What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-07-23 compared with 2021-04-26 · 334 added, 314 removed, 554 unchanged (54% 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 $308,800 during the six months ended March 31, 2021.

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.

Approximately 91% of our home sales revenue in the nine months ended June 30, 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.

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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.

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

These operations are reported in our homebuilding segment.

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 the third quarter of fiscal 2021, we sold a single-family rental community for $23.1 million in revenues and $11.4 million of gross profit.

In the first quarter of fiscal 2021, we sold a single-family rental community for $31.8 million and recorded a gain on sale of $14.0 million.

At June 30, 2021, our homebuilding inventory included $303.1 million of assets related to 44 single-family rental communities, and our single-family rental platform included 2,340 homes and finished lots, of which 680 homes were completed.

At June 30, 2021, we owned 64% of the outstanding shares of Forestar Group Inc.

Forestar has made significant investments in land acquisition and development over the last few years to expand its business across the United States.

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

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

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

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

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

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

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

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

At 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%.

At June 30, 2021 and September 30, 2020, our consolidated balance sheets included $458.3 million and $246.2 million, respectively, of assets related to multi-family rental operations.

Total assets related to other business activities were $632.2 million and $379.4 million at June 30, 2021 and September 30, 2020, respectively.

During the nine months ended June 30, 2021, the number and value of our net sales orders increased 20% and 33%, respectively, compared to the prior year period.

During the nine months ended June 30, 2021, our number of homes closed and home sales revenues increased 33% and 41%, respectively, compared to the prior year period, and our consolidated revenues increased 41% to $19.7 billion compared to $13.9 billion in the prior year period.

Our pre-tax income was $3.6 billion in the nine months ended June 30, 2021 compared to $1.9 billion in the prior year period, and our pre-tax operating margin was 18.5% compared to 13.9%.

Net income was $2.8 billion in the nine months ended June 30, 2021 compared to $1.5 billion in the prior year period.

In the trailing twelve months ended June 30, 2021, our return on equity (ROE) was 29.5% compared to 19.9% in the prior year period, and our homebuilding return on inventory (ROI) was 34.9% compared to 21.6%.

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 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 .

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

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

where we operate.

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

During April 2020 when restrictive stay-at-home orders were in place for many markets across the United States, we experienced increases in sales cancellations and 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 has remained strong throughout the first half of fiscal 2021.

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

As economic activity resumed and restrictive orders relating to COVID-19 were eased, demand for our homes improved significantly during the remainder of fiscal 2020 and has remained strong throughout 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.

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

However, multiple disruptions in the supply chain, combined with the improvement in economic conditions and strong demand for new homes, have resulted in shortages in certain building materials and tightness in the labor market, which has caused our construction cycle to lengthen.

During the current quarter, we have slowed our home sales pace to more closely align with our production levels, and we are selling homes later in the construction cycle when we have more certainty regarding the home close date for our homebuyers.

Based on the stage of completion of our current homes in inventory, production schedules and capacity, we expect to continue restricting the pace of our sales orders during our fourth fiscal quarter.

Within our homebuilding land and lot portfolio, our lots controlled through purchase contracts represent 76% of the lots owned and controlled at June 30, 2021 compared to 70% at September 30, 2020 and 66% at June 30, 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 .

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 made operational adjustments as a result of C-19;

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

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

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

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

• Increasing our investments in the construction and leasing of single-family and multi-family rental properties to meet rental demand in high growth suburban markets and selling these properties profitably.

We believe our operating strategy, which has produced positive results in recent years, will allow us to successfully operate through changing economic conditions to maintain and improve our financial and competitive position.

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

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

Key financial results as of and for the three months ended June 30, 2021, as compared to the same period of 2020, were as follows:

Homebuilding:

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• Homes closed increased 22% to 21,588 homes, and the average closing price of those homes was $326,100.

• Net sales orders increased 35% to 27,059 homes, and the value of net sales orders increased 47% to $8.8 billion.

• Net sales orders decreased 17% to 17,952 homes, while the value of net sales orders increased 2% to $6.4 billion.

• Sales order backlog increased 39% to 32,209 homes, and the value of sales order backlog increased 57% to $11.0 billion.

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• Homebuilding pre-tax income was 18.9% of homebuilding revenues compared to 13.6%.

• 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.

• Homebuilding cash and cash equivalents totaled $1.7 billion compared to $2.6 billion and $1.9 billion at September 30, 2020 and June 30, 2020, respectively.

• Homebuilding inventories totaled $13.9 billion compared to $11.0 billion and $10.9 billion at September 30, 2020 and June 30, 2020, respectively.

• Homes in inventory totaled 47,300 compared to 38,000 and 32,800 at September 30, 2020 and June 30, 2020, respectively.

• Owned lots totaled 123,900 compared to 112,600 and 115,200 at September 30, 2020 and June 30, 2020, respectively.

Lots controlled through purchase contracts increased to 393,200 from 264,300 and 220,300 at September 30, 2020 and June 30, 2020, respectively.

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

• Homebuilding debt to total capital was 16.0% compared to 17.5% and 18.4% at September 30, 2020 and June 30, 2020, respectively.

• Forestar’s revenues increased 76% to $312.9 million compared to $177.9 million.

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Horton totaled 3,719 compared to 1,991.

• Forestar’s pre-tax income was $37.6 million compared to $13.7 million.

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

• 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.

• Forestar’s pre-tax income was $21.1 million, including an $18.1 million loss on extinguishment of debt, compared to $10.3 million.

