What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-01-27 compared with 2020-07-30 · 314 added, 414 removed, 451 unchanged (62% of the section changed)

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We construct and sell homes through our operating divisions in 90 markets across 29 states, primarily under the names of D.R.

Horton, America’s Builder;

Emerald Homes;

Express Homes and Freedom Homes.

Horton, America’s Builder, Emerald Homes, Express Homes and Freedom Homes.

Our common stock is included in the S&P 500 Index and listed on the New York Stock Exchange under the ticker symbol “DHI.” Unless the context otherwise requires, the terms “D.R.

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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 $297,600 during the nine months ended June 30, 2020.

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), 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 homebuilding operations are our core business and primarily include the construction and sale of single-family homes with sales prices generally ranging from $150,000 to more than $1,000,000, with an average closing price of $304,100 during the three months ended December 31, 2020.

Approximately 92% of our home sales revenue in the three months ended December 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.

Our position as the most geographically diverse and largest volume homebuilder in the United States provides a strong platform for us to compete for new home sales.

Our product offerings include a broad range of homes for entry-level, move-up, active adult and luxury buyers across our markets.

Our entry-level homes at affordable price points have experienced very strong demand from homebuyers, as the entry-level segment of the new home market remains under-served, with low inventory levels relative to demand.

During fiscal 2020, we began constructing and leasing homes as income-producing single-family rental communities.

After a rental community is constructed and achieves a stabilized level of leased occupancy, we generally expect to market the community for a bulk sale of homes.

These operations are reported in our homebuilding segment.

During the three months ended December 31, 2020, we completed our first sale of a single-family rental community representing 124 homes for $31.8 million, resulting in a gain on sale of $14.0 million.

At December 31, 2020, our homebuilding fixed assets included $106.6 million of assets related to our single-family rental platform, representing 13 communities totaling 890 single-family rental homes and finished lots, which included 440 completed homes.

At December 31, 2020, we owned 65% of the outstanding shares of Forestar Group Inc.

(Forestar), a publicly traded residential lot development company listed on the New York Stock Exchange under the ticker symbol “FOR.” Forestar is a key part 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.

During fiscal 2019 and 2020, Forestar raised capital by issuing senior notes and common stock in the public markets and has invested this capital in land acquisition and development to expand its business across the United States.

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

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

Our 100% owned subsidiary title companies serve as title insurance agents by providing title insurance policies, examination and closing services, primarily to our homebuyers.

In addition to our homebuilding, Forestar and financial services operations, we have subsidiaries that engage in other business activities.

These subsidiaries conduct insurance-related operations, construct and own income-producing multi-family rental properties, own non-residential real estate including ranch land and improvements and own and operate oil and gas related assets.

The operating results of these subsidiaries are immaterial for separate reporting and therefore are grouped together and presented as other.

One of these subsidiaries, DHI Communities, develops, constructs and owns multi-family residential properties that produce rental income.

DHI Communities is primarily focused on constructing garden style multi-family products, which typically accommodate 200 to 400 dwelling units, in high growth suburban markets.

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

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

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%.

Our 100% owned subsidiary title companies serve as title insurance agents by providing title insurance policies, examination, underwriting and closing services, primarily related to our homebuilding transactions.

In addition to our homebuilding, Forestar and financial services operations, we engage in other business activities through our subsidiaries.

We conduct insurance-related operations, construct and own income-producing multi-family rental properties, own non-residential real estate including ranch land and improvements and own and operate oil and gas related assets.

The results of these operations are immaterial for separate reporting and therefore are grouped together and presented as other.

Our multi-family rental operations develop, construct, lease and own multi-family residential properties that produce rental income.

We primarily focus on constructing garden style multi-family communities, which typically accommodate 200 to 400 dwelling units, in high growth suburban markets.

After we complete construction and achieve a stabilized level of leased occupancy, the property is typically marketed for sale.

At December 31, 2020 and September 30, 2020, our consolidated balance sheets included $294.3 million and $246.2 million, respectively, of multi-family rental assets.

Total assets related to other business activities were $438.7 million and $379.4 million at December 31, 2020 and September 30, 2020, respectively.

First Quarter Operating Results

During the three months ended December 31, 2020, the number and value of our net sales orders increased 56% and 62%, respectively, compared to the prior year period.

During the three months ended December 31, 2020, our number of homes closed and home sales revenues increased 45% and 48%, respectively, compared to the prior year period, and our consolidated revenues increased 48% to $5.9 billion compared to $4.0 billion in the prior year period.

Our pre-tax income was $1.0 billion in the three months ended December 31, 2020 compared to $523.3 million in the prior year period, and our pre-tax operating margin was 17.4% compared to 13.0%.

Net income was $795.2 million in the three months ended December 31, 2020 compared to $432.5 million in the prior year period.

In the trailing twelve months ended December 31, 2020, our return on equity (ROE) was 24.4% compared to 18.2% in the prior year period, and our homebuilding return on inventory (ROI) was 28.0% compared to 18.7%.

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

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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 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.

Within our homebuilding land and lot portfolio, our lots controlled under purchase contracts represent 72% of the lots owned and controlled at December 31, 2020 compared to 70% at September 30, 2020 and 61% at December 31, 2019.

Our relationship with Forestar and expanded relationships with other land developers across the country have allowed us to increase the controlled portion of our lot pipeline .

During 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 of the 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.

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 decreased sales orders compared to the prior year.

However, as economic activity began to resume and restrictive orders were eased, demand for our homes improved significantly during the remainder of fiscal 2020 and the first quarter of fiscal 2021.

We believe the increase in demand has been primarily fueled by increased buyer urgency due to lower interest rates on mortgage loans and the limited supply of homes at affordable price points across most of our markets.

We were and remain well-positioned for increased demand with our affordable product offerings, lot supply and housing inventory.

However, even with the resurgence of demand, we remain cautious as to the ongoing impact of C-19 on our operations and on the overall economy.

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 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.

economy and level of employment, capital markets, secondary mortgage markets, consumer confidence, demand for our homes and availability and cost 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 severity 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 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;

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 maximize the returns on our inventory investments and generate strong profitability and cash flows, while managing risk and maintaining financial flexibility to navigate changing economic conditions and make opportunistic strategic investments.

We have made operational adjustments as a result of C-19;

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.

• 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.

