiaries engaged in other business activities totaled $361.3 million and $317.9 million at June 30, 2020 and September 30, 2019, respectively.

Fiscal Year-to-Date Operating Results

Economic fundamentals remained solid in the housing market throughout most of the second quarter of fiscal 2020, as interest rates on mortgage loans remained low, demand was strong and there was a limited supply of homes at affordable prices across most of our markets.

During the six months ended March 31, 2020, our number of homes closed and home sales revenues increased 10% and 11%, respectively, compared to the prior year period, and our consolidated revenues increased 11% to $8.5 billion compared to $7.6 billion in the prior year period.

Our pre-tax income was $1.1 billion in the six months ended March 31, 2020 compared to $838.5 million in the prior year period, and our pre-tax operating margin was 13.4% compared to 11.0%.

Net income was $916.4 million in the six months ended March 31, 2020 compared to $641.1 million in the prior year period.

The current six month period results include a tax benefit of $39.5 million related to the retroactive reinstatement of the federal energy efficient homes tax credit.

Cash provided by our homebuilding operations was $52.1 million in the six months ended March 31, 2020 compared to cash used of $215.9 million in the prior year period.

In the trailing twelve months ended March 31, 2020, our homebuilding return on inventory (ROI) was 20.2% compared to 18.6% in the prior year period.

Homebuilding ROI is calculated as homebuilding pre-tax income for the year divided by average inventory.

Average inventory in the ROI calculation is the sum of ending inventory balances for the trailing five quarters divided by five.

Within our homebuilding land and lot portfolio, our lots controlled under purchase contracts represent 64% of the lots owned and controlled at March 31, 2020 compared to 60% at September 30, 2019 and 62% at March 31, 2019.

During the nine months ended June 30, 2020, our number of homes closed and home sales revenues increased 10% and 11%, respectively, compared to the prior year period, and our consolidated revenues increased 11% to $13.9 billion compared to $12.6 billion in the prior year period.

Our pre-tax income was $1.9 billion in the nine months ended June 30, 2020 compared to $1.5 billion in the prior year period, and our pre-tax operating margin was 13.9% compared to 11.7%.

Net income was $1.5 billion in the nine months ended June 30, 2020 compared to $1.1 billion in the prior year period.

The current nine month period results include a tax benefit of $77.6 million related to the retroactive reinstatement of the federal energy efficient homes tax credit.

Cash provided by our homebuilding operations was $1.2 billion in the nine months ended June 30, 2020 compared to $605.7 million in the prior year period.

In the trailing twelve months ended June 30, 2020, our return on equity (ROE) was 19.9% compared to 17.3% in the prior year period, and our homebuilding return on inventory (ROI) was 21.6% compared to 18.1%.

ROE is calculated as net income attributable to D.R.

Horton for the trailing twelve months divided by average stockholders’ equity, where average stockholders’ equity is the sum of ending stockholders’ equity balances of the trailing five quarters divided by five.

Homebuilding ROI is calculated as homebuilding pre-tax income for the trailing twelve months divided by average inventory, where average inventory is the sum of ending homebuilding inventory balances for the trailing five quarters divided by five.

Within our homebuilding land and lot portfolio, our lots controlled under purchase contracts represent 66% of the lots owned and controlled at June 30, 2020 compared to 60% at September 30, 2019 and 61% at June 30, 2019.

Our focus on increasing the controlled portion of our finished lot pipeline has benefited from our relationship with Forestar, our majority-owned lot development company .

During the latter part of March and into April, the impacts of the COVID-19 pandemic (COVID-19) and the related widespread reductions in economic activity across the United States began to adversely affect our business operations and the demand for our homes across all of our operating markets.

We have experienced increases in sales cancellations and decreases in sales orders in late March and April as compared to the same period in the prior year.

As of April 28, 2020, our net sales orders for the month of April are approximately 11% lower than the same period a year ago.

This trend in net sales orders may not be indicative of the net sales order results that may be expected for the full month of April 2020, because a significant number of sales contract cancellations typically occur in the final days of each month, which can significantly affect net sales orders for the full month.

As of April 28, 2020, our weekly net sales order volumes in the most recent two weeks have increased as compared to the preceding four weeks.

In almost all of the municipalities across the U.S.

where we operate, residential construction and financial services have been designated as essential businesses as part of critical infrastructure.

We have continued our homebuilding, lot development and financial services operations in those markets where allowed and have implemented operational protocols to comply with social distancing and other health and safety standards as required by federal, state and local government agencies, taking into consideration guidelines of the Centers for Disease Control and Prevention and other public health authorities.

Our mortgage company has experienced lower pricing and margins on sales of mortgage loans and servicing rights in late March and April due to disruption in the secondary mortgage markets.

Many purchasers and servicers of our mortgages have limited their purchases and tightened their credit standards due to liquidity and operational challenges caused by COVID-19 and the uncertainty of the impact of the borrower forbearance provisions of the federal Coronavirus Aid, Relief, and Economic Security Act (CARES Act) enacted in late March 2020.

There is significant uncertainty regarding the extent to which and how long COVID-19 and related government directives, actions and economic relief efforts will disrupt the U.S.

During the latter part of March 2020, the impacts of the COVID-19 pandemic (C-19) and the related widespread reductions in economic activity across the United States began to adversely affect our business.

However, residential construction and financial services are designated as essential businesses as part of critical infrastructure in almost all municipalities across the U.S.

where we operate.

We implemented operational protocols to comply with social distancing and other health and safety standards as required by federal, state and local government agencies, taking into consideration guidelines of the Centers for Disease Control and Prevention and other public health authorities.

During April 2020 when restrictive stay-at-home orders were in place for many markets across the United States, we experienced increases in sales cancellations and decreases in sales orders, and net sales orders for April were 1% lower than the same month in the prior year.

However, as economic activity began to resume and restrictive orders began to be lifted, our weekly sales pace during May and June increased significantly, and our cancellation rate returned to normal levels.

In both May and June, our net sales orders increased over 50% compared to the prior year periods.

For the third quarter of fiscal 2020, our net sales orders increased by 38% compared to the prior year quarter.

We believe the increase in demand in May and June was fueled by increased buyer urgency due to lower interest rates on mortgage loans, the limited supply of homes at affordable price points across most of our markets and to some extent the lower levels of home sales from mid-March through early April, which caused some pent-up demand.

We were and remain well-positioned for this increased demand with our affordable product offerings, lot supply and housing inventory, particularly completed homes and those close to completion.

However, even with the resurgence of demand in May and June, we remain cautious as to the impact C-19 may have on our operations and on the overall economy in the future.

There is significant uncertainty regarding the extent to which and how long C-19 and its related effects will impact the U.S.

economy and level of employment, capital markets, secondary mortgage markets, consumer confidence, demand for our homes and availability of mortgage loans to homebuyers.

The extent to which this impacts our operational and financial performance will depend on future developments, including the duration and spread of COVID-19 and the impact on our customers, trade partners and employees, all of which are highly uncertain and cannot be predicted.

We believe our strong balance sheet and liquidity position will help us operate in this uncertain environment.

We will seek to maintain our flexible financial position by generating strong cash flows from our homebuilding operations, limiting land acquisition and land development spending and adjusting our product offerings, incentives, home pricing, sales pace and inventory levels to optimize the return on our inventory investments in each of our communities based on local housing market conditions.

Our operating strategy focuses on enhancing long-term value to our shareholders by leveraging our financial and competitive position in our core homebuilding business to increase the returns on our inventory investments and generate strong profitability and cash flows, while managing risk and maintaining financial flexibility to withstand an economic downturn and remain positioned to make opportunistic strategic investments.

We are making operational adjustments and limiting capital investments as a result of the COVID-19 pandemic and its potential impact on our businesses, including cautiously managing our homes under construction and limiting land acquisition and land development activities;

The extent to which this impacts our operational and financial performance will depend on future developments, including the duration and spread of C-19 and the impact on our customers, trade partners and employees, all of which are highly uncertain and cannot be predicted.

We believe our strong balance sheet and liquidity position provide us with the flexibility to operate effectively through these changing economic conditions.

We plan to continue to generate strong cash flows from our homebuilding operations and manage our product offerings, incentives, home pricing, sales pace and inventory levels to optimize the return on our inventory investments in each of our communities based on local housing market conditions.

Our operating strategy focuses on enhancing long-term value to our shareholders by leveraging our financial and competitive position in our core homebuilding business to increase the returns on our inventory investments and generate strong profitability and cash flows, while managing risk and maintaining financial flexibility to navigate uncertain economic conditions and make opportunistic strategic investments.

We have made operational adjustments as a result of the COVID-19 pandemic;

however, our strategy remains consistent and includes the following initiatives:

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• Delivering high quality homes and a positive experience to our customers both during and after the sale.

• Currently, we are cautiously managing our inventory of homes under construction relative to demand in each of our markets to adjust to the impact of COVID-19, while continuing to start construction on unsold homes to capture new home demand and actively controlling the number of unsold, completed homes in inventory.

• Currently, we are limiting our land acquisition and development investments to adjust to the impact of COVID-19, while still investing in desirable markets and controlling the level of land and lots we own in each market relative to the local new home demand.

• Currently, our homebuilding operations are working with land developers and our majority-owned Forestar lot development subsidiary to adjust timing of lot purchases under contract to align with current and expected new home demand in each of our markets to adjust to the impact of COVID-19, while continuing to seek opportunities to expand the portion of our land and finished lots controlled through purchase contracts and assisting Forestar with their operations.

• Managing our inventory of homes under construction relative to demand in each of our markets to adjust to the impact of C-19, while continuing to start construction on unsold homes to capture new home demand and actively controlling the number of unsold, completed homes in inventory.

• Monitoring our land acquisition and development investments to adjust to the impact of C-19, while still investing in desirable markets and controlling the level of land and lots we own in each market relative to the local new home demand.

• Continuing to seek opportunities to expand the portion of our land and finished lots controlled through purchase contracts and assist Forestar with its operations, while adjusting the timing of our lot purchases under contract, where necessary, to adjust to the impact of C-19.

• Controlling the cost of goods purchased from both vendors and subcontractors.

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• Investing in the construction of garden style multi-family rental properties to meet rental demand in high growth suburban markets and selling these properties profitably.

We believe our operating strategy, which has produced positive results in recent years, will allow us to withstand the impact of COVID-19 and related economic downturn and maintain and improve our financial and competitive position and balance sheet strength.

We believe our operating strategy, which has produced positive results in recent years, will allow us to successfully operate through an uncertain economic environment to maintain and improve our financial and competitive position and balance sheet strength.

However, we cannot provide any assurances that the initiatives listed above will continue to be successful, and we may need to adjust components of our strategy to meet future market conditions.

