HORTON D R INC /DE/ 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included in this quarterly report and with our annual report on Form 10-K for the fiscal year ended September 30, 2020. Some of the information contained in this discussion and analysis constitutes forward-looking statements that involve risks and uncertainties. Actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to these differences include, but are not limited to, those described in the “Forward-Looking Statements” section following this discussion. BUSINESS D.R. Horton, Inc. is the largest homebuilding company in the United States as measured by number of homes closed. We construct and sell homes through our operating divisions in 96 markets across 30 states, primarily under the names of D.R. Horton, America’s Builder, Emerald Homes, Express Homes and Freedom Homes. Our common stock is included in the S&P 500 Index and listed on the New York Stock Exchange under the ticker symbol “DHI.” Unless the context otherwise requires, the terms “D.R. Horton,” the “Company,” “we” and “our” used herein refer to D.R. Horton, Inc., a Delaware corporation, and its predecessors and subsidiaries. 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 $315,000 during the nine months ended June 30, 2021. 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. Our product offerings include a broad range of homes for entry-level, move-up, active adult and luxury buyers across our markets. Our entry-level homes at affordable price points have experienced very strong demand from homebuyers, as this segment of the new home market remains under-served, with low inventory levels relative to demand. During fiscal 2020, we also began constructing and leasing homes as income-producing single-family rental communities. After a rental community is constructed and achieves a stabilized level of leased occupancy, we generally market the community for a bulk sale of homes. These operations are reported in our homebuilding segment. 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), 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 through land purchase contracts. Forestar has made significant investments in land acquisition and development over the last few years to expand its business across the United States. Our financial services operations provide mortgage financing and title agency services to homebuyers in many of our homebuilding markets. DHI Mortgage, our 100% owned subsidiary, provides mortgage financing services primarily to our homebuyers and sells substantially all of the mortgages it originates and the majority of the related servicing rights to third-party purchasers. DHI Mortgage originates loans in accordance with purchaser guidelines and sells substantially all of its mortgage production shortly after origination. Our 100% owned subsidiary title companies serve as title insurance agents by providing title insurance policies, examination, underwriting and closing services, primarily related to our homebuilding transactions. 33 Table of Contents 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, 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, 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 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. OVERVIEW 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. Horton for the trailing twelve months divided by average stockholders’ equity, where average stockholders’ equity is the sum of ending stockholders’ equity balances of the trailing five quarters divided by five. Homebuilding ROI is calculated as homebuilding pre-tax income for the trailing twelve months divided by average inventory, where average inventory is the sum of ending homebuilding inventory balances for the trailing five quarters divided by five. 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 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. We plan to continue to generate strong cash flows from our homebuilding operations and manage our product offerings, incentives, home pricing, sales pace and inventory levels to optimize the return on our inventory investments in each of our communities based on local housing market conditions. 34 Table of Contents STRATEGY 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 COVID-19; however, our strategy remains consistent and includes the following initiatives: • Developing and retaining highly experienced and productive teams of personnel throughout our company that are aligned and focused on continuous improvement in our operational execution and financial performance. • Maintaining a strong cash balance and overall liquidity position and controlling our level of debt. • Allocating and actively managing our inventory investments across our operating markets to diversify our geographic risk. • Offering new home communities that appeal to a broad range of entry-level, move-up, active adult and luxury homebuyers based on consumer demand in each market. • Modifying product offerings, sales pace, home prices and sales incentives as necessary in each of our markets to meet consumer demand and maintain affordability. • Delivering high quality homes and a positive experience to our customers both during and after the sale. • Managing our inventory of homes under construction relative to demand in each of our markets, including starting construction on unsold homes to capture new home demand and actively controlling the number of unsold, completed homes in inventory. • Investing in land and land development in desirable markets, while controlling the level of land and lots we own in each market relative to the local new home demand. • Continuing to seek opportunities to expand the portion of our land and finished lots controlled through purchase contracts with Forestar and other land developers across the country. • Controlling the cost of goods purchased from both vendors and subcontractors. • Improving the efficiency of our land development, construction, sales and other key operational activities. • Controlling our selling, general and administrative (SG&A) expense infrastructure to match production levels. • Opportunistically evaluating potential acquisitions to enhance our operations and improve returns. • Ensuring that our financial services business provides high quality mortgage and title services to homebuyers efficiently and effectively. • 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. 