• Managing our inventory of 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.

• Investing in land and land development in desirable markets, while 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 with Forestar and other land developers across the country.

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

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• Ensuring that our financial services business provides high quality mortgage and title services to homebuyers efficiently and effectively.

• 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 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 June 30, 2020, as compared to the same period of 2019, were as follows:

• Investing in the construction and leasing of single-family and 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 successfully operate through changing economic conditions to maintain and improve our financial and competitive position.

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

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

Homebuilding:

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• Homebuilding pre-tax income was 16.4% of homebuilding revenues compared to 11.9%.

• 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.

• Homebuilding cash and cash equivalents totaled $2.1 billion compared to $2.6 billion and $1.2 billion at September 30, 2020 and December 31, 2019, respectively.

• Homebuilding inventories totaled $12.1 billion compared to $11.0 billion and $10.9 billion at September 30, 2020 and December 31, 2019, respectively.

• Homes in inventory totaled 42,100 compared to 38,000 and 30,200 at September 30, 2020 and December 31, 2019, respectively.

• Owned lots totaled 122,000 compared to 112,600 and 123,400 at September 30, 2020 and December 31, 2019, respectively.

Lots controlled through purchase contracts increased to 318,700 from 264,300 and 195,600 at September 30, 2020 and December 31, 2019, respectively.

• Homebuilding debt was $2.6 billion compared to $2.5 billion at both September 30, 2020 and December 31, 2019.

• Homebuilding debt to total capital was 17.3% compared to 17.5% and 19.5% at September 30, 2020 and December 31, 2019, respectively.

• Forestar’s revenues increased 24% to $307.1 million compared to $247.2 million.

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• Forestar’s pre-tax income was $29.2 million compared to $22.2 million.

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

• 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.

• Forestar’s pre-tax income was 9.5% of revenues compared to 9.0%.

• Forestar’s cash and cash equivalents totaled $237.4 million compared to $394.3 million and $373.3 million at September 30, 2020 and December 31, 2019, respectively.

• Forestar’s inventories totaled $1.5 billion compared to $1.3 billion and $1.1 billion at September 30, 2020 and December 31, 2019, respectively.

• Forestar’s owned and controlled lots totaled 77,500 compared to 60,500 and 44,500 at September 30, 2020 and December 31, 2019, respectively.

Of these lots, 34,900 were under contract to sell to or subject to a right of first offer with D.R.

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.

Horton compared to 30,400 and 25,600 at September 30, 2020 and December 31, 2019, respectively.

• Forestar’s debt was $654.1 million compared to $641.1 million and $462.1 million at September 30, 2020 and December 31, 2019, respectively.

• Forestar’s debt to total capital was 42.3% compared to 42.4% and 35.9% at September 30, 2020 and December 31, 2019, respectively.

Financial Services:

• Financial services revenues increased 82% to $187.2 million compared to $102.9 million.

• Financial services pre-tax income was $68.8 million compared to $48.1 million.

• Financial services pre-tax income increased 176% to $84.1 million compared to $30.5 million.

• Financial services pre-tax income was 44.9% of financial services revenues compared to 29.6%.

Consolidated Results:

• Consolidated pre-tax income increased 25% to $782.4 million compared to $626.7 million.

• Consolidated pre-tax income increased 98% to $1.0 billion compared to $523.3 million.

• Consolidated pre-tax income was 17.4% of consolidated revenues compared to 13.0%.

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Horton increased 84% to $2.14 compared to $1.16.

• 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:

• Homebuilding revenues increased 11% to $13.5 billion compared to $12.2 billion.

• Homes closed increased 10% to 45,140 homes, and the average closing price of those homes was $297,600.

• Net sales orders increased 26% to 54,732 homes, and the value of net sales orders increased 27% to $16.3 billion.

• Home sales gross margin was 21.3% compared to 19.9%.

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

• 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 $1.2 billion compared to $605.7 million.

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

Revenues in the current and prior year periods included $548.6 million and $141.8 million, respectively, of revenue from land and lot sales to our homebuilding segment.

• Forestar’s lots sold increased 188% to 6,396 compared to 2,224.

Lots sold to D.R.

Horton totaled 6,287 compared to 1,903.

• Forestar’s pre-tax income was $46.1 million compared to $29.6 million.

• Forestar’s pre-tax income was 7.9% of Forestar revenues compared to 15.4%.

Financial Services:

• Financial services revenues increased 19% to $364.0 million compared to $306.4 million.

• Financial services pre-tax income was $124.0 million compared to $105.6 million.

• Financial services pre-tax income was 34.1% of financial services revenues compared to 34.5%.

Consolidated Results:

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

• Stockholders’ equity was $12.5 billion compared to $11.8 billion and $10.2 billion at September 30, 2020 and December 31, 2019, respectively.

• Book value per common share increased to $34.33 compared to $32.53 and $27.92 at September 30, 2020 and December 31, 2019, respectively.

• Debt to total capital was 25.3% compared to 26.6% at September 30, 2020 and 27.0% at December 31, 2019.

RESULTS OF OPERATIONS - HOMEBUILDING

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State Reporting Region/Market State Reporting Region/Market

East Region Southeast Region

Delaware Central Delaware Alabama Birmingham

Northern Delaware Huntsville

Georgia Savannah Mobile/Baldwin County

Maryland Baltimore Montgomery

East Region Midwest Region

Delaware Central Delaware Colorado Colorado Springs

Northern Delaware Denver

Georgia Savannah Fort Collins

Maryland Baltimore Illinois Chicago

Suburban Washington, D.C.

New Jersey Northern New Jersey Florida Fort Myers/Naples

Southern New Jersey Gainesville

North Carolina Asheville Jacksonville

Charlotte Lakeland

Greensboro/Winston-Salem Melbourne/Vero Beach

Raleigh/Durham Miami/Fort Lauderdale

Wilmington Ocala

Pennsylvania Philadelphia Orlando

South Carolina Charleston Pensacola/Panama City

Columbia Port St.

Greenville/Spartanburg Tampa/Sarasota

Hilton Head Volusia County

Myrtle Beach West Palm Beach

Virginia Northern Virginia Georgia Atlanta

Southern Virginia Augusta

Mississippi Gulf Coast

Midwest Region Tennessee Chattanooga

Colorado Denver Knoxville

Fort Collins Memphis

Illinois Chicago Nashville

Indiana Fort Wayne

Indianapolis West Region

Iowa Des Moines California Bakersfield

Minnesota Minneapolis/St.

