What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-04-26 compared with 2021-01-27 · 358 added, 255 removed, 510 unchanged (55% of the section changed)

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

Our homebuilding operations are our core business and primarily include the construction and sale of single-family homes with sales prices generally ranging from $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.

Approximately 91% of our home sales revenue in the six months ended March 31, 2021 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.

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

During fiscal 2020, we also 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.

During the six months ended March 31, 2021, 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 March 31, 2021, our homebuilding fixed assets included $182.6 million of assets related to 27 single-family rental communities, and our single-family rental platform included 1,650 homes and finished lots, of which 570 homes were completed.

At March 31, 2021, we owned 64% 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.

Forestar has made significant investments in land acquisition and development over the last few years 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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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%.

At March 31, 2021 and September 30, 2020, our consolidated balance sheets included $394.4 million and $246.2 million, respectively, of assets related to multi-family rental operations.

Total assets related to other business activities were $547.5 million and $379.4 million at March 31, 2021 and September 30, 2020, respectively.

Fiscal Year-to-Date Operating Results

During the six months ended March 31, 2021, the number and value of our net sales orders increased 43% and 53%, respectively, compared to the prior year period.

During the six months ended March 31, 2021, our number of homes closed and home sales revenues increased 40% and 44%, respectively, compared to the prior year period, and our consolidated revenues increased 45% to $12.4 billion compared to $8.5 billion in the prior year period.

Our pre-tax income was $2.2 billion in the six months ended March 31, 2021 compared to $1.1 billion in the prior year period, and our pre-tax operating margin was 17.9% compared to 13.4%.

Net income was $1.7 billion in the six months ended March 31, 2021 compared to $916.4 million in the prior year period.

In the trailing twelve months ended March 31, 2021, our return on equity (ROE) was 27.1% compared to 19.1% in the prior year period, and our homebuilding return on inventory (ROI) was 31.2% compared to 20.2%.

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 72% of the lots owned and controlled at December 31, 2020 compared to 70% at September 30, 2020 and 61% at December 31, 2019.

Within our homebuilding land and lot portfolio, our lots controlled under purchase contracts represent 75% of the lots owned and controlled at March 31, 2021 compared to 70% at September 30, 2020 and 64% at March 31, 2020.

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 .

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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.

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 has remained strong throughout the first half of fiscal 2021.

We believe the increase in demand has been fueled by historically low 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 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.

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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;

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

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

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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:

Key financial results as of and for the three months ended March 31, 2021, as compared to the same period of 2020, were as follows:

Homebuilding:

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• Homebuilding SG&A expense was 7.6% of homebuilding revenues compared to 8.3%.

• Homebuilding pre-tax income was $935.2 million compared to $461.6 million.

• Homebuilding pre-tax income was $1.1 billion compared to $565.5 million.

• Homebuilding pre-tax income was 17.0% of homebuilding revenues compared to 12.9%.

• 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.

• Homebuilding cash and cash equivalents totaled $1.9 billion compared to $2.6 billion and $1.0 billion at September 30, 2020 and March 31, 2020, respectively.

• Homebuilding inventories totaled $12.9 billion compared to $11.0 billion and $11.1 billion at September 30, 2020 and March 31, 2020, respectively.

• Homes in inventory totaled 46,100 compared to 38,000 and 33,400 at September 30, 2020 and March 31, 2020, respectively.

• Owned lots totaled 121,500 compared to 112,600 and 118,700 at September 30, 2020 and March 31, 2020, respectively.

Lots controlled through purchase contracts increased to 365,200 from 264,300 and 210,600 at September 30, 2020 and March 31, 2020, respectively.

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

• Homebuilding debt to total capital was 16.8% compared to 17.5% and 19.2% at September 30, 2020 and March 31, 2020, respectively.

• Forestar’s revenues increased 80% to $287.1 million compared to $159.1 million.

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• Forestar’s pre-tax income was 13.1% of revenues compared to 8.6%.

• 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.

• Forestar’s cash and cash equivalents totaled $167.2 million compared to $394.3 million and $438.2 million at September 30, 2020 and March 31, 2020, respectively.

• Forestar’s inventories totaled $1.7 billion compared to $1.3 billion and $1.2 billion at September 30, 2020 and March 31, 2020, respectively.

• Forestar’s owned and controlled lots totaled 84,500 compared to 60,500 and 52,300 at September 30, 2020 and March 31, 2020, respectively.

Of these lots, 37,100 were under contract to sell to or subject to a right of first offer with D.R.

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.

Horton compared to 30,400 and 28,600 at September 30, 2020 and March 31, 2020, respectively.

• Forestar’s debt was $654.6 million compared to $641.1 million and $640.1 million at September 30, 2020 and March 31, 2020, respectively.

• Forestar’s debt to total capital was 41.0% compared to 42.4% and 43.4% at September 30, 2020 and March 31, 2020, respectively.

Financial Services:

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Horton increased 95% to $2.53 compared to $1.30.

• 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.

• Stockholders’ equity was $13.0 billion compared to $11.8 billion and $10.5 billion at September 30, 2020 and March 31, 2020, respectively.

• Book value per common share increased to $35.96 compared to $32.53 and $28.77 at September 30, 2020 and March 31, 2020, respectively.