35 Table of Contents KEY RESULTS 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: • Homebuilding revenues increased 35% to $7.1 billion compared to $5.2 billion. • Homes closed increased 22% to 21,588 homes, and the average closing price of those homes was $326,100. • 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. • Home sales gross margin was 25.9% compared to 21.6%. • Homebuilding SG&A expense was 7.1% of homebuilding revenues compared to 7.9%. • Homebuilding pre-tax income was $1.3 billion compared to $709.8 million. • Homebuilding pre-tax income was 18.9% of homebuilding revenues compared to 13.6%. • 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. 36 Table of Contents Forestar: • Forestar’s revenues increased 76% to $312.9 million compared to $177.9 million. Revenues in the current and prior year quarters included $303.2 million and $175.5 million, respectively, of revenue from land and lot sales to our homebuilding segment. • Forestar’s lots sold increased 91% to 3,858 compared to 2,023. Lots sold to D.R. Horton totaled 3,719 compared to 1,991. • 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 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: • Financial services revenues increased 20% to $188.7 million compared to $156.6 million. • Financial services pre-tax income increased 2% to $70.3 million compared to $68.8 million. • Financial services pre-tax income was 37.3% of financial services revenues compared to 43.9%. Consolidated Results: • Consolidated pre-tax income increased 81% to $1.4 billion compared to $782.4 million. • Consolidated pre-tax income was 19.4% of consolidated revenues compared to 14.5%. • Income tax expense was $299.1 million compared to $149.5 million, and our effective tax rate was 21.1% compared to 19.1%. • Net income attributable to D.R. 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 $13.8 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. 37 Table of Contents Key financial results for the nine months ended June 30, 2021, as compared to the same period of 2020, were as follows: Homebuilding: • Homebuilding revenues increased 41% to $19.0 billion compared to $13.5 billion. • Homes closed increased 33% to 60,028 homes, and the average closing price of those homes was $315,000. • Net sales orders increased 20% to 65,429 homes, and the value of net sales orders increased 33% to $21.7 billion. • Home sales gross margin was 24.9% compared to 21.3%. • Homebuilding SG&A expense was 7.5% of homebuilding revenues compared to 8.4%. • Homebuilding pre-tax income was $3.3 billion compared to $1.7 billion. • Homebuilding pre-tax income was 17.5% of homebuilding revenues compared to 12.9%. • Net cash provided by homebuilding operations was $276.1 million compared to $1.2 billion. Forestar: • Forestar’s revenues increased 55% to $907.1 million compared to $584.3 million. Revenues in the current and prior year periods included $865.8 million and $548.6 million, respectively, of revenue from land and lot sales to our homebuilding segment. • Forestar’s lots sold increased 72% to 11,013 compared to 6,396. Lots sold to D.R. Horton totaled 10,466 compared to 6,287. • Forestar’s pre-tax income was $87.9 million compared to $46.1 million. • Forestar’s pre-tax income was 9.7% of Forestar revenues compared to 7.9%. Financial Services: • Financial services revenues increased 65% to $601.1 million compared to $364.0 million. • Financial services pre-tax income increased 111% to $262.1 million compared to $124.0 million. • Financial services pre-tax income was 43.6% of financial services revenues compared to 34.1%. Consolidated Results: • Consolidated pre-tax income increased 88% to $3.6 billion compared to $1.9 billion. • Consolidated pre-tax income was 18.5% of consolidated revenues compared to 13.9%. • Income tax expense was $784.1 million compared to $377.6 million, and our effective tax rate was 21.6% compared to 19.6%. • Net income attributable to D.R. 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 $34.5 million compared to $588.9 million of cash provided by operations. 38 Table of Contents RESULTS OF OPERATIONS - HOMEBUILDING We conduct our homebuilding operations in the geographic regions, states and markets listed below, and we conduct our financial services operations in many of these markets. Our homebuilding operating divisions are aggregated into six reporting segments, also referred to as reporting regions, which comprise the markets below. Our financial statements and the notes thereto contain additional information regarding segment performance. State Reporting Region/Market State Reporting Region/Market East Region Southeast Region Delaware Central Delaware Alabama Birmingham Northern Delaware Huntsville Georgia Savannah Mobile/Baldwin County Maryland Baltimore Montgomery Suburban Washington, D.C. Tuscaloosa 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. Lucie 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 Fort Collins 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. George Midland/Odessa Washington Seattle/Tacoma/Everett/Olympia New Braunfels/San Marcos Spokane San Antonio Vancouver 39 Table of Contents 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 June 30, Net Homes Sold Value (In millions) Average Selling Price 2021 2020 % Change 2021 2020 % Change 2021 2020 % Change East 2,158 2,803 (23) % $ 766.3 $ 837.8 (9) % $ 355,100 $ 298,900 19 % Midwest 789 1,374 (43) % 327.2 483.8 (32) % 414,700 352,100 18 % Southeast 5,843 6,991 (16) % 1,956.6 1,920.0 2 % 334,900 274,600 22 % South Central 5,897 6,644 (11) % 1,826.8 1,693.5 8 % 309,800 254,900 22 % Southwest 830 1,017 (18) % 315.8 285.4 11 % 380,500 280,600 36 % West 2,435 2,690 (9) % 1,256.2 1,116.8 12 % 515,900 415,200 24 % 17,952 21,519 (17) % $ 6,448.9 $ 6,337.3 2 % $ 359,200 $ 294,500 22 % Nine Months Ended June 30, Net Homes Sold Value (In millions) Average Selling Price 2021 2020 % Change 2021 2020 % Change 2021 2020 % Change East 8,079 7,393 9 % $ 2,702.3 $ 2,188.3 23 % $ 334,500 $ 296,000 13 % Midwest 3,814 3,514 9 % 1,494.8 1,245.5 20 % 391,900 354,400 11 % Southeast 22,323 17,381 28 % 6,992.7 4,746.7 47 % 313,300 273,100 15 % South Central 21,161 16,558 28 % 6,039.7 4,226.7 43 % 285,400 255,300 12 % Southwest 3,050 2,626 16 % 1,042.8 752.8 39 % 341,900 286,700 19 % West 7,002 7,260 (4) % 3,441.6 3,147.9 9 % 491,500 433,600 13 % 65,429 54,732 20 % $ 21,713.9 $ 16,307.9 33 % $ 331,900 $ 298,000 11 % Sales Order Cancellations Three Months Ended June 30, Cancelled Sales Orders Value (In millions) Cancellation Rate (2) 2021 2020 2021 2020 2021 2020 East 532 841 $ 173.3 $ 239.7 20 % 23 % Midwest 188 311 68.2 98.8 19 % 18 % Southeast 1,123 2,005 351.1 556.3 16 % 22 % South Central 1,438 1,970 417.3 507.4 20 % 23 % Southwest 164 276 54.0 77.4 16 % 21 % West 267 565 135.7 243.6 10 % 17 % 3,712 5,968 $ 1,199.6 $ 1,723.2 17 % 22 % Nine Months Ended June 30, Cancelled Sales Orders Value (In millions) Cancellation Rate (2) 2021 2020 2021 2020 2021 2020 East 1,771 1,931 $ 549.3 $ 551.3 18 % 21 % Midwest 725 696 266.2 225.7 16 % 17 % Southeast 4,734 4,871 1,404.2 1,340.0 17 % 22 % South Central 4,483 4,336 1,220.0 1,114.8 17 % 21 % Southwest 556 660 170.3 187.8 15 % 20 % West 768 1,251 365.8 552.3 10 % 15 % 13,037 13,745 $ 3,975.8 $ 3,971.9 17 % 20 % ________ (1) Net sales orders represent the number and dollar value of new sales contracts executed with customers (gross sales orders), net of cancelled sales orders. (2) Cancellation rate represents the number of cancelled sales orders divided by gross sales orders. 40 Table of Contents Net Sales Orders 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. 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. 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 market in the Midwest; the Florida markets (particularly Tampa) in the Southeast; 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 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 June 30, Homes in Backlog Value (In millions) Average Selling Price 2021 2020 % Change 2021 2020 % Change 2021 2020 % Change East 3,324 3,028 10 % $ 1,141.2 $ 929.3 23 % $ 343,300 $ 306,900 12 % Midwest 2,075 1,834 13 % 832.3 646.6 29 % 401,100 352,600 14 % Southeast 9,831 6,675 47 % 3,275.3 1,873.7 75 % 333,200 280,700 19 % South Central 11,601 7,380 57 % 3,467.0 1,920.0 81 % 298,900 260,200 15 % Southwest 2,529 1,348 88 % 872.7 384.8 127 % 345,100 285,500 21 % West 2,849 2,940 (3) % 1,433.7 1,259.4 14 % 503,200 428,400 17 % 32,209 23,205 39 % $ 11,022.2 $ 7,013.8 57 % $ 342,200 $ 302,300 13 % Sales Order Backlog Sales order backlog represents homes under contract but not yet closed at the end of the period. Many of the contracts in our sales order backlog are subject to contingencies, including mortgage loan approval and buyers selling their existing homes, which can result in cancellations. A portion of the contracts in backlog will not result in closings due to cancellations. 41 Table of Contents Homes Closed and Home Sales Revenue Three Months Ended June 30, Homes Closed Value (In millions) Average Selling Price 2021 2020 % Change 2021 2020 % Change 2021 2020 % Change East 3,077 2,500 23 % $ 1,032.6 $ 735.2 40 % $ 335,600 $ 294,100 14 % Midwest 1,371 1,053 30 % 514.2 372.7 38 % 375,100 353,900 6 % Southeast 7,456 5,921 26 % 2,276.4 1,627.8 40 % 305,300 274,900 11 % South Central 6,222 5,397 15 % 1,705.1 1,375.6 24 % 274,000 254,900 7 % Southwest 946 750 26 % 291.0 213.8 36 % 307,600 285,100 8 % West 2,516 2,021 24 % 1,220.8 882.5 38 % 485,200 436,700 11 % 21,588 17,642 22 % $ 7,040.1 $ 5,207.6 35 % $ 326,100 $ 295,200 10 % Nine Months Ended June 30, Homes Closed Value (In millions) Average Selling Price 2021 2020 % Change 2021 2020 % Change 2021 2020 % Change East 8,338 6,281 33 % $ 2,698.4 $ 1,835.1 47 % $ 323,600 $ 292,200 11 % Midwest 3,755 2,743 37 % 1,394.1 963.6 45 % 371,300 351,300 6 % Southeast 20,748 14,983 38 % 6,095.9 4,092.5 49 % 293,800 273,100 8 % South Central 17,598 13,344 32 % 4,681.4 3,390.8 38 % 266,000 254,100 5 % Southwest 2,526 2,093 21 % 766.3 609.5 26 % 303,400 291,200 4 % West 7,063 5,696 24 % 3,273.1 2,542.7 29 % 463,400 446,400 4 % 60,028 45,140 33 % $ 18,909.2 $ 13,434.2 41 % $ 315,000 $ 297,600 6 % Home Sales Revenue 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 (particularly Tampa) in the Southeast; the Houston, Dallas and San Antonio markets in the South Central; the Phoenix market in the Southwest; and the Las Vegas, Southern California and Sacramento markets in the West. 42 Table of Contents Homebuilding Operating Margin Analysis Percentages of Related Revenues Three Months Ended June 30, Nine Months Ended June 30, 2021 2020 2021 2020 Gross profit – home sales 25.9 % 21.6 % 24.9 % 21.3 % Gross profit – land/lot sales and other 52.3 % 29.7 % 39.3 % 29.8 % Inventory and land option charges (0.1) % (0.1) % (0.1) % (0.1) % Gross profit – total homebuilding 25.9 % 21.5 % 24.9 % 21.2 % Selling, general and administrative expense 7.1 % 7.9 % 7.5 % 8.4 % Gain on sale of assets — % — % (0.1) % — % Other (income) expense (0.1) % — % (0.1) % (0.1) % Homebuilding pre-tax income 18.9 % 13.6 % 17.5 % 12.9 % Home Sales Gross Profit 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. These actions could cause our gross profit margins to fluctuate in future periods. If new home demand declines from current levels, we would expect our gross profit margins to also decline. Land/Lot Sales and Other Revenues Land/lot sales and other revenues from our homebuilding operations were $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. We generally purchase land and lots with the intent to build and sell homes on them. However, some of the land that we purchase includes commercially zoned parcels that we may sell to commercial developers. We may also sell residential lots or land parcels to manage our supply or for other strategic reasons. 