Paul Bay Area

Ohio Cincinnati Fresno

Columbus Los Angeles County

Modesto/Merced

South Central Region Riverside County

Louisiana Baton Rouge Sacramento

Lake Charles/Lafayette San Bernardino County

Oklahoma Oklahoma City San Diego County

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 nine months ended June 30, 2020 and 2019.

New Jersey Northern New Jersey Indianapolis

Southern New Jersey Iowa Des Moines

North Carolina Asheville Minnesota Minneapolis/St.

Charlotte Ohio Cincinnati

Greensboro/Winston-Salem Columbus

Raleigh/Durham

Wilmington South Central Region

Pennsylvania Central Pennsylvania Louisiana Baton Rouge

Philadelphia Lake Charles/Lafayette

South Carolina Charleston Oklahoma Oklahoma City

Columbia Texas Austin

Greenville/Spartanburg Bryan/College Station

Hilton Head Corpus Christi

Myrtle Beach Dallas

Virginia Northern Virginia Fort Worth

Southern Virginia Houston

Killeen/Temple/Waco

Southeast Region Midland/Odessa

Alabama Birmingham New Braunfels/San Marcos

Huntsville San Antonio

Mobile/Baldwin County

Montgomery Southwest Region

Tuscaloosa Arizona Phoenix

Florida Fort Myers/Naples Tucson

Gainesville New Mexico Albuquerque

Lakeland West Region

Melbourne/Vero Beach California Bakersfield

Miami/Fort Lauderdale Bay Area

Orlando Los Angeles County

Pensacola/Panama City Modesto/Merced

Lucie Riverside County

Tampa/Sarasota Sacramento

Volusia County San Bernardino County

West Palm Beach San Diego County

Georgia Atlanta Hawaii Oahu

Augusta Nevada Las Vegas

Mississippi Gulf Coast Reno

Tennessee Chattanooga Oregon Bend

Knoxville Portland/Salem

Memphis Utah Salt Lake City

Nashville Washington Seattle/Tacoma/Everett/Olympia

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 months ended December 31, 2020 and 2019.

Net Sales Orders (1)

Three Months Ended June 30,

Net Homes Sold Value (In millions) Average Selling Price

Change 2020 2019 %

East 2,803 2,073 35 % $ 837.8 $ 606.0 38 % $ 298,900 $ 292,300 2 %

Midwest 1,374 881 56 % 483.8 298.1 62 % 352,100 338,400 4 %

Southeast 6,991 5,105 37 % 1,920.0 1,379.5 39 % 274,600 270,200 2 %

South Central 6,644 4,475 48 % 1,693.5 1,139.7 49 % 254,900 254,700 — %

Southwest 1,017 799 27 % 285.4 217.6 31 % 280,600 272,300 3 %

West 2,690 2,255 19 % 1,116.8 1,066.2 5 % 415,200 472,800 (12) %

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

Nine Months Ended June 30,

Three Months Ended December 31,

Net Homes Sold Value (In millions) Average Selling Price

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Sales Order Cancellations

Three Months Ended June 30,

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

2020 2019 2020 2019 2020 2019

East 841 565 $ 239.7 $ 156.4 23 % 21 %

Midwest 311 216 98.8 70.3 18 % 20 %

Southeast 2,005 1,446 556.3 382.3 22 % 22 %

South Central 1,970 1,204 507.4 304.5 23 % 21 %

Southwest 276 216 77.4 55.9 21 % 21 %

West 565 331 243.6 155.0 17 % 13 %

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

Nine Months Ended June 30,

Three Months Ended December 31,

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

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4,408 3,207 $ 1,297.6 $ 923.9 18 % 20 %

___________________________________________

(1) Net sales orders represent the number and dollar value of new sales contracts executed with customers (gross sales orders), net of cancelled sales orders.

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Net Sales Orders

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 number of net sales orders increased 56% in the three months ended December 31, 2020 compared to the prior year period, with increases in all of our regions.

The value of net sales orders increased 62% to $6.4 billion (20,418 homes) for the three months ended December 31, 2020 compared to $3.9 billion (13,126 homes) in the prior year period.

The average selling price of net sales orders during the three months ended December 31, 2020 was $314,200, up 4% from the prior year period.

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

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 Carolina markets in the East;

the Denver and Indianapolis markets in the Midwest;

the Florida markets (particularly Tampa) in the Southeast;

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

the Dallas, Houston, Austin and San Antonio markets in the South Central;

the Phoenix market in the Southwest;

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.

and the California markets in the West.

Our sales order cancellation rate (cancelled sales orders divided by gross sales orders for the period) was 18% in the three months ended December 31, 2020 compared to 20% in the prior year period.

The increase in our sales orders that occurred in the second half of fiscal 2020 has continued into fiscal 2021 and reflects buyer urgency due to low interest rates on mortgage loans and the limited supply of homes at affordable price points across most of our markets.

Sales Order Backlog

As of June 30,

As of December 31,

Homes in Backlog Value (In millions) Average Selling Price

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Homes Closed and Home Sales Revenue

Three Months Ended June 30,

Homes Closed Value (In millions) Average Selling Price

Change 2020 2019 %

East 2,500 2,356 6 % $ 735.2 $ 674.7 9 % $ 294,100 $ 286,400 3 %

Midwest 1,053 856 23 % 372.7 301.8 23 % 353,900 352,600 — %

Southeast 5,921 5,181 14 % 1,627.8 1,384.3 18 % 274,900 267,200 3 %

South Central 5,397 4,635 16 % 1,375.6 1,177.8 17 % 254,900 254,100 — %

Southwest 750 855 (12) % 213.8 228.7 (7) % 285,100 267,500 7 %

West 2,021 2,088 (3) % 882.5 967.3 (9) % 436,700 463,300 (6) %

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

Nine Months Ended June 30,

Three Months Ended December 31,

Homes Closed Value (In millions) Average Selling Price

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Home Sales Revenue

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.

Revenues from home sales increased 48% to $5.7 billion (18,739 homes closed) for the three months ended December 31, 2020 from $3.9 billion (12,959 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.

The number of homes closed increased 45% in the three months ended December 31, 2020 compared to the prior year period.