• Debt to total capital was 25.7% compared to 26.6% at September 30, 2020 and 29.2% at March 31, 2020.

Key financial results for the six months ended March 31, 2021, as compared to the same period of 2020, were as follows:

Homebuilding:

• Homebuilding revenues increased 44% to $11.9 billion compared to $8.3 billion.

• Homes closed increased 40% to 38,440 homes, and the average closing price of those homes was $308,800.

• Net sales orders increased 43% to 47,477 homes, and the value of net sales orders increased 53% to $15.3 billion.

• Home sales gross margin was 24.4% compared to 21.1%.

• Homebuilding SG&A expense was 7.7% of homebuilding revenues compared to 8.7%.

• Homebuilding pre-tax income was $2.0 billion compared to $1.0 billion.

• Homebuilding pre-tax income was 16.7% of homebuilding revenues compared to 12.4%.

• Net cash provided by homebuilding operations was $138.0 million compared to $52.1 million.

• Forestar’s revenues increased 46% to $594.2 million compared to $406.4 million.

Revenues in the current and prior year periods included $562.5 million and $373.2 million, respectively, of revenue from land and lot sales to our homebuilding segment.

• Forestar’s lots sold increased 64% to 7,155 compared to 4,373.

Lots sold to D.R.

Horton totaled 6,747 compared to 4,296.

• Forestar’s pre-tax income was $66.8 million compared to $35.8 million.

• Forestar’s pre-tax income was 11.2% of revenues compared to 8.8%.

Financial Services:

• Financial services revenues increased 99% to $412.3 million compared to $207.4 million.

• Financial services pre-tax income increased 247% to $191.8 million compared to $55.2 million.

• Financial services pre-tax income was 46.5% of financial services revenues compared to 26.6%.

Consolidated Results:

• Consolidated pre-tax income increased 93% to $2.2 billion compared to $1.1 billion.

• Consolidated pre-tax income was 17.9% of consolidated revenues compared to 13.4%.

• Income tax expense was $485.1 million compared to $228.1 million, and our effective tax rate was 21.9% compared to 19.9%.

• Net income attributable to D.R.

Horton increased 88% to $1.7 billion compared to $914.0 million.

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

Horton increased 90% to $4.67 compared to $2.46.

• Net cash used in operations was $154.9 million compared to $395.1 million.

RESULTS OF OPERATIONS - HOMEBUILDING

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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.

Southern New Jersey Northwest Indiana

North Carolina Asheville Iowa Des Moines

Charlotte Minnesota Minneapolis/St.

Greensboro/Winston-Salem Ohio Cincinnati

Raleigh/Durham Columbus

Pennsylvania Central Pennsylvania South Central Region

Philadelphia Louisiana Baton Rouge

South Carolina Charleston Lake Charles/Lafayette

Columbia Oklahoma Oklahoma City

Greenville/Spartanburg Texas Austin

Hilton Head Bryan/College Station

Myrtle Beach Corpus Christi

Virginia Northern Virginia Dallas

Southern Virginia Fort Worth

Southeast Region Killeen/Temple/Waco

Alabama Birmingham Midland/Odessa

Huntsville New Braunfels/San Marcos

Mobile/Baldwin County San Antonio

Tuscaloosa Southwest Region

Florida Fort Myers/Naples Arizona Phoenix

Gainesville Tucson

Jacksonville New Mexico Albuquerque

Melbourne/Vero Beach West Region

Miami/Fort Lauderdale California Bakersfield

Ocala Bay Area

Orlando Fresno

Pensacola/Panama City Los Angeles County

Lucie Modesto/Merced

Tampa/Sarasota Riverside County

Volusia County Sacramento

West Palm Beach San Bernardino County

Georgia Atlanta San Diego County

Augusta Hawaii Oahu

Mississippi Gulf Coast Nevada Las Vegas

Tennessee Chattanooga Reno

Knoxville Oregon Bend

Memphis Portland/Salem

Nashville Utah Salt Lake City

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 and six months ended March 31, 2021 and 2020.

Net Sales Orders (1)

Three Months Ended December 31,

Three Months Ended March 31,

Net Homes Sold Value (In millions) Average Selling Price

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27,059 20,087 35 % $ 8,849.0 $ 6,020.9 47 % $ 327,000 $ 299,700 9 %

Six Months Ended March 31,

Net Homes Sold Value (In millions) Average Selling Price

Change 2021 2020 %

East 5,921 4,590 29 % $ 1,936.0 $ 1,350.5 43 % $ 327,000 $ 294,200 11 %

Midwest 3,025 2,140 41 % 1,167.5 761.7 53 % 386,000 355,900 8 %

Southeast 16,480 10,390 59 % 5,036.1 2,826.7 78 % 305,600 272,100 12 %

South Central 15,264 9,914 54 % 4,213.0 2,533.2 66 % 276,000 255,500 8 %

Southwest 2,220 1,609 38 % 727.0 467.3 56 % 327,500 290,400 13 %

West 4,567 4,570 — % 2,185.4 2,031.2 8 % 478,500 444,500 8 %

47,477 33,213 43 % $ 15,265.0 $ 9,970.6 53 % $ 321,500 $ 300,200 7 %

Sales Order Cancellations

Three Months Ended December 31,

Three Months Ended March 31,

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

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4,917 4,570 $ 1,478.6 $ 1,324.8 15 % 19 %