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. 43 Table of Contents Inventory and Land Option Charges At the end of each quarter, we review the performance and outlook for all of our communities and land inventories for indicators of potential impairment and perform detailed impairment evaluations and analyses when necessary. As of June 30, 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, 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 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 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; however, we cannot make assurances that we will be able to maintain or improve upon the current SG&A expense as a percentage of revenues. Interest Incurred We capitalize interest costs incurred to inventory during active development and construction (active inventory). Capitalized interest is charged to cost of sales as the related inventory is delivered to the buyer. Interest incurred by our homebuilding operations was $22.7 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 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. 44 Table of Contents Other Income 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. Business Acquisition In October 2020, we acquired the homebuilding operations of Braselton Homes in Corpus Christi, Texas for approximately $23.0 million in cash. The assets acquired included approximately 90 homes in inventory, 95 lots and control of approximately 840 additional lots through purchase contracts. We also acquired a sales order backlog of approximately 125 homes. 45 Table of Contents Homebuilding Results by Reporting Region Three Months Ended June 30, 2021 2020 Homebuilding Revenues Homebuilding Pre-tax Income (1) % of Revenues Homebuilding Revenues Homebuilding Pre-tax Income (1) % of Revenues (In millions) East $ 1,032.7 $ 190.3 18.4 % $ 736.3 $ 106.9 14.5 % Midwest 514.6 67.2 13.1 % 373.3 34.1 9.1 % Southeast 2,300.1 465.3 20.2 % 1,629.1 233.5 14.3 % South Central 1,709.8 323.1 18.9 % 1,376.4 201.8 14.7 % Southwest 291.0 46.7 16.0 % 216.1 29.7 13.7 % West 1,222.1 244.3 20.0 % 890.9 103.8 11.7 % $ 7,070.3 $ 1,336.9 18.9 % $ 5,222.1 $ 709.8 13.6 % Nine Months Ended June 30, 2021 2020 Homebuilding Revenues Homebuilding Pre-tax Income (1) % of Revenues Homebuilding Revenues Homebuilding Pre-tax Income (1) % of Revenues (In millions) East $ 2,703.4 $ 468.8 17.3 % $ 1,836.5 $ 240.1 13.1 % Midwest 1,396.1 177.3 12.7 % 964.6 76.4 7.9 % Southeast 6,133.4 1,147.8 18.7 % 4,096.4 567.4 13.9 % South Central 4,688.8 854.6 18.2 % 3,401.5 490.7 14.4 % Southwest 766.7 124.8 16.3 % 626.8 95.0 15.2 % West 3,288.2 550.9 16.8 % 2,558.1 267.3 10.4 % $ 18,976.6 $ 3,324.2 17.5 % $ 13,483.9 $ 1,736.9 12.9 % ______________ (1) Expenses maintained at the corporate level consist primarily of interest and property taxes, which are capitalized and amortized to cost of sales or expensed directly, and the expenses related to operating our corporate office. The amortization of capitalized interest and property taxes is allocated to each segment based on the segment’s cost of sales, while expenses associated with the corporate office are allocated to each segment based on the segment’s inventory balances. East Region — Homebuilding revenues increased 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. markets. 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. 46 Table of Contents 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. 47 Table of Contents HOMEBUILDING INVENTORIES, LAND AND LOT POSITION AND HOMES IN INVENTORY We routinely enter into contracts to purchase land or developed residential lots at predetermined prices on a defined schedule commensurate with planned development or anticipated new home demand. At the time of purchase, the undeveloped land is generally vested with the rights to begin development or construction work, and we plan and coordinate the development of our land into residential lots for use in our homebuilding business. We manage our inventory of owned land and lots and homes under construction relative to demand in each of our markets, including starting construction on unsold homes to capture new home demand and actively controlling the number of unsold, completed homes in inventory. Our homebuilding segment’s inventories at June 30, 2021 and September 30, 2020 are summarized as follows: As of June 30, 2021 Construction in Progress and Finished Homes Residential Land/Lots Developed and Under Development Land Held for Development Land Held for Sale Rental Properties (1) Total Inventory (In millions) East $ 955.8 $ 611.1 $ 5.6 $ 1.4 $ 31.7 $ 1,605.6 Midwest 697.8 506.1 — 1.8 20.2 1,225.9 Southeast 2,200.7 1,135.7 17.3 0.6 156.3 3,510.6 South Central 2,151.7 1,639.1 0.3 — 33.5 3,824.6 Southwest 417.0 512.1 1.1 — 25.5 955.7 West 1,291.7 1,183.9 5.7 19.4 35.9 2,536.6 Corporate and unallocated (2) 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 Construction in Progress and Finished Homes Residential Land/Lots Developed and Under Development Land Held for Development Land Held for Sale Total Inventory (In millions) East $ 785.3 $ 531.2 $ 5.5 $ 6.3 $ 1,328.3 Midwest 497.0 459.0 1.8 0.7 958.5 Southeast 1,655.5 1,231.5 32.3 0.6 2,919.9 South Central 1,596.3 1,282.3 0.3 1.0 2,879.9 Southwest 244.2 449.7 1.6 0.3 695.8 West 1,137.3 847.1 5.7 19.0 2,009.1 Corporate and unallocated (2) 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. 