Key financial results as of and for the three months ended March 31, 2020, as compared to the same period of 2019, were as follows:

Key financial results as of and for the three months ended June 30, 2020, as compared to the same period of 2019, were as follows:

Homebuilding:

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• Homebuilding pre-tax income was 13.6% of homebuilding revenues compared to 11.8%.

• Homebuilding cash and cash equivalents totaled $1.0 billion compared to $1.0 billion and $557.3 million at September 30, 2019 and March 31, 2019, respectively.

• Homebuilding inventories totaled $11.1 billion compared to $10.3 billion and $11.1 billion at September 30, 2019 and March 31, 2019, respectively.

• Homes in inventory totaled 33,400 compared to 27,700 and 32,100 at September 30, 2019 and March 31, 2019, respectively.

• Owned lots totaled 118,700 compared to 121,400 and 120,900 at September 30, 2019 and March 31, 2019, respectively.

Lots controlled through purchase contracts increased to 210,600 from 185,900 and 195,500 at September 30, 2019 and March 31, 2019, respectively.

• Homebuilding debt was $2.5 billion compared to $2.0 billion and $2.8 billion at September 30, 2019 and March 31, 2019, respectively.

• Homebuilding debt to total capital was 19.2% compared to 17.0% and 22.9% at September 30, 2019 and March 31, 2019, respectively.

• Homebuilding cash and cash equivalents totaled $1.9 billion compared to $1.0 billion and $577.9 million at September 30, 2019 and June 30, 2019, respectively.

• Homebuilding inventories totaled $10.9 billion compared to $10.3 billion and $10.7 billion at September 30, 2019 and June 30, 2019, respectively.

• Homes in inventory totaled 32,800 compared to 27,700 and 29,200 at September 30, 2019 and June 30, 2019, respectively.

• Owned lots totaled 115,200 compared to 121,400 and 118,500 at September 30, 2019 and June 30, 2019, respectively.

Lots controlled through purchase contracts increased to 220,300 from 185,900 and 184,500 at September 30, 2019 and June 30, 2019, respectively.

• Homebuilding debt was $2.5 billion compared to $2.0 billion and $2.2 billion at September 30, 2019 and June 30, 2019, respectively.

• Homebuilding debt to total capital was 18.4% compared to 17.0% and 18.5% at September 30, 2019 and June 30, 2019, respectively.

• Forestar’s revenues increased 102% to $177.9 million compared to $88.2 million.

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• Forestar’s pre-tax income was 5.8% of Forestar revenues compared to 9.5%.

• Forestar’s cash and cash equivalents totaled $438.2 million compared to $382.8 million and $66.4 million at September 30, 2019 and March 31, 2019, respectively.

• Forestar’s inventories totaled $1.2 billion compared to $1.0 billion and $851.5 million at September 30, 2019 and March 31, 2019, respectively.

• Owned and controlled lots totaled 52,300 compared to 38,300 and 31,400 at September 30, 2019 and March 31, 2019, respectively.

• Forestar’s cash and cash equivalents totaled $355.6 million compared to $382.8 million and $223.0 million at September 30, 2019 and June 30, 2019, respectively.

• Forestar’s inventories totaled $1.3 billion compared to $1.0 billion at both September 30, 2019 and June 30, 2019.

• Owned and controlled lots totaled 50,700 compared to 38,300 and 37,400 at September 30, 2019 and June 30, 2019, respectively.

Of these lots, 29,600 were under contract to sell to or subject to a right of first offer with D.R.

Horton, compared to 23,400 and 21,700 at September 30, 2019 and March 31, 2019, respectively.

• Forestar’s debt was $640.1 million compared to $460.5 million and $149.2 million at September 30, 2019 and March 31, 2019, respectively.

• Forestar’s debt to total capital was 43.4% compared to 36.3% and 17.8% at September 30, 2019 and March 31, 2019, respectively.

Horton, compared to 23,400 and 24,100 at September 30, 2019 and June 30, 2019, respectively.

• Forestar’s debt was $640.6 million compared to $460.5 million and $458.9 million at September 30, 2019 and June 30, 2019, respectively.

• Forestar’s debt to total capital was 43.1% compared to 36.3% and 39.8% at September 30, 2019 and June 30, 2019, respectively.

Financial Services:

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• Consolidated pre-tax income was 14.5% of consolidated revenues compared to 12.8%.

• Income tax expense was $137.3 million compared to $108.4 million.

• Income tax expense was $149.5 million compared to $153.1 million, and our effective tax rate was 19.1% compared to 24.4%.

• Net income attributable to D.R.

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Horton increased 37% to $1.72 compared to $1.26.

• Stockholders’ equity was $10.5 billion compared to $10.0 billion and $9.4 billion at September 30, 2019 and March 31, 2019, respectively.

• Book value per common share increased to $28.77 compared to $27.20 and $25.09 at September 30, 2019 and March 31, 2019, respectively.

• Debt to total capital was 29.2% compared to 25.3% at September 30, 2019 and 27.9% at March 31, 2019.

Key financial results for the six months ended March 31, 2020, as compared to the same period of 2019, were as follows:

• Stockholders’ equity was $11.0 billion compared to $10.0 billion and $9.6 billion at September 30, 2019 and June 30, 2019, respectively.

• Book value per common share increased to $30.38 compared to $27.20 and $26.08 at September 30, 2019 and June 30, 2019, respectively.

• Debt to total capital was 28.0% compared to 25.3% at September 30, 2019 and 26.4% at June 30, 2019.

Key financial results for the nine months ended June 30, 2020, as compared to the same period of 2019, were as follows:

Homebuilding:

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• Homebuilding SG&A expense was 8.4% of homebuilding revenues compared to 8.8%.

• Homebuilding pre-tax income was $1.0 billion compared to $754.8 million.

• Homebuilding pre-tax income was $1.7 billion compared to $1.3 billion.

• Homebuilding pre-tax income was 12.9% of homebuilding revenues compared to 10.8%.

• Net cash provided by homebuilding operations was $52.1 million compared to net cash used of $215.9 million.

• Net cash provided by homebuilding operations was $1.2 billion compared to $605.7 million.

• Forestar’s revenues increased 204% to $584.3 million compared to $192.0 million.

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Consolidated Results:

• Consolidated pre-tax income increased 36% to $1.1 billion compared to $838.5 million.

• Consolidated pre-tax income increased 32% to $1.9 billion compared to $1.5 billion.

• Consolidated pre-tax income was 13.9% of consolidated revenues compared to 11.7%.

• Income tax expense was $228.1 million compared to $197.4 million.

• Income tax expense was $377.6 million compared to $350.5 million, and our effective tax rate was 19.6% compared to 23.9%.

• Net income attributable to D.R.

Horton increased 43% to $914.0 million compared to $638.4 million.

Horton increased 39% to $1.5 billion compared to $1.1 billion.

• Diluted net income per common share attributable to D.R.

Horton increased 42% to $4.17 compared to $2.94.

• Net cash used in operations was $395.1 million compared to $461.7 million.

• Net cash provided by operations was $588.9 million compared to $80.7 million.

RESULTS OF OPERATIONS - HOMEBUILDING

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Louisiana Baton Rouge Sacramento

Lafayette San Bernardino County

Lake Charles/Lafayette San Bernardino County

Oklahoma Oklahoma City San Diego County

Texas Austin Ventura County

Bryan/College Station Hawaii Maui

Fort Worth Nevada Las Vegas

Killeen/Temple/Waco Oregon Bend

Midland/Odessa Portland/Salem

New Braunfels/San Marcos Utah Salt Lake City

San Antonio Washington Seattle/Tacoma/Everett/Olympia

Southwest Region Vancouver

Texas Austin Hawaii Maui

Bryan/College Station Oahu

Dallas Nevada Las Vegas

Fort Worth Reno

Houston Oregon Bend

Killeen/Temple/Waco Portland/Salem

Midland/Odessa Utah Salt Lake City

New Braunfels/San Marcos Washington Seattle/Tacoma/Everett/Olympia

San Antonio Spokane

Southwest Region

Arizona Phoenix

New Mexico Albuquerque

The following tables and related discussion set forth key operating and financial data for our homebuilding operations by reporting segment as of and for the three and six months ended March 31, 2020 and 2019.

The following tables and related discussion set forth key operating and financial data for our homebuilding operations by reporting segment as of and for the three and nine months ended June 30, 2020 and 2019.

Net Sales Orders (1)

Three Months Ended March 31,

Three Months Ended June 30,

Net Homes Sold Value (In millions) Average Selling Price

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21,519 15,588 38 % $ 6,337.3 $ 4,707.1 35 % $ 294,500 $ 302,000 (2) %

Six Months Ended March 31,

Nine Months Ended June 30,

Net Homes Sold Value (In millions) Average Selling Price

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Sales Order Cancellations

Three Months Ended March 31,

Three Months Ended June 30,

Cancelled Sales Orders Value (In millions) Cancellation Rate (2)

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5,968 3,978 $ 1,723.2 $ 1,124.4 22 % 20 %

Six Months Ended March 31,

Nine Months Ended June 30,

Cancelled Sales Orders Value (In millions) Cancellation Rate (2)

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Net Sales Orders

The number of net sales orders increased 20% and 19% in the three and six months ended March 31, 2020, respectively, compared to the prior year periods, with increases in all of our regions.

The value of net sales orders increased 22% to $6.0 billion (20,087 homes) and to $10.0 billion (33,213 homes) for the three and six months ended March 31, 2020, respectively, compared to $4.9 billion (16,805 homes) and $8.2 billion (27,847 homes) in the prior year periods.

The average selling price of net sales orders during the three and six months ended March 31, 2020 was $299,700 and $300,200, respectively, up 2% from both prior year periods.

The number of net sales orders increased 38% and 26% in the three and nine months ended June 30, 2020, respectively, compared to the prior year periods, with increases in all of our regions.

The value of net sales orders increased 35% to $6.3 billion (21,519 homes) and 27% to $16.3 billion (54,732 homes) for the three and nine months ended June 30, 2020, respectively, compared to $4.7 billion (15,588 homes) and $12.9 billion (43,435 homes) in the prior year periods.

The average selling price of net sales orders during the three and nine months ended June 30, 2020 was $294,500 and $298,000, respectively, down 2% and up 1% from the prior year periods.

The markets contributing most to the increases in sales volumes in our regions were as follows:

the Carolina markets in the East;

the Denver, Iowa and Minnesota markets in the Midwest;

the Florida markets in the Southeast;

the Houston and Dallas markets in the South Central;

the Carolina markets (particularly Myrtle Beach) in the East;

the Denver, Chicago and Indiana markets (quarter) and the Denver, Iowa and Indiana markets (nine month period) in the Midwest;

the Florida markets (particularly Tampa) in the Southeast;

the Houston, Dallas and Fort Worth markets in the South Central;

the Phoenix market in the Southwest;

and the California markets in the West.