Six Months Ended March 31,

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

2021 2020 2021 2020 2021 2020

East 1,239 1,090 $ 376.0 $ 311.6 17 % 19 %

Midwest 537 385 198.0 126.8 15 % 15 %

Southeast 3,611 2,866 1,053.1 783.7 18 % 22 %

South Central 3,045 2,366 802.7 607.4 17 % 19 %

Southwest 392 384 116.3 110.5 15 % 19 %

West 501 686 230.1 308.7 10 % 13 %

9,325 7,777 $ 2,776.2 $ 2,248.7 16 % 19 %

(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 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 number of net sales orders increased 35% and 43% in the three and six months ended March 31, 2021, respectively, compared to the prior year periods, with increases in most of our regions.

The value of net sales orders increased 47% to $8.8 billion (27,059 homes) and 53% to $15.3 billion (47,477 homes) for the three and six months ended March 31, 2021, respectively, compared to $6.0 billion (20,087 homes) and $10.0 billion (33,213 homes) in the prior year periods.

The average selling price of net sales orders during the three and six months ended March 31, 2021 was $327,000 and $321,500, respectively, up 9% and 7% from the prior year periods.

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

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the Florida markets (particularly Tampa) in the Southeast;

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

the Phoenix market in the Southwest;

and the California markets in the West.

Our sales order cancellation rate (cancelled sales orders divided by gross sales orders for the period) was 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.

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

and the Phoenix market in the Southwest.

The decrease in sales volume in our West region in the current quarter compared to the prior year was primarily due to our Seattle market.

Our sales order cancellation rate (cancelled sales orders divided by gross sales orders for the period) was 15% and 16% in the three and six months ended March 31, 2021, respectively, compared to 19% in both prior year periods.

Our sales order pace has shown continued strength throughout the first half of fiscal 2021 and reflects increased demand due to historically low interest rates on mortgage loans and the continued limited supply of homes at affordable price points across most of our markets.

Sales Order Backlog

As of December 31,

As of March 31,

Homes in Backlog Value (In millions) Average Selling Price

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Homes Closed and Home Sales Revenue

Three Months Ended December 31,

Three Months Ended March 31,

Homes Closed Value (In millions) Average Selling Price

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19,701 14,539 36 % $ 6,170.4 $ 4,363.3 41 % $ 313,200 $ 300,100 4 %

Six Months Ended March 31,

Homes Closed Value (In millions) Average Selling Price

Change 2021 2020 %

East 5,261 3,781 39 % $ 1,665.9 $ 1,099.9 51 % $ 316,700 $ 290,900 9 %

Midwest 2,384 1,690 41 % 879.9 590.9 49 % 369,100 349,600 6 %

Southeast 13,292 9,062 47 % 3,819.5 2,464.7 55 % 287,400 272,000 6 %

South Central 11,376 7,947 43 % 2,976.3 2,015.2 48 % 261,600 253,600 3 %

Southwest 1,580 1,343 18 % 475.3 395.7 20 % 300,800 294,600 2 %

West 4,547 3,675 24 % 2,052.2 1,660.2 24 % 451,300 451,800 — %

38,440 27,498 40 % $ 11,869.1 $ 8,226.6 44 % $ 308,800 $ 299,200 3 %

Home Sales Revenue

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.

Revenues from home sales increased 41% to $6.2 billion (19,701 homes closed) for the three months ended March 31, 2021 from $4.4 billion (14,539 homes closed) in the prior year period.

Revenues from home sales increased 44% to $11.9 billion (38,440 homes closed) for the six months ended March 31, 2021 from $8.2 billion (27,498 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 Chicago markets in the Midwest;

the Florida markets (particularly Tampa) in the Southeast;

The number of homes closed increased 36% and 40% in the three and six months ended March 31, 2021, respectively, compared to the prior year periods.

The markets contributing most to the increased closing volume in our regions were as follows:

the Carolina markets in the East;

the Denver and Indianapolis markets in the Midwest;

the Florida markets 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.

the Phoenix market in the Southwest;

and the California markets in the West.

Homebuilding Operating Margin Analysis

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Three Months Ended

March 31, Six Months Ended

2021 2020 2021 2020

Gross profit – home sales 24.6 % 21.3 % 24.4 % 21.1 %

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Home Sales Gross Profit

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.

Gross profit from home sales increased to $1.5 billion in the three months ended March 31, 2021 from $927.8 million in the prior year period and increased 330 basis points to 24.6% as a percentage of home sales revenues.

The percentage increase resulted from improvements of 320 basis points due to the average selling price of our homes closed increasing by more than the average cost of those homes, 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, partially offset by increased warranty and construction defect costs of 10 basis points.

Gross profit from home sales increased to $2.9 billion in the six months ended March 31, 2021 from $1.7 billion in the prior year period and increased 330 basis points to 24.4% as a percentage of home sales revenues.

The percentage increase resulted from improvements of 300 basis points due to an increase in the average selling price while the cost of our homes closed decreased 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 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.

If new home demand declines from current levels, we would expect our gross profit margins to also decline.

Land/Lot Sales and Other Revenues

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.