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

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 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.

the Denver and Chicago markets in the Midwest;

the Florida markets (particularly Tampa) in the Southeast;

the Houston, Dallas and San Antonio markets in the South Central;

the Phoenix and Tucson markets in the Southwest;

and the Las Vegas, Southern California and Seattle markets in the West.

Homebuilding Operating Margin Analysis

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Three Months Ended

June 30, Nine Months Ended

2020 2019 2020 2019

Gross profit – home sales 24.1 % 21.0 %

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Selling, general and administrative expense 7.9 % 9.2 %

Gain on sale of assets (0.2) % — %

Other (income) expense — % (0.1) %

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Home Sales Gross Profit

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.

We remain focused on managing the pricing, incentives and sales pace in each of our communities during this uncertain environment to optimize the returns on our inventory investments and adjust to local market conditions and new home demand.

Gross profit from home sales increased to $1.4 billion in the three months ended December 31, 2020 from $811.7 million in the prior year period and increased 310 basis points to 24.1% as a percentage of home sales revenues.

The percentage increase resulted from improvements of 280 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, 10 basis points due to a decrease in the amortization of capitalized interest and 10 basis points due to a decrease in warranty and construction defect costs.

We remain focused on managing the pricing, incentives and sales pace in each of our communities to optimize the returns on our inventory investments and adjust to local market conditions and new home demand.

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

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.

If new home demand declines from current levels due to an economic recession, an increase in mortgage interest rates, the impact of C-19 or otherwise, 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 $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.

Land/lot sales and other revenues from our homebuilding operations were $19.9 million and $19.7 million in the three months ended December 31, 2020 and 2019, respectively.

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 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.

As of December 31, 2020, our homebuilding operations had $23.8 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.

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 of December 31, 2020, we performed detailed impairment evaluations of communities and land inventories with a combined carrying value of $33.5 million and recorded impairment charges of $5.6 million during the three months ended December 31, 2020 to reduce the carrying value of impaired land to fair value.

There were no impairment charges recorded in the prior year period.

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.

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

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.

During the three months ended December 31, 2020 and 2019, earnest money and pre-acquisition cost write-offs related to land purchase contracts that we have terminated or expect to terminate were $2.3 million and $3.5 million, respectively.

Selling, General and Administrative (SG&A) Expense

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.

SG&A expense from homebuilding activities increased 26% to $451.2 million in the three months ended December 31, 2020 from $358.4 million in the prior year period.

SG&A expense as a percentage of homebuilding revenues was 7.9% in the three months ended December 31, 2020 compared to 9.2% in the prior year period.

Employee compensation and related costs represented 79% and 73% of SG&A costs in the three months ended December 31, 2020 and 2019, respectively.

These costs increased 36% to $356.0 million in the three months ended December 31, 2020 from $262.0 million in the prior year period.

Our homebuilding operations employed 7,583 and 6,811 employees at December 31, 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 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.

Interest incurred by our homebuilding operations was $24.4 million in the three months ended December 31, 2020, up slightly from $24.3 million in the prior year period.

Interest charged to cost of sales was 0.8% of total cost of sales (excluding inventory and land option charges) in both the three months ended December 31, 2020 and 2019.

Gain on Sale of Assets

During the three months ended December 31, 2020, we sold one single-family rental community representing 124 homes for $31.8 million, resulting in a gain on sale of $13.1 million in our homebuilding segment and $0.9 million in our other businesses.

Other income, net of other expenses, included in our homebuilding operations was $1.5 million in the three months ended December 31, 2020 compared to $5.4 million in the prior year period.

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

The activities that result in this ancillary income are not significant, either individually or in the aggregate.

Business Acquisition

In October 2020, we acquired the homebuilding operations of Braselton Homes for approximately $23.0 million in cash.

Braselton Homes operates in Corpus Christi, Texas.

The assets acquired included approximately 90 homes in inventory, 95 lots and control of approximately 840 additional lots through purchase contracts.

We also acquired a sales order backlog of approximately 125 homes.

Homebuilding Results by Reporting Region

Three Months Ended June 30,

Revenues Homebuilding

Income (1) % of

Revenues Homebuilding

Income (1) % of

(In millions)

East $ 736.3 $ 106.9 14.5 % $ 675.2 $ 74.1 11.0 %

Midwest 373.3 34.1 9.1 % 303.3 18.7 6.2 %

Southeast 1,629.1 233.5 14.3 % 1,388.1 168.4 12.1 %

South Central 1,376.4 201.8 14.7 % 1,178.0 164.3 13.9 %

Southwest 216.1 29.7 13.7 % 240.6 33.5 13.9 %

West 890.9 103.8 11.7 % 976.9 102.8 10.5 %

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

Nine Months Ended June 30,

Three Months Ended December 31,

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 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.

East Region — Homebuilding revenues increased 55% in the three months ended December 31, 2020 compared to the prior year period, primarily due to an increase in the number of homes closed in our New Jersey, Myrtle Beach, suburban Washington D.C.

and Charlotte markets.

The region generated pre-tax income of $132.5 million in the three months ended December 31, 2020 compared to $59.9 million in the prior year period.

Gross profit from home sales as a percentage of home sales revenue (home sales gross profit percentage) increased by 360 basis points in the three months ended December 31, 2020 compared to the prior year period, 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 170 basis points in the three months ended December 31, 2020 compared to the prior year period, primarily due to the increase in homebuilding revenues.

Midwest Region — Homebuilding revenues increased 46% in the three months ended December 31, 2020 compared to the prior year period, primarily due to increases in the number of homes closed in our Denver, Chicago and Indianapolis markets.

The region generated pre-tax income of $49.2 million in the three months ended December 31, 2020 compared to $18.6 million in the prior year period.

Home sales gross profit percentage increased by 360 basis points in the three months ended December 31, 2020 compared to the prior year period, 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 210 basis points in the three months ended December 31, 2020 compared to the prior year period, primarily due to the increase in homebuilding revenues.

Southeast Region — Homebuilding revenues increased 55% in the three months ended December 31, 2020 compared to the prior year period, primarily due to increases in the number of homes closed in all of our markets.

The region generated pre-tax income of $305.8 million in the three months ended December 31, 2020 compared to $146.3 million in the prior year period.