Our sales order cancellation rate (cancelled sales orders divided by gross sales orders for the period) was 19% in both the three and six months ended March 31, 2020 compared to 19% and 21% in the prior year periods.

During the latter part of March and into April, the impacts of the COVID-19 pandemic and the related widespread reductions in economic activity began to adversely affect our business operations and the demand for our homes.

We experienced increases in sales cancellations and decreases in sales orders in late March and April as compared to the same period in the prior year.

There is significant uncertainty regarding the extent to which and how long COVID-19 and related government directives, actions and economic relief efforts will disrupt the U.S.

economy and level of employment, capital markets, secondary mortgage markets, consumer confidence, demand for our homes and availability of mortgage loans to homebuyers.

We believe we are well positioned to operate in this uncertain environment and will continue to adjust product offerings, incentives, home pricing, sales pace and inventory levels to optimize the return on our inventory investments in each of our communities based on local housing market conditions.

and the Portland and California markets in the West.

Our sales order cancellation rate (cancelled sales orders divided by gross sales orders for the period) was 22% and 20% in the three and nine months ended June 30, 2020, respectively, compared to 20% and 21% in the prior year periods.

During the month of April 2020 when restrictive stay at home orders were in place for many of our markets, we experienced increases in sales cancellations and decreases in sales orders, and our net sales orders for the month were 1% lower than the same period a year ago.

However, as some economic activity began to resume and restrictive orders began to be lifted, our weekly sales pace during May and June increased significantly, and our cancellation rate returned to normal levels.

Sales Order Backlog

As of March 31,

As of June 30,

Homes in Backlog Value (In millions) Average Selling Price

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Homes Closed and Home Sales Revenue

Three Months Ended March 31,

Three Months Ended June 30,

Homes Closed Value (In millions) Average Selling Price

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17,642 15,971 10 % $ 5,207.6 $ 4,734.6 10 % $ 295,200 $ 296,400 — %

Six Months Ended March 31,

Nine Months Ended June 30,

Homes Closed Value (In millions) Average Selling Price

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Home Sales Revenue

Revenues from home sales increased 10% to $4.4 billion (14,539 homes closed) for the three months ended March 31, 2020 from $4.0 billion (13,480 homes closed) in the prior year period.

Revenues from home sales increased 11% to $8.2 billion (27,498 homes closed) for the six months ended March 31, 2020 from $7.4 billion (24,980 homes closed) in the prior year period.

Home sales revenues increased in all of our regions primarily due to an increase in the number of homes closed, as well as an increase in the average selling price of homes in our Southwest region.

The number of homes closed increased 8% and 10% in the three and six months ended March 31, 2020, respectively, compared to the prior year periods.

Revenues from home sales increased 10% to $5.2 billion (17,642 homes closed) for the three months ended June 30, 2020 from $4.7 billion (15,971 homes closed) in the prior year period.

Revenues from home sales increased 11% to $13.4 billion (45,140 homes closed) for the nine months ended June 30, 2020 from $12.1 billion (40,951 homes closed) in the prior year period.

Home sales revenues increased in most of our regions primarily due to an increase in the number of homes closed.

The number of homes closed increased 10% in both the three and nine months ended June 30, 2020 compared to the prior year periods.

The markets contributing most to the increases in closing volumes in our regions were as follows:

the New Jersey and Carolina markets in the East;

the Indiana markets in the Midwest;

the Carolina markets (particularly Myrtle Beach) in the East;

the Denver and Iowa markets (quarter) and the Indiana and Iowa markets (nine month period) in the Midwest;

the Florida markets in the Southeast;

the Houston market in the South Central;

the Tucson market in the Southwest;

and the Portland and Washington markets in the West.

the Dallas and San Antonio markets (quarter) and the Houston and Dallas markets (nine month period) in the South Central;

and the California markets (nine month period) in the West.

The markets contributing most to the decreases in closing volumes in the Southwest during both periods and in the West during the quarter were Phoenix and Seattle, respectively.

Homebuilding Operating Margin Analysis

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Three Months Ended

March 31, Six Months Ended

June 30, Nine Months Ended

2020 2019 2020 2019

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Home Sales Gross Profit

Gross profit from home sales increased to $927.8 million in the three months ended March 31, 2020 from $766.3 million in the prior year period and increased 200 basis points to 21.3% as a percentage of home sales revenues.

The percentage increase resulted from improvements of 180 basis points due to a decrease in the average cost of our homes closed while the average selling price increased slightly, 10 basis points from a decrease in the amount of purchase accounting adjustments related to prior year acquisitions and 10 basis points due to a decrease in the amortization of capitalized interest.

Gross profit from home sales increased to $1.7 billion in the six months ended March 31, 2020 from $1.4 billion in the prior year period and increased 150 basis points to 21.1% as a percentage of home sales revenues.

Gross profit from home sales increased to $1.1 billion in the three months ended June 30, 2020 from $961.6 million in the prior year period and increased 130 basis points to 21.6% as a percentage of home sales revenues.

The percentage increase resulted from improvements of 120 basis points due to a decrease in the average cost of our homes closed while the average selling price remained flat, 10 basis points from a decrease in the amount of purchase accounting adjustments related to prior year acquisitions and 10 basis points due to a decrease in the amortization of capitalized interest, partially offset by a 10 basis point decrease due to increased warranty and construction defect costs.

Gross profit from home sales increased to $2.9 billion in the nine months ended June 30, 2020 from $2.4 billion in the prior year period and increased 140 basis points to 21.3% as a percentage of home sales revenues.

The percentage increase resulted from improvements of 130 basis points due to a decrease in the average cost of our homes closed while the average selling price increased slightly, 10 basis points from a decrease in the amount of purchase accounting adjustments related to prior year acquisitions and 10 basis points due to a decrease in the amortization of capitalized interest, partially offset by a 10 basis point decrease due to increased warranty and construction defect costs.

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These actions could cause our gross profit margins to fluctuate in future periods.

If an economic recession and a decline in new home demand occur due to COVID-19, we would expect our gross profit margins to decline from current levels.

If a prolonged economic recession and a resulting decline in new home demand occur due to C-19, we would expect our gross profit margins to decline from current levels.

Land/Lot Sales and Other Revenues

Land/lot sales and other revenues from our homebuilding operations were $15.5 million and $35.2 million in the three and six months ended March 31, 2020, respectively, and $14.9 million and $21.7 million in the comparable periods of fiscal 2019.

Land/lot sales and other revenues from our homebuilding operations were $14.5 million and $49.7 million in the three and nine months ended June 30, 2020, respectively, and $27.5 million and $49.2 million in the comparable periods of fiscal 2019.

We continually evaluate our land and lot supply, and fluctuations in revenues and profitability from land sales occur based on how we manage our inventory levels in various markets.

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We may also sell residential lots or land parcels to manage our supply or for other strategic reasons.

As of March 31, 2020, our homebuilding operations had $26.1 million of land held for sale that we expect to sell in the next twelve months.

As of June 30, 2020, our homebuilding operations had $28.1 million of land held for sale that we expect to sell in the next twelve months.

Inventory and Land Option Charges

At the end of each quarter, we review the performance and outlook for all of our communities and land inventories for indicators of potential impairment and perform detailed impairment evaluations and analyses when necessary.

At March 31, 2020, we performed detailed impairment evaluations of communities and land inventories with a combined carrying value of $47.6 million and recorded impairment charges of $1.7 million during the three months ended March 31, 2020 to reduce the carrying value of impaired land to fair value.

During the six months ended March 31, 2020, impairment charges totaled $1.7 million.

There were $7.7 million and $11.9 million of impairment charges recorded in the three and six months ended March 31, 2019, respectively.

As of June 30, 2020, we performed detailed impairment evaluations of communities and land inventories with a combined carrying value of $52.1 million and determined that no communities or land inventories were impaired.

Accordingly, no impairment charges were recorded during the three months ended June 30, 2020 compared to $6.8 million of impairment charges in the prior year period.

During the nine months ended June 30, 2020 and 2019, impairment charges totaled $1.7 million and $18.6 million, respectively.

As we manage our inventory investments across our operating markets to optimize returns and cash flows, we may modify our pricing and incentives, construction and development plans or land sale strategies in individual active communities and land held for development, which could result in the affected communities being evaluated for potential impairment.

There is uncertainty regarding the extent to which and how long COVID-19 will disrupt our operations.

If the housing market or economic conditions are adversely affected for a prolonged period due to COVID-19 or otherwise, we may be required to evaluate additional communities for potential impairment.

If the housing market or economic conditions are adversely affected for a prolonged period due to C-19 or otherwise, we may be required to evaluate additional communities for potential impairment.

These evaluations could result in additional impairment charges which could be significant.

During the three and six months ended March 31, 2020, earnest money and pre-acquisition cost write-offs related to land purchase contracts that we have terminated or expect to terminate were $7.1 million and $10.7 million, respectively, compared to $6.1 million and $9.9 million in the same periods of fiscal 2019.

During the three and nine months ended June 30, 2020, earnest money and pre-acquisition cost write-offs related to land purchase contracts that we have terminated or expect to terminate were $4.9 million and $15.6 million, respectively, compared to $12.4 million and $22.4 million in the same periods of fiscal 2019.

Selling, General and Administrative (SG&A) Expense

SG&A expense from homebuilding activities increased 1% to $361.8 million and 5% to $720.2 million in the three and six months ended March 31, 2020, respectively, from $359.3 million and $683.9 million in the prior year periods.

SG&A expense as a percentage of homebuilding revenues was 8.3% and 8.7% in the three and six months ended March 31, 2020, respectively, compared to 9.0% and 9.2% in the prior year periods.

Employee compensation and related costs represented 73% of SG&A costs in both the three and six months ended March 31, 2020 compared to 73% and 72% in the prior year periods.

These costs increased 1% to $265.7 million and 8% to $527.7 million in the three and six months ended March 31, 2020, respectively.

Our homebuilding operations employed 6,987 and 6,904 employees at March 31, 2020 and 2019, respectively.

SG&A expense from homebuilding activities increased 7% to $415.1 million and 6% to $1.14 billion in the three and nine months ended June 30, 2020, respectively, from $387.4 million and $1.07 billion in the prior year periods.

SG&A expense as a percentage of homebuilding revenues was 7.9% and 8.4% in the three and nine months ended June 30, 2020, respectively, compared to 8.1% and 8.8% in the prior year periods.

Employee compensation and related costs represented 77% and 75% of SG&A costs in the three and nine months ended June 30, 2020, respectively, compared to 73% and 72% in the prior year periods.

These costs increased 13% to $320.3 million and 10% to $848.0 million in the three and nine months ended June 30, 2020, respectively.

Our homebuilding operations employed 7,077 and 6,962 employees at June 30, 2020 and 2019, respectively.