48 Table of Contents 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 Land/Lots Owned (1) Lots Controlled Through Land and Lot Purchase Contracts (2)(3) Total Land/Lots Owned and Controlled Homes in Inventory (4) East 12,800 78,100 90,900 5,600 Midwest 8,400 29,600 38,000 3,700 Southeast 25,600 139,700 165,300 14,600 South Central 47,200 93,300 140,500 15,500 Southwest 7,000 16,100 23,100 3,000 West 22,900 36,400 59,300 4,900 123,900 393,200 517,100 47,300 24 % 76 % 100 % As of September 30, 2020 Land/Lots Owned (1) Lots Controlled Through Land and Lot Purchase Contracts (2)(3) Total Land/Lots Owned and Controlled Homes in Inventory (4) East 11,300 50,500 61,800 4,900 Midwest 8,000 17,800 25,800 2,600 Southeast 28,700 95,700 124,400 11,500 South Central 40,100 65,200 105,300 12,600 Southwest 7,200 7,600 14,800 1,800 West 17,300 27,500 44,800 4,600 112,600 264,300 376,900 38,000 30 % 70 % 100 % ___________________ (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 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 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. 49 Table of Contents RESULTS OF OPERATIONS – FORESTAR 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 nine months ended June 30, 2021 and 2020 were as follows: Three Months Ended June 30, Nine Months Ended June 30, 2021 2020 2021 2020 (In millions) Residential lot sales $ 307.4 $ 164.4 $ 894.5 $ 537.9 Tract sales and other 5.5 13.5 12.6 46.4 Total revenues $ 312.9 $ 177.9 $ 907.1 $ 584.3 Cost of sales 257.1 157.1 753.8 510.3 Selling, general and administrative expense 16.9 11.2 48.7 32.8 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 Residential land and lot sales primarily consist of the sale of single-family lots to local, regional and national homebuilders. During the three and nine months ended June 30, 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 June 30, Nine Months Ended June 30, 2021 2020 2021 2020 ($ in millions) Total residential single-family lots sold 3,858 2,023 11,013 6,396 Residential single-family lots sold to D.R. Horton 3,719 1,991 10,466 6,287 Residential lot sales revenues from sales to D.R. Horton $ 300.2 $ 162.1 $ 859.8 $ 528.0 Tract acres sold to D.R. Horton 7 30 21 66 Tract sales revenues from sales to D.R. Horton $ 3.0 $ 13.4 $ 6.0 $ 20.6 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. Horton provides Forestar with certain administrative, compliance, operational and procurement services. 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. Horton. Approximately 900 of these lots are under contract to sell to other builders. 50 Table of Contents RESULTS OF OPERATIONS – FINANCIAL SERVICES The following tables and related discussion set forth key operating and financial data for our financial services operations, comprising DHI Mortgage and our subsidiary title companies, for the three and nine months ended June 30, 2021 and 2020. Three Months Ended June 30, Nine Months Ended June 30, 2021 2020 % Change 2021 2020 % Change Number of first-lien loans originated or brokered by DHI Mortgage for D.R. Horton homebuyers 14,313 12,487 15 % 40,262 30,628 31 % Number of homes closed by D.R. Horton 21,588 17,642 22 % 60,028 45,140 33 % Percentage of D.R. Horton homes financed by DHI Mortgage 66 % 71 % 67 % 68 % Number of total loans originated or brokered by DHI Mortgage for D.R. Horton homebuyers 14,337 12,511 15 % 40,315 30,745 31 % Total number of loans originated or brokered by DHI Mortgage 14,668 12,920 14 % 41,294 31,672 30 % Captive business percentage 98 % 97 % 98 % 97 % Loans sold by DHI Mortgage to third parties 15,261 12,661 21 % 41,090 30,180 36 % Three Months Ended June 30, Nine Months Ended June 30, 2021 2020 % Change 2021 2020 % Change (In millions) Loan origination and other fees $ 12.9 $ 11.0 17 % $ 35.8 $ 26.0 38 % Gains on sale of mortgage loans and mortgage servicing rights 135.4 116.7 16 % 453.0 263.7 72 % Servicing income 0.8 — — % 3.1 — — % Total mortgage operations revenues 149.1 127.7 17 % 491.9 289.7 70 % Title policy premiums 39.6 28.9 37 % 109.2 74.3 47 % Total revenues 188.7 156.6 20 % 601.1 364.0 65 % General and administrative expense 127.0 93.9 35 % 360.4 257.7 40 % Other (income) expense (8.6) (6.1) 41 % (21.4) (17.7) 21 % Financial services pre-tax income $ 70.3 $ 68.8 2 % $ 262.1 $ 124.0 111 % Financial Services Operating Margin Analysis Percentages of Financial Services Revenues Three Months Ended June 30, Nine Months Ended June 30, 2021 2020 2021 2020 General and administrative expense 67.3 % 60.0 % 60.0 % 70.8 % Other (income) expense (4.6) % (3.9) % (3.6) % (4.9) % Financial services pre-tax income 37.3 % 43.9 % 43.6 % 34.1 % 51 Table of Contents Mortgage Loan Activity The volume of loans originated by our mortgage operations is directly related to the number of homes closed by our homebuilding operations. In the three and nine months ended June 30, 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 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. Financial Services Revenues and Expenses 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 2,755 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 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. 52 Table of Contents RESULTS OF OPERATIONS - OTHER BUSINESSES 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 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 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 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. Income Taxes 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 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. Any reversal of the valuation allowance in future periods will impact our effective tax rate. The accounting for deferred taxes is based upon estimates of future results. Differences between the anticipated and actual outcomes of these future results could have a material impact on our consolidated results of operations or financial position. Also, changes in existing federal and state tax laws and tax rates could affect future tax results and the valuation of our deferred tax assets. 