Home sales gross profit percentage increased by 340 basis points in the three months ended December 31, 2020 compared to the prior year period, primarily due to the average selling price of homes closed increasing while the average cost of those homes decreased slightly.

As a percentage of homebuilding revenues, SG&A expenses decreased by 140 basis points in the three months ended December 31, 2020 compared to the prior year period, primarily due to the increase in homebuilding revenues.

South Central Region — Homebuilding revenues increased 54% in the three months ended December 31, 2020 compared to the prior year period, primarily due to increases in the number of homes closed in our Houston, Dallas and San Antonio markets.

The region generated pre-tax income of $264.7 million in the three months ended December 31, 2020 compared to $132.6 million in the prior year period.

Home sales gross profit percentage increased by 200 basis points in the three months ended December 31, 2020 compared to the prior year period, 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 120 basis points in the three months ended December 31, 2020 compared to the prior year period, primarily due to the increase in homebuilding revenues.

Southwest Region — Homebuilding revenues increased 10% in the three months ended December 31, 2020 compared to the prior year period, primarily due to increases in the number of homes closed in all of our markets.

The region generated pre-tax income of $38.6 million in the three months ended December 31, 2020 compared to $34.5 million in the prior year period.

Home sales gross profit percentage increased by 170 basis points in the three months ended December 31, 2020 compared to the prior year period, primarily due to the average selling price of homes closed increasing, while the average cost of those homes decreased.

As a percentage of homebuilding revenues, SG&A expenses increased by 130 basis points in the three months ended December 31, 2020 compared to the prior year period, due to an increase in employee compensation and related costs.

West Region — Homebuilding revenues increased 33% in the three months ended December 31, 2020 compared to the prior year period, primarily due to increases in the number of homes closed in our Las Vegas, Southern California and Seattle markets, partially offset by decreases in the average selling price of homes closed in many markets.

The region generated pre-tax income of $144.4 million in the three months ended December 31, 2020 compared to $69.7 million in the prior year period.

Home sales gross profit percentage increased by 350 basis points in the three months ended December 31, 2020 compared to the prior year period, primarily due to the average selling price of homes closed decreasing by less than the average cost of those homes.

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 June 30, 2020 and September 30, 2019 are summarized as follows:

As of June 30, 2020

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

As of December 31, 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 June 30, 2020 and September 30, 2019 are summarized as follows:

As of June 30, 2020

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

As of December 31, 2020

Owned (1) Lots Controlled

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___________________

(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.

(1) Land/lots owned include approximately 35,600 and 33,800 owned lots that are fully developed and ready for home construction at December 31, 2020 and September 30, 2020, respectively.

Land/lots owned also include land held for development representing 1,600 lots at both December 31, 2020 and September 30, 2020.

(2) The total remaining purchase price of lots controlled through land and lot purchase contracts at December 31, 2020 and September 30, 2020 was $11.9 billion and $9.9 billion, respectively, secured by earnest money deposits of $776.0 million and $653.4 million, respectively.

The total remaining purchase price of lots controlled through land and lot purchase contracts at December 31, 2020 and September 30, 2020 included $1.3 billion and $1.0 billion, respectively, related to lot purchase contracts with Forestar, secured by $122.9 million and $98.2 million, respectively, of earnest money.

(3) Lots controlled at December 31, 2020 include approximately 34,900 lots owned or controlled by Forestar, 18,300 of which our homebuilding divisions have under contract to purchase and 16,600 of which our homebuilding divisions have a right of first offer to purchase.

Of these, approximately 15,700 lots were in our Southeast region, 6,000 lots were in our South Central region, 5,600 lots were in our West region, 3,100 lots were in our East region, 2,600 lots were in our Southwest region, and 1,900 lots were in our Midwest region.

Lots controlled at September 30, 2020 included approximately 30,400 lots owned or controlled by Forestar, 14,000 of which our homebuilding divisions had under contract to purchase and 16,400 of which our homebuilding divisions had a right of first offer to purchase.

(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.

(4) Approximately 16,300 and 14,900 of our homes in inventory were unsold at December 31, 2020 and September 30, 2020, respectively.

At December 31, 2020, approximately 1,600 of our unsold homes were completed, of which approximately 200 homes had been completed for more than six months.

At September 30, 2020, approximately 1,900 of our unsold homes were completed, of which approximately 300 homes had been completed for more than six months.

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

Homes in inventory exclude approximately 1,900 and 1,800 model homes at December 31, 2020 and September 30, 2020, respectively.

RESULTS OF OPERATIONS – FORESTAR

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.

In fiscal 2018, we acquired 75% of the outstanding shares of Forestar and at December 31, 2020, we owned 65% of its outstanding shares.

Forestar is a publicly traded residential lot development company with operations in 51 markets across 21 states as of December 31, 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 nine months ended June 30, 2020 and 2019 were as follows.

(See Note B for additional Forestar segment information.)

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

Three Months Ended

June 30, Nine Months Ended

2020 2019 2020 2019

(In millions)

Residential land and lot sales $ 307.0 $ 247.1

Commercial tract sales — — 2.5 18.5

Other 0.1 0.1

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Selling, general and administrative expense 15.5 10.5

Gain on sale of assets — (1.5) (0.1) (2.4)

Loss on sale of assets — 0.1

Other (income) expense (0.5) (2.2)

Income before income taxes $ 29.2 $ 22.2

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.

At December 31, 2020, Forestar owned directly or controlled through land and lot purchase contracts approximately 77,500 residential lots, of which approximately 4,900 are fully developed.

Approximately 34,900 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 nine months ended June 30, 2020 and 2019, Forestar’s land and lot sales, including the portion sold to D.R.

During the three months ended December 31, 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

June 30, Nine Months Ended

2020 2019 2020 2019

($ in millions)

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Residential tract acres sold to D.R.

Horton 30 — 66 —

Residential land sales revenues from sales to D.R.

Horton $ — $ 7.2

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.

SG&A expense for the three months ended December 31, 2020 and 2019 includes charges of $1.1 million and $1.3 million, respectively, related to the shared services agreement between Forestar and D.R.

Horton whereby D.R.

Horton provides Forestar with certain administrative, compliance, operational and procurement services.

Shared services charges were $0.5 million and $1.6 million, respectively, in the same periods of fiscal 2019.

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 nine months ended June 30, 2020 and 2019.