Land/lot sales and other revenues from our homebuilding operations were $17.3 million and $37.2 million in the three and six months ended March 31, 2021, respectively, and $15.5 million and $35.2 million in the comparable periods of fiscal 2020.

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 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.

As of March 31, 2021, our homebuilding operations had $24.1 million of land held for sale that we expect to sell in the next twelve months.

Inventory and Land Option Charges

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

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 of March 31, 2021, we determined that no communities were impaired, and no impairment charges were recorded during the three months ended March 31, 2021.

During the six months ended March 31, 2021, impairment charges totaled $5.6 million.

There were $1.7 million of impairment charges recorded in the three and six months ended March 31, 2020.

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 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.

During the three and six months ended March 31, 2021, earnest money and pre-acquisition cost write-offs related to land purchase contracts that we have terminated or expect to terminate were $3.2 million and $5.6 million, respectively, compared to $7.1 million and $10.7 million in the same periods of fiscal 2020.

Selling, General and Administrative (SG&A) Expense

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.

SG&A expense from homebuilding activities increased 30% to $469.5 million and 28% to $920.6 million in the three and six months ended March 31, 2021, respectively, from $361.8 million and $720.2 million in the prior year periods.

SG&A expense as a percentage of homebuilding revenues was 7.6% and 7.7% in the three and six months ended March 31, 2021, respectively, compared to 8.3% and 8.7% in the prior year periods.

Employee compensation and related costs represented 81% and 80% of SG&A costs in the three and six months ended March 31, 2021, respectively, compared to 73% in both prior year periods.

These costs increased 44% to $382.3 million and 40% to $738.3 million in the three and six months ended March 31, 2021, respectively, from $265.7 million and $527.7 million in the prior year periods.

Our homebuilding operations employed 7,916 and 6,987 employees at March 31, 2021 and 2020, 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 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.

Interest incurred by our homebuilding operations was $22.6 million and $47.0 million in the three and six months ended March 31, 2021, respectively, compared to $22.9 million and $47.2 million in the prior year periods.

Interest charged to cost of sales was 0.7% and 0.8% of total cost of sales (excluding inventory and land option charges) in the three and six months ended March 31, 2021, respectively, compared to 0.8% in both prior year periods.

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.

During the six months ended March 31, 2021, 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 $1.8 million and $3.3 million in the three and six months ended March 31, 2021, respectively, compared to $4.1 million and $9.6 million in the prior year periods.

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.

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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.

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

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

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Homebuilding Results by Reporting Region

Three Months Ended December 31,

Three Months Ended March 31,

Revenues Homebuilding

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$ 6,187.7 $ 1,052.1 17.0 % $ 4,378.8 $ 565.5 12.9 %

Six Months Ended March 31,

Revenues Homebuilding

Income (1) % of

Revenues Homebuilding

Income (1) % of

(In millions)

East $ 1,670.7 $ 278.5 16.7 % $ 1,100.2 $ 133.2 12.1 %

Midwest 881.5 110.1 12.5 % 591.3 42.3 7.2 %

Southeast 3,833.3 682.5 17.8 % 2,467.3 333.9 13.5 %

South Central 2,979.0 531.5 17.8 % 2,025.1 288.9 14.3 %

Southwest 475.7 78.1 16.4 % 410.7 65.3 15.9 %

West 2,066.1 306.6 14.8 % 1,667.2 163.5 9.8 %

$ 11,906.3 $ 1,987.3 16.7 % $ 8,261.8 $ 1,027.1 12.4 %

______________

(1) Expenses maintained at the corporate level consist primarily of interest and property taxes, which are capitalized and amortized to cost of sales or expensed directly, and the expenses related to operating our corporate office.

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 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.

East Region — Homebuilding revenues increased 49% and 52% in the three and six months ended March 31, 2021, respectively, compared to the prior year periods, primarily due to increases in the number of homes closed in our New Jersey, Myrtle Beach, Greenville and Charlotte markets.

The region generated pre-tax income of $146.0 million and $278.5 million in the three and six months ended March 31, 2021, respectively, compared to $73.3 million and $133.2 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 370 basis points in both the three and six months ended March 31, 2021 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 80 and 120 basis points in the three and six months ended March 31, 2021, respectively, compared to the prior year periods, primarily due to the increase in homebuilding revenues.

Midwest Region — Homebuilding revenues increased 52% and 49% in the three and six months ended March 31, 2021, respectively, compared to the prior year periods, primarily due to increases in the number of homes closed in our Denver, Chicago and Indianapolis markets.

The region generated pre-tax income of $60.9 million and $110.1 million in the three and six months ended March 31, 2021, respectively, compared to $23.6 million and $42.3 million in the prior year periods.

Home sales gross profit percentage increased by 360 basis points in both the three and six months ended March 31, 2021 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 160 and 190 basis points in the three and six months ended March 31, 2021, respectively, compared to the prior year periods, primarily due to the increase in homebuilding revenues.

Southeast Region — Homebuilding revenues increased 56% and 55% in the three and six months ended March 31, 2021, respectively, compared to the prior year periods, primarily due to increases in the number of homes closed in all of our markets.

The region generated pre-tax income of $376.7 million and $682.5 million in the three and six months ended March 31, 2021, respectively, compared to $187.8 million and $333.9 million in the prior year periods.