53 Table of Contents CAPITAL RESOURCES AND LIQUIDITY We have historically funded our operations with cash flows from operating activities, borrowings under bank credit facilities and the issuance of new debt securities. Our current levels of cash, borrowing capacity and balance sheet leverage provide us with the operational flexibility to adjust to changes in economic and market conditions. Currently, we are increasing our investments in homebuilding inventories and single-family and multi-family rental properties to expand our operations and grow our revenues and profitability, as well as considering opportunistic strategic investments as they arise. We are also returning capital to our shareholders through dividend payments and repurchases of our common stock. We are maintaining higher homebuilding cash balances than in prior years to support the increased scale and level of activity in our business and to provide flexibility to adjust to changing conditions and opportunities. At 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. We exclude the debt of Forestar and our financial services business because they are separately capitalized and not guaranteed by our parent company or any of our homebuilding entities. We regularly assess our projected capital requirements to fund growth in our business, repay debt obligations, pay dividends, repurchase our common stock and maintain sufficient cash levels to support our other operational needs, and we regularly evaluate our opportunities to raise additional capital. D.R. Horton has an automatically effective universal shelf registration statement filed with the Securities and Exchange Commission (SEC) in August 2018, registering debt and equity securities that may be issued from time to time in amounts to be determined. Forestar also has an effective shelf registration statement filed with the SEC in September 2018, registering $500 million of equity securities. 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. We believe that our existing cash resources, revolving credit facilities, mortgage repurchase facility and ability to access the capital markets or obtain additional bank financing will provide sufficient liquidity to fund our near-term working capital needs and debt obligations. Capital Resources - Homebuilding 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. Letters of credit issued under the facility reduce the available borrowing capacity. 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 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. 54 Table of Contents 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. The annual effective interest rate of these notes after giving effect to the amortization of the discount and financing costs is 1.6%. In December 2020, we repaid $400 million principal amount of our 2.55% senior notes at maturity. The indentures governing our senior notes impose restrictions on the creation of secured debt and liens. At June 30, 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. Capital Resources - Forestar The achievement of Forestar’s long-term growth objectives will depend on its ability to obtain financing in sufficient capacities. As market conditions permit, Forestar may issue new debt or equity securities through the capital markets or obtain additional bank financing to provide capital for future growth and additional liquidity. 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. Borrowings under the revolving credit facility are subject to a borrowing base calculation based on Forestar’s book value of its real estate assets and unrestricted cash. Letters of credit issued under the facility reduce the available borrowing capacity. 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. The financial covenants require Forestar to maintain a minimum level of tangible net worth, a minimum level of liquidity and a maximum allowable leverage ratio. 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. At June 30, 2021, Forestar was in compliance with all of the covenants, limitations and restrictions of its revolving credit facility. 55 Table of Contents 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%. 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. Horton, Inc. or any of the subsidiaries that guarantee our homebuilding debt. 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. 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 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. DHI Mortgage then has the right and obligation to repurchase the purchased loans upon their sale to third-party purchasers in the secondary market or within specified time frames from 45 to 60 days in accordance with the terms of the mortgage repurchase facility. In February 2021, the mortgage repurchase facility was amended to increase its capacity and extend its maturity date to February 18, 2022. The total capacity of the facility is $1.4 billion; however, the capacity increases, without requiring additional commitments, to $1.6 billion for approximately 30 days at each quarter end and 45 days at fiscal year end. The capacity of the facility can also be increased to $1.8 billion, subject to the availability of additional commitments. 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. Horton, Inc. or any of the subsidiaries that guarantee our homebuilding debt. The facility contains financial covenants as to the mortgage subsidiary’s minimum required tangible net worth, its maximum allowable leverage ratio and its minimum required liquidity. These covenants are measured and reported to the lenders monthly. At June 30, 2021, DHI Mortgage was in compliance with all of the conditions and covenants of the mortgage repurchase facility. 