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

2020 2019 % Change 2020 2019 % Change

Three Months Ended December 31,

2020 2019 % Change

Number of first-lien loans originated or brokered by DHI Mortgage for D.R.

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Loans sold by DHI Mortgage to third parties 13,458 8,745 54 %

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

2020 2019 % Change 2020 2019 % Change

Three Months Ended December 31,

2020 2019 % Change

(In millions)

Loan origination fees $ 0.8 $ 3.5 (77) % $ 2.2 $ 10.2 (78) %

Sale of servicing rights and gains from sale of mortgage loans 116.7 85.4 37 % 263.7 218.3 21 %

Other revenues 10.2 6.6 55 % 23.8 16.3 46 %

Loan origination and other fees $ 11.1 $ 7.5 48 %

Gains on sale of mortgage loans and mortgage servicing rights 138.9 73.6 89 %

Servicing income 2.4 — — %

Total mortgage operations revenues 152.4 81.1 88 %

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Three Months Ended

June 30, Nine Months Ended

2020 2019 2020 2019

General and administrative expense 58.5 % 75.7 %

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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 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 97% of DHI Mortgage loan originations in the three and nine months ended June 30, 2020 compared to 98% in the prior year periods.

In the three months ended December 31, 2020, the volume of first-lien loans originated or brokered by DHI Mortgage for our homebuyers increased 51% from the prior year period, due to the 45% increase in the number of homes closed by our homebuilding operations, as well as a 3% increase in the percentage of homes closed for which DHI Mortgage handled our homebuyers’ financing.

Homes closed by our homebuilding operations constituted 97% of DHI Mortgage loan originations in both periods.

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

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%.

The number of loans sold increased 54% in the three months ended December 31, 2020 compared to the prior year period.

Virtually all of the mortgage loans held for sale on December 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).

During the three months ended December 31, 2020, approximately 66% of our mortgage loans were sold directly to Fannie Mae or into securities backed by Ginnie Mae and 27% were sold to two other major financial entities.

Changes in market conditions 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.

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.

As a result of the rapid decline in servicing values at the end of March, we began retaining the servicing rights on a portion of our loan originations.

Servicing values have since improved, and we sold a portion of our retained mortgage servicing rights in the three months ended December 31, 2020.

We expect to continue retaining some servicing rights prior to selling them to third parties, typically within six months of loan origination.

Financial Services Revenues and Expenses

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 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 1,979 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.

Revenues from our mortgage operations increased 88% to $152.4 million in the three months ended December 31, 2020 from $81.1 million in the prior year period, primarily due to a 50% increase in loan originations and a higher net gain achieved on the sale of loan originations in the secondary market.

Revenues from our title operations increased 60% to $34.8 million in the three months ended December 31, 2020 from $21.8 million in the prior year period, primarily due to a 50% increase in escrow closings.

General and administrative (G&A) expense related to our financial services operations increased 41% to $109.5 million in the three months ended December 31, 2020 from $77.9 million in the prior year period.

The increase was primarily due to an increase in employee related costs to support a higher volume of transactions.

Our financial services operations employed 2,403 and 1,882 employees at December 31, 2020 and 2019, respectively.

As a percentage of financial services revenues, G&A expense was 58.5% in the three months ended December 31, 2020 compared to 75.7% in the prior year period.

Our significant increase in loan volume resulted in better G&A leverage in the current year period.

However, fluctuations in financial services G&A expense as a percentage of revenues can 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.

As a result of the revenue increases from higher volumes of mortgage originations and escrow closings and better leverage of our G&A expenses, pre-tax income from our financial services operations increased 176% to $84.1 million in the three months ended December 31, 2020 from $30.5 million in the prior year period.

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.

DHI Communities is primarily focused on constructing garden style multi-family products, which typically accommodate 200 to 400 dwelling units, in high growth suburban markets.

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

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.

The combined pre-tax income of all of our subsidiaries engaged in other business activities was $2.2 million in the three months ended December 31, 2020 compared to $29.6 million in the prior year period.

Income generated by our other businesses can vary significantly based on the timing of multi-family rental property sales.

There were no sales of multi-family rental properties during the current year period.

In the prior year period, one property was sold for $61.5 million with a gain on sale of $31.2 million.

Our multi-family rental operations develop, construct, lease and own multi-family residential properties that produce rental income.

We primarily focus on constructing garden style multi-family communities, which typically accommodate 200 to 400 dwelling units, in high growth suburban markets.

After we complete construction and achieve a stabilized level of leased occupancy, the property is typically marketed for sale.

At December 31, 2020, we had four multi-family rental projects under active construction and four projects that were substantially complete.

These eight projects represent 2,325 multi-family units, including 1,015 units under active construction and 1,310 completed units.

RESULTS OF OPERATIONS - CONSOLIDATED

Income before Income Taxes

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 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 $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.

Pre-tax income for the three months ended December 31, 2020 was $1.0 billion compared to $523.3 million in the prior year period.

The increase was primarily due to an increase 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 months ended December 31, 2020 and 2019 was $239.1 million and $90.8 million, respectively.

Our effective tax rate was 23.1% for the three months ended December 31, 2020 compared to 17.4% in the prior year period.

The effective tax rates for both periods include an expense for state income taxes and tax benefits related to stock-based compensation and the federal energy efficient homes tax credit.

For the three months ended December 31, 2019, the retroactive reinstatement of the federal energy efficient homes tax credit for homes closed from January 1, 2018 to September 30, 2019 reduced our effective tax rate by 5.6%.

Our deferred tax assets, net of deferred tax liabilities, were $149.5 million at December 31, 2020 compared to $152.4 million at September 30, 2020.

We have a valuation allowance of $7.5 million at December 31, 2020 and September 30, 2020 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 housing market across the United States.

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.

Our current levels of cash, borrowing capacity and balance sheet leverage provide us with the operational flexibility to adjust to changes in economic and market conditions.

We remain cautious as to the ongoing impact of C-19 on the U.S.

economy and will adjust our strategy as appropriate should market conditions change due to the pandemic or otherwise.

In the current market, we are increasing our investments in homebuilding inventories and single-family and multi-family rental properties to expand our operations and grow our revenues and profitability, as well as considering opportunistic strategic investments as they arise.

We are also maintaining higher homebuilding cash balances than in prior years to support the increased scale and level of activity in our business and to provide flexibility to adjust to changing conditions and opportunities.