• Forestar’s pre-tax income was 6.7% of Forestar revenues compared to 5.8%.

• Forestar’s cash and cash equivalents totaled $116.0 million compared to $394.3 million and $355.6 million at September 30, 2020 and June 30, 2020, respectively.

• Forestar’s inventories totaled $1.9 billion compared to $1.3 billion at both September 30, 2020 and June 30, 2020.

• Forestar’s owned and controlled lots totaled 96,600 compared to 60,500 and 50,700 at September 30, 2020 and June 30, 2020, respectively.

Of these lots, 39,400 were under contract to sell to or subject to a right of first offer with D.R.

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.

Horton compared to 30,400 and 29,600 at September 30, 2020 and June 30, 2020, respectively.

• Forestar’s debt was $704.1 million compared to $641.1 million and $640.6 million at September 30, 2020 and June 30, 2020, respectively.

• Forestar’s debt to total capital was 42.1% compared to 42.4% and 43.1% at September 30, 2020 and June 30, 2020, respectively.

Forestar’s net debt to total capital was 37.8% compared to 22.1% and 25.2% at September 30, 2020 and June 30, 2020, respectively.

Financial Services:

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• Net income attributable to D.R.

Horton increased 93% to $929.5 million compared to $482.7 million.

Horton increased 77% to $1.1 billion compared to $630.7 million.

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

Horton increased 78% to $3.06 compared to $1.72.

• 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:

• Stockholders’ equity was $13.8 billion compared to $11.8 billion and $11.0 billion at September 30, 2020 and June 30, 2020, respectively.

• Book value per common share increased to $38.54 compared to $32.53 and $30.38 at September 30, 2020 and June 30, 2020, respectively.

• Debt to total capital was 24.2% compared to 26.6% and 28.0% at September 30, 2020 and June 30, 2020, respectively.

Key financial results for the nine months ended June 30, 2021, as compared to the same period of 2020, were as follows:

Homebuilding:

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• Homebuilding pre-tax income was 17.5% of homebuilding revenues compared to 12.9%.

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

• Net cash provided by homebuilding operations was $276.1 million compared to $1.2 billion.

• Forestar’s revenues increased 55% to $907.1 million compared to $584.3 million.

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• Forestar’s pre-tax income was $87.9 million compared to $46.1 million.

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

• Forestar’s pre-tax income was 9.7% of Forestar revenues compared to 7.9%.

Financial Services:

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• Net income attributable to D.R.

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

Horton increased 84% to $2.8 billion compared to $1.5 billion.

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

Horton increased 85% to $7.73 compared to $4.17.

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

• Net cash used in operations was $34.5 million compared to $588.9 million of cash provided by operations.

RESULTS OF OPERATIONS - HOMEBUILDING

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State Reporting Region/Market State Reporting Region/Market

East Region Midwest Region

Delaware Central Delaware Colorado Colorado Springs

Northern Delaware Denver

Georgia Savannah Fort Collins

Maryland Baltimore Illinois Chicago

East Region Southeast Region

Delaware Central Delaware Alabama Birmingham

Northern Delaware Huntsville

Georgia Savannah Mobile/Baldwin County

Maryland Baltimore Montgomery

Suburban Washington, D.C.

Indiana Fort Wayne

New Jersey Northern New Jersey Indianapolis

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.

Western Maryland Florida Fort Myers/Naples

New Jersey Northern New Jersey Gainesville

Southern New Jersey Jacksonville

North Carolina Asheville Lakeland

Charlotte Melbourne/Vero Beach

Greensboro/Winston-Salem Miami/Fort Lauderdale

Raleigh/Durham Ocala

Wilmington Orlando

Pennsylvania Central Pennsylvania Pensacola/Panama City

Philadelphia Port St.

South Carolina Charleston Tallahassee

Columbia Tampa/Sarasota

Greenville/Spartanburg Volusia County

Hilton Head West Palm Beach

Myrtle Beach Georgia Atlanta

Virginia Northern Virginia Augusta

Southern Virginia Mississippi Gulf Coast

Tennessee Chattanooga

Midwest Region Knoxville

Colorado Colorado Springs Memphis

Denver Nashville

Illinois Chicago Southwest Region

Indiana Fort Wayne Arizona Phoenix

Indianapolis Tucson

Northwest Indiana New Mexico Albuquerque

Iowa Des Moines

Kentucky Louisville West Region

Minnesota Minneapolis/St.

Paul California Bakersfield

Ohio Cincinnati Bay Area

Columbus Fresno

Los Angeles County

South Central Region Modesto/Merced

Louisiana Baton Rouge Riverside County

Lake Charles/Lafayette Sacramento

Oklahoma Oklahoma City San Bernardino County

Tulsa San Diego County

Texas Austin Hawaii Oahu

Bryan/College Station Nevada Las Vegas

Corpus Christi Reno

Dallas Oregon Bend

Fort Worth Portland/Salem

Houston Utah Salt Lake City

Killeen/Temple/Waco St.

Midland/Odessa Washington Seattle/Tacoma/Everett/Olympia

New Braunfels/San Marcos Spokane

San Antonio Vancouver

The following tables and related discussion set forth key operating and financial data for our homebuilding operations by reporting segment as of and for the three and nine months ended June 30, 2021 and 2020.