56 Table of Contents 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. The liquidity of our financial services business depends upon its continued ability to renew and extend the mortgage repurchase facility or to obtain other additional financing in sufficient capacities. Operating Cash Flow Activities 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 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. 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 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. Financing Cash Flow Activities We expect the short-term financing needs of our operations will be funded with existing cash, cash generated from operations and borrowings under our credit facilities. Long-term financing needs for our homebuilding and Forestar operations may be funded with the issuance of senior unsecured debt securities or equity securities through the capital markets. During the nine months ended June 30, 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. 57 Table of Contents 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. The declaration of future cash dividends is at the discretion of our Board of Directors and will depend upon, among other things, our future earnings, cash flows, capital requirements, financial condition and general business conditions. CONTRACTUAL CASH OBLIGATIONS, COMMERCIAL COMMITMENTS AND OFF-BALANCE SHEET ARRANGEMENTS Our primary contractual cash obligations are payments under our debt agreements and lease payments under operating leases. We expect to fund our contractual obligations in the ordinary course of business through a combination of our existing cash resources, cash flows generated from profits, our credit facilities or other bank financing and the issuance of new debt or equity securities through the public capital markets as market conditions may permit. At June 30, 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. When we complete our performance obligations, the related letters of credit and bonds are generally released shortly thereafter, leaving us with no continuing obligations. We have no material third-party guarantees. Our mortgage subsidiary enters into various commitments related to the lending activities of our mortgage operations. Further discussion of these commitments is provided in Item 3 “Quantitative and Qualitative Disclosures About Market Risk” under Part I of this quarterly report on Form 10-Q. We enter into land and lot purchase contracts to acquire land or lots for the construction of homes. Lot purchase contracts enable us to control significant lot positions with limited capital investment. Among our homebuilding land and lot purchase contracts at June 30, 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. Further information about our land purchase contracts is provided in the “Homebuilding Inventories, Land and Lot Position and Homes in Inventory” section included herein. 58 Table of Contents SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION As of June 30, 2021, D.R. Horton, Inc. 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. Horton, Inc. (Guarantors or Guarantor Subsidiaries). Each of the Guarantor Subsidiaries is 100% owned, directly or indirectly, by D.R. Horton, Inc. 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. The guarantees are effectively subordinated to any secured debt of such Guarantor to the extent of the value of the assets securing such debt. The guarantees will be structurally subordinated to indebtedness and other liabilities of Non-Guarantor Subsidiaries of the Guarantors. The guarantees by a Guarantor Subsidiary will be automatically and unconditionally released and discharged upon: (1) the sale or other disposition of its common stock whereby it is no longer a subsidiary of ours; (2) the sale or other disposition of all or substantially all of its assets (other than to us or another Guarantor); (3) its merger or consolidation with an entity other than us or another Guarantor; or (4) its ceasing to guarantee any of our publicly traded debt securities and ceasing to guarantee any of our obligations under our homebuilding revolving credit facility. The following tables present summarized financial information for D.R. Horton, Inc. and the Guarantor Subsidiaries on a combined basis after intercompany transactions and balances have been eliminated among D.R. Horton, Inc. and the Guarantor Subsidiaries, as well as their investment in, and equity in earnings from the Non-Guarantor Subsidiaries. D.R. Horton, Inc. and Guarantor Subsidiaries Summarized Balance Sheet Data June 30, 2021 September 30, 2020 (In millions) Assets Cash $ 1,615.7 $ 2,498.5 Inventories 13,773.3 10,921.8 Amount due from Non-Guarantor Subsidiaries 651.1 524.6 Total assets 17,961.9 15,503.9 Liabilities & Stockholders’ Equity Notes payable $ 2,620.0 $ 2,514.4 Total liabilities 5,476.9 4,746.9 Stockholders’ equity 12,485.0 10,757.0 Summarized Statement of Operations Data Nine Months Ended June 30, 2021 Year Ended September 30, 2020 (In millions) Revenues $ 18,942.3 $ 19,630.0 Cost of sales 14,233.0 15,379.2 Selling, general and administrative expense 1,374.5 1,584.4 Income before income taxes 3,313.2 2,666.4 Net income 2,605.1 2,134.7 59 Table of Contents A court could void or subordinate any Guarantor’s guarantee under the fraudulent conveyance laws if existing or future creditors of any such Guarantor were successful in establishing that: (i) such guarantee was incurred with fraudulent intent; or (ii) such Guarantor did not receive fair consideration or reasonably equivalent value for issuing its guarantee and was insolvent at the time of the guarantee, was rendered insolvent by reason of the guarantee, was engaged in a business or transaction for which its assets constituted unreasonably small capital to carry on its business, or intended to incur, or believed that it would incur, debt