At December 31, 2020, our ratio of debt to total capital (notes payable divided by stockholders’ equity plus notes payable) was 25.3% compared to 26.6% at September 30, 2020 and 27.0% at December 31, 2019.

Our ratio of homebuilding debt to total capital (homebuilding notes payable divided by stockholders’ equity plus homebuilding notes payable) was 17.3% compared to 17.5% at September 30, 2020 and 19.5% at December 31, 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 2021.

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We exclude the debt of Forestar and our financial services business because they are separately capitalized and not guaranteed by our parent company or any of our homebuilding entities.

We regularly assess our projected capital requirements to fund growth in our business, repay debt obligations, pay dividends, repurchase our common stock and support other general corporate and operational needs, and we regularly evaluate our opportunities to raise additional capital.

We regularly assess our projected capital requirements to fund growth in our business, repay debt obligations, pay dividends, repurchase our common stock and maintain sufficient cash levels to support our other operational needs, and we regularly evaluate our opportunities to raise additional capital.

Horton has an automatically effective universal shelf registration statement filed with the Securities and Exchange Commission (SEC) in August 2018, registering debt and equity securities that may be issued from time to time in amounts to be determined.

Forestar also has an effective shelf registration statement filed with the SEC in September 2018, registering $500 million of equity securities, of which $394.3 million remains available.

Forestar also has an effective shelf registration statement filed with the SEC in September 2018, registering $500 million of equity securities.

At December 31, 2020, $394.3 million remained available under Forestar’s shelf registration statement, $100 million of which is reserved for sales under its at-the-market equity offering program.

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.

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

Cash and Cash Equivalents — At December 31, 2020, cash and cash equivalents of our homebuilding segment totaled $2.1 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.

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The maturity date of the facility is October 2, 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.

At December 31, 2020, there were no borrowings outstanding and $151.6 million of letters of credit issued under the revolving credit facility, resulting in available capacity of approximately $1.44 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.

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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.

There were no borrowings outstanding under the facility at December 31, 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.

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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.

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

Public Unsecured Debt — We have $2.55 billion principal amount of homebuilding senior notes outstanding as of December 31, 2020 that mature from September 2022 through October 2027.

In October 2020, we issued $500 million principal amount of 1.4% senior notes due October 15, 2027, 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 1.6%.

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%.

In December 2020, we repaid $400 million principal amount of our 2.55% senior notes at maturity.

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

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.

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

Repurchases of Common Stock — We repurchased 1.0 million shares of our common stock for $69.8 million during the three months ended December 31, 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 June 30, 2020, the full amount of the debt repurchase authorization was remaining and $535.3 million of the equity repurchase authorization was remaining.

At December 31, 2020, the full amount of the debt repurchase authorization was remaining, and $465.5 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 June 30, 2020, Forestar had cash and cash equivalents of $355.6 million.

Cash and Cash Equivalents — At December 31, 2020, Forestar had cash and cash equivalents of $237.4 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.

The facility also provides for the issuance of letters of credit with a sublimit equal to the greater of $100 million and 50% of the revolving credit commitment.

Borrowings under the revolving credit facility are subject to a borrowing base based on Forestar’s book value of its real estate assets and unrestricted cash.

Borrowings under the revolving credit facility are subject to a borrowing base calculation based on Forestar’s book value of its real estate assets and unrestricted cash.

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

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.

At December 31, 2020, there were no borrowings outstanding and $40.5 million of letters of credit issued under the revolving credit facility, resulting in available capacity of $339.5 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.

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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.

Unsecured Debt — In February 2020, Forestar issued $300 million principal amount of 5.0% senior notes pursuant to Rule 144A and Regulation S under the Securities Act of 1933, as amended.

The notes are due March 1, 2028, with interest payable semiannually, and represent unsecured obligations of Forestar.

The annual effective interest rate of these notes after giving effect to the amortization of financing costs is 5.2%.

These notes may be redeemed prior to maturity, subject to certain limitations and premiums defined in the indenture agreement.

Forestar also has $350 million principal amount of 8.0% senior notes that mature April 15, 2024.

In March 2020, Forestar repaid $118.9 million principal amount of its 3.75% convertible senior notes in cash at maturity.

Unsecured Debt — Forestar has $650 million principal amount of senior notes issued pursuant to Rule 144A and Regulation S under the Securities Act of 1933, as amended.

The notes mature from April 2024 through March 2028, with interest payable semi-annually, and represent unsecured obligations of Forestar.

Forestar’s revolving credit facility and its senior notes are not guaranteed by D.R.

or any of the subsidiaries that guarantee our homebuilding debt.

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.

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

Debt Repurchase Authorization — Effective April 30, 2020, Forestar’s Board of Directors authorized the repurchase of up to $30 million of Forestar’s debt securities.

The authorization has no expiration date.

All of the $30 million authorization was remaining at December 31, 2020.

Capital Resources - Financial Services

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

Cash and Cash Equivalents — At December 31, 2020, cash and cash equivalents of our financial services operations totaled $65.3 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 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 total capacity of the facility is $1.35 billion;

however, the capacity increased, without requiring additional commitments, to $1.575 billion for approximately 45 days around September 30, 2020 and increased again for approximately 30 days around December 31, 2020.

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

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.

We are currently in discussions with our lenders and expect to renew and extend the facility on similar terms prior to its maturity date.

As of December 31, 2020, $1.31 billion of mortgage loans held for sale with a collateral value of $1.29 billion were pledged under the mortgage repurchase facility.

As a result of advance paydowns totaling $319.4 million, DHI Mortgage had an obligation of $969.1 million outstanding under the mortgage repurchase facility at December 31, 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 June 30, 2020, DHI Mortgage was in compliance with all of the conditions and covenants of the mortgage repurchase facility.

At December 31, 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 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.

In the three months ended December 31, 2020, net cash used in operating activities was $252.1 million compared to $113.8 million in the prior year period.

Cash used in operating activities in the current year period primarily consisted of $269.2 million and $158.7 million of cash used in our homebuilding and Forestar segments, respectively, partially offset by $173.1 million of cash provided by our financial services segment.

Cash used to increase construction in progress and finished home inventory was $591.2 million in the current year period compared to $334.8 million in the prior year period.

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Investing Cash Flow Activities

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.