We attempt to control our SG&A costs while ensuring that our infrastructure adequately supports our operations;

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Capitalized interest is charged to cost of sales as the related inventory is delivered to the buyer.

Interest incurred by our homebuilding operations decreased 25% to $22.9 million and 18% to $47.2 million in the three and six months ended March 31, 2020, respectively, from $30.5 million and $57.6 million in the prior year periods.

The decreases were due to decreases of 17% and 11%, respectively, in our average homebuilding debt and lower average interest rates on our homebuilding debt during the periods.

Interest charged to cost of sales was 0.8% of total cost of sales (excluding inventory and land option charges) in both the three and six months ended March 31, 2020 compared to 0.9% in both prior year periods.

Other income, net of other expenses, included in our homebuilding operations was $4.1 million and $9.6 million in the three and six months ended March 31, 2020, respectively, compared to $1.6 million and $3.5 million in the prior year periods.

Interest incurred by our homebuilding operations decreased 13% to $22.3 million and 17% to $69.5 million in the three and nine months ended June 30, 2020, respectively, from $25.7 million and $83.3 million in the prior year periods.

The decreases were due to lower average interest rates on our homebuilding debt, as well as decreases of 1% and 8%, respectively, in our average homebuilding debt during the periods.

Interest charged to cost of sales was 0.8% of total cost of sales (excluding inventory and land option charges) in both the three and nine months ended June 30, 2020 compared to 0.9% in both prior year periods.

Other income, net of other expenses, included in our homebuilding operations was $0.2 million and $9.7 million in the three and nine months ended June 30, 2020, respectively, compared to $2.5 million and $6.1 million in the prior year periods.

Other income consists of interest income, rental income and various other types of ancillary income, gains, expenses and losses not directly associated with sales of homes, land and lots.

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Homebuilding Results by Reporting Region

Three Months Ended March 31,

Three Months Ended June 30,

Revenues Homebuilding

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$ 5,222.1 $ 709.8 13.6 % $ 4,762.1 $ 561.8 11.8 %

Six Months Ended March 31,

Nine Months Ended June 30,

Revenues Homebuilding

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The amortization of capitalized interest and property taxes is allocated to each segment based on the segment’s cost of sales, while expenses associated with the corporate office are allocated to each segment based on the segment’s inventory balances.

East Region — Homebuilding revenues increased 12% and 14% in the three and six months ended March 31, 2020, respectively, compared to the prior year periods, primarily due to increases in the number of homes closed in our New Jersey and Carolina markets.

The region generated pre-tax income of $73.3 million and $133.2 million in the three and six months ended March 31, 2020, respectively, compared to $45.9 million and $83.9 million in the prior year periods.

Gross profit from home sales as a percentage of home sales revenue (home sales gross profit percentage) increased by 270 basis points in both the three and six months ended March 31, 2020 compared to the prior year periods, due to decreases in the average cost of homes closed while the average selling price of those homes increased slightly.

As a percentage of homebuilding revenues, SG&A expenses decreased by 90 and 50 basis points in the three and six months ended March 31, 2020, respectively, compared to the prior year periods, primarily due to the increase in homebuilding revenues.

Midwest Region — Homebuilding revenues increased 24% and 19% in the three and six months ended March 31, 2020, respectively, compared to the prior year periods, primarily due to an increase in the number of homes closed in our Indiana and Denver markets.

The region generated pre-tax income of $23.6 million and $42.3 million in the three and six months ended March 31, 2020, respectively, compared to $9.5 million and $20.2 million in the prior year periods.

Home sales gross profit percentage increased by 260 and 300 basis points in the three and six months ended March 31, 2020, respectively, compared to the prior year periods, largely due to decreases in purchase accounting adjustments related to the fiscal 2019 acquisitions of Westport Homes and Classic Builders.

As a percentage of homebuilding revenues, SG&A expenses decreased by 140 basis points in the three month period, primarily due to the increase in homebuilding revenues, and it increased by 10 basis points in the six month period, primarily due to increased employee compensation in the first quarter of fiscal 2020.

Southeast Region — Homebuilding revenues increased 9% and 11% in the three and six months ended March 31, 2020, respectively, compared to the prior year periods, primarily due to increases in the number of homes closed in our Florida markets.

The region generated pre-tax income of $187.8 million and $333.9 million in the three and six months ended March 31, 2020, respectively, compared to $131.0 million and $243.2 million in the prior year periods.

Home sales gross profit percentage increased by 290 and 220 basis points in the three and six months ended March 31, 2020, respectively, compared to the prior year periods, primarily due to increases in the average selling price of homes closed while the average cost of those homes decreased slightly.

As a percentage of homebuilding revenues, SG&A expenses decreased by 40 and 30 basis points in the three and six months ended March 31, 2020, respectively, compared to the prior year periods, primarily due to the increase in homebuilding revenues.

South Central Region — Homebuilding revenues increased 8% and 9% in the three and six months ended March 31, 2020, respectively, compared to the prior year periods, primarily due to increases in the number of homes closed in our Houston market.

The region generated pre-tax income of $156.2 million and $288.9 million in the three and six months ended March 31, 2020, respectively, compared to $119.3 million and $225.3 million in the prior year periods.

Home sales gross profit percentage increased by 240 and 200 basis points in the three and six months ended March 31, 2020, respectively, compared to the prior year periods, primarily due to increases in the average selling price of homes closed while the average cost of those homes decreased slightly.

As a percentage of homebuilding revenues, SG&A expenses decreased by 70 and 40 basis points in the three and six months ended March 31, 2020, respectively, compared to the prior year periods, primarily due to the increase in homebuilding revenues.

Southwest Region — Homebuilding revenues increased 15% and 30% in the three and six months ended March 31, 2020, respectively, compared to the prior year periods, primarily due to increases in the average selling price of homes closed in all markets and an increase in the number of homes closed in our Tucson market.

The region generated pre-tax income of $30.8 million and $65.3 million in the three and six months ended March 31, 2020, respectively, compared to $18.6 million and $36.3 million in the prior year periods.

Home sales gross profit percentage increased by 350 and 270 basis points in the three and six months ended March 31, 2020, respectively, compared to the prior year periods, primarily due to the average selling price of homes closed increasing by more than the average cost.

As a percentage of homebuilding revenues, SG&A expenses decreased by 110 and 160 basis points in the three and six months ended March 31, 2020, respectively, compared to the prior year periods, primarily due to the significant increase in homebuilding revenues.

West Region — Homebuilding revenues increased 5% and 7% in the three and six months ended March 31, 2020, respectively, compared to the prior year periods, due to increases in the number of homes closed in most markets, partially offset by a decrease in the average selling price of homes closed.

The region generated pre-tax income of $93.8 million and $163.5 million in the three and six months ended March 31, 2020, respectively, compared to $76.1 million and $145.9 million in the prior year periods.

Home sales gross profit percentage decreased by 50 and 130 basis points in the three and six months ended March 31, 2020, respectively, compared to the prior year periods, primarily due to the average selling price decreasing by more than the average cost of the homes closed.

As a percentage of homebuilding revenues, SG&A expenses decreased by 90 basis points in both the three and six months ended March 31, 2020, respectively, compared to the prior year periods, primarily due to the increase in homebuilding revenues.

East Region — Homebuilding revenues increased 9% and 12% in the three and nine months ended June 30, 2020, respectively, compared to the prior year periods, primarily due to increases in the number of homes closed in our Myrtle Beach, Charlotte and New Jersey markets.

The region generated pre-tax income of $106.9 million and $240.1 million in the three and nine months ended June 30, 2020, respectively, compared to $74.1 million and $158.0 million in the prior year periods.

Gross profit from home sales as a percentage of home sales revenue (home sales gross profit percentage) increased by 320 and 290 basis points in the three and nine months ended June 30, 2020, respectively, compared to the prior year periods, due to increases in the average selling price of homes closed and a decrease in the average cost of those homes.

As a percentage of homebuilding revenues, SG&A expenses decreased by 30 and 40 basis points in the three and nine months ended June 30, 2020, respectively, compared to the prior year periods, primarily due to the increase in homebuilding revenues.

Midwest Region — Homebuilding revenues increased 23% and 20% in the three and nine months ended June 30, 2020, respectively, compared to the prior year periods, primarily due to an increase in the number of homes closed in our Denver market in both periods and our Indianapolis market in the nine month period.

The region generated pre-tax income of $34.1 million and $76.4 million in the three and nine months ended June 30, 2020, respectively, compared to $18.7 million and $38.8 million in the prior year periods.

Home sales gross profit percentage increased by 170 and 250 basis points in the three and nine months ended June 30, 2020, respectively, compared to the prior year periods, largely due to decreases in purchase accounting adjustments related to the fiscal 2019 acquisitions of Westport Homes and Classic Builders.

As a percentage of homebuilding revenues, SG&A expenses decreased by 200 and 70 basis points in the three and nine months ended June 30, 2020, respectively, primarily due to the increase in homebuilding revenues.

The decrease in the nine month period was less than the three month period primarily due to increased employee compensation in the first quarter of fiscal 2020.

Southeast Region — Homebuilding revenues increased 17% and 14% in the three and nine months ended June 30, 2020, respectively, compared to the prior year periods, primarily due to increases in the number of homes closed in most of our markets.

The region generated pre-tax income of $233.5 million and $567.4 million in the three and nine months ended June 30, 2020, respectively, compared to $168.4 million and $411.6 million in the prior year periods.

Home sales gross profit percentage increased by 170 and 200 basis points in the three and nine months ended June 30, 2020, respectively, compared to the prior year periods, primarily due to the average selling price of homes closed increasing by more than the average cost of those homes.

As a percentage of homebuilding revenues, SG&A expenses decreased by 20 and 30 basis points in the three and nine months ended June 30, 2020, respectively, compared to the prior year periods, primarily due to the increase in homebuilding revenues.

South Central Region — Homebuilding revenues increased 17% and 12% in the three and nine months ended June 30, 2020, respectively, compared to the prior year periods, primarily due to increases in the number of homes closed in our Dallas, San Antonio and Louisiana markets.

The region generated pre-tax income of $201.8 million and $490.7 million in the three and nine months ended June 30, 2020, respectively, compared to $164.3 million and $389.6 million in the prior year periods.

Home sales gross profit percentage increased by 30 and 130 basis points in the three and nine months ended June 30, 2020, respectively, compared to the prior year periods, primarily due to increases in the average selling price of homes closed while the average cost of those homes was flat in the three month period and decreased slightly in the nine month period.

Southwest Region — Homebuilding revenues decreased 10% and increased 12% in the three and nine months ended June 30, 2020, respectively, compared to the prior year periods.

The decrease in the three month period was primarily due to a decrease in the number of homes closed in our Phoenix market.

The increase in the nine month period was primarily due to increases in the average selling price of homes closed in all markets.