Net Sales Orders (1)

Three Months Ended March 31,

Three Months Ended June 30,

Net Homes Sold Value (In millions) Average Selling Price

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17,952 21,519 (17) % $ 6,448.9 $ 6,337.3 2 % $ 359,200 $ 294,500 22 %

Six Months Ended March 31,

Nine Months Ended June 30,

Net Homes Sold Value (In millions) Average Selling Price

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Sales Order Cancellations

Three Months Ended March 31,

Three Months Ended June 30,

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

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3,712 5,968 $ 1,199.6 $ 1,723.2 17 % 22 %

Six Months Ended March 31,

Nine Months Ended June 30,

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

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Net Sales Orders

The number of net sales orders increased 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:

The number of net sales orders decreased 17% in the three months ended June 30, 2021 compared to the prior year period, while the value of net sales orders increased 2% to $6.4 billion (17,952 homes) for the three months ended June 30, 2021 compared to $6.3 billion (21,519 homes) in the prior year period due to the increase in our average selling price.

The average selling price of net sales orders during the three months ended June 30, 2021 was $359,200, up 22% from the prior year period.

During the third quarter of fiscal 2021, demand for homes remained strong.

As a result, during the quarter, we slowed our home sales pace to more closely align with our production levels, and we are selling homes later in the construction cycle when we have more certainty regarding the home close date for our homebuyers.

Based on the stage of completion of our current homes in inventory, production schedules and capacity, we expect to continue restricting the pace of our sales orders during our fourth fiscal quarter.

The number of net sales orders increased 20% in the nine months ended June 30, 2021 compared to the prior year period, and the value of net sales orders increased 33% to $21.7 billion (65,429 homes) for the nine months ended June 30, 2021 compared to $16.3 billion (54,732 homes) in the prior year period.

The average selling price of net sales orders during the nine months ended June 30, 2021 was $331,900, up 11% from the prior year period.

The markets contributing most to the year to date increases in sales volumes in our regions in the nine month period were as follows:

the Carolina markets in the East;

the Denver and Indianapolis markets in the Midwest;

the Denver market in the Midwest;

the Florida markets (particularly Tampa) in the Southeast;

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

the San Antonio, Dallas 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.

The decrease in sales volume in our West region in both periods compared to the prior year was primarily due to our Seattle and Portland markets.

Our sales order cancellation rate (cancelled sales orders divided by gross sales orders for the period) was 17% in both the three and nine months ended June 30, 2021 compared to 22% and 20% in the prior year periods.

Sales Order Backlog

As of March 31,

As of June 30,

Homes in Backlog Value (In millions) Average Selling Price

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Homes Closed and Home Sales Revenue

Three Months Ended March 31,

Three Months Ended June 30,

Homes Closed Value (In millions) Average Selling Price

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21,588 17,642 22 % $ 7,040.1 $ 5,207.6 35 % $ 326,100 $ 295,200 10 %

Six Months Ended March 31,

Nine Months Ended June 30,

Homes Closed Value (In millions) Average Selling Price

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Home Sales Revenue

Revenues from home sales increased 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 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;

Revenues from home sales increased 35% to $7.0 billion (21,588 homes closed) for the three months ended June 30, 2021 from $5.2 billion (17,642 homes closed) in the prior year period.

Revenues from home sales increased 41% to $18.9 billion (60,028 homes closed) for the nine months ended June 30, 2021 from $13.4 billion (45,140 homes closed) in the prior year period.

Home sales revenues increased in all of our regions due to an increase in the number of homes closed and an increase in average selling prices.

Home sales revenues and the number of homes closed exclude sales of single-family and multi-family rental communities.

The number of homes closed increased 22% in the three months ended June 30, 2021 compared to the prior year period.

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

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

the Indianapolis and Denver markets in the Midwest;

the Florida markets (particularly Tampa) in the Southeast;

the Houston, Louisiana and Austin markets in the South Central;

the Phoenix market in the Southwest;

and the Salt Lake City, Reno and Sacramento markets in the West.

The number of homes closed increased 33% in the nine months ended June 30, 2021 compared to the prior year period.

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

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

the Denver and Indianapolis markets in the Midwest;

the Florida markets in the Southeast;

the Florida markets (particularly Tampa) in the Southeast;

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

the Phoenix market in the Southwest;

and the California markets in the West.

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

Homebuilding Operating Margin Analysis

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Three Months Ended

March 31, Six Months Ended

June 30, Nine Months Ended

2021 2020 2021 2020

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Home Sales Gross Profit

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.

Gross profit from home sales increased to $1.8 billion in the three months ended June 30, 2021 from $1.1 billion in the prior year period and increased 430 basis points to 25.9% as a percentage of home sales revenues.

The percentage increase resulted from improvements of 390 basis points due to the average selling price of our homes closed increasing by more than the average cost of those homes, 20 basis points due to a decrease in the amortization of capitalized interest and 20 basis points due to a decrease in warranty and construction defect costs.

Gross profit from home sales increased to $4.7 billion in the nine months ended June 30, 2021 from $2.9 billion in the prior year period and increased 360 basis points to 24.9% as a percentage of home sales revenues.

The percentage increase resulted from improvements of 330 basis points due to the average selling price of our homes closed increasing by more than the average cost of those homes, 20 basis points due to a decrease in warranty and construction defect costs and 10 basis points due to a decrease in the amortization of capitalized interest.

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.

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Land/Lot Sales and Other Revenues

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.

Land/lot sales and other revenues from our homebuilding operations were $30.2 million and $67.4 million in the three and nine months ended June 30, 2021, respectively, and $14.5 million and $49.7 million in the comparable periods of fiscal 2020.

During the current quarter, we began recording bulk sales of single-family rental communities in land/lot sales and other revenues in our homebuilding segment.