Home sales gross profit percentage increased by 320 and 330 basis points in the three and six months ended March 31, 2021, respectively, compared to the prior year periods, 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 90 and 110 basis points in the three and six months ended March 31, 2021, respectively, compared to the prior year periods, primarily due to the increase in homebuilding revenues.

South Central Region — Homebuilding revenues increased 41% and 47% in the three and six months ended March 31, 2021, respectively, compared to the prior year periods, primarily due to increases in the number of homes closed in most of our Texas markets.

The region generated pre-tax income of $266.8 million and $531.5 million in the three and six months ended March 31, 2021, respectively, compared to $156.2 million and $288.9 million in the prior year periods.

Home sales gross profit percentage increased by 220 and 210 basis points in the three and six months ended March 31, 2021, 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 50 and 80 basis points in the three and six months ended March 31, 2021, respectively, compared to the prior year periods, primarily due to the increase in homebuilding revenues.

Southwest Region — Homebuilding revenues increased 22% and 16% in the three and six months ended March 31, 2021, respectively, compared to the prior year periods, primarily due to increases in the number of homes closed in our Arizona markets.

The region generated pre-tax income of $39.5 million and $78.1 million in the three and six months ended March 31, 2021, respectively, compared to $30.8 million and $65.3 million in the prior year periods.

Home sales gross profit percentage increased by 190 and 180 basis points in the three and six months ended March 31, 2021, 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 increased by 90 and 110 basis points in the three and six months ended March 31, 2021, respectively, compared to the prior year periods, due to increased costs to support the growth in inventories.

West Region — Homebuilding revenues increased 16% and 24% in the three and six months ended March 31, 2021, respectively, compared to the prior year periods, primarily due to increases in the number of homes closed in our Las Vegas, Southern California and Sacramento markets.

The region generated pre-tax income of $162.2 million and $306.6 million in the three and six months ended March 31, 2021, respectively, compared to $93.8 million and $163.5 million in the prior year periods.

Home sales gross profit percentage increased by 450 and 400 basis points in the three and six months ended March 31, 2021, respectively, compared to the prior year periods, primarily due to the average cost of homes closed decreasing while the average selling price increased in the three month period and decreased slightly in the six month period.

As a percentage of homebuilding revenues, SG&A expenses decreased by 40 and 100 basis points in the three and six months ended March 31, 2021, respectively, compared to the prior year periods, primarily due to the increase in homebuilding revenues.

HOMEBUILDING INVENTORIES, LAND AND LOT POSITION AND HOMES IN INVENTORY

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

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

As of December 31, 2020

Our homebuilding segment’s inventories at March 31, 2021 and September 30, 2020 are summarized as follows:

As of March 31, 2021

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 December 31, 2020 and September 30, 2020 are summarized as follows:

As of December 31, 2020

Our homebuilding segment’s land and lot position and homes in inventory at March 31, 2021 and September 30, 2020 are summarized as follows:

As of March 31, 2021

Owned (1) Lots Controlled

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___________________

(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.

(1) Land/lots owned included approximately 31,600 and 33,800 owned lots that are fully developed and ready for home construction at March 31, 2021 and September 30, 2020, respectively.

Land/lots owned also included land held for development representing 1,400 and 1,600 lots at March 31, 2021 and September 30, 2020, respectively.

(2) The total remaining purchase price of lots controlled through land and lot purchase contracts at March 31, 2021 and September 30, 2020 was $13.5 billion and $9.9 billion, respectively, secured by earnest money deposits of $873.9 million and $653.4 million, respectively.

The total remaining purchase price of lots controlled through land and lot purchase contracts at March 31, 2021 and September 30, 2020 included $1.5 billion and $1.0 billion, respectively, related to lot purchase contracts with Forestar, secured by $139.6 million and $98.2 million, respectively, of earnest money.

(3) Lots controlled at March 31, 2021 included approximately 37,100 lots owned or controlled by Forestar, 20,400 of which our homebuilding divisions have under contract to purchase and 16,700 of which our homebuilding divisions have a right of first offer to purchase.

Of these, approximately 17,400 lots were in our Southeast region, 5,600 lots were in our South Central region, 5,300 lots were in our West region, 4,100 lots were in our East region, 2,700 lots were in our Southwest region, and 2,000 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 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.

(4) Approximately 12,200 and 14,900 of our homes in inventory were unsold at March 31, 2021 and September 30, 2020, respectively.

At March 31, 2021, approximately 700 of our unsold homes were completed, of which approximately 100 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 and 1,800 model homes at December 31, 2020 and September 30, 2020, respectively.

Homes in inventory exclude approximately 1,900 and 1,800 model homes at March 31, 2021 and September 30, 2020, respectively.

RESULTS OF OPERATIONS – FORESTAR

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.

In fiscal 2018, we acquired 75% of the outstanding shares of Forestar and at March 31, 2021, we owned 64% of its outstanding shares.

Forestar is a publicly traded residential lot development company with operations in 54 markets across 22 states as of March 31, 2021.

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.)