The region generated pre-tax income of $29.7 million and $95.0 million in the three and nine months ended June 30, 2020, respectively, compared to $33.5 million and $69.8 million in the prior year periods.

Home sales gross profit percentage increased by 60 and 190 basis points in the three and nine months ended June 30, 2020, respectively, compared to the prior year periods, primarily due to the average selling price of homes closed increasing by more than the average cost.

As a percentage of homebuilding revenues, SG&A expenses increased by 130 basis points and decreased by 40 basis points in the three and nine months ended June 30, 2020, respectively, compared to the prior year periods, primarily due to the change in homebuilding revenues.

West Region — Homebuilding revenues decreased 9% and increased 1% in the three and nine months ended June 30, 2020, respectively, compared to the prior year periods.

The decrease in three month period was due to decreases in the average selling price of homes closed in many markets, as well as decreases in the number of homes closed in most markets, particularly Seattle.

The region generated pre-tax income of $103.8 million and $267.3 million in the three and nine months ended June 30, 2020, respectively, compared to $102.8 million and $248.8 million in the prior year periods.

Home sales gross profit percentage increased by 50 basis points and decreased by 70 basis points in the three and nine months ended June 30, 2020, respectively, compared to the prior year periods.

The increase in the three month period was primarily due to the average selling price decreasing by less than the average cost of the homes closed.

The decrease in the nine month period was primarily due to the average selling price decreasing by more than the average cost of the homes closed.

As a percentage of homebuilding revenues, SG&A expenses increased by 40 basis points and decreased by 40 basis points in the three and nine months ended June 30, 2020, respectively, compared to the prior year periods, primarily due to the change in homebuilding revenues.

HOMEBUILDING INVENTORIES, LAND AND LOT POSITION AND HOMES IN INVENTORY

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We manage our inventory of owned land and lots and homes under construction relative to demand in each of our markets, including starting construction on unsold homes to capture new home demand and actively controlling the number of unsold, completed homes in inventory.

Our homebuilding segment’s inventories at March 31, 2020 and September 30, 2019 are summarized as follows:

As of March 31, 2020

Our homebuilding segment’s inventories at June 30, 2020 and September 30, 2019 are summarized as follows:

As of June 30, 2020

Construction in Progress and

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(1) Corporate and unallocated inventory consists primarily of capitalized interest and property taxes.

Our homebuilding segment’s land and lot position and homes in inventory at March 31, 2020 and September 30, 2019 are summarized as follows:

As of March 31, 2020

Our homebuilding segment’s land and lot position and homes in inventory at June 30, 2020 and September 30, 2019 are summarized as follows:

As of June 30, 2020

Owned (1) Lots Controlled

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___________________

(1) Land/lots owned include approximately 38,000 and 36,100 owned lots that are fully developed and ready for home construction at March 31, 2020 and September 30, 2019, respectively.

Land/lots owned also include land held for development representing 1,700 lots at both March 31, 2020 and September 30, 2019.

(2) The total remaining purchase price of lots controlled through land and lot purchase contracts at March 31, 2020 and September 30, 2019 was $8.1 billion and $7.2 billion, respectively, secured by earnest money deposits of $566.5 million and $515.4 million, respectively.

The total remaining purchase price of lots controlled through land and lot purchase contracts at March 31, 2020 and September 30, 2019 included $1.0 billion and $953.8 million, respectively, related to lot purchase contracts with Forestar, secured by $99.3 million and $88.7 million, respectively, of earnest money.

(3) Lots controlled at March 31, 2020 include approximately 28,600 lots owned or controlled by Forestar, 14,200 of which our homebuilding divisions have under contract to purchase and 14,400 of which our homebuilding divisions have a right of first offer to purchase.

Of these, approximately 11,000 lots were in our Southeast region, 5,600 lots were in our South Central region, 4,800 lots were in our West region, 2,900 lots were in our Southwest region, 2,800 lots were in our East region and 1,500 lots were in our Midwest region.

(1) Land/lots owned include approximately 36,500 and 36,100 owned lots that are fully developed and ready for home construction at June 30, 2020 and September 30, 2019, respectively.

Land/lots owned also include land held for development representing 1,700 lots at both June 30, 2020 and September 30, 2019.

(2) The total remaining purchase price of lots controlled through land and lot purchase contracts at June 30, 2020 and September 30, 2019 was $8.5 billion and $7.2 billion, respectively, secured by earnest money deposits of $561.9 million and $515.4 million, respectively.

The total remaining purchase price of lots controlled through land and lot purchase contracts at June 30, 2020 and September 30, 2019 included $1.0 billion and $953.8 million, respectively, related to lot purchase contracts with Forestar, secured by $97.9 million and $88.7 million, respectively, of earnest money.

(3) Lots controlled at June 30, 2020 include approximately 29,600 lots owned or controlled by Forestar, 14,100 of which our homebuilding divisions have under contract to purchase and 15,500 of which our homebuilding divisions have a right of first offer to purchase.

Of these, approximately 12,500 lots were in our Southeast region, 5,700 lots were in our South Central region, 4,700 lots were in our West region, 2,900 lots were in our East region, 2,500 lots were in our Southwest region, and 1,300 lots were in our Midwest region.

Lots controlled at September 30, 2019 included approximately 23,400 lots owned or controlled by Forestar, 12,800 of which our homebuilding divisions had under contract to purchase and 10,600 of which our homebuilding divisions had a right of first offer to purchase.

(4) Approximately 16,700 and 16,000 of our homes in inventory were unsold at March 31, 2020 and September 30, 2019, respectively.

At March 31, 2020, approximately 4,700 of our unsold homes were completed, of which approximately 600 homes had been completed for more than six months.

(4) Approximately 12,700 and 16,000 of our homes in inventory were unsold at June 30, 2020 and September 30, 2019, respectively.

At June 30, 2020, approximately 2,900 of our unsold homes were completed, of which approximately 400 homes had been completed for more than six months.

At September 30, 2019, approximately 5,200 of our unsold homes were completed, of which approximately 800 homes had been completed for more than six months.

Homes in inventory exclude approximately 1,900 model homes at both March 31, 2020 and September 30, 2019.

Homes in inventory exclude approximately 1,900 model homes at both June 30, 2020 and September 30, 2019.

RESULTS OF OPERATIONS – FORESTAR

In October 2017, we acquired 75% of the outstanding shares of Forestar, and as of March 31, 2020 we owned 65% of its outstanding shares.

Forestar is a publicly traded residential lot development company with operations in 50 markets across 21 states as of March 31, 2020.

In October 2017, we acquired 75% of the outstanding shares of Forestar, and as of June 30, 2020 we owned 65% of its outstanding shares.

Forestar is a publicly traded residential lot development company with operations in 51 markets across 22 states as of June 30, 2020.

Forestar’s segment results are presented on their historical cost basis, consistent with the manner in which management evaluates segment performance.

(See Note B for additional Forestar segment information and purchase accounting adjustments.)

Results of operations for the Forestar segment for the three and six months ended March 31, 2020 and 2019 were as follows.

Results of operations for the Forestar segment for the three and nine months ended June 30, 2020 and 2019 were as follows.

Three Months Ended

March 31, Six Months Ended

June 30, Nine Months Ended

2020 2019 2020 2019

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Income before income taxes $ 10.3 $ 8.4 $ 46.1 $ 29.6

At March 31, 2020, Forestar owned directly or controlled through land and lot purchase contracts approximately 52,300 residential lots, of which approximately 4,400 are fully developed.

At June 30, 2020, Forestar owned directly or controlled through land and lot purchase contracts approximately 50,700 residential lots, of which approximately 6,000 are fully developed.

Approximately 29,600 of these lots are under contract to sell to D.R.

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Residential land and lot sales primarily consist of the sale of single-family lots to local, regional and national homebuilders.

During the three and six months ended March 31, 2020 and 2019, Forestar’s land and lot sales, including the portion sold to D.R.

During the three and nine months ended June 30, 2020 and 2019, Forestar’s land and lot sales, including the portion sold to D.R.

Horton and the revenues generated from those sales, were as follows.

Three Months Ended

March 31, Six Months Ended

June 30, Nine Months Ended

2020 2019 2020 2019

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Horton $ 13.4 $ — $ 20.6 $ —

SG&A expense for the three and six months ended March 31, 2020 includes charges of $1.3 million and $2.6 million, respectively, related to the shared services agreement between Forestar and D.R.

SG&A expense for the three and nine months ended June 30, 2020 includes charges of $1.2 million and $3.8 million, respectively, related to the shared services agreement between Forestar and D.R.

Horton whereby D.R.

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RESULTS OF OPERATIONS – FINANCIAL SERVICES

The following tables and related discussion set forth key operating and financial data for our financial services operations, comprising DHI Mortgage and our subsidiary title companies, for the three and six months ended March 31, 2020 and 2019.

Three Months Ended March 31, Six Months Ended March 31,

Three Months Ended June 30, Nine Months Ended June 30,

2020 2019 % Change 2020 2019 % Change

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Loans sold by DHI Mortgage to third parties 12,661 8,901 42 % 30,180 22,897 32 %

Three Months Ended March 31, Six Months Ended March 31,

Three Months Ended June 30, Nine Months Ended June 30,

2020 2019 % Change 2020 2019 % Change

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Three Months Ended

March 31, Six Months Ended

June 30, Nine Months Ended

2020 2019 2020 2019

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The volume of loans originated by our mortgage operations is directly related to the number of homes closed by our homebuilding operations.

In the three and six months ended March 31, 2020, the volume of first-lien loans originated or brokered by DHI Mortgage for our homebuyers increased 30% and 32%, respectively, due to increases in the number of homes closed by our homebuilding operations of 8% and 10% and increases in the percentage of homes closed for which DHI Mortgage handled the homebuyers’ financing.

These percentages were 67% and 66% in the three and six months ended March 31, 2020, respectively, compared to 56% and 55% in the prior year periods.

Increases in the portion of home closings financed by DHI Mortgage were primarily due to the Company’s program to offer below market interest rates to D.R.

In the three and nine months ended June 30, 2020, the volume of first-lien loans originated or brokered by DHI Mortgage for our homebuyers increased 35% and 33%, respectively, due to increases in the percentage of homes closed for which DHI Mortgage handled the homebuyers’ financing, as well as increases in the number of homes closed by our homebuilding operations of 10% in both periods.

The percentages of homes closed for which DHI Mortgage handled the homebuyers’ financing were 71% and 68% in the three and nine months ended June 30, 2020, respectively, compared to 58% and 56% in the prior year periods.

Increases in these percentages were primarily due to the Company’s program to offer below market interest rates to D.R.

Horton homebuyers, expanded coverage in certain markets and increased efficiencies resulting from technology advances.

Homes closed by our homebuilding operations constituted 98% and 97% of DHI Mortgage loan originations in the three and six months ended March 31, 2020, respectively, compared to 98% in both prior year periods.