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.

In the three months ended December 31, 2020, net cash used in investing activities was $91.4 million compared to $17.8 million in the prior year period.

In the current year period, uses of cash included expenditures related to our rental operations totaling $86.2 million, an acquisition of the homebuilding operations of Braselton Homes for $23.0 million and purchases of property and equipment totaling $16.3 million, partially offset by proceeds from the sale of a single-family rental community for $31.8 million.

In the prior year period, uses of cash included expenditures related to our rental operations totaling $59.6 million and purchases of property and equipment totaling $21.6 million, partially offset by proceeds from the sale of assets primarily consisting of $61.5 million related to the sale of a multi-family rental property.

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 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.

During the three months ended December 31, 2020, net cash used in financing activities was $221.7 million, consisting primarily of repayment of $400 million principal amount of our 2.55% homebuilding senior notes at maturity, net payments of $163.5 million on our mortgage repurchase facility, payment of cash dividends totaling $72.9 million and cash used to repurchase shares of our common stock of $53.8 million.

These uses of cash were partially offset by note proceeds from our issuance of $500 million principal amount of 1.4% homebuilding senior notes.

During the three months ended December 31, 2019, net cash provided by financing activities was $213.5 million, consisting primarily of note proceeds from our issuance of $500 million principal amount of 2.5% homebuilding senior notes, partially offset by cash used to repurchase shares of our common stock of $163.1 million, payment of cash dividends totaling $64.6 million and net payments of $38.6 million on our mortgage repurchase facility.

During the three months ended December 31, 2020, our Board of Directors approved a quarterly cash dividend of $0.20 per common share, which was paid on December 14, 2020 to stockholders of record on December 4, 2020.

In January 2021, our Board of Directors approved a quarterly cash dividend of $0.20 per common share, payable on February 25, 2021 to stockholders of record on February 17, 2021.

Cash dividends of $0.175 per common share were approved and paid in each quarter of fiscal 2020.

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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 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.

At December 31, 2020, we had outstanding letters of credit of $192.1 million and surety bonds of $1.9 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 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.

Among our homebuilding land and lot purchase contracts at December 31, 2020, there were a limited number of contracts with $73.5 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, $41.5 million related to contracts between our homebuilding segment and Forestar.

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SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION

As of June 30, 2020, D.R.

As of December 31, 2020, D.R.

had outstanding $2.55 billion principal amount of homebuilding senior notes due through October 2027 and no amounts outstanding on its homebuilding revolving credit facilities.

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and Guarantor Subsidiaries

Summarized Balance Sheet Data June 30,

Summarized Balance Sheet Data December 31,

2020 September 30,

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11,321.0 10,757.0

Summarized Statement of Operations Data Nine Months Ended

June 30, 2020 Fiscal Year Ended September 30, 2019

Summarized Statement of Operations Data Three Months Ended

December 31, 2020 Fiscal Year Ended September 30, 2020

(In millions)

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A court could void or subordinate any Guarantor’s guarantee under the fraudulent conveyance laws if existing or future creditors of any such Guarantor were successful in establishing that:

• such guarantee was incurred with fraudulent intent;

• such Guarantor did not receive fair consideration or reasonably equivalent value for issuing its guarantee;

• was insolvent at the time of the guarantee;

• was rendered insolvent by reason of the guarantee;

• was engaged in a business or transaction for which its assets constituted unreasonably small capital to carry on its business;

• intended to incur, or believed that it would incur, debt beyond its ability to pay such debt as it matured.

(i) such guarantee was incurred with fraudulent intent;

or (ii) such Guarantor did not receive fair consideration or reasonably equivalent value for issuing its guarantee and was insolvent at the time of the guarantee, was rendered insolvent by reason of the guarantee, was engaged in a business or transaction for which its assets constituted unreasonably small capital to carry on its business, or intended to incur, or believed that it would incur, debt beyond its ability to pay such debt as it matured.

The measures of insolvency for purposes of determining whether a fraudulent conveyance occurred would vary depending upon the laws of the relevant jurisdiction and upon the valuation assumptions and methodology applied by the court.

Generally, however, a company would be considered insolvent for purposes of the foregoing if:

• the sum of the company’s debts, including contingent, unliquidated and unmatured liabilities, is greater than all of such company’s property at a fair valuation;

• the present fair saleable value of the company’s assets is less than the amount that will be required to pay the probable liability on its existing debts as they become absolute and matured.

Generally, however, a company would be considered insolvent for purposes of the foregoing if the sum of the company’s debts, including contingent, unliquidated and unmatured liabilities, is greater than all of such company’s property at a fair valuation, or if the present fair saleable value of the company’s assets is less than the amount that will be required to pay the probable liability on its existing debts as they become absolute and matured.

The indentures governing our homebuilding senior notes contain a “savings clause,” which limits the liability of each Guarantor on its guarantee to the maximum amount that such Guarantor can incur without risk that its guarantee will be subject to avoidance as a fraudulent transfer.

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As disclosed in our critical accounting policies in our Form 10-K for the fiscal year ended September 30, 2020, our reserves for construction defect claims include the estimated costs of both known claims and anticipated future claims.

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.

At December 31, 2020 and September 30, 2020, we had reserves for approximately 270 and 260 pending construction defect claims, respectively, and no individual existing claim was material to our financial statements.

During the three months ended December 31, 2020, we established reserves for approximately 30 new construction defect claims and resolved 20 construction defect claims for a total cost of $2.3 million.

At December 31, 2019 and September 30, 2019, we had reserves for approximately 195 and 180 pending construction defect claims, respectively, and no individual existing claim was material to our financial statements.

During the three months ended December 31, 2019, we established reserves for approximately 35 new construction defect claims and resolved 20 construction defect claims for a total cost of $14.9 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 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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• the effects of health and safety incidents;

• the effects of negative publicity;

• supply shortages and other risks of acquiring land, building materials and skilled labor;

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• the effects of governmental regulations on our financial services operations;

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

• competitive conditions within the homebuilding, lot development and financial services industries;

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

• the effects of negative publicity;

• the effects of the loss of key personnel;

• information technology failures and data security breaches.

• information technology failures, data security breaches and our ability to satisfy privacy and data protection laws and regulations.

We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

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, 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.

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, 2020, including the section entitled “Risk Factors,” which is filed with the SEC.

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