beyond its ability to pay such debt as it matured. The measures of insolvency for purposes of determining whether a fraudulent conveyance occurred would vary depending upon the laws of the relevant jurisdiction and upon the valuation assumptions and methodology applied by the court. Generally, however, a company would be considered insolvent for purposes of the foregoing if the sum of the company’s debts, including contingent, unliquidated and unmatured liabilities, is greater than all of such company’s property at a fair valuation, or if the present fair saleable value of the company’s assets is less than the amount that will be required to pay the probable liability on its existing debts as they become absolute and matured. The indentures governing our homebuilding senior notes contain a “savings clause,” which limits the liability of each Guarantor on its guarantee to the maximum amount that such Guarantor can incur without risk that its guarantee will be subject to avoidance as a fraudulent transfer. This provision may not be effective to protect such guarantees from fraudulent transfer challenges or, if it does, it may reduce such Guarantor’s obligation such that the remaining amount due and collectible under the guarantees would not suffice, if necessary, to pay the notes in full when due. On the basis of historical financial information, operating history and other factors, we believe that each of the Guarantors, after giving effect to the issuance of the guarantees when such guarantees were issued, was not insolvent, did not have unreasonably small capital for the business in which it engaged and did not and has not incurred debts beyond its ability to pay such debts as they mature. We cannot assure you, however, as to what standard a court would apply in making these determinations or that a court would agree with our conclusions in this regard. 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 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 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. SEASONALITY 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 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. 60 Table of Contents Forward-Looking Statements Some of the statements contained in this report, as well as in other materials we have filed or will file with the SEC, statements made by us in periodic press releases and oral statements we make to analysts, stockholders and the press in the course of presentations about us, may be construed as “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, Section 21E of the Securities Exchange Act of 1934 and the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based on management’s beliefs as well as assumptions made by, and information currently available to, management. These forward-looking statements typically include the words “anticipate,” “believe,” “consider,” “continue,” “could,” “estimate,” “expect,” “forecast,” “goal,” “intend,” “likely,” “may,” “outlook,” “plan,” “possible,” “potential,” “predict,” “projection,” “seek,” “should,” “strategy,” “target,” “will,” “would” or other words of similar meaning. Any or all of the forward-looking statements included in this report and in any other of our reports or public statements may not approximate actual experience, and the expectations derived from them may not be realized, due to risks, uncertainties and other factors. As a result, actual results may differ materially from the expectations or results we discuss in the forward-looking statements. These risks, uncertainties and other factors include, but are not limited to: • the effects of public health issues such as a major epidemic or pandemic, including the impact of COVID-19 on the economy and our businesses; • the cyclical nature of the homebuilding and lot development industries and changes in economic, real estate and other conditions; • constriction of the credit and public capital markets, which could limit our ability to access capital and increase our costs of capital; • reductions in the availability of mortgage financing provided by government agencies, changes in government financing programs, a decrease in our ability to sell mortgage loans on attractive terms or an increase in mortgage interest rates; • the risks associated with our land and lot inventory; • our ability to effect our growth strategies, acquisitions or investments successfully; • the impact of an inflationary, deflationary or higher interest rate environment; • home warranty and construction defect claims; • the effects of health and safety incidents; • supply shortages and other risks of acquiring land, building materials and skilled labor; • reductions in the availability of performance bonds; • increases in the costs of owning a home; • the effects of governmental regulations and environmental matters on our homebuilding and land development operations; • the effects of governmental regulations on our financial services operations; • competitive conditions within the homebuilding, lot development and financial services industries; • our ability to manage and service our debt and comply with related debt covenants, restrictions and limitations; • the effects of negative publicity; • the effects of the loss of key personnel; and • information technology failures, data security breaches and our ability to satisfy privacy and data protection laws and regulations. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. However, any further disclosures made on related subjects in subsequent reports on Forms 10-K, 10-Q and 8-K should be consulted. Additional information about issues that could lead to material changes in performance and risk factors that have the potential to affect us is contained in our annual report on Form 10-K for the fiscal year ended September 30, 2020, including the section entitled “Risk Factors,” which is filed with the SEC. 61 Table of Contents