Homes closed by our homebuilding operations constituted 97% of DHI Mortgage loan originations in the three and nine months ended June 30, 2020 compared to 98% in the prior year periods.

These percentages reflect DHI Mortgage’s consistent focus on the captive business provided by our homebuilding operations.

The number of loans sold increased 26% and 25% in the three and six months ended March 31, 2020, respectively, compared to the prior year periods.

Virtually all of the mortgage loans held for sale on March 31, 2020 were eligible for sale to the Federal National Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage Corporation (Freddie Mac) or the Government National Mortgage Association (Ginnie Mae).

Approximately 90% of the mortgage loans sold by DHI Mortgage during the six months ended March 31, 2020 were sold to four major financial entities, of which one entity purchased 33%.

Due to the disruption in the secondary mortgage markets beginning in late March 2020 caused by COVID-19 and the uncertainty of the impact of the CARES Act, many financial entities have begun offering lower pricing and limiting their purchases of our mortgages and servicing rights.

This could result in a greater concentration of our mortgage sales in future periods to fewer financial entities and directly to Fannie Mae or Ginnie Mae, and we may make other adjustments to our mortgage operations to adapt to changes in market conditions.

The number of loans sold increased 42% and 32% in the three and nine months ended June 30, 2020, respectively, compared to the prior year periods.

Virtually all of the mortgage loans held for sale on June 30, 2020 were eligible for sale to the Federal National Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage Corporation (Freddie Mac) or the Government National Mortgage Association (Ginnie Mae).

Approximately 93% of the mortgage loans sold by DHI Mortgage during the nine months ended June 30, 2020 were sold to four major financial entities, of which one entity purchased 36%.

Due to the disruption in the secondary mortgage markets beginning in late March 2020 caused by C-19 and the uncertainty of the impact of the CARES Act, many financial entities began offering lower pricing and limiting their purchases of our mortgages and servicing rights.

We began retaining the servicing rights on some of our loan originations during the three months ended June 30, 2020.

Continued uncertainty could result in a greater concentration of our mortgage sales in future periods to fewer financial entities and directly to Fannie Mae or Ginnie Mae, and we may need to make other adjustments to our mortgage operations to adapt to changes in market conditions.

Financial Services Revenues and Expenses

Revenues from our mortgage operations decreased 1% to $80.9 million and increased 8% to $162.0 million in the three and six months ended March 31, 2020, respectively, from $81.8 million and $149.4 million in the prior year periods, while the number of loan originations increased 31% and 33% over those same periods.

Revenues increased at a lower rate than origination volume due to lower pricing and resulting net gains on loan originations due to disruption in the secondary mortgage market caused by COVID-19 and the uncertainty of the impact of the CARES Act, which included changes to current forbearance options for government-backed loans designed to keep homeowners in their homes.

Revenues from our mortgage operations increased 34% to $127.7 million and 18% to $289.7 million in the three and nine months ended June 30, 2020, respectively, from $95.5 million and $244.8 million in the prior year periods, while the number of loan originations increased 37% and 35% over those same periods.

Revenues increased at a lower rate than origination volume due to lower pricing and resulting net gains on loan originations due to disruption in the secondary mortgage market caused by C-19 and the uncertainty of the impact of the CARES Act, which included changes to current forbearance options for government-backed loans designed to keep homeowners in their homes.

Due to the uncertainty surrounding these forbearance options, servicing values declined rapidly at the end of March.

The significant decline in servicing values resulted in lower net gains on loan originations during the three months ended March 31, 2020 compared to the prior year period even as loan originations increased 31%.

General and administrative (G&A) expense related to our financial services operations increased 20% to $85.9 million and $163.8 million in the three and six months ended March 31, 2020, respectively, from $71.3 million and $137.0 million in the prior year periods.

The significant decline in servicing values resulted in lower net gains on loan originations during the current year periods compared to the prior year periods even as loan originations increased 37%.

General and administrative (G&A) expense related to our financial services operations increased 23% to $93.9 million and 21% to $257.7 million in the three and nine months ended June 30, 2020, respectively, from $76.4 million and $213.4 million in the prior year periods.

The increases were primarily due to increases in employee related costs to support a higher volume of transactions.

Our financial services operations employed 1,934 and 1,923 employees at March 31, 2020 and 2019, respectively.

As a percentage of financial services revenues, G&A expense was 82.2% and 79.0% in the three and six months ended March 31, 2020, respectively, compared to 70.2% and 73.3% in the prior year periods.

Fluctuations in financial services G&A expense as a percentage of revenues can be expected to occur, as some components of revenue may fluctuate differently than loan volumes, and some expenses are not directly related to mortgage loan volume or to changes in the amount of revenue earned.

Our financial services operations employed 1,979 and 1,938 employees at June 30, 2020 and 2019, respectively.

As a percentage of financial services revenues, G&A expense was 60.0% and 70.8% in the three and nine months ended June 30, 2020, respectively, compared to 63.9% and 69.6% in the prior year periods.

Fluctuations in financial services G&A expense as a percentage of revenues occur because some components of revenue fluctuate differently than loan volumes, and some expenses are not directly related to mortgage loan volume or to changes in the amount of revenue earned.

Other income, net of other expense, included in our financial services operations consists primarily of the interest income of our mortgage subsidiary.

RESULTS OF OPERATIONS - OTHER BUSINESSES

The combined pre-tax loss of all of our subsidiaries engaged in other business activities was $0.6 million in the three months ended June 30, 2020 and the combined pre-tax income was $56.9 million in the nine months ended June 30, 2020, compared to pre-tax income of $24.1 million and $52.6 million, respectively, in the prior year periods.

Income generated by our other businesses can vary significantly based on the timing of sales of multi-family rental properties of which there were none during the current quarter.

Through DHI Communities, a 100% owned subsidiary, we develop, construct and own multi-family residential properties that produce rental income.

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After DHI Communities has completed construction and achieved a stabilized occupancy rate, the property is typically marketed for sale.

We currently have three projects under active construction and one project that is substantially complete.

In November 2019, DHI Communities sold a multi-family rental property for $61.5 million and recorded a gain on the sale of $31.2 million.

In February 2020, DHI Communities sold a multi-family rental property for $67.0 million and recorded a gain on the sale of $28.2 million.

We had four projects under active construction and one project that was substantially complete at June 30, 2020.

DHI Communities sold two multi-family rental properties during the current fiscal year, one in November 2019 and another in February 2020, for a total of $128.5 million and recorded gains on sale totaling $59.4 million.

RESULTS OF OPERATIONS - CONSOLIDATED

Income before Income Taxes

Pre-tax income for the three and six months ended March 31, 2020 was $621.3 million and $1.1 billion, respectively, compared to $462.8 million and $838.5 million in the prior year periods.

Pre-tax income for the three and nine months ended June 30, 2020 was $782.4 million and $1.9 billion, respectively, compared to $626.7 million and $1.5 billion in the prior year periods.

The increases were primarily due to increases in pre-tax income generated by our homebuilding operations as a result of higher revenues from increased home closings and an increase in home sales gross margin.

Our income tax expense for the three and six months ended March 31, 2020 was $137.3 million and $228.1 million, respectively, compared to $108.4 million and $197.4 million in the prior year periods.

Our effective tax rate was 22.1% and 19.9% for the three and six months ended March 31, 2020, respectively, compared to 23.4% and 23.5% in the prior year periods.

The effective tax rate for the three and six months ended March 31, 2020 includes a tax benefit of $6.6 million and $39.5 million, respectively, from the enactment of the Taxpayer Certainty and Disaster Tax Relief Act of 2019 (the Act).

Our income tax expense for the three and nine months ended June 30, 2020 was $149.5 million and $377.6 million, respectively, compared to $153.1 million and $350.5 million in the prior year periods.

Our effective tax rate was 19.1% and 19.6% for the three and nine months ended June 30, 2020, respectively, compared to 24.4% and 23.9% in the prior year periods.

The effective tax rate for the three and nine months ended June 30, 2020 includes a tax benefit of $38.1 million and $77.6 million, respectively, from the enactment of the Taxpayer Certainty and Disaster Tax Relief Act of 2019 (the Act).

The Act retroactively reinstated the federal energy efficient homes tax credit that expired on December 31, 2017 to homes closed from January 1, 2018 to December 31, 2020.

The effective tax rates for all periods include an expense for state income taxes, reduced by tax benefits related to stock-based compensation.

Our deferred tax assets, net of deferred tax liabilities, were $167.3 million at March 31, 2020 compared to $181.8 million at September 30, 2019.

We have a valuation allowance of $17.8 million at March 31, 2020 and $18.7 million at September 30, 2019 related to state deferred tax assets for net operating loss (NOL) carryforwards that are more likely than not to expire before being realized.

Our deferred tax assets, net of deferred tax liabilities, were $172.2 million at June 30, 2020 compared to $181.8 million at September 30, 2019.

We have a valuation allowance of $13.6 million at June 30, 2020 and $18.7 million at September 30, 2019 related to state deferred tax assets for net operating loss (NOL) carryforwards that are more likely than not to expire before being realized.

We will continue to evaluate both the positive and negative evidence in determining the need for a valuation allowance with respect to our remaining state NOL carryforwards.

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We have historically funded our operations with cash flows from operating activities, borrowings under bank credit facilities and the issuance of new debt securities.

Our current levels of cash, borrowing capacity and balance sheet leverage provide us with the operational flexibility to adjust to the recent sudden, significant changes in economic conditions and the current uncertainty in the housing market across the United States.

Currently, we are cautiously managing our homes under construction and limiting land acquisition and land development activities as a result of the COVID-19 pandemic and its potential impact on our business.

At March 31, 2020, our ratio of debt to total capital (notes payable divided by stockholders’ equity plus notes payable) was 29.2% compared to 25.3% at September 30, 2019 and 27.9% at March 31, 2019.

Our ratio of homebuilding debt to total capital (homebuilding notes payable divided by stockholders’ equity plus homebuilding notes payable) was 19.2% compared to 17.0% at September 30, 2019 and 22.9% at March 31, 2019.

Currently, we are managing our homes under construction and land acquisition and land development activities to adjust to the impact of the C-19 pandemic on our business across our markets.

At June 30, 2020, our ratio of debt to total capital (notes payable divided by stockholders’ equity plus notes payable) was 28.0% compared to 25.3% at September 30, 2019 and 26.4% at June 30, 2019.

Our ratio of homebuilding debt to total capital (homebuilding notes payable divided by stockholders’ equity plus homebuilding notes payable) was 18.4% compared to 17.0% at September 30, 2019 and 18.5% at June 30, 2019.

Over the long term, we intend to maintain our ratio of homebuilding debt to total capital below 35%, and we expect it to remain significantly lower than 35% throughout fiscal 2020.