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

Results of operations for the Forestar segment for the three and six months ended March 31, 2021 and 2020 were as follows:

Three Months Ended

March 31, Six Months Ended

2021 2020 2021 2020

(In millions)

Residential land and lot sales $ 307.0 $ 247.1

Other 0.1 0.1

Residential lot sales $ 280.2 $ 156.4 $ 587.1 $ 373.5

Tract sales and other 6.9 2.7 7.1 32.9

Total revenues $ 287.1 $ 159.1 $ 594.2 $ 406.4

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Selling, general and administrative expense 16.3 11.2 31.8 21.7

Loss on sale of assets — 0.1

Gain on sale of assets — (0.3) — (0.1)

Other (income) expense (0.6) (2.1) (1.1) (4.2)

Income before income taxes $ 37.6 $ 13.7 $ 66.8 $ 35.8

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.

At March 31, 2021, Forestar owned directly or controlled through land and lot purchase contracts approximately 84,500 residential lots, of which approximately 4,800 are fully developed.

Approximately 37,100 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 months ended December 31, 2020 and 2019, Forestar’s land and lot sales, including the portion sold to D.R.

During the three and six months ended March 31, 2021 and 2020, Forestar’s land and lot sales, including the portion sold to D.R.

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

Three Months Ended

March 31, Six Months Ended

2021 2020 2021 2020

($ in millions)

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Horton $ 265.3 $ 151.9 $ 559.5 $ 366.0

Residential tract acres sold to D.R.

Residential land sales revenues from sales to D.R.

Tract acres sold to D.R.

Horton 14 — 14 36

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.

Tract sales revenues from sales to D.R.

Horton $ 3.0 $ — $ 3.0 $ 7.2

SG&A expense for the three and six months ended March 31, 2021 included charges of $0.9 million and $2.0 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 $1.3 million and $2.6 million, respectively, in the same periods of fiscal 2020.

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 months ended December 31, 2020 and 2019.

Three Months Ended December 31,

2020 2019 % Change

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

2021 2020 % Change 2021 2020 % 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 12,371 8,774 41 % 25,829 17,519 47 %

Three Months Ended December 31,

2020 2019 % Change

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

2021 2020 % Change 2021 2020 % Change

(In millions)

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Three Months Ended

March 31, Six Months Ended

2021 2020 2021 2020

General and administrative expense 55.0 % 82.2 % 56.6 % 79.0 %

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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 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.

In the three and six months ended March 31, 2021, the volume of first-lien loans originated or brokered by DHI Mortgage for our homebuyers increased 36% and 43%, respectively, from the prior year periods, due to increases in the number of homes closed by our homebuilding operations of 36% and 40%.

In the six month period, a 2% increase in the percentage of homes closed for which DHI Mortgage handled our homebuyers’ financing also contributed to the increase in loan origination volume.

Homes closed by our homebuilding operations constituted 98% of DHI Mortgage loan originations in both the three and six months ended March 31, 2021 compared to 98% and 97%, respectively, in the prior year periods.

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

The number of loans sold increased 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.

The number of loans sold increased 41% and 47% in the three and six months ended March 31, 2021, respectively, compared to the prior year periods.

Virtually all of the mortgage loans held for sale on March 31, 2021 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 six months ended March 31, 2021, approximately 54% of our mortgage loans were sold directly to Fannie Mae or into securities backed by Ginnie Mae, and 37% 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.

As a result of the rapid decline in servicing values at the end of March 2020, 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.

Servicing values have since improved, and we sold a portion of our retained mortgage servicing rights in the six months ended March 31, 2021.

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 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.

Revenues from our mortgage operations increased 135% to $190.3 million and 112% to $342.7 million in the three and six months ended March 31, 2021, respectively, from $80.9 million and $162.0 million in the prior year periods, primarily due to increases of 35% and 42% in loan originations and higher net gains achieved on the sale of loan originations in the secondary market.

Revenues from our title operations increased 47% to $34.8 million and 53% to $69.6 million in the three and six months ended March 31, 2021, respectively, from $23.6 million and $45.4 million in the prior year periods, primarily due to increases of 41% and 46% in escrow closings.

General and administrative (G&A) expense related to our financial services operations increased 44% to $123.7 million and 42% to $233.3 million in the three and six months ended March 31, 2021, respectively, from $85.9 million and $163.8 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 2,578 and 1,934 employees at March 31, 2021 and 2020, respectively.

As a percentage of financial services revenues, G&A expense was 55.0% and 56.6% in the three and six months ended March 31, 2021, respectively, compared to 82.2% and 79.0% in the prior year periods.

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

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.

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 336% to $107.7 million and 247% to $191.8 million in the three and six months ended March 31, 2021, respectively, from $24.7 million and $55.2 million in the prior year periods.

RESULTS OF OPERATIONS - OTHER BUSINESSES

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.

The combined pre-tax income of all of our subsidiaries engaged in other business activities was $0.1 million and $2.3 million in the three and six months ended March 31, 2021, respectively, compared to $28.0 million and $57.5 million in the prior year periods.

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.

There were no multi-family rental properties sold during the current year periods.

There were two multi-family rental properties sold during the prior year periods, one in November 2019 and another in February 2020, for a total of $128.5 million with gains on sale totaling $59.4 million.

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

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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.

At March 31, 2021, we had eight multi-family rental projects under active construction and four projects that were substantially complete and in the lease-up phase.

These 12 projects represent 3,760 multi-family units, including 2,450 units under active construction and 1,310 completed units.

RESULTS OF OPERATIONS - CONSOLIDATED

Income before Income Taxes

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.

Pre-tax income for the three and six months ended March 31, 2021 was $1.2 billion and $2.2 billion, respectively, compared to $621.3 million and $1.1 billion in the prior year periods.

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

Our income tax expense for the three and six months ended March 31, 2021 was $246.0 million and $485.1 million, respectively, compared to $137.3 million and $228.1 million in the prior year periods.

Our effective tax rate was 20.8% and 21.9% for the three and six months ended March 31, 2021 compared to 22.1% and 19.9% in the prior year periods.

The effective tax rates for all 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 six months ended March 31, 2020, the retroactive reinstatement of the federal energy efficient homes tax credit reduced our effective tax rate by 2.6%.

For the three and six months ended March 31, 2021, a change in the estimate of homes qualifying for the fiscal 2020 retroactive extension of the energy efficient tax credit reduced our effective tax rate by 0.6% and 0.3%, respectively.

Our deferred tax assets, net of deferred tax liabilities, were $150.2 million at March 31, 2021 compared to $152.4 million at September 30, 2020.

We have a valuation allowance of $7.4 million and $7.5 million at March 31, 2021 and September 30, 2020, respectively, 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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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.

Currently, 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 returning capital to our shareholders through dividend payments and repurchases of our common stock.

We are 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 March 31, 2021, our ratio of debt to total capital (notes payable divided by stockholders’ equity plus notes payable) was 25.7% compared to 26.6% at September 30, 2020 and 29.2% at March 31, 2020.

Our ratio of homebuilding debt to total capital (homebuilding notes payable divided by stockholders’ equity plus homebuilding notes payable) was 16.8% compared to 17.5% at September 30, 2020 and 19.2% at March 31, 2020.

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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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.

At March 31, 2021, $370.6 million remained available under Forestar’s shelf registration statement, of which $76.3 million 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.

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Capital Resources - Homebuilding

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

Cash and Cash Equivalents — At March 31, 2021, cash and cash equivalents of our homebuilding segment totaled $1.9 billion.

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

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

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.

At March 31, 2021, there were no borrowings outstanding and $143.6 million of letters of credit issued under the revolving credit facility, resulting in available capacity of $1.45 billion.

In April 2021, our senior unsecured homebuilding revolving credit facility was amended to extend its maturity date to April 20, 2026.

The maturity date may be extended subject to the approval of lenders holding a majority of the commitments.

The capacity of the homebuilding revolving credit facility was increased to $2.19 billion with an uncommitted accordion feature that could increase the size of the facility to $3.0 billion, subject to certain conditions and availability of additional bank commitments.

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

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

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

There were no borrowings outstanding under the facility at December 31, 2020.

There were no borrowings outstanding under the facility at March 31, 2021.

This facility is not expected to be renewed upon its maturity on May 27, 2021.

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 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.

At March 31, 2021, 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 March 31, 2021 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.

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

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.

At March 31, 2021, we were in compliance with all of the limitations and restrictions associated with our public debt obligations.

Repurchases of Common Stock — We repurchased 5.5 million shares of our common stock for $420.2 million during the six months ended March 31, 2021.

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 December 31, 2020, the full amount of the debt repurchase authorization was remaining, and $465.5 million of the equity repurchase authorization was remaining.

At March 31, 2021, the full amount of the debt repurchase authorization was remaining, and $115.1 million of the equity repurchase authorization was remaining.

These authorizations have no expiration date.

Effective April 20, 2021, our Board of Directors authorized the repurchase of up to $1.0 billion of our common stock, replacing the prior authorization.

The authorization has no expiration date.

Capital Resources - Forestar

Forestar’s ability to achieve its long-term growth objectives will depend on its ability to obtain financing in sufficient capacities.

The achievement of Forestar’s long-term growth objectives will depend on its ability to obtain financing in sufficient capacities.

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 December 31, 2020, Forestar had cash and cash equivalents of $237.4 million.

Cash and Cash Equivalents — At March 31, 2021, Forestar had cash and cash equivalents of $167.2 million.

Bank Credit Facility — Forestar has a $380 million senior unsecured revolving credit facility with an uncommitted accordion feature that could increase the size of the facility to $570 million, subject to certain conditions and availability of additional bank commitments.

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

At 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.

The maturity date of the facility is October 2, 2022.

At March 31, 2021, there were no borrowings outstanding and $46.0 million of letters of credit issued under the revolving credit facility, resulting in available capacity of $334.0 million.

In April 2021, Forestar’s revolving credit facility was amended to extend its maturity date to April 16, 2025.

The maturity date may be extended subject to the approval of lenders holding a majority of the commitments.

The capacity of Forestar’s revolving credit facility was increased to $410 million with an uncommitted accordion feature that could increase the size of the facility to $600 million, subject to certain conditions and availability of additional bank commitments.

The Forestar revolving credit facility includes customary affirmative and negative covenants, events of default and financial covenants.

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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 — 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.

At March 31, 2021, Forestar was in compliance with all of the covenants, limitations and restrictions of its revolving credit facility.

Unsecured Debt — As of March 31, 2021, Forestar had $350 million principal amount of 8.0% senior notes due 2024 and $300 million principal amount of 5.0% senior notes due 2028.

The notes were issued pursuant to Rule 144A and Regulation S under the Securities Act of 1933, as amended, and represent unsecured obligations of Forestar.

In April 2021, Forestar issued $400 million principal amount of 3.85% senior notes that mature May 15, 2026 with interest payable semiannually.

The annual effective interest rate of the notes after giving effect to the amortization of financing costs is 4.1%.

A portion of the net proceeds from the issuance of the notes will be used to redeem the $350 million principal amount of 8.0% senior notes due April 15, 2024 in full, and the remainder of the proceeds will be used for general corporate purposes.

In April 2021, Forestar delivered notice for the full redemption of its $350 million principal amount of 8.0% senior notes outstanding.

The redemption price of $365.6 million includes a call premium of $14.0 million and accrued and unpaid interest of $1.6 million.

The notes are scheduled to be redeemed May 7, 2021.

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

At March 31, 2021, 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.

All of the $30 million authorization was remaining at March 31, 2021.

Issuance of Common Stock — During the three months ended March 31, 2021, Forestar issued 1.0 million shares of common stock under its at-the-market equity offering program for proceeds of $23.3 million, net of commissions and other issuance costs.

At March 31, 2021, $370.6 million remained available for issuance under Forestar’s shelf registration statement, of which $76.3 million is reserved for sales under its at-the-market equity offering program.

Capital Resources - Financial Services

Cash and Cash Equivalents — At December 31, 2020, cash and cash equivalents of our financial services operations totaled $65.3 million.

Cash and Cash Equivalents — At March 31, 2021, cash and cash equivalents of our financial services operations totaled $94.7 million.

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

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

In February 2021, the mortgage repurchase facility was amended to increase its capacity and extend its maturity date to February 18, 2022.

The total capacity of the facility is $1.4 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.

however, the capacity increases, without requiring additional commitments, to $1.633 billion for approximately 30 days at each quarter end and 45 days at fiscal year end.

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.

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.

As of March 31, 2021, $1.69 billion of mortgage loans held for sale with a collateral value of $1.66 billion were pledged under the mortgage repurchase facility.

As a result of advance paydowns totaling $454.8 million, DHI Mortgage had an obligation of $1.2 billion outstanding under the mortgage repurchase facility at March 31, 2021 at a 2.1% 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 December 31, 2020, DHI Mortgage was in compliance with all of the conditions and covenants of the mortgage repurchase facility.

At March 31, 2021, 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 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.

In the six months ended March 31, 2021, net cash used in operating activities was $154.9 million compared to $395.1 million in the prior year period.

Cash used in operating activities in the current year period primarily consisted of $249.5 million and $32.3 million of cash used in our Forestar and financial services segments, respectively, partially offset by $138.0 million of cash provided by our homebuilding segment.

Cash used to increase construction in progress and finished home inventory was $1.3 billion in the current year period compared to $724.4 million in the prior year period.

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

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

Also, pursuant to IRS News Release 2021-43, we have deferred approximately $215 million of federal and certain state estimated tax payments originally due March 15, 2021 until June 15, 2021 as a result of the Texas winter storm.

This deferral provided $215 million of cash from operations during the six months ended March 31, 2021.

Investing Cash Flow Activities

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 six months ended March 31, 2021, net cash used in investing activities was $196.1 million compared to $34.6 million in the prior year period.

In the current year period, uses of cash included expenditures related to our rental operations totaling $173.9 million, an acquisition of the homebuilding operations of Braselton Homes for $23.0 million and purchases of property and equipment totaling $30.5 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.

In the prior year period, uses of cash included expenditures related to our rental operations totaling $113.0 million and purchases of property and equipment totaling $47.6 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.

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 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.

During the six months ended March 31, 2021, net cash used in financing activities was $457.2 million, consisting primarily of repayment of $400 million principal amount of our 2.55% homebuilding senior notes at maturity, payment of cash dividends totaling $145.6 million and cash used to repurchase shares of our common stock of $420.2 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 and net advances of $70.9 million on our mortgage repurchase facility.

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

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

During each of the first two quarters of fiscal 2021, our Board of Directors approved a quarterly cash dividend of $0.20 per common share, the most recent of which was paid on February 25, 2021 to stockholders of record on February 17, 2021.

In April 2021, our Board of Directors approved a quarterly cash dividend of $0.20 per common share, payable on May 20, 2021 to stockholders of record on May 10, 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 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.

At March 31, 2021, we had outstanding letters of credit of $189.6 million and surety bonds of $2.1 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 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.

Among our homebuilding land and lot purchase contracts at March 31, 2021, there were a limited number of contracts with $80.5 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 December 31, 2020, D.R.

As of March 31, 2021, 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 December 31,

Summarized Balance Sheet Data March 31,

2021 September 30,

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11,713.2 10,757.0

Summarized Statement of Operations Data Three Months Ended

December 31, 2020 Fiscal Year Ended September 30, 2020

Summarized Statement of Operations Data Six Months Ended

March 31, 2021 Year Ended September 30, 2020

(In millions)

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

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.

At March 31, 2021 and September 30, 2020, we had reserves for approximately 320 and 260 pending construction defect claims, respectively, and no individual existing claim was material to our financial statements.

During the six months ended March 31, 2021, we established reserves for approximately 115 new construction defect claims and resolved 55 construction defect claims for a total cost of $6.2 million.

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

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

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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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