Revenues during the three and nine months ended June 30, 2021 included our sale of a single-family rental community for $23.1 million in the current quarter, which generated $11.4 million of gross profit.

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

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

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

As of June 30, 2021, our homebuilding operations had $23.5 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 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 of June 30, 2021, we determined that no communities were impaired, and no impairment charges were recorded during the three months ended June 30, 2021.

During the nine months ended June 30, 2021, impairment charges totaled $5.6 million.

There were no impairment charges recorded in the prior year quarter and $1.7 million of impairment charges recorded in the nine months ended June 30, 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.

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

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

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

During the three and six months ended March 31, 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.

During the three and nine months ended June 30, 2021, earnest money and pre-acquisition cost write-offs related to land purchase contracts that we have terminated or expect to terminate were $4.9 million and $10.4 million, respectively, compared to $4.9 million and $15.6 million in the same periods of fiscal 2020.

Selling, General and Administrative (SG&A) Expense

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.

SG&A expense from homebuilding activities increased 21% to $502.0 million and 25% to $1.4 billion in the three and nine months ended June 30, 2021, respectively, from $415.1 million and $1.1 billion in the prior year periods.

SG&A expense as a percentage of homebuilding revenues was 7.1% and 7.5% in the three and nine months ended June 30, 2021, respectively, compared to 7.9% and 8.4% in the prior year periods.

Employee compensation and related costs represented 82% and 81% of SG&A costs in the three and nine months ended June 30, 2021, respectively, compared to 77% and 75% in the prior year periods.

These costs increased 29% to $411.6 million and 36% to $1.1 billion in the three and nine months ended June 30, 2021, respectively, from $320.3 million and $848.0 million in the prior year periods.

Our homebuilding operations employed 8,203 and 7,077 people at June 30, 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 $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.

Interest incurred by our homebuilding operations was $22.7 million and $69.7 million in the three and nine months ended June 30, 2021, respectively, compared to $22.3 million and $69.5 million in the prior year periods.

Interest charged to cost of sales was 0.7% of total cost of sales (excluding inventory and land option charges) in both the three and nine months ended June 30, 2021 compared to 0.8% in both prior year periods.

Gain on Sale of Assets

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.

In December 2020, we sold a single-family rental community for $31.8 million which resulted in a gain on sale of $13.1 million in our homebuilding segment and $0.9 million in our other businesses during the nine months ended June 30, 2021.

Other income, net of other expenses, included in our homebuilding operations was $7.1 million and $10.4 million in the three and nine months ended June 30, 2021, respectively, compared to $0.2 million and $9.7 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.

Beginning in the current quarter, rental income of $2.9 million from our single-family rental communities is also included in other income in our homebuilding segment.

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

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Homebuilding Results by Reporting Region

Three Months Ended March 31,

Three Months Ended June 30,

Revenues Homebuilding

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$ 7,070.3 $ 1,336.9 18.9 % $ 5,222.1 $ 709.8 13.6 %

Six Months Ended March 31,

Nine Months Ended June 30,

Revenues Homebuilding

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

East Region — Homebuilding revenues increased 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.

East Region — Homebuilding revenues increased 40% and 47% in the three and nine months ended June 30, 2021, respectively, compared to the prior year periods, primarily due to increases in the number of homes closed in our Myrtle Beach, Delaware, Raleigh and Suburban Washington, D.C.

The region generated pre-tax income of $190.3 million and $468.8 million in the three and nine months ended June 30, 2021, respectively, compared to $106.9 million and $240.1 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 340 and 350 basis points in the three and nine months ended June 30, 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 60 and 100 basis points in the three and nine months ended June 30, 2021, respectively, compared to the prior year periods, primarily due to the increase in homebuilding revenues.

Midwest Region — Homebuilding revenues increased 38% and 45% in the three and nine months ended June 30, 2021, respectively, compared to the prior year periods, primarily due to increases in the number of homes closed in our Denver, Indianapolis and Chicago markets.

The region generated pre-tax income of $67.2 million and $177.3 million in the three and nine months ended June 30, 2021, respectively, compared to $34.1 million and $76.4 million in the prior year periods.

Home sales gross profit percentage increased by 310 and 340 basis points in the three and nine months ended June 30, 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 10 and 120 basis points in the three and nine months ended June 30, 2021, respectively, compared to the prior year periods, primarily due to the increase in homebuilding revenues.

Southeast Region — Homebuilding revenues increased 41% and 50% in the three and nine months ended June 30, 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 $465.3 million and $1.1 billion in the three and nine months ended June 30, 2021, respectively, compared to $233.5 million and $567.4 million in the prior year periods.

Home sales gross profit percentage increased by 460 and 380 basis points in the three and nine months ended June 30, 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 100 basis points in the three and nine months ended June 30, 2021, respectively, compared to the prior year periods, primarily due to the increase in homebuilding revenues.

South Central Region — Homebuilding revenues increased 24% and 38% in the three and nine months ended June 30, 2021, respectively, compared to the prior year periods, primarily due to increases in the number of homes closed in our Houston, Dallas, San Antonio and Austin markets.

The region generated pre-tax income of $323.1 million and $854.6 million in the three and nine months ended June 30, 2021, respectively, compared to $201.8 million and $490.7 million in the prior year periods.

Home sales gross profit percentage increased by 360 and 270 basis points in the three and nine months ended June 30, 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 60 and 70 basis points in the three and nine months ended June 30, 2021, respectively, compared to the prior year periods, primarily due to the increase in homebuilding revenues.

Southwest Region — Homebuilding revenues increased 35% and 22% in the three and nine months ended June 30, 2021, respectively, compared to the prior year periods, primarily due to increases in the number of homes closed in our Phoenix market.

The region generated pre-tax income of $46.7 million and $124.8 million in the three and nine months ended June 30, 2021, respectively, compared to $29.7 million and $95.0 million in the prior year periods.

Home sales gross profit percentage increased by 190 and 180 basis points in the three and nine months ended June 30, 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 40 basis points and increased by 50 basis points in the three and nine months ended June 30, 2021, respectively, compared to the prior year periods.

The increase in the nine month period was due to increased employee compensation and related costs to support inventory growth.

West Region — Homebuilding revenues increased 37% and 29% in the three and nine months ended June 30, 2021, respectively, compared to the prior year periods, primarily due to increases in the number of homes closed in our Southern California, Las Vegas, Sacramento and Reno markets.

The region generated pre-tax income of $244.3 million and $550.9 million in the three and nine months ended June 30, 2021, respectively, compared to $103.8 million and $267.3 million in the prior year periods.

Home sales gross profit percentage increased by 650 and 500 basis points in the three and nine months ended June 30, 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 in the three month period and the average cost of homes closed decreasing while the average selling price increased in the nine month period.

As a percentage of homebuilding revenues, SG&A expenses decreased by 170 and 130 basis points in the three and nine months ended June 30, 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 March 31, 2021 and September 30, 2020 are summarized as follows:

As of March 31, 2021

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

As of June 30, 2021

Construction in Progress and

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for Development Land Held

for Sale Total Inventory

for Sale Rental Properties (1)

Total Inventory

(In millions)

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123.1 87.4 0.4 0.3 — 211.2

$ 7,837.8 $ 5,675.4 $ 30.4 $ 23.5 $ 303.1 $ 13,870.2

As of September 30, 2020

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121.9 100.6 0.6 0.4 223.5

$ 6,037.5 $ 4,901.4 $ 47.8 $ 28.3 $ 11,015.0

(1) These inventory amounts relate to our single-family rental communities that are reported in our homebuilding segment.

Multi-family rental property inventory totaling $436.3 million at June 30, 2021 is included in our other segment.

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

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

As of March 31, 2021

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

As of June 30, 2021

Owned (1) Lots Controlled

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___________________

(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.

(1) Land/lots owned included approximately 31,100 and 33,800 owned lots that are fully developed and ready for home construction at June 30, 2021 and September 30, 2020, respectively.

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

Land/lots owned exclude 3,400 and 100 lots related to our single-family rental operations at June 30, 2021 and September 30, 2020, respectively.

(2) The total remaining purchase price of lots controlled through land and lot purchase contracts at June 30, 2021 and September 30, 2020 was $15.0 billion and $9.9 billion, respectively, secured by earnest money deposits of $999.8 million and $653.4 million, respectively.

The total remaining purchase price of lots controlled through land and lot purchase contracts at June 30, 2021 and September 30, 2020 included $1.6 billion and $1.0 billion, respectively, related to lot purchase contracts with Forestar, secured by $152.7 million and $98.2 million, respectively, of earnest money.

(3) Lots controlled at June 30, 2021 included approximately 39,400 lots owned or controlled by Forestar, 21,500 of which our homebuilding divisions have under contract to purchase and 17,900 of which our homebuilding divisions have a right of first offer to purchase.

Of these, approximately 20,500 lots were in our Southeast region, 5,100 lots were in our South Central region, 4,900 lots were in our West region, 4,000 lots were in our East region, 2,500 lots were in our Southwest region and 2,400 lots were in our Midwest region.

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

(4) Approximately 12,200 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.

(4) Approximately 15,400 and 14,900 of our homes in inventory were unsold at June 30, 2021 and September 30, 2020, respectively.

At June 30, 2021, approximately 500 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 March 31, 2021 and September 30, 2020, respectively.

Homes in inventory exclude 1,300 and 600 homes related to our single-family rental operations at June 30, 2021 and September 30, 2020, respectively, and also exclude approximately 1,800 model homes at both dates.

RESULTS OF OPERATIONS – FORESTAR

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.

In fiscal 2018, we acquired 75% of the outstanding shares of Forestar and at June 30, 2021, we owned 64% of its outstanding shares.

Forestar is a publicly traded residential lot development company with operations in 55 markets across 22 states as of June 30, 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 and six months ended March 31, 2021 and 2020 were as follows:

Results of operations for the Forestar segment for the three and nine months ended June 30, 2021 and 2020 were as follows:

Three Months Ended

March 31, Six Months Ended

June 30, Nine Months Ended

2021 2020 2021 2020

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Gain on sale of assets — — — (0.1)

Loss on extinguishment of debt 18.1 — 18.1 —

Other (income) expense (0.3) (0.7) (1.4) (4.8)

Income before income taxes $ 21.1 $ 10.3 $ 87.9 $ 46.1

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.

Horton or subject to a right of first offer under the master supply agreement with D.R.

Approximately 700 of these lots are under contract to sell to other builders.

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

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

During the three and nine months ended June 30, 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

June 30, Nine Months Ended

2021 2020 2021 2020

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Horton $ 3.0 $ 13.4 $ 6.0 $ 20.6

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.

SG&A expense for the three and nine months ended June 30, 2021 included charges of $1.0 million and $2.9 million, respectively, related to the shared services agreement between Forestar and D.R.

Horton whereby D.R.

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Shared services charges were $1.2 million and $3.8 million, respectively, in the same periods of fiscal 2020.

Loss on extinguishment of debt of $18.1 million in the three and nine months ended June 30, 2021 was due to Forestar’s redemption of its $350 million principal amount of 8.0% senior notes due 2024 in May 2021.

At June 30, 2021, Forestar owned directly or controlled through land and lot purchase contracts approximately 96,600 residential lots, of which approximately 4,400 are fully developed.

Approximately 39,400 of these lots are under contract to sell to D.R.

Horton or subject to a right of first offer under the master supply agreement with D.R.

Approximately 900 of these lots are under contract to sell to other builders.

RESULTS OF OPERATIONS – FINANCIAL SERVICES

The following tables and related discussion set forth key operating and financial data for our financial services operations, comprising DHI Mortgage and our subsidiary title companies, for the three and six months ended March 31, 2021 and 2020.

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

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

2021 2020 % Change 2021 2020 % Change

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Loans sold by DHI Mortgage to third parties 15,261 12,661 21 % 41,090 30,180 36 %

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

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

2021 2020 % Change 2021 2020 % Change

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Three Months Ended

March 31, Six Months Ended

June 30, Nine Months Ended

2021 2020 2021 2020

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

In the three and six months ended March 31, 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.

In the three and nine months ended June 30, 2021, the volume of first-lien loans originated or brokered by DHI Mortgage for our homebuyers increased 15% and 31%, respectively, from the prior year periods, due to increases in the number of homes closed by our homebuilding operations of 22% and 33%.

Homes closed by our homebuilding operations constituted 98% of DHI Mortgage loan originations in both the three and nine months ended June 30, 2021 compared to 97% 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 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.

The number of loans sold increased 21% and 36% in the three and nine months ended June 30, 2021, respectively, compared to the prior year periods.

Virtually all of the mortgage loans held for sale on June 30, 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 nine months ended June 30, 2021, approximately 55% 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 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 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 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.

Revenues from our mortgage operations increased 17% to $149.1 million and 70% to $491.9 million in the three and nine months ended June 30, 2021, respectively, from $127.7 million and $289.7 million in the prior year periods, primarily due to increases of 14% and 30% in loan originations.

In the nine month period, higher net gains achieved on the sale of loan originations in the secondary market also contributed to the increase.

Net gains on the sale of mortgage loan originations decreased in the third quarter due to competitive pricing pressures in the marketplace.

Revenues from our title operations increased 37% to $39.6 million and 47% to $109.2 million in the three and nine months ended June 30, 2021, respectively, from $28.9 million and $74.3 million in the prior year periods, primarily due to increases of 26% and 38% in escrow closings.

General and administrative (G&A) expense related to our financial services operations increased 35% to $127.0 million and 40% to $360.4 million in the three and nine months ended June 30, 2021, respectively, from $93.9 million and $257.7 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.

Our financial services operations employed 2,755 and 1,979 people at June 30, 2021 and 2020, respectively.

As a percentage of financial services revenues, G&A expense was 67.3% and 60.0% in the three and nine months ended June 30, 2021, respectively, compared to 60.0% and 70.8% in the prior year periods.

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 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.

As a result of the revenue increase from a higher volume of mortgage originations and escrow closings and better leverage of our G&A expenses, pre-tax income from our financial services operations increased 111% to $262.1 million in the nine months ended June 30, 2021 from $124.0 million in the prior year period.

RESULTS OF OPERATIONS - OTHER BUSINESSES

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.

The pre-tax income of all of our subsidiaries engaged in other business activities was $7.7 million and $10.1 million in the three and nine months ended June 30, 2021, respectively, compared to a pre-tax loss of $0.6 million and pre-tax income of $56.9 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 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.

There were no multi-family rental properties sold during the current year periods or in the prior year quarter.

There were two multi-family rental properties sold during the prior year nine month period for a total of $128.5 million with gains on sale totaling $59.4 million.

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

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

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

At 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.

At June 30, 2021, we had eleven multi-family rental projects under active construction and four projects that were substantially complete and in the lease-up phase.

These 15 projects represent 4,540 multi-family units, of which 3,230 units were under active construction and 1,310 units were completed.

RESULTS OF OPERATIONS - CONSOLIDATED

Income before Income Taxes

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.

Pre-tax income for the three and nine months ended June 30, 2021 was $1.4 billion and $3.6 billion, respectively, compared to $782.4 million and $1.9 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.

Our income tax expense for the three and nine months ended June 30, 2021 was $299.1 million and $784.1 million, respectively, compared to $149.5 million and $377.6 million in the prior year periods.

Our effective tax rate was 21.1% and 21.6% for the three and nine months ended June 30, 2021 compared to 19.1% and 19.6% 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.

For the three and nine months ended June 30, 2020, the fiscal 2020 retroactive reinstatement of the federal energy efficient homes tax credit reduced our effective tax rate by 3.1% and 2.8%, respectively.

For the three and nine months ended June 30, 2021, a change in the estimate of homes qualifying for the fiscal 2020 energy efficient tax credit and the retroactive extension of the energy efficient tax credit reduced our effective tax rate by 1.9% and 0.9%, respectively.

Our deferred tax assets, net of deferred tax liabilities, were $154.4 million at June 30, 2021 compared to $152.4 million at September 30, 2020.

We have a valuation allowance of $7.3 million and $7.5 million at June 30, 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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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.

At June 30, 2021, our ratio of debt to total capital (notes payable divided by stockholders’ equity plus notes payable) was 24.2% compared to 26.6% at September 30, 2020 and 28.0% at June 30, 2020.

Our ratio of homebuilding debt to total capital (homebuilding notes payable divided by stockholders’ equity plus homebuilding notes payable) was 16.0% compared to 17.5% at September 30, 2020 and 18.4% at June 30, 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% in the fourth quarter of fiscal 2021 and throughout fiscal 2022.

We believe that the ratio of homebuilding debt to total capital is useful in understanding the leverage employed in our homebuilding operations and comparing our capital structure with other homebuilders.

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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 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.

At June 30, 2021, $361.0 million remained available under Forestar’s shelf registration statement, of which $66.7 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 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.

Cash and Cash Equivalents — At June 30, 2021, cash and cash equivalents of our homebuilding segment totaled $1.7 billion.

Bank Credit Facilities — In April 2021, our senior unsecured homebuilding revolving credit facility was amended to increase its capacity 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.

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

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The interest rate on borrowings under the revolving credit facility may be based on either the Prime Rate or London Interbank Offered Rate (LIBOR) plus an applicable margin, as defined in the credit agreement governing the facility.

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

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.

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.

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

These covenants are measured as defined in the credit agreements governing the facilities and are reported to the lenders quarterly.

A failure to comply with these financial covenants could allow the lending banks to terminate the availability of funds under the revolving credit facilities or cause any outstanding borrowings to become due and payable prior to maturity.

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

At 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.

The maturity date of the facility was extended to April 20, 2026.

At June 30, 2021, there were no borrowings outstanding and $159.3 million of letters of credit issued under the revolving credit facility, resulting in available capacity of $2.03 billion.

Our $375 million 364-day senior unsecured homebuilding revolving credit facility was not renewed upon its maturity on May 27, 2021.

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

These covenants are measured as defined in the credit agreement governing the facility and are reported to the lenders quarterly.

A failure to comply with these financial covenants could allow the lending banks to terminate the availability of funds under the revolving credit facility or cause any outstanding borrowings to become due and payable prior to maturity.

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

At June 30, 2021, we were in compliance with all of the covenants, limitations and restrictions of our homebuilding revolving credit facility.

Public Unsecured Debt — We have $2.55 billion principal amount of homebuilding senior notes outstanding as of June 30, 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 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 March 31, 2021, the full amount of the debt repurchase authorization was remaining, and $115.1 million of the equity repurchase authorization was remaining.

At June 30, 2021, we were in compliance with all of the limitations and restrictions associated with our public debt obligations.

Debt and Equity Repurchase Authorizations — In July 2019, our Board of Directors authorized the repurchase of up to $500 million of debt securities.

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

We repurchased 2.6 million shares of our common stock for $241.2 million during the current quarter for a total of 8.1 million shares repurchased for $661.4 million during the nine months ended June 30, 2021.

At June 30, 2021, the full amount of the debt repurchase authorization was remaining and $758.8 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

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

Cash and Cash Equivalents — At March 31, 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.

At June 30, 2021, Forestar’s ratio of debt to total capital (notes payable divided by stockholders’ equity plus notes payable) was 42.1% compared to 42.4% at September 30, 2020 and 43.1% at June 30, 2020.

Forestar’s ratio of net debt to total capital (notes payable net of cash divided by stockholders’ equity plus notes payable net of cash) was 37.8% compared to 22.1% at September 30, 2020 and 25.2% at June 30, 2020.

Cash and Cash Equivalents — At June 30, 2021, Forestar had cash and cash equivalents of $116.0 million.

Bank Credit Facility — In April 2021, Forestar’s senior unsecured revolving credit facility was amended to increase its capacity 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 facility also provides for the issuance of letters of credit with a sublimit equal to the greater of $100 million and 50% of the revolving credit commitment.

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

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 maturity date of the facility was extended to April 16, 2025.

Borrowings and repayments under the facility were $25 million each during the nine months ended June 30, 2021.

At June 30, 2021, there were no borrowings outstanding and $60.2 million of letters of credit issued under the revolving credit facility, resulting in available capacity of $349.8 million.

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

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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.

At June 30, 2021, Forestar was in compliance with all of the covenants, limitations and restrictions of its revolving credit facility.

Unsecured Debt — As of June 30, 2021, Forestar had $700 million principal amount of senior notes issued pursuant to Rule 144A and Regulation S under the Securities Act of 1933, as amended, which represent unsecured obligations of Forestar.

These notes include $400 million principal amount of 3.85% senior notes issued in April 2021 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.

The net proceeds from this issuance were primarily used to redeem Forestar’s $350 million principal amount of 8.0% senior notes due 2024 in May 2021.

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

Forestar recognized an $18.1 million loss on extinguishment of debt during the current quarter upon redemption of the notes.

Forestar also has $300 million principal amount of 5.0% senior notes due 2028.

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

At June 30, 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 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.

All of the $30 million authorization was remaining at June 30, 2021, and the authorization has no expiration date.

Issuance of Common Stock — During the nine months ended June 30, 2021, Forestar issued 1.4 million shares of common stock under its at-the-market equity offering program for proceeds of $32.6 million, net of commissions and other issuance costs.

At June 30, 2021, $361.0 million remained available for issuance under Forestar’s shelf registration statement, of which $66.7 million is reserved for sales under its at-the-market equity offering program.

Capital Resources - Financial Services

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

Cash and Cash Equivalents — At June 30, 2021, cash and cash equivalents of our financial services operations totaled $101.1 million.

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

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

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.

Through additional commitments, the total capacity of the facility was temporarily increased to $1.6 billion effective June 11, 2021 through November 4, 2021.

During this period, the capacity increases, without requiring additional commitments, to $1.8 billion for approximately 30 days at the end of the third quarter and for 45 days at fiscal year end.

As of June 30, 2021, $1.5 billion of mortgage loans held for sale with a collateral value of $1.5 billion were pledged under the mortgage repurchase facility.

As a result of advance paydowns totaling $410.2 million, DHI Mortgage had an obligation of $1.1 billion outstanding under the mortgage repurchase facility at June 30, 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 March 31, 2021, DHI Mortgage was in compliance with all of the conditions and covenants of the mortgage repurchase facility.

At June 30, 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 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.

In the nine months ended June 30, 2021, net cash used in operating activities was $34.5 million compared to $588.9 million of cash provided by operating activities in the prior year period.

Cash used in operating activities in the current year period primarily consisted of $340.6 million and $58.2 million of cash used in our Forestar segment and other businesses, respectively, partially offset by $276.1 million and $96.2 million of cash provided by our homebuilding and financial services segments, respectively.

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

Cash used to increase construction in progress and finished home inventory was $1.7 billion in the current year period compared to $602.3 million in the prior year period.

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

Cash used to increase residential land and lots in the current year period was $975.2 million compared to $324.2 million in the prior year period.

In both periods, the expenditures were made to increase our homes in inventory in response to the strength of homebuyer demand.

Cash used to increase residential land and lots in the current year period was $1.3 billion compared to $361.9 million in the prior year period.

Of these amounts, $541.7 million and $259.8 million, respectively, related to Forestar.

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.

During the three months ended June 30, 2021, we increased our single-family and multi-family rental properties by $196.0 million, which is reflected as cash used in operating activities.

During the six month period ended March 31, 2021 and in the prior year nine month period ended June 30, 2020, expenditures related to rental properties were $173.9 million and $153.6 million, respectively, and are reflected as cash used in investing activities.

Investing Cash Flow Activities

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 nine months ended June 30, 2021, net cash used in investing activities was $206.9 million compared to $100.4 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, purchases of property and equipment totaling $46.0 million and the acquisition of the homebuilding operations of Braselton Homes for $23.0 million, partially offset by proceeds from the sale of a single-family rental community for $31.8 million in the first quarter of fiscal 2021.

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

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

During the six months ended March 31, 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.

During the nine months ended June 30, 2021, net cash used in financing activities was $829.6 million, consisting primarily of repayment of $400 million principal amount of our 2.55% homebuilding senior notes at maturity, Forestar’s redemption of its $350 million principal amount of 8.0% senior notes, cash used to repurchase shares of our common stock of $661.4 million and payment of cash dividends totaling $217.7 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 Forestar’s issuance of $400 million principal amount of 3.85% senior notes.

During the nine months ended June 30, 2020, net cash provided by financing activities was $370.2 million, consisting primarily of note proceeds of $1.1 billion from draws on our homebuilding revolving credit facility, our issuance of $500 million principal amount of 2.5% homebuilding senior notes, our issuance of $500 million principal amount of 2.6% homebuilding senior notes, Forestar’s issuance of $300 million principal amount of 5.0% senior notes and net advances of $284.0 million on our mortgage repurchase facility.

Note proceeds were partially offset by repayment of amounts drawn on our homebuilding revolving credit facility totaling $1.1 billion, repayment of $500 million principal amount of our 4.0% senior notes at maturity, Forestar’s repayment of $118.9 million principal amount of its 3.75% convertible senior notes at maturity, cash used to repurchase shares of our common stock of $360.4 million and payment of cash dividends totaling $192.3 million.

During each of the first three 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 May 20, 2021 to stockholders of record on May 10, 2021.

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

At June 30, 2021, we had outstanding letters of credit of $219.5 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 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.

Among our homebuilding land and lot purchase contracts at June 30, 2021, there were a limited number of contracts with $136.9 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, $67.8 million related to contracts between our homebuilding segment and Forestar.

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SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION

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.

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

As of June 30, 2021, D.R.

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

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

(Guarantors or Guarantor Subsidiaries).

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

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

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

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

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and Guarantor Subsidiaries

Summarized Balance Sheet Data March 31,

Summarized Balance Sheet Data June 30,

2021 September 30,

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12,485.0 10,757.0

Summarized Statement of Operations Data Six Months Ended

March 31, 2021 Year Ended September 30, 2020

Summarized Statement of Operations Data Nine Months Ended

June 30, 2021 Year Ended

September 30, 2020

(In millions)

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CRITICAL ACCOUNTING POLICIES

As disclosed in our annual report on Form 10-K for the fiscal year ended September 30, 2020, our most critical accounting policies relate to revenue recognition, inventories and cost of sales, warranty claims and legal claims and insurance.

Since September 30, 2020, there have been no significant changes to those critical accounting policies.

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 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.

At June 30, 2021 and September 30, 2020, we had reserves for approximately 350 and 260 pending construction defect claims, respectively, and no individual existing claim was material to our financial statements.

During the nine months ended June 30, 2021, we established reserves for approximately 165 new construction defect claims and resolved 75 construction defect claims for a total cost of $13.3 million.

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

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

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.

The seasonal nature of our business can also cause significant variations in our working capital requirements in our homebuilding, lot development and financial services operations.

The seasonal nature of our business can also cause significant variations in the working capital requirements of our homebuilding, lot development and financial services operations.

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

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

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

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

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

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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