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As market conditions permit, we may issue new debt or equity securities through the capital markets or obtain additional bank financing to fund our projected capital requirements or provide additional liquidity.

Due to the current economic uncertainties related to COVID-19 and the related disruption in the financial markets, we may be limited in accessing the capital markets or obtaining additional bank financing or the cost of accessing this financing could become more expensive.

We believe that our existing cash resources, revolving credit facilities, mortgage repurchase facility and ability to access the capital markets or obtain additional bank financing will provide sufficient liquidity to fund our near-term working capital needs and debt obligations.

However, due to the current economic uncertainties related to C-19, we may be limited in accessing the capital markets or obtaining additional bank financing or the cost of accessing this financing could become more expensive for funding our longer-term capital needs.

Capital Resources - Homebuilding

Cash and Cash Equivalents — At March 31, 2020, cash and cash equivalents of our homebuilding segment totaled $1.0 billion.

Bank Credit Facility — We have a $1.59 billion senior unsecured homebuilding revolving credit facility with an uncommitted accordion feature that could increase the size of the facility to $2.5 billion, subject to certain conditions and availability of additional bank commitments.

Cash and Cash Equivalents — At June 30, 2020, cash and cash equivalents of our homebuilding segment totaled $1.9 billion.

Bank Credit Facilities — We have a $1.59 billion senior unsecured homebuilding revolving credit facility with an uncommitted accordion feature that could increase the size of the facility to $2.5 billion, 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 100% of the revolving credit commitment.

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The maturity date of the facility is October 2, 2024.

Borrowings and repayments under the facility were $800 million and $300 million, respectively, during the six months ended March 31, 2020.

At March 31, 2020, there were $500 million of borrowings outstanding at a 1.7% annual interest rate and $116.3 million of letters of credit issued under the revolving credit facility, resulting in available capacity of $973.7 million.

Our homebuilding revolving credit facility imposes restrictions on our operations and activities, including requiring the maintenance of a maximum allowable leverage ratio and a borrowing base restriction if our leverage ratio exceeds a certain level.

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.

The credit agreement governing the facility imposes restrictions on the creation of secured debt and liens.

At March 31, 2020, we were in compliance with all of the covenants, limitations and restrictions of our homebuilding revolving credit facility.

Public Unsecured Debt — We have $1.95 billion principal amount of homebuilding senior notes outstanding as of March 31, 2020 that mature from December 2020 through October 2024.

Borrowings and repayments under the facility were $1.06 billion each during the nine months ended June 30, 2020.

At June 30, 2020, there were no borrowings outstanding and $127.8 million of letters of credit issued under the revolving credit facility, resulting in available capacity of approximately $1.46 billion.

In May 2020, we entered into a credit agreement providing for a $375 million 364-day senior unsecured homebuilding revolving credit facility with an uncommitted accordion feature that could increase the size of the facility to $550 million, subject to certain conditions and availability of additional bank commitments.

The interest rate on borrowings under the 364-day revolving credit facility may be based on either the Prime Rate or LIBOR plus an applicable margin, as defined in the credit agreement governing the facility.

The maturity date of the facility is May 27, 2021.

There were no borrowings under the facility for the period from its inception through June 30, 2020.

Our homebuilding revolving credit facilities impose restrictions on our operations and activities, including requiring the maintenance of a maximum allowable leverage ratio and a borrowing base restriction if our leverage ratio exceeds a certain level.

Both facilities include substantially the same affirmative and negative covenants, events of default and financial covenants.

These covenants are measured as defined in the credit agreements governing the facilities 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 facilities or cause any outstanding borrowings to become due and payable prior to maturity.

The credit agreements governing the facilities impose restrictions on the creation of secured debt and liens.

At June 30, 2020, we were in compliance with all of the covenants, limitations and restrictions of our homebuilding revolving credit facilities.

Public Unsecured Debt — We have $2.45 billion principal amount of homebuilding senior notes outstanding as of June 30, 2020 that mature from December 2020 through October 2025.

In October 2019, we issued $500 million principal amount of 2.5% senior notes due October 15, 2024, with interest payable semi-annually.

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In February 2020, we repaid $500 million principal amount of our 4.0% senior notes at maturity.

In May 2020, we issued $500 million principal amount of 2.6% senior notes due October 15, 2025 with interest payable semi-annually.

The annual effective interest rate of these notes after giving effect to the amortization of the discount and financing costs is 2.8%.

The indentures governing our senior notes impose restrictions on the creation of secured debt and liens.

At March 31, 2020, we were in compliance with all of the limitations and restrictions associated with our public debt obligations.

Repurchases of Common Stock — During the three and six months ended March 31, 2020, we repurchased 4.0 million and 7.0 million shares, respectively, of our common stock for $197.3 million and $360.4 million, respectively.

At June 30, 2020, we were in compliance with all of the limitations and restrictions associated with our public debt obligations.

Repurchases of Common Stock — We repurchased 7.0 million shares of our common stock for $360.4 million during the nine months ended June 30, 2020, none of which were purchased in the three months ended June 30, 2020.

Debt and Equity Repurchase Authorizations — Effective July 30, 2019, our Board of Directors authorized the repurchase of up to $500 million of debt securities and $1.0 billion of our common stock.

At March 31, 2020, the full amount of the debt repurchase authorization was remaining and $535.3 million of the equity repurchase authorization was remaining.

At June 30, 2020, the full amount of the debt repurchase authorization was remaining and $535.3 million of the equity repurchase authorization was remaining.

These authorizations have no expiration date.

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As market conditions permit, Forestar may issue new debt or equity securities through the capital markets or obtain additional bank financing to provide capital for future growth and additional liquidity.

Cash and Cash Equivalents — At March 31, 2020, Forestar had cash and cash equivalents of $438.2 million.

Cash and Cash Equivalents — At June 30, 2020, Forestar had cash and cash equivalents of $355.6 million.

Bank Credit Facility — Forestar has 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.

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Letters of credit issued under the facility reduce the available borrowing capacity.

At March 31, 2020, there were no borrowings outstanding and $31.0 million of letters of credit issued under the revolving credit facility, resulting in available capacity of $349.0 million.

At June 30, 2020, there were no borrowings outstanding and $31.6 million of letters of credit issued under the revolving credit facility, resulting in available capacity of $348.4 million.

The maturity date of the facility is October 2, 2022, which can 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 Forestar revolving credit facility includes customary affirmative and negative covenants, events of default and financial covenants.

The financial covenants require Forestar to maintain a minimum level of tangible net worth, a minimum level of liquidity and a maximum allowable leverage ratio.

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or any of the subsidiaries that guarantee our homebuilding debt.

At March 31, 2020, Forestar was in compliance with all of the covenants, limitations and restrictions of its revolving credit facility and senior note obligations.

At June 30, 2020, Forestar was in compliance with all of the covenants, limitations and restrictions of its revolving credit facility and senior note obligations.

Capital Resources - Financial Services

Cash and Cash Equivalents — At March 31, 2020, cash and cash equivalents of our financial services operations totaled $45.8 million.

Cash and Cash Equivalents — At June 30, 2020, cash and cash equivalents of our financial services operations totaled $75.1 million.

Mortgage Repurchase Facility — Our mortgage subsidiary, DHI Mortgage, has a mortgage repurchase facility that provides financing and liquidity to DHI Mortgage by facilitating purchase transactions in which DHI Mortgage transfers eligible loans to the counterparties upon receipt of funds from the counterparties.

DHI Mortgage then has the right and obligation to repurchase the purchased loans upon their sale to third-party purchasers in the secondary market or within specified time frames from 45 to 60 days in accordance with the terms of the mortgage repurchase facility.

In February 2020, the mortgage repurchase facility was amended to extend its maturity date to February 19, 2021.

The total capacity of the facility is $1.2 billion;

however, the capacity increases without requiring additional commitments to $1.4 billion for approximately 30 days at each quarter end and 45 days at fiscal year end.

In May 2020, the mortgage repurchase facility was amended to increase its total capacity to $1.35 billion;

however, the capacity increases without requiring additional commitments to $1.575 billion for approximately 30 days at the end of the third quarter of fiscal 2020 and first quarter of fiscal 2021 and for approximately 45 days at the end of fiscal 2020.

The capacity of the facility can also be increased to $1.8 billion subject to the availability of additional commitments.

Through additional commitments, the capacity of the facility was temporarily increased to $1.5 billion effective March 26, 2020 through April 23, 2020.

As of March 31, 2020, $1.3 billion of mortgage loans held for sale with a collateral value of $1.2 billion were pledged under the mortgage repurchase facility.

DHI Mortgage had an obligation of $1.2 billion outstanding under the mortgage repurchase facility at March 31, 2020 at a 2.6% annual interest rate.

The maturity date of the facility is February 19, 2021.

As of June 30, 2020, $1.39 billion of mortgage loans held for sale with a collateral value of $1.36 billion were pledged under the mortgage repurchase facility.

DHI Mortgage had an obligation of $1.2 billion outstanding under the mortgage repurchase facility at June 30, 2020 at a 2.4% annual interest rate.

The mortgage repurchase facility is not guaranteed by D.R.

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These covenants are measured and reported to the lenders monthly.

At March 31, 2020, DHI Mortgage was in compliance with all of the conditions and covenants of the mortgage repurchase facility.

At June 30, 2020, DHI Mortgage was in compliance with all of the conditions and covenants of the mortgage repurchase facility.

In the past, DHI Mortgage has been able to renew or extend its mortgage credit facility at a sufficient capacity and on satisfactory terms prior to its maturity and obtain temporary additional commitments through amendments to the credit agreement during periods of higher than normal volumes of mortgages held for sale.

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Operating Cash Flow Activities

In the six months ended March 31, 2020, net cash used in operating activities was $395.1 million compared to $461.7 million in the prior year period.

Cash used in operating activities in the current year period primarily consisted of $312.1 million and $123.8 million of cash used in our financial services and Forestar segments, respectively, partially offset by $52.1 million of cash provided by our homebuilding segment.

In the nine months ended June 30, 2020, net cash provided by operating activities was $588.9 million compared to $80.7 million in the prior year period.

Cash provided by operating activities in the current year period primarily consisted of $1.2 billion of cash provided by our homebuilding segment, partially offset by $347.7 million and $205.7 million of cash used in our financial services and Forestar segments, respectively.

Cash used to increase construction in progress and finished home inventory was $602.3 million in the current year period compared to $393.0 million in the prior year period.

In both periods, the expenditures were made to support the expected increases in sales and closing volumes.

In both periods, the expenditures were made to support increased sales and closing volumes.

Cash used to increase residential land and lots in the current year period was $361.9 million compared to $606.2 million in the prior year period.

Of these amounts, $171.4 million and $341.8 million related to Forestar, respectively.

Of these amounts, $259.8 million and $531.5 million, respectively, related to Forestar.

The most significant source of cash provided by operating activities in both periods was net income.

Investing Cash Flow Activities

In the six months ended March 31, 2020, net cash used in investing activities was $34.6 million compared to $321.1 million in the prior year period.

In the nine months ended June 30, 2020, net cash used in investing activities was $100.4 million compared to $326.3 million in the prior year period.

In the current year period, uses of cash included expenditures related to our rental properties totaling $153.6 million and purchases of property and equipment totaling $66.8 million, partially offset by proceeds from the sale of assets primarily consisting of $128.5 million related to the sale of two multi-family rental properties.

In the prior year period, the most significant uses of cash were the purchases of the homebuilding operations of Westport Homes, Classic Builders and Terramor Homes, whereby $309.6 million of the aggregate purchase price was paid during the period.

In the prior year period, the most significant uses of cash were the purchases of the homebuilding operations of Westport Homes, Classic Builders and Terramor Homes.

Proceeds from the sale of assets in the prior year period included $133.4 million related to the sale of two multi-family rental properties.

Financing Cash Flow Activities

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Long-term financing needs for our homebuilding and Forestar operations may be funded with the issuance of senior unsecured debt securities or equity securities through the capital markets.

During the six months ended March 31, 2020, net cash provided by financing activities was $453.0 million, consisting primarily of note proceeds of $800 million from draws on our homebuilding revolving credit facility, our issuance of $500 million principal amount of 2.5% homebuilding senior notes, Forestar’s issuance of $300 million principal amount of 5.0% senior notes and net advances of $297.6 million on our mortgage repurchase facility.

Note proceeds were partially offset by repayment of amounts drawn on our homebuilding revolving credit facility totaling $300 million, repayment of $500 million principal amount of our 4.0% senior notes at maturity, Forestar’s repayment of $118.9 million principal amount of its 3.75% convertible senior notes at maturity, cash used to repurchase 7.0 million shares of our common stock for $360.4 million and payment of cash dividends totaling $128.7 million.

During the six months ended March 31, 2019, net cash provided by financing activities was $8.0 million, consisting primarily of note proceeds of $1.8 billion from draws on our homebuilding revolving credit facility and net advances of $53.0 million on our mortgage repurchase facility.

Note proceeds were largely offset by repayment of amounts drawn on our homebuilding revolving credit facility totaling $1.0 billion, repayment of $500 million principal amount of our 3.75% homebuilding senior notes at maturity, cash used to repurchase 6.1 million shares of our common stock for $216.2 million and payment of cash dividends totaling $111.9 million.

During each of the first two quarters of fiscal 2020, our Board of Directors approved and paid quarterly cash dividends of $0.175 per common share, the most recent of which was paid on February 24, 2020 to stockholders of record on February 10, 2020.

In April 2020, our Board of Directors approved a quarterly cash dividend of $0.175 per common share, payable on May 21, 2020 to stockholders of record on May 11, 2020.

During the nine months ended June 30, 2020, net cash provided by financing activities was $370.2 million, consisting primarily of note proceeds of $1.06 billion from draws on our homebuilding revolving credit facility, our issuance of $500 million principal amount of 2.5% homebuilding senior notes, our issuance of $500 million principal amount of 2.6% homebuilding senior notes, Forestar’s issuance of $300 million principal amount of 5.0% senior notes and net advances of $284.0 million on our mortgage repurchase facility.

Note proceeds were partially offset by repayment of amounts drawn on our homebuilding revolving credit facility totaling $1.06 billion, repayment of $500 million principal amount of our 4.0% senior notes at maturity, Forestar’s repayment of $118.9 million principal amount of its 3.75% convertible senior notes at maturity, cash used to repurchase 7.0 million shares of our common stock for $360.4 million and payment of cash dividends totaling $192.3 million.

During the nine months ended June 30, 2019, net cash used in financing activities was $375.1 million, consisting primarily of repayment of amounts drawn on our homebuilding and Forestar revolving credit facilities totaling $2.0 billion, repayment of $500 million principal amount of our 3.75% homebuilding senior notes at maturity, cash used to repurchase 9.4 million shares of our common stock for $361.5 million and payment of cash dividends totaling $167.9 million.

These uses of cash were partially offset by note proceeds of $2.2 billion from draws on our homebuilding and Forestar revolving credit facilities, Forestar’s issuance of $350 million principal amount of 8.0% senior notes and net advances of $158.8 million on our mortgage repurchase facility.

During each of the first three quarters of fiscal 2020, our Board of Directors approved and paid quarterly cash dividends of $0.175 per common share, the most recent of which was paid on May 21, 2020 to stockholders of record on May 11, 2020.

In July 2020, our Board of Directors approved a quarterly cash dividend of $0.175 per common share, payable on August 24, 2020 to stockholders of record on August 12, 2020.

Cash dividends of $0.15 per common share were approved and paid in each quarter of fiscal 2019.

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We expect to fund our contractual obligations in the ordinary course of business through a combination of our existing cash resources, cash flows generated from profits, our credit facilities or other bank financing, and the issuance of new debt or equity securities through the public capital markets as market conditions may permit.

At March 31, 2020, we had outstanding letters of credit of $147.3 million and surety bonds of $1.8 billion, issued by third parties to secure performance under various contracts.

At June 30, 2020, we had outstanding letters of credit of $159.4 million and surety bonds of $1.7 billion, 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.

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Lot purchase contracts enable us to control significant lot positions with limited capital investment.

Among our homebuilding land and lot purchase contracts at March 31, 2020, there were a limited number of contracts, representing $70.7 million of remaining purchase price, subject to specific performance provisions that may require us to purchase the land or lots upon the land sellers meeting their respective contractual obligations.

Among our homebuilding land and lot purchase contracts at June 30, 2020, there were a limited number of contracts, representing $50.8 million of remaining purchase price, subject to specific performance provisions that may require us to purchase the land or lots upon the land sellers meeting their respective contractual obligations.

Of this amount, $11.5 million related to contracts between our homebuilding segment and Forestar.

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SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION

As of March 31, 2020, D.R.

had outstanding $1.95 billion principal amount of homebuilding senior notes due through October 2024 and $ 500 million drawn on its homebuilding revolving credit facility.

All of the homebuilding senior notes and the homebuilding revolving credit facility are fully and unconditionally guaranteed, on a joint and several basis, by certain subsidiaries of D.R.

As of June 30, 2020, D.R.

had outstanding $2.45 billion principal amount of homebuilding senior notes due through October 2025 and no amounts outstanding on its homebuilding revolving credit facilities.

All of the homebuilding senior notes and the homebuilding revolving credit facilities are fully and unconditionally guaranteed, on a joint and several basis, by certain subsidiaries of D.R.

(Guarantors or Guarantor Subsidiaries).

Each of the Guarantor Subsidiaries is 100% owned, directly or indirectly, by D.R.

Our subsidiaries associated with the Forestar lot development operation, financial services operations, multi-family residential construction and certain other subsidiaries do not guarantee the homebuilding senior notes or the homebuilding revolving credit facility (collectively, Non-Guarantor Subsidiaries).

The guarantees are senior unsecured obligations of each Guarantor and rank equal with all existing and future senior debt of such Guarantor and senior to all subordinated debt of such Guarantor.

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and Guarantor Subsidiaries

Summarized Balance Sheet Data March 31, 2020 September 30, 2019

Summarized Balance Sheet Data June 30,

2020 September 30,

(In millions)

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10,002.2 9,216.6

Summarized Statement of Operations Data Six Months Ended March 31, 2020 Fiscal Year Ended September 30, 2019

Summarized Statement of Operations Data Nine Months Ended

June 30, 2020 Fiscal Year Ended September 30, 2019

(In millions)

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As disclosed in our critical accounting policies in our Form 10-K for the fiscal year ended September 30, 2019, our reserves for construction defect claims include the estimated costs of both known claims and anticipated future claims.

At March 31, 2020 and September 30, 2019, we had reserves for approximately 220 and 180 pending construction defect claims, respectively, and no individual existing claim was material to our financial statements.

During the six months ended March 31, 2020, we established reserves for approximately 85 new construction defect claims and resolved 45 construction defect claims for a total cost of $18.3 million.

At March 31, 2019 and September 30, 2018, we had reserves for approximately 160 and 155 pending construction defect claims, respectively, and no individual existing claim was material to our financial statements.

During the six months ended March 31, 2019, we established reserves for approximately 50 new construction defect claims and resolved 45 construction defect claims for a total cost of $5.4 million.

At June 30, 2020 and September 30, 2019, we had reserves for approximately 240 and 180 pending construction defect claims, respectively, and no individual existing claim was material to our financial statements.

During the nine months ended June 30, 2020, we established reserves for approximately 120 new construction defect claims and resolved 60 construction defect claims for a total cost of $20.6 million.

At June 30, 2019 and September 30, 2018, we had reserves for approximately 180 and 155 pending construction defect claims, respectively, and no individual existing claim was material to our financial statements.

During the nine months ended June 30, 2019, we established reserves for approximately 80 new construction defect claims and resolved 55 construction defect claims for a total cost of $6.9 million.

Although significant changes in market conditions have impacted our seasonal patterns in the past and could do so again in the future, we generally close more homes and generate greater revenues and operating income in the third and fourth quarters of our fiscal year.

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As a result of seasonal activity, our quarterly results of operations and financial position at the end of a particular fiscal quarter are not necessarily representative of the balance of our fiscal year.

Due to the impact of COVID-19, our homes closed, revenues and operating income in fiscal 2020 may not follow our historical seasonal patterns.

Due to the impact of C-19, our homes closed, revenues and operating income in fiscal 2020 may not follow our historical seasonal patterns.

Forward-Looking Statements

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These risks, uncertainties and other factors include, but are not limited to:

• the effects of public health issues such as a major epidemic or pandemic, including the impact of COVID-19 on the economy and our businesses;

• the effects of public health issues such as a major epidemic or pandemic, including the impact of C-19 on the economy and our businesses;

• the cyclical nature of the homebuilding and lot development industries and changes in economic, real estate and other conditions;

18 unchanged sentences

However, any further disclosures made on related subjects in subsequent reports on Forms 10-K, 10-Q and 8-K should be consulted.

Additional information about issues that could lead to material changes in performance and risk factors that have the potential to affect us is contained in our annual report on Form 10-K for the fiscal year ended September 30, 2019, including the section entitled “Risk Factors,” as supplemented by Part II, Item 1A.

in this quarterly report on Form 10-Q, which is filed with the SEC.

Additional information about issues that could lead to material changes in performance and risk factors that have the potential to affect us is contained in our annual report on Form 10-K for the fiscal year ended September 30, 2019, which is filed with the SEC, including the section entitled “Risk Factors,” as supplemented by Part II, Item 1A.

in this quarterly report on Form 10-Q.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis