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Item 7. Management’s Discussion and Analysis

2021-11-18 compared with 2020-11-20 · 426 added, 328 removed, 514 unchanged (59% of the section changed)

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to promote an understanding of our financial condition, results of operations, liquidity and certain other factors that may affect future results.

MD&A is provided as a supplement to, and should be read in conjunction with our consolidated financial statements and notes to those statements that appear elsewhere in this Form 10-K.

This section generally discusses the results of operations for fiscal 2021 compared to 2020.

For similar operating and financial data and discussion of our fiscal 2020 results compared to our fiscal 2019 results, refer to Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under Part II of our annual report on Form 10-K for the fiscal year ended September 30, 2020, which was filed with the SEC on November 20, 2020.

The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs.

Actual results could differ materially from those discussed in the forward-looking statements.

Factors that could cause or contribute to any differences include, but are not limited to, those discussed under the caption “Forward-Looking Statements” and under Item 1A, “Risk Factors.”

Results of Operations — Overview

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Our pre-tax income was $5.4 billion in fiscal 2021 compared to $3.0 billion in fiscal 2020, and our pre-tax operating margin was 19.3% compared to 14.7%.

Net income was $2.4 billion in fiscal 2020 compared to $1.6 billion in the prior year.

The current year results include a tax benefit of $93.4 million related to the retroactive reinstatement of the federal energy efficient homes tax credit.

Net income was $4.2 billion in fiscal 2021 compared to $2.4 billion in fiscal 2020, and our diluted earnings per share was $11.41 compared to $6.41.

Cash provided by our homebuilding operations was $1.2 billion in fiscal 2021 compared to $1.9 billion in fiscal 2020.

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

Within our homebuilding land and lot portfolio, our lots controlled under purchase contracts represent 70% of the lots owned and controlled at September 30, 2020 compared to 60% at September 30, 2019.

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

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

However, residential construction and financial services were designated as essential businesses in almost all of our markets, which allowed us to continue to operate during that time.

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

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

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

For the third and fourth quarters of fiscal 2020, our net sales orders increased by 38% and 81%, respectively, compared to the prior year quarters.

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

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

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

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

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

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

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 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.

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 current availability of labor and materials, 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 in many of our communities in the near term to match our production levels.

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

Our relationship with Forestar and expanded relationships with other land developers across the country have allowed us to continue 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.

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

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

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

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.

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.

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• 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 by assisting Forestar with its operations and expanding our relationships with land developers across the country.

• Continuing to seek opportunities to expand the portion of our land and finished lots controlled through purchase contracts with Forestar and other land developers.

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

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

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

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

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

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

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

Key financial results as of and for our fiscal year ended September 30, 2021, as compared to fiscal 2020, were as follows:

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• Net sales orders increased 4% to 81,378 homes, and the value of net sales orders increased 18% to $27.7 billion.

• Sales order backlog increased 96% to 26,683 homes, and the value of sales order backlog increased 98% to $8.2 billion.

• Sales order backlog decreased 2% to 26,221 homes, while the value of sales order backlog increased 16% to $9.5 billion.

• Home sales gross margin was 25.5% compared to 21.8%.

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• Homebuilding return on inventory was 37.9% compared to 24.6%.

• Cash provided by homebuilding operations was $1.9 billion compared to $1.4 billion.

• Net cash provided by homebuilding operations was $1.2 billion compared to $1.9 billion.

• Homebuilding cash and cash equivalents totaled $3.0 billion compared to $2.6 billion.

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• Homebuilding debt was $3.2 billion compared to $2.5 billion.

• Homebuilding debt to total capital was 17.5% compared to 17.0%.

• Forestar’s revenues increased 118% to $931.8 million compared to $428.3 million.

Revenues in fiscal 2020 and 2019 included $887.4 million and $326.6 million, respectively, of revenue from land and lot sales to our homebuilding segment.

• Homebuilding debt to total capital was 17.8% compared to 17.5%, and net homebuilding debt to total capital was 1.7% compared to (0.3)%.

• Forestar’s revenues increased 42% to $1.3 billion compared to $931.8 million.

Revenues in fiscal 2021 and 2020 included $1.2 billion and $887.4 million, respectively, of revenue from land and lot sales to our homebuilding segment.

• Forestar’s lots sold increased 53% to 15,915 compared to 10,373.

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Horton totaled 14,839 compared to 10,164.

• Forestar’s pre-tax income was $78.1 million compared to $45.7 million.

• Forestar’s pre-tax income was $146.6 million, which included an $18.1 million loss on extinguishment of debt, compared to $78.1 million.

• Forestar’s pre-tax income was 11.1% of Forestar revenues compared to 8.4%.

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• Forestar’s debt to total capital was 41.0% compared to 42.4%.

Forestar’s net debt to total capital was 35.2% compared to 22.1%.

Financial Services:

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• Consolidated pre-tax income was 19.3% of consolidated revenues compared to 14.7%.

• Income tax expense was $602.5 million compared to $506.7 million.

• Income tax expense was $1.2 billion compared to $602.5 million, and our effective tax rate was 21.8% compared to 20.2%.

• Net income attributable to D.R.

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Horton increased 78% to $11.41 compared to $6.41.

• Cash provided by operations was $1.4 billion compared to $892.1 million.

• Net cash provided by operations was $534.4 million compared to $1.4 billion.

• Stockholders’ equity was $14.9 billion compared to $11.8 billion.

• Book value per common share increased to $41.81 compared to $32.53.

• Debt to total capital was 26.6% compared to 25.3%.

• Debt to total capital was 26.7% compared to 26.6%, and net debt to total capital was 12.9% compared to 9.7%.

Results of Operations — Homebuilding

Our operating segments are our 53 homebuilding divisions, our majority-owned Forestar lot development operations, our financial services operations and our other business activities.

The homebuilding operating segments are aggregated into six reporting segments.

These reporting segments, which we also refer to as reporting regions, have homebuilding operations located in the following states:

Delaware, Georgia (Savannah only), Maryland, New Jersey, North Carolina, Pennsylvania, South Carolina and Virginia

Colorado, Illinois, Indiana, Iowa, Minnesota and Ohio

Alabama, Florida, Georgia, Mississippi and Tennessee

Due to the change in aggregation of our homebuilding operating segments into six new reportable segments during fiscal 2021, the following tables and related discussion of our homebuilding results include comparative information for the fiscal years ended September 30, 2021, 2020 and 2019.

Based on the new aggregation, our six reporting segments and the states in which we have homebuilding operations are as follows:

Colorado, Oregon, Utah and Washington

Arizona, California, Hawaii, Nevada and New Mexico

South Central:

Louisiana, Oklahoma and Texas

Arizona and New Mexico

California, Hawaii, Nevada, Oregon, Utah and Washington

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 fiscal years ended September 30, 2020 and 2019.

For similar operating and financial data and discussion of our fiscal 2019 results compared to our fiscal 2018 results, refer to Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under Part II of our annual report on Form 10-K for the fiscal year ended September 30, 2019, which was filed with the SEC on November 25, 2019.

Net Sales Orders (1)

Year Ended September 30,

Net Homes Sold Value (In millions) Average Selling Price

Change 2020 2019 %

East 10,621 7,941 34 % $ 3,202.1 $ 2,291.1 40 % $ 301,500 $ 288,500 5 %

Midwest 5,010 3,224 55 % 1,794.8 1,127.8 59 % 358,200 349,800 2 %

Oklahoma and Texas

Alabama, Florida, Louisiana and Mississippi

Georgia, North Carolina, South Carolina and Tennessee

Delaware, Illinois, Indiana, Iowa, Kentucky, Maryland, Minnesota, Nebraska,

New Jersey, Ohio, Pennsylvania and Virginia

Net Sales Orders (1) Net Homes Sold

Year Ended September 30, % Change

2021 2020 2019 2021 vs 2020 2020 vs 2019

Northwest 4,530 5,308 3,919 (15) % 35 %

Southwest 9,456 10,214 7,382 (7) % 38 %

South Central 23,631 21,511 14,942 10 % 44 %

Southeast 24,239 21,103 15,640 15 % 35 %

East 14,038 14,480 11,011 (3) % 32 %

North 5,484 5,842 3,671 (6) % 59 %

81,378 78,458 56,565 4 % 39 %

Value (In millions)

Northwest $ 2,320.2 $ 2,342.3 $ 1,737.4 (1) % 35 %

Southwest 4,179.3 3,838.8 2,909.8 9 % 32 %

South Central 6,992.9 5,555.2 3,821.5 26 % 45 %

Southeast 7,632.1 5,781.2 4,122.0 32 % 40 %

East 4,496.9 4,086.3 3,034.1 10 % 35 %

North 2,126.8 2,002.5 1,218.6 6 % 64 %

$ 27,748.2 $ 23,606.3 $ 16,843.4 18 % 40 %

Average Selling Price

Northwest $ 512,200 $ 441,300 $ 443,300 16 % — %

Southwest 442,000 375,800 394,200 18 % (5) %

West 10,142 7,716 31 % 4,416.8 3,539.2 25 % 435,500 458,700 (5) %

South Central 295,900 258,200 255,800 15 % 1 %

Southeast 314,900 274,000 263,600 15 % 4 %

East 320,300 282,200 275,600 14 % 2 %

North 387,800 342,800 332,000 13 % 3 %

$ 341,000 $ 300,900 $ 297,800 13 % 1 %

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2021 2020 2019 2021 2020 2019 2021 2020 2019

East 2,722 2,155 $ 779.6 $ 607.3 20 % 21 %

Midwest 1,027 680 338.0 229.2 17 % 17 %

Southeast 6,750 5,410 1,856.8 1,444.4 21 % 23 %

South Central 6,140 4,751 1,583.6 1,193.2 21 % 23 %

Northwest 583 760 540 $ 294.2 $ 334.1 $ 228.5 11 % 13 % 12 %

Southwest 1,497 1,994 1,889 598.0 739.1 697.5 14 % 16 % 20 %

West 1,628 1,323 717.7 614.0 14 % 15 %

South Central 5,301 5,432 4,184 1,510.2 1,413.2 1,064.2 18 % 20 % 22 %

Southeast 5,356 5,882 4,323 1,585.1 1,604.1 1,128.1 18 % 22 % 22 %

East 3,136 3,948 3,488 947.6 1,073.4 937.4 18 % 21 % 24 %

North 986 1,150 864 354.6 365.0 279.4 15 % 16 % 19 %

16,859 19,166 15,288 $ 5,289.7 $ 5,528.9 $ 4,335.1 17 % 20 % 21 %

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Net Sales Orders

2021 versus 2020

The number of net sales orders increased 4% during 2021 compared to 2020, and the value of net sales orders increased 18% to $27.7 billion (81,378 homes) in 2021 from $23.6 billion (78,458 homes) in 2020.

The average selling price of net sales orders during fiscal 2021 was $341,000, up 13% from the prior year.

During fiscal 2021, demand for homes remained strong.

As a result, during the second half of fiscal 2021, 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 in many of our communities in the near term to match our production levels.

Although these challenges may persist for some time, we expect to ultimately increase our production capacity and close more homes in fiscal 2022 than we closed in fiscal 2021.

In regions with an increase in sales volume, the markets contributing most to the increases were the San Antonio and Dallas markets in the South Central and the Florida markets (particularly Tampa) in the Southeast.

In regions with a decrease in sales volume, the markets having the most effect were as follows:

the Seattle and Portland markets in the Northwest;

the Phoenix market in the Southwest;

the Charlotte and Atlanta markets in the East;

and the Minneapolis market in the North.

Our sales order cancellation rate (cancelled sales orders divided by gross sales orders for the period) was 17% in 2021 compared to 20% in 2020.

2020 versus 2019

The number of net sales orders increased 39% during 2020 compared to 2019, with significant increases in all of our regions.

The value of net sales orders increased 40% to $23.6 billion (78,458 homes) in 2020 from $16.8 billion (56,565 homes) in 2019.

The average selling price of net sales orders during fiscal 2020 was $300,900, up 1% from the prior year.

The average selling price of net sales orders during 2020 was $300,900, up 1% from the prior year.

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

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

the Denver, Minneapolis and Indiana markets in the Midwest;

the Florida markets (particularly Tampa) in the Southeast;

the Denver and Portland markets in the Northwest;

the Phoenix and California markets in the Southwest;

the Houston and Dallas markets in the South Central;

the Phoenix market in the Southwest;

and the California and Nevada markets in the West.

the Florida markets (particularly Tampa) in the Southeast;

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

and the Minneapolis, Delaware and Indiana markets in the North.

Our sales order cancellation rate (cancelled sales orders divided by gross sales orders for the period) was 20% in 2020 compared to 21% in 2019.

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

Sales Order Backlog

As of September 30,

Homes in Backlog Value (In millions) Average Selling Price

Change 2020 2019 %

East 3,583 1,916 87 % $ 1,137.4 $ 576.1 97 % $ 317,400 $ 300,700 6 %

Midwest 2,016 1,063 90 % 731.5 364.7 101 % 362,800 343,100 6 %

Sales Order Backlog Homes in Backlog

As of September 30, % Change

2021 2020 2019 2021 vs 2020 2020 vs 2019

Northwest 954 1,544 694 (38) % 122 %

Southwest 3,438 3,742 1,673 (8) % 124 %

South Central 8,733 7,213 3,667 21 % 97 %

Southeast 7,319 6,922 3,740 6 % 85 %

East 4,217 4,857 2,643 (13) % 84 %

North 1,560 2,405 1,196 (35) % 101 %

26,221 26,683 13,613 (2) % 96 %

Value (In millions)

Northwest $ 497.7 $ 693.1 $ 301.6 (28) % 130 %

Southwest 1,495.9 1,341.3 675.6 12 % 99 %

South Central 2,825.4 1,904.9 964.2 48 % 98 %

Southeast 2,534.7 1,968.6 1,051.3 29 % 87 %

East 1,469.4 1,426.4 748.6 3 % 91 %

North 640.0 851.3 398.8 (25) % 113 %

$ 9,463.1 $ 8,185.6 $ 4,140.1 16 % 98 %

Average Selling Price

Northwest $ 521,700 $ 448,900 $ 434,600 16 % 3 %

Southwest 435,100 358,400 403,800 21 % (11) %

West 2,910 1,376 111 % 1,265.1 654.2 93 % 434,700 475,400 (9) %

South Central 323,500 264,100 262,900 22 % — %

Southeast 346,300 284,400 281,100 22 % 1 %

East 348,400 293,700 283,200 19 % 4 %

North 410,300 354,000 333,400 16 % 6 %

$ 360,900 $ 306,800 $ 304,100 18 % 1 %

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A portion of the contracts in backlog will not result in closings due to cancellations.

Homes Closed and Home Sales Revenue

Year Ended September 30,

Homes Closed Value (In millions) Average Selling Price

Change 2020 2019 %

East 8,954 7,928 13 % $ 2,640.8 $ 2,285.0 16 % $ 294,900 $ 288,200 2 %

Midwest 4,057 3,193 27 % 1,428.0 1,113.8 28 % 352,000 348,800 1 %

Home Closings and Revenue Homes Closed

Year Ended September 30, % Change

2021 2020 2019 2021 vs 2020 2020 vs 2019

Northwest 5,120 4,458 3,878 15 % 15 %

Southwest 9,760 8,145 7,578 20 % 7 %

South Central 22,236 17,965 15,428 24 % 16 %

Southeast 23,842 17,921 15,411 33 % 16 %

East 14,678 12,266 11,086 20 % 11 %

North 6,329 4,633 3,594 37 % 29 %

81,965 65,388 56,975 25 % 15 %

Home Sales Revenue (In millions)

Northwest $ 2,515.6 $ 1,950.8 $ 1,718.3 29 % 14 %

Southwest 4,024.7 3,173.1 2,999.7 27 % 6 %

South Central 6,104.2 4,614.6 3,932.9 32 % 17 %

Southeast 7,066.1 4,863.8 4,009.9 45 % 21 %

East 4,453.9 3,408.5 3,075.9 31 % 11 %

North 2,338.1 1,550.0 1,188.3 51 % 30 %

$ 26,502.6 $ 19,560.8 $ 16,925.0 35 % 16 %

Average Selling Price

Northwest $ 491,300 $ 437,600 $ 443,100 12 % (1) %

Southwest 412,400 389,600 395,800 6 % (2) %

West 8,608 7,787 11 % 3,805.9 3,610.3 5 % 442,100 463,600 (5) %

South Central 274,500 256,900 254,900 7 % 1 %

Southeast 296,400 271,400 260,200 9 % 4 %

East 303,400 277,900 277,500 9 % — %

North 369,400 334,600 330,600 10 % 1 %

$ 323,300 $ 299,100 $ 297,100 8 % 1 %

Home Sales Revenue

2021 versus 2020

Revenues from home sales increased 35% to $26.5 billion (81,965 homes closed) in 2021 from $19.6 billion (65,388 homes closed) in 2020.

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

The number of homes closed in 2021 increased 25% from 2020.

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

the Denver and Salt Lake City markets in the Northwest;

the Phoenix and California markets in the Southwest;

the Houston and Dallas markets in the South Central;

the Florida markets (particularly Tampa) in the Southeast;

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

and the Indiana and Delaware markets in the North.

2020 versus 2019

Revenues from home sales increased 16% to $19.6 billion (65,388 homes closed) in 2020 from $16.9 billion (56,975 homes closed) in 2019.

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

The number of homes closed in fiscal 2020 increased 15% from 2019.

The number of homes closed in 2020 increased 15% from 2019.

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

the New Jersey, Myrtle Beach and Charlotte markets in the East;

the Denver and Indianapolis markets in the Midwest;

the Florida markets (particularly Tampa) in the Southeast;

the Denver and Portland markets in the Northwest;

the California markets in the Southwest;

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

the Tucson market in the Southwest;

and the Portland and Southern California markets in the West.

the Florida markets (particularly Tampa) in the Southeast;

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

and the Delaware, Indiana and Iowa markets in the North.

Homebuilding Operating Margin Analysis

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Year Ended September 30,

2021 2020 2019

Gross profit — home sales 25.5 % 21.8 % 20.2 %

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Selling, general and administrative expense 7.3 % 8.1 % 8.7 %

Other (income) (0.1) % (0.1) %

Other (income) expense — % (0.1) % (0.1) %

Homebuilding pre-tax income 18.1 % 13.6 % 11.2 %

Home Sales Gross Profit

2021 versus 2020

Gross profit from home sales increased to $6.9 billion in 2021 from $4.3 billion in 2020 and increased 370 basis points to 25.5% as a percentage of home sales revenues.

The percentage increase resulted from improvements of 150 basis points due to a decrease in the average cost of our homes closed while the average selling price increased slightly, 20 basis points from a decrease in the amount of purchase accounting adjustments related to prior year acquisitions and 10 basis points due to a decrease in the amortization of capitalized interest, partially offset by increased warranty and construction defect costs of 20 basis points.

The percentage increase resulted from improvements of 340 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 10 basis points due to a decrease in warranty and construction defect costs.

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

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

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

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

2020 versus 2019

Gross profit from home sales increased to $4.3 billion in 2020 from $3.4 billion in 2019 and increased 160 basis points to 21.8% as a percentage of home sales revenues.

Land/Lot Sales and Other Revenues

Land/lot sales and other revenues from our homebuilding operations were $83.1 million and $91.9 million in fiscal 2020 and 2019, respectively.

Land/lot sales and other revenues from our homebuilding operations were $75.0 million, $80.7 million and $91.9 million in fiscal 2021, 2020 and 2019, respectively.

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

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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 September 30, 2020, we performed detailed impairment evaluations of communities with a combined carrying value of $36.1 million and determined that no communities were impaired.

Homebuilding impairment charges during fiscal 2020 and 2019 were $1.7 million and $24.9 million, respectively.

As of September 30, 2021, we determined that no communities were impaired, and no impairment charges were recorded during the three months ended September 30, 2021.

There were $5.6 million of homebuilding impairment charges recorded during fiscal 2021 compared to $1.7 million and $24.9 million of impairment charges recorded in fiscal 2020 and 2019, respectively.

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

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

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

During fiscal 2020 and 2019, earnest money and pre-acquisition cost write-offs related to land purchase contracts that we have terminated or expect to terminate were $21.2 million and $28.3 million, respectively.

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 fiscal 2021, 2020 and 2019, earnest money and pre-acquisition cost write-offs related to land purchase contracts that we have terminated or expect to terminate were $19.3 million, $21.2 million and $28.3 million, respectively.

Selling, General and Administrative (SG&A) Expense

SG&A expense from homebuilding activities increased 8% to $1.6 billion in fiscal 2020 from $1.5 billion in fiscal 2019.

SG&A expense from homebuilding activities was $1.9 billion, $1.6 billion and $1.5 billion in fiscal 2021, 2020 and 2019, respectively, an increase of 22% in 2021 and 8% in 2020 from the respective prior years.

SG&A expense as a percentage of homebuilding revenues was 7.3%, 8.1% and 8.7% in fiscal 2021, 2020 and 2019, respectively.

Employee compensation and related costs represented 75% of SG&A costs in fiscal 2020 compared to 72% in fiscal 2019.

These costs increased 13% to $1.2 billion in 2020 from $1.1 billion in 2019.

Our homebuilding operations employed 7,281 and 6,810 employees at September 30, 2020 and 2019, respectively.

Employee compensation and related costs were $1.6 billion, $1.2 billion and $1.1 billion in fiscal 2021, 2020 and 2019, respectively, representing 81%, 75% and 72% of SG&A costs in those years.

These costs increased 31% in 2021 and 13% in 2020.

Our homebuilding operations employed 8,429, 7,281 and 6,810 people at September 30, 2021, 2020 and 2019, respectively.

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

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

Interest incurred by our homebuilding operations decreased 11% to $93.0 million in fiscal 2020 from $104.7 million in fiscal 2019.

The decrease was due to lower average interest rates on our homebuilding debt, as well as a 2% decrease in our average homebuilding debt in fiscal 2020 compared to the prior year.

Interest charged to cost of sales was 0.8% and 0.9% of total cost of sales (excluding inventory and land option charges) in fiscal 2020 and 2019, respectively.

Other income, net of other expenses, included in our homebuilding operations was $11.7 million in fiscal 2020 compared to $9.5 million in fiscal 2019.

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

Interest incurred by our homebuilding operations was $93.6 million, $93.0 million and $104.7 million in fiscal 2021, 2020 and 2019, respectively.

Interest charged to cost of sales was 0.7%, 0.8% and 0.9% of total cost of sales (excluding inventory and land option charges) in those years.

Other income, net of other expenses, included in our homebuilding operations was $10.3 million, $11.7 million and $9.5 million in fiscal 2021, 2020 and 2019, respectively.

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

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

Business Acquisition

In October 2020, we acquired the homebuilding operations of Braselton Homes for approximately $23 million in cash.

Braselton Homes operates in Corpus Christi, Texas.

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

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

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Year Ended September 30,

Revenues Homebuilding

Income (1) % of

Revenues Homebuilding

Income (1) % of

Homebuilding Revenues Homebuilding Pre-tax Income (1) Pre-tax Income as a Percentage of Homebuilding Revenues

2021 2020 2019 2021 2020 2019 2021 2020 2019

(In millions)

East $ 2,642.3 $ 357.0 13.5 % $ 2,290.2 $ 238.8 10.4 %

Midwest 1,429.0 128.8 9.0 % 1,123.1 57.7 5.1 %

Southeast 5,845.2 841.0 14.4 % 4,977.8 584.7 11.7 %

South Central 4,998.1 758.0 15.2 % 4,202.4 551.1 13.1 %

Northwest $ 2,516.6 $ 1,953.4 $ 1,721.5 $ 510.8 $ 264.5 $ 222.9 20.3 % 13.5 % 12.9 %

Southwest 4,071.0 3,230.3 3,050.8 653.1 366.1 284.5 16.0 % 11.3 % 9.3 %

West 3,847.7 443.3 11.5 % 3,650.8 378.0 10.4 %

$ 19,643.9 $ 2,665.0 13.6 % $ 17,016.9 $ 1,910.7 11.2 %

South Central 6,111.2 4,625.9 3,944.0 1,150.2 714.9 527.6 18.8 % 15.5 % 13.4 %

Southeast 7,079.6 4,871.5 4,023.5 1,371.9 709.5 477.8 19.4 % 14.6 % 11.9 %

East 4,459.0 3,410.1 3,081.2 795.1 484.3 361.9 17.8 % 14.2 % 11.7 %

North 2,340.2 1,550.3 1,195.9 331.7 126.2 36.0 14.2 % 8.1 % 3.0 %

$ 26,577.6 $ 19,641.5 $ 17,016.9 $ 4,812.8 $ 2,665.5 $ 1,910.7 18.1 % 13.6 % 11.2 %

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

East Region — Homebuilding revenues increased 15% in fiscal 2020 compared to fiscal 2019, primarily due to increases in the number of homes closed in our New Jersey, Myrtle Beach and Charlotte markets.

2021 versus 2020

Northwest Region — Homebuilding revenues increased 29% in fiscal 2021 compared to fiscal 2020, primarily due to increases in the number of homes closed in our Denver, Salt Lake City and Seattle markets as well as an increase in the average selling price.

The region generated pre-tax income of $510.8 million in 2021 compared to $264.5 million in 2020.

Gross profit from home sales as a percentage of home sales revenue (home sales gross profit percentage) increased by 250 basis points in 2020 compared to 2019, due to an increase in the average selling price of homes closed and a decrease in the average cost of those homes.

Gross profit from home sales as a percentage of home sales revenue (home sales gross profit percentage) increased by 620 basis points in 2021 compared to 2020, 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 basis points in 2021 compared to 2020, primarily due to the increase in homebuilding revenues.

Midwest Region — Homebuilding revenues increased 27% in fiscal 2020 compared to fiscal 2019, primarily due to increases in the number of homes closed in our Denver and Indianapolis markets.

Southwest Region — Homebuilding revenues increased 26% in fiscal 2021 compared to fiscal 2020, primarily due to increases in the number of homes closed in our California and Phoenix markets.

The region generated pre-tax income of $653.1 million in 2021 compared to $366.1 million in 2020.

Home sales gross profit percentage increased by 270 basis points in 2020 compared to 2019, due to decreases in purchase accounting adjustments in the current year related to the acquisitions of Westport Homes and Classic Builders.

Home sales gross profit percentage increased by 380 basis points in 2021 compared to 2020, 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 100 basis points in 2021 compared to 2020, primarily due to the increase in homebuilding revenues.

South Central Region — Homebuilding revenues increased 32% in fiscal 2021 compared to fiscal 2020, primarily due to increases in the number of homes closed in our Houston, Dallas and Austin markets.

The region generated pre-tax income of $1.2 billion in 2021 compared to $714.9 million in 2020.

Home sales gross profit percentage increased by 260 basis points in 2021 compared to 2020, 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 70 basis points in 2021 compared to 2020, primarily due to the increase in homebuilding revenues.

Southeast Region — Homebuilding revenues increased 45% in fiscal 2021 compared to fiscal 2020, primarily due to increases in the number of homes closed in all of our markets.

The region generated pre-tax income of $841.0 million in 2020 compared to $584.7 million in 2019.

The region generated pre-tax income of $1.4 billion in 2021 compared to $709.5 million in 2020.

Home sales gross profit percentage increased by 390 basis points in 2021 compared to 2020, 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 100 basis points in 2021 compared to 2020, primarily due to the increase in homebuilding revenues.

South Central Region — Homebuilding revenues increased 19% in fiscal 2020 compared to fiscal 2019, primarily due to increases in the number of homes closed in our Houston, Dallas and San Antonio markets.

East Region — Homebuilding revenues increased 31% in fiscal 2021 compared to fiscal 2020, primarily due to increases in the average selling price of homes closed in all markets.

The region generated pre-tax income of $795.1 million in 2021 compared to $484.3 million in 2020.

Home sales gross profit percentage increased by 130 basis points in 2020 compared to 2019, primarily due to an increase in the average selling price of homes closed and a decrease in the average cost of those homes.

Home sales gross profit percentage increased by 290 basis points in 2021 compared to 2020, 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 70 basis points in 2021 compared to 2020, primarily due to the increase in homebuilding revenues.

Southwest Region — Homebuilding revenues increased 14% in fiscal 2020 compared to fiscal 2019, primarily due to increases in the average selling price of homes closed in all markets.

North Region — Homebuilding revenues increased 51% in fiscal 2021 compared to fiscal 2020, primarily due to increases in the number of homes closed in our Indianapolis and Delaware markets.

The region generated pre-tax income of $331.7 million in 2021 compared to $126.2 million in 2020.

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As a percentage of homebuilding revenues, SG&A expenses decreased by 110 basis points in 2021 compared to 2020, primarily due to the increase in homebuilding revenues.

West Region — Homebuilding revenues increased 5% in fiscal 2020 compared to fiscal 2019, due to increases in the number of homes closed in our Portland, Southern California, Las Vegas and Spokane markets, partially offset by decreases in the average selling price of homes closed in many markets.

2020 versus 2019

Northwest Region — Homebuilding revenues increased 13% in fiscal 2020 compared to fiscal 2019, primarily due to increases in the number of homes closed in our Denver and Portland markets.

The region generated pre-tax income of $264.5 million in 2020 compared to $222.9 million in 2019.

Home sales gross profit percentage decreased by 20 basis points in 2020 compared to 2019, primarily due to the average selling price of homes closed decreasing by more than the average cost of those homes.

As a percentage of homebuilding revenues, SG&A expenses decreased by 40 basis points in 2020 compared to 2019, primarily due to the increase in homebuilding revenues.

Southwest Region — Homebuilding revenues increased 6% in fiscal 2020 compared to fiscal 2019, primarily due to increases in the number of homes closed in most of our markets.

The region generated pre-tax income of $366.1 million in 2020 compared to $284.5 million in 2019.

Home sales gross profit percentage increased by 60 basis points in 2020 compared to 2019, primarily due to the average cost of homes closed decreasing by more than the average selling price.

The region also benefited from lower inventory and land option charges, which were $3.5 million in 2020 compared to $18.6 million in 2019.

As a percentage of homebuilding revenues, SG&A expenses decreased by 60 basis points in 2020 compared to 2019, primarily due to the increase in homebuilding revenues.

South Central Region — Homebuilding revenues increased 17% in fiscal 2020 compared to fiscal 2019, primarily due to increases in the number of homes closed in our Houston, Dallas and San Antonio markets.

The region generated pre-tax income of $714.9 million in 2020 compared to $527.6 million in 2019.

Home sales gross profit percentage increased by 140 basis points in 2020 compared to 2019, primarily due to an increase in the average selling price of homes closed while the average cost of those homes decreased.

As a percentage of homebuilding revenues, SG&A expenses decreased by 60 basis points in 2020 compared to 2019, primarily due to the increase in homebuilding revenues.

Southeast Region — Homebuilding revenues increased 21% in fiscal 2020 compared to fiscal 2019, primarily due to increases in the number of homes closed in all of our markets.

The region generated pre-tax income of $709.5 million in 2020 compared to $477.8 million in 2019.

Home sales gross profit percentage increased by 210 basis points in 2020 compared to 2019, primarily due to the average selling price of homes closed increasing by more than the average cost of those homes.

As a percentage of homebuilding revenues, SG&A expenses decreased by 50 basis points in 2020 compared to 2019, primarily due to the increase in homebuilding revenues.

East Region — Homebuilding revenues increased 11% in fiscal 2020 compared to fiscal 2019, primarily due to increases in the average selling price of homes closed in our Myrtle Beach, Knoxville and Charlotte markets.

The region generated pre-tax income of $484.3 million in 2020 compared to $361.9 million in 2019.

Home sales gross profit percentage increased by 210 basis points in 2020 compared to 2019, primarily due to an increase in the average selling price of homes closed while the average cost of those homes decreased.

As a percentage of homebuilding revenues, SG&A expenses decreased by 30 basis points in 2020 compared to 2019, primarily due to the increase in homebuilding revenues.

North Region — Homebuilding revenues increased 30% in fiscal 2020 compared to fiscal 2019, primarily due to increases in the number of homes closed in our Delaware, Iowa, Indianapolis and New Jersey markets.

The region generated pre-tax income of $126.2 million in 2020 compared to $36.0 million in 2019.

Home sales gross profit percentage increased by 380 basis points in 2020 compared to 2019, primarily due to an increase in the average selling price of homes closed while the average cost of those homes decreased.

As a percentage of homebuilding revenues, SG&A expenses decreased by 130 basis points in 2020 compared to 2019, primarily due to the increase in homebuilding revenues.

Homebuilding Inventories, Land and Lot Position and Homes in Inventory

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(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

Northwest $ 609.6 $ 685.4 $ — $ 12.5 $ 1,307.5

Southwest 1,113.5 1,315.8 6.9 9.4 2,445.6

West 1,137.3 847.1 5.7 19.0 2,009.1

South Central 1,977.4 1,501.5 0.4 — 3,479.3

Southeast 2,002.4 1,160.1 16.1 — 3,178.6

East 1,124.6 792.3 1.3 1.4 1,919.6

North 901.4 460.4 5.3 1.8 1,368.9

Corporate and unallocated (1)

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(In millions)

East $ 697.1 $ 581.2 $ 10.5 $ — $ 1,288.8

Midwest 473.9 361.1 1.8 — 836.8

Southeast 1,434.7 1,299.9 31.8 1.6 2,768.0

South Central 1,215.4 1,317.5 0.3 — 2,533.2

Northwest $ 573.3 $ 410.8 $ — $ 0.5 $ 984.6

Southwest 973.7 1,063.5 7.3 18.8 2,063.3

West 1,089.0 950.6 13.9 2.5 2,056.0

South Central 1,434.6 1,141.7 0.3 1.0 2,577.6

Southeast 1,445.9 1,170.7 31.7 0.6 2,648.9

East 917.5 615.6 0.9 6.2 1,540.2

North 570.6 398.5 7.0 0.8 976.9

Corporate and unallocated (1)

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

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

Our land and lot position and homes in inventory at September 30, 2021 and 2020 are summarized as follows:

September 30, 2021

Lots Controlled Under

Lots Controlled Through

Land and Lot Purchase

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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

Northwest 9,000 31,400 40,400 2,600

Southwest 22,800 34,300 57,100 5,500

West 17,300 27,500 44,800 4,600

South Central 42,800 79,000 121,800 14,000

Southeast 26,700 125,500 152,200 13,600

East 17,300 83,100 100,400 7,300

North 9,200 49,200 58,400 4,800

127,800 402,500 530,300 47,800

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September 30, 2020

Lots Controlled Under

Lots Controlled Through

Land and Lot Purchase

2 unchanged sentences

Inventory (4)

East 11,000 30,500 41,500 3,900

Midwest 8,300 10,900 19,200 2,200

Southeast 34,800 73,300 108,100 8,900

South Central 41,600 51,400 93,000 7,900

Northwest 5,000 21,300 26,300 2,500

Southwest 21,300 19,800 41,100 4,500

West 19,000 14,000 33,000 3,500

South Central 35,400 57,400 92,800 11,300

Southeast 29,100 84,700 113,800 10,200

East 12,200 54,800 67,000 6,400

North 9,600 26,300 35,900 3,100

112,600 264,300 376,900 38,000

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________________________

(1) Land/lots owned include approximately 33,800 and 36,100 owned lots that are fully developed and ready for home construction at September 30, 2020 and 2019, respectively.

Land/lots owned also include land held for development representing 1,600 and 1,700 lots at September 30, 2020 and 2019, respectively.

(2) The total remaining purchase price of lots controlled through land and lot purchase contracts at September 30, 2020 and 2019 was $9.9 billion and $7.2 billion, respectively, secured by earnest money deposits of $653.4 million and $515.4 million, respectively.

The total remaining purchase price of lots controlled through land and lot purchase contracts at September 30, 2020 and 2019 included $1.0 billion and $953.8 million, respectively, related to lot purchase contracts with Forestar, secured by $98.2 million and $88.7 million, respectively, of earnest money.

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

Of these, approximately 15,400 lots were in our Southeast region, 5,000 lots were in our South Central region, 4,200 lots were in our West region, 2,600 lots were in our East region, 2,000 lots were in our Southwest region and 1,200 lots were in our Midwest region.

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

Land/lots owned also included land held for development representing 1,300 and 1,600 lots at September 30, 2021 and 2020, respectively.

(2) The total remaining purchase price of lots controlled through land and lot purchase contracts at September 30, 2021 and 2020 was $15.5 billion and $9.9 billion, respectively, secured by earnest money deposits of $1.1 billion and $653.4 million, respectively.

The total remaining purchase price of lots controlled through land and lot purchase contracts at September 30, 2021 and 2020 included $1.6 billion and $1.0 billion, respectively, related to lot purchase contracts with Forestar, secured by $151.0 million and $98.2 million, respectively, of earnest money.

(3) Lots controlled at September 30, 2021 included approximately 39,200 lots owned or controlled by Forestar, 21,000 of which our homebuilding divisions have under contract to purchase and 18,200 of which our homebuilding divisions have a right of first offer to purchase.

Of these, approximately 17,800 lots were in our Southeast region, 6,500 lots were in our East region, 5,400 lots were in our Southwest region, 4,600 lots were in our South Central region, 3,400 lots were in our North region and 1,500 lots were in our Northwest 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.

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

Homes in inventory exclude approximately 1,800 and 1,900 model homes at September 30, 2020 and 2019, respectively.

Homes in inventory exclude approximately 1,800 model homes at both September 30, 2021 and 2020.

Results of Operations — Forestar

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

In fiscal 2018, we acquired 75% of the outstanding shares of Forestar and at September 30, 2021, we owned 63% of its outstanding shares.

Forestar is a publicly traded residential lot development company with operations in 56 markets across 23 states as of September 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 and purchase accounting adjustments.)

(See Note B to the accompanying financial statements for additional Forestar segment information.)

Results of operations for the Forestar segment for the fiscal years ended September 30, 2021 and 2020 were as follows:

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(In millions)

Residential land and lot sales $ 928.9 $ 407.5

Commercial tract sales 2.5 18.5

Other 0.4 2.3

Residential lot sales $ 1,293.1 $ 880.3

Tract sales and other 32.7 51.5

Total revenues 1,325.8 931.8

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Selling, general and administrative expense 68.4 45.7

Equity in earnings of unconsolidated entities (0.7) (0.5)

Gain on sale of assets (2.5) (0.1)

Loss on extinguishment of debt 18.1 —

Other (income) expense (1.4) (5.6)

Income before income taxes $ 146.6 $ 78.1

At September 30, 2020, Forestar owned directly or controlled through land and lot purchase contracts approximately 60,500 residential lots, of which approximately 5,000 are fully developed.

Approximately 30,400 of these lots are under contract to sell to D.R.

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

Approximately 400 of these lots are under contract to sell to other builders.

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

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Horton $ 1,206.5 $ 861.8

Residential tract acres sold to D.R.

Tract acres sold to D.R.

Horton 85 143

Residential land sales revenues from sales to D.R.

Tract sales revenues from sales to D.R.

Horton $ 25.9 $ 25.6

SG&A expense for fiscal 2020 and 2019 includes charges of $5.0 million and $2.1 million, respectively, related to the shared services agreement between Forestar and D.R.

SG&A expense for fiscal 2021 and 2020 included charges of $4.0 million and $5.0 million, respectively, related to the shared services agreement between Forestar and D.R.

Horton whereby D.R.

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

Loss on extinguishment of debt of $18.1 million in fiscal 2021 was due to Forestar’s redemption of its $350 million principal amount of 8.0% senior notes due 2024 in May 2021.

At September 30, 2021, Forestar owned directly or controlled through land and lot purchase contracts 97,000 residential lots, of which approximately 5,300 are fully developed.

Approximately 39,200 of these lots are under contract to sell to D.R.

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

Approximately 800 of these lots are under contract to sell to other builders.

Results of Operations — Financial Services

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(In millions)

Loan origination fees $ 3.0 $ 11.7 (74) %

Sale of servicing rights and gains from sale of mortgage loans 437.2 319.4 37 %

Other revenues 36.5 24.4 50 %

Loan origination and other fees $ 48.1 $ 39.5 22 %

Gains on sale of mortgage loans and mortgage servicing rights 619.1 437.2 42 %

Servicing income 3.6 — — %

Total mortgage operations revenues 670.8 476.7 41 %

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

In fiscal 2020, the volume of first-lien loans originated or brokered by DHI Mortgage for our homebuyers increased 35% from the prior year, due to an increase in the percentage of homes closed for which DHI Mortgage handled the homebuyers’ financing, as well a 15% increase in the number of homes closed by our homebuilding operations.

The percentage of homes closed for which DHI Mortgage handled the homebuyers’ financing was 68% in fiscal 2020 compared to 58% in the prior year.

The increase in this percentage was primarily due to the Company’s program to offer below market interest rates to D.R.

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

In fiscal 2021, the volume of first-lien loans originated or brokered by DHI Mortgage for our homebuyers increased 23% from the prior year due to a 25% increase in the number of homes closed by our homebuilding operations.

Homes closed by our homebuilding operations constituted 98% and 97% of DHI Mortgage loan originations in fiscal 2021 and 2020, respectively.

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

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

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

Servicing values have since improved, and we expect to sell these rights to third parties.

Financial Services Revenues and Expenses

Revenues from our mortgage operations increased 34% to $476.7 million in fiscal 2020 from $355.5 million in fiscal 2019, primarily due to a 36% increase in loan originations.

During the fourth quarter, due to better clarity related to the CARES Act, pricing and execution in the secondary market improved from the previous nine months ended June 30, 2020, which caused revenues in the fourth quarter to increase at a higher rate than origination volume.

Revenues from our mortgage operations increased 41% to $670.8 million in fiscal 2021 from $476.7 million in fiscal 2020, primarily due to a 22% increase in loan originations and higher net gains achieved on the sale of loan originations in the secondary market.

Revenues from our title operations increased 41% to $152.8 million in fiscal 2021 from $108.2 million in fiscal 2020, primarily due to a 30% increase in escrow closings.

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

Our financial services operations employed 2,163 and 1,924 employees at September 30, 2020 and 2019, respectively.

Our financial services operations employed 2,891 and 2,163 people at September 30, 2021 and 2020, respectively.

As a percentage of financial services revenues, G&A expense was 59.3% in fiscal 2021 compared to 62.4% in the prior year.

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

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

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

As a result of the revenue increases from higher volumes of mortgage originations and escrow closings, which also allowed us to better leverage our G&A expenses, pre-tax income from our financial services operations increased 47% to $245.2 million in fiscal 2020 from $166.3 million in fiscal 2019.

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 49% to $364.6 million in fiscal 2021 from $245.2 million in fiscal 2020.

Results of Operations — Rental

Our rental segment consists of multi-family and single-family rental operations.

The multi-family rental operations develop, construct, lease, own and ultimately sell the residential properties.

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

The single-family rental operations construct single-family rental homes with the intent to later market the community for a bulk sale of homes.

Multi-family and single-family rental property sales are recognized as revenues, and rental income is recognized as other income.

Results of operations for the rental segment for the fiscal years ended September 30, 2021 and 2020 were as follows:

Year Ended September 30,

(In millions)

Single-family rental $ 75.9 $ —

Multi-family rental 191.9 128.5

Total revenues 267.8 128.5

Cost of sales

Single-family rental 42.4 —

Multi-family rental 119.1 69.0

Total cost of sales 161.5 69.0

Selling, general and administrative expense 44.6 27.8

Other (income) expense (24.8) (8.1)

Income before income taxes $ 86.5 $ 39.8

During fiscal 2021, we sold three multi-family rental properties for $191.9 million (960 total units) compared to two properties (540 total units) in fiscal 2020 for $128.5 million.

During fiscal 2021, we sold three single-family rental properties (260 total homes) for $75.9 million.

There were no bulk sales of single-family rental properties in fiscal 2020.

At September 30, 2021, our rental property inventory of $840.9 million included $425.1 million of assets related to our multi-family rental operations and $415.8 million of assets related to our single-family rental operations.

At September 30, 2021, we had 15 multi-family rental properties under active construction and one community that was substantially complete and in the lease-up phase.

These 16 communities represent 4,690 multi-family units, including 4,340 units under active construction and 350 completed units.

At September 30, 2021, our single-family rental properties (55 total communities) included 2,650 homes and finished lots, of which 865 homes were completed.

At September 30, 2020, our rental property inventory of $316.0 million included $229.9 million of assets related to our multi-family rental operations and $86.1 million of assets related to our single-family rental operations.

At September 30, 2020, we had five multi-family rental properties under active construction and one community that was substantially complete and in the lease-up phase.

These six communities represent 1,730 multi-family units, including 1,430 units under active construction and 300 completed units.

At September 30, 2020, our single-family rental properties (10 total communities) included 740 homes and finished lots, of which 440 homes were completed.

Results of Operations — Other Businesses

The combined pre-tax income of all of our subsidiaries engaged in other business activities was $55.1 million in fiscal 2020 compared to $55.5 million in fiscal 2019.

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

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

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

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

During fiscal 2020 and 2019, DHI Communities sold multi-family rental properties for a total of $128.5 million and $133.4 million, respectively, and recorded gains on sale totaling $59.4 million and $51.9 million.

DHI Communities had five projects under active construction and one project that was substantially complete at September 30, 2020.

These six projects represent 1,730 multi-family units, including 1,430 units under active construction and 300 completed units.

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

We conduct insurance-related operations, own non-residential real estate including ranch land and improvements and own and operate energy related assets.

The pre-tax income of all of our subsidiaries engaged in other business activities was $32.7 million in fiscal 2021 compared to $14.8 million in fiscal 2020.

Results of Operations — Consolidated

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

In fiscal 2020, our homebuilding, financial services and other businesses generated pre-tax income of $2.7 billion, $245.2 million and $55.1 million, respectively, compared to pre-tax income of $1.9 billion, $166.3 million and $55.5 million, respectively, in fiscal 2019.

Our income tax expense was $602.5 million and $506.7 million in fiscal 2020 and 2019, respectively, and our effective tax rate was 20.2% and 23.8% in those years.

The effective tax rate for fiscal 2020 includes a tax benefit of $93.4 million from the enactment of the Taxpayer Certainty and Disaster Tax Relief Act of 2019 (the Act).

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

The effective tax rate for fiscal 2020 also includes a tax benefit of $11.2 million related to the release of a valuation allowance against our state deferred tax assets.

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

In fiscal 2021, our homebuilding, financial services, Forestar and rental businesses generated pre-tax income of $4.8 billion, $364.6 million, $146.6 million and $86.5 million, respectively, compared to $2.7 billion, $245.2 million, $78.1 million and $39.8 million, respectively, in fiscal 2020.

Our income tax expense was $1.2 billion and $602.5 million in fiscal 2021 and 2020, respectively, and our effective tax rate was 21.8% and 20.2% in those years.

The effective tax rates in fiscal 2021 and 2020 include an expense for state income taxes, tax benefits related to stock-based compensation and a reduction of 2.2% and 3.1%, respectively, for tax benefits related to the federal energy efficient homes tax credit.

Our effective tax rate for fiscal 2020 also includes a reduction of 0.4% for a tax benefit related to the release of a valuation allowance against our state deferred tax assets.

Our deferred tax assets, net of deferred tax liabilities, were $159.5 million at September 30, 2021 compared to $152.4 million at September 30, 2020.

We have a valuation allowance of $4.2 million and $7.5 million at September 30, 2021 and 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.

The decrease in the valuation allowance is primarily attributable to our determination that we will have sufficient future taxable income in certain state tax jurisdictions to realize a portion of our state NOL carryforwards.

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

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Horton has $10.3 million of tax benefits for state NOL carryforwards that expire at various times depending on the tax jurisdiction.

Of the total amount, $5.4 million of the tax benefits expire over the next ten years and the remaining $10.4 million expires from fiscal years 2031 to 2040.

Of the total amount, $2.9 million of the tax benefits expire over the next ten years and the remaining $7.4 million expire from fiscal years 2032 to 2041.

Forestar has $1.4 million of tax benefits for state NOL carryforwards that expire at various times depending on the tax jurisdiction.

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Unrecognized tax benefits are the differences between tax positions taken or expected to be taken in a tax return and the benefits recognized in our financial statements.

Our unrecognized tax benefits totaled $8.9 million at September 30, 2020 and were insignificant at September 30, 2019.

Our unrecognized tax benefits totaled $2.9 million and $8.9 million at September 30, 2021 and 2020, respectively.

Horton is subject to federal income tax and state income tax in multiple jurisdictions.

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Horton’s major tax jurisdictions remains open for examination for fiscal years 2018 through 2021.

Horton is not currently under audit for federal income tax, but is under audit by various states.

We are not aware of any significant findings by the state taxing authorities.

A federal refund claim related to the retroactive extension of energy efficient homes tax credits for fiscal year 2018 is currently under audit by the Internal Revenue Service.

Horton is under audit by various states, however, we are not aware of any significant findings by the state taxing authorities.

Forestar is subject to federal income tax and state income tax in multiple jurisdictions.

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

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

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

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

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

During fiscal 2021 and currently, we have and continue to increase 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 consider opportunistic strategic investments as they may arise.

We are also returning capital to our shareholders through dividend payments and repurchases of our common stock.

In the last two fiscal years, we have maintained 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 September 30, 2021, our ratio of debt to total capital (notes payable divided by stockholders’ equity plus notes payable) was 26.7% compared to 26.6% at September 30, 2020.

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

As of September 30, 2021, we had outstanding notes payable with varying maturities totaling an aggregate principal amount of $5.4 billion, with $1.9 billion payable within 12 months.

Future interest payments associated with the notes total $451.4 million, with $156.4 million payable within 12 months.

At September 30, 2021, we had outstanding letters of credit of $247.4 million and surety bonds of $2.3 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.

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

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

Horton has an automatically effective universal shelf registration statement filed with the SEC in July 2021, 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 September 30, 2020, $394.3 million remained available under Forestar’s shelf registration statement, $100 million of which is reserved for sales under its at-the-market equity offering program.

At September 30, 2021, $359.9 million remained available under Forestar’s shelf registration statement, of which $65.6 million was reserved for sales under its at-the-market equity offering program.

In October 2021, after the expiration of Forestar’s existing registration statement and at-the-market equity offering program, a new shelf registration statement became effective, registering $750 million of equity securities.

Forestar anticipates entering into a new at-the-market equity offering program under this new registration statement.

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, including the maturity of $400 million aggregate principal amount of our homebuilding senior notes in fiscal 2021.

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

Capital Resources - Homebuilding

Cash and Cash Equivalents — At September 30, 2021, cash and cash equivalents of our homebuilding segment totaled $3.0 billion.

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

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

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

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

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

Borrowings and repayments under the facility totaled $1.06 billion each during fiscal 2020.

At September 30, 2020, there were no borrowings outstanding and $142.9 million of letters of credit issued under the revolving credit facility, resulting in available capacity of approximately $1.45 billion.

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

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

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

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

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

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

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

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

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

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

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

At September 30, 2021, there were no borrowings outstanding and $187.1 million of letters of credit issued under the revolving credit facility, resulting in available capacity of $2.0 billion.

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

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

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

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

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

At September 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 $3.15 billion principal amount of homebuilding senior notes outstanding as of September 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 February 2020, we repaid $500 million principal amount of our 4.0% senior notes at maturity.

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

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

In August 2021, we issued $600 million principal amount of 1.3% senior notes due October 15, 2026, 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 1.5%.

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

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%.

Repurchases of Common Stock — During fiscal 2020, we repurchased 7.0 million shares of our common stock for $360.4 million.

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

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

Debt and Stock 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.

During fiscal 2021, we repurchased 10.4 million shares of our common stock for $874.0 million.

At September 30, 2021, the full amount of the debt repurchase authorization was remaining, and $546.2 million of the stock repurchase authorization was remaining.

These authorizations have no expiration date.

Capital Resources - Forestar

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

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

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

At September 30, 2021, Forestar’s ratio of debt to total capital (notes payable divided by stockholders’ equity plus notes payable) was 41.0% compared to 42.4% at September 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 35.2% compared to 22.1% at September 30, 2020.

Cash and Cash Equivalents — At September 30, 2021, Forestar had cash and cash equivalents of $153.6 million.

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

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.

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

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.

Borrowings and repayments under the facility totaled $58.0 million each during fiscal 2021.

At September 30, 2021, there were no borrowings outstanding and $60.3 million of letters of credit issued under the revolving credit facility, resulting in available capacity of $349.7 million.

The maturity date of the facility is October 2, 2022, which can be extended by up to one year on up to two additional occasions, subject to the approval of lenders holding a majority of the commitments.

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

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

The notes mature March 1, 2028, with interest payable semi-annually, and represent unsecured obligations of Forestar.

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

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

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

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

Unsecured Debt — As of September 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 upon redemption of the notes.

Forestar also has $300 million principal amount of 5.0% senior notes that mature March 1, 2028.

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

Forestar’s senior notes may be redeemed prior to maturity, subject to certain limitations and premiums defined in the indenture agreements.

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

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

The authorization has no expiration date.

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

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

Issuance of Common Stock — During fiscal 2021, Forestar issued 1.4 million shares of common stock under its at-the-market equity offering program for proceeds of $33.4 million, net of commissions and other issuance costs.

At September 30, 2021, $359.9 million remained available for issuance under Forestar’s shelf registration statement, of which $65.6 million was reserved for sales under its at-the-market equity offering program.

Forestar anticipates entering into a new at-the-market equity offering program under this new registration statement.

Capital Resources - Financial Services

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The total capacity of the facility is $1.4 billion;

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

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

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

however, the capacity automatically increases during certain higher volume periods and can be further increased through additional commitments.

The total capacity of the facility at September 30, 2021 was $1.8 billion, and its maturity date is February 18, 2022.

As of September 30, 2021, $1.9 billion of mortgage loans held for sale with a collateral value of $1.9 billion were pledged under the mortgage repurchase facility.

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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.

Capital Resources - Rental

Cash and Cash Equivalents — At September 30, 2021, cash and cash equivalents of our rental operations segment totaled $16.8 million.

During fiscal 2021, we substantially increased the investment in our rental operations.

The inventory in our rental segment totaled $840.9 million at September 30, 2021 compared to $316.0 million at September 30, 2020.

To date, we have funded our rental operations with capital from our homebuilding operations.

Our rental operations had no debt outstanding at September 30, 2021;

however, we are currently exploring debt financing with our banks to fund a portion of the expected future growth.

Over the longer term, as our rental operations continue to grow, we plan to evaluate additional capital sources to fund future growth opportunities.

Operating Cash Flow Activities

In fiscal 2020, net cash provided by operating activities was $1.4 billion compared to $892.1 million in fiscal 2019.

Cash provided by operating activities in the current year primarily consisted of $1.9 billion of cash provided by our homebuilding segment, partially offset by $292.8 million and $168.5 million of cash used in our financial services and Forestar segments, respectively.

Cash used to increase construction in progress and finished home inventory was $739.1 million in fiscal 2020 as our homes in inventory increased by approximately 10,300 homes at September 30, 2020 compared to September 30, 2019.

Cash provided from a decrease in construction in progress and finished home inventory was $84.6 million in fiscal 2019 as our homes in inventory at September 30, 2019 remained relatively flat compared to September 30, 2018.

Cash used to increase residential land and lots was $324.4 million in fiscal 2020 compared to $676.4 million in fiscal 2019.

In fiscal 2021, net cash provided by operating activities was $534.4 million compared to $1.4 billion in fiscal 2020.

Cash provided by operating activities in the current year consisted of $1.2 billion of cash provided by our homebuilding segment, which was partially offset by cash used in our Forestar, financial services and rental segments.

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 fiscal 2021 compared to $739.1 million in fiscal 2020.

In both years, 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 was $1.7 billion in fiscal 2021 compared to $324.4 million in fiscal 2020.

Of these amounts, $585.6 million and $281.5 million, respectively, related to Forestar.

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

During the six months ended September 30, 2021, we increased our single-family and multi-family rental properties by $303.6 million, which is reflected as cash used in operating activities.

Prior to the change in presentation of rental operations, as discussed in Note A to the accompanying financial statements, cash activities related to rental properties were presented as investing activities.

During the six month period ended March 31, 2021 and in fiscal 2020, expenditures related to rental properties were $173.9 million and $190.3 million, respectively, and are reflected as cash used in investing activities.

Investing Cash Flow Activities

In fiscal 2021, net cash used in investing activities was $252.2 million compared to $166.1 million in fiscal 2020.

In fiscal 2020, uses of cash included expenditures related to our rental properties totaling $190.3 million and purchases of property and equipment totaling $96.5 million, partially offset by proceeds from the sale of assets primarily consisting of $128.5 million related to the sale of two multi-family rental properties.

In fiscal 2019, the most significant uses of cash were the purchases of the homebuilding operations of Westport Homes, Classic Builders and Terramor Homes.

Proceeds from the sale of assets in fiscal 2019 included $133.4 million related to the sale of two multi-family rental properties.

In fiscal 2021, uses of cash included expenditures related to our rental operations totaling $173.9 million, purchases of property and equipment totaling $93.5 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 fiscal 2020, uses of cash included expenditures related to our rental operations totaling $190.3 million and purchases of property and equipment totaling $96.5 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.

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

In fiscal 2021, net cash used in financing activities was $85.1 million, consisting primarily of repayment of $400 million principal amount of our 2.55% homebuilding senior notes at maturity, Forestar’s early redemption of its $350 million principal amount of 8.0% senior notes, cash used to repurchase shares of our common stock of $848.4 million and payment of cash dividends totaling $289.3 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 $600 million principal amount of 1.3% homebuilding senior notes, Forestar’s issuance of $400 million principal amount of 3.85% senior notes and net advances of $362.0 million on our mortgage repurchase facility.

In fiscal 2020, net cash provided by financing activities was $270.6 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 $243.7 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% homebuilding senior notes at maturity, Forestar’s repayment of $118.9 million principal amount of its 3.75% convertible senior notes at maturity, cash used to repurchase 7.0 million shares of our common stock for $360.4 million and payment of cash dividends totaling $256.0 million.

In fiscal 2019, net cash used in financing activities was $490.1 million, consisting primarily of repayment of amounts drawn on our homebuilding and Forestar revolving credit facilities totaling $2.2 billion, repayment of $500 million principal amount of our 3.75% homebuilding senior notes at maturity, cash used to repurchase 11.9 million shares of our common stock for $479.8 million and payment of cash dividends totaling $223.4 million.

These uses of cash were partially offset by note proceeds of $2.2 billion from draws on our homebuilding and Forestar revolving credit facilities, Forestar’s issuance of $350 million principal amount of 8.0% senior notes, net advances of $251.2 million on our mortgage repurchase facility and proceeds of $100.7 million from Forestar’s issuance of common stock.

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% homebuilding 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 $256.0 million.

Our Board of Directors approved and paid quarterly cash dividends of $0.20 per common share in fiscal 2021 and $0.175 per common share in fiscal 2020.

In November 2020, our Board of Directors approved a quarterly cash dividend of $0.20 per common share, payable on December 14, 2020, to stockholders of record on December 4, 2020.

In October 2021, our Board of Directors approved a quarterly cash dividend of $0.225 per common share, payable on December 15, 2021, to stockholders of record on December 6, 2021.

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.

Our future cash requirements for contractual obligations as of September 30, 2020 are presented below.

Payments Due by Period

Total Less Than

1 Year 1 - 3 Years > 3 - 5 Years More Than

(In millions)

Notes Payable — Principal (1) $ 4,303.7 $ 1,599.1 $ 1,050.7 $ 853.1 $ 800.8

Notes Payable — Interest (1) 487.4 151.9 214.4 84.2 36.9

Operating Leases 39.5 17.4 16.8 5.2 0.1

Purchase Obligations (2) 32.6 30.2 2.4 — —

$ 4,863.2 $ 1,798.6 $ 1,284.3 $ 942.5 $ 837.8

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(1) Notes payable represents principal and interest payments due on our senior notes, our secured notes, our mortgage subsidiary’s repurchase facility and our homebuilding and Forestar revolving credit facilities.

Because the balances of our revolving credit facilities were zero at September 30, 2020, we did not assume any principal or interest payments related to these facilities in future periods.

The interest obligation associated with our mortgage repurchase facility is based on its annual effective rate of 2.4% and principal balance outstanding at September 30, 2020.

(2) Purchase obligations relate to a limited number of land and lot purchase contracts with $32.6 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, $1.4 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.

At September 30, 2020, we had outstanding letters of credit of $178.9 million and surety bonds of $1.8 billion, issued by third parties to secure performance under various contracts.

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 7A “Quantitative and Qualitative Disclosures About Market Risk” under Part II of this annual report on Form 10-K.

Supplemental Guarantor Financial Information

As of September 30, 2021, D.R.

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

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

had $3.15 billion principal amount of homebuilding senior notes outstanding due through October 2027 and no amounts outstanding on its homebuilding revolving credit facility.

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

(Guarantors or Guarantor Subsidiaries).

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

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

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

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

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

• such guarantee was incurred with fraudulent intent;

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

• was insolvent at the time of the guarantee;

• was rendered insolvent by reason of the guarantee;

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

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

(i) such guarantee was incurred with fraudulent intent;

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

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

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

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

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

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

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

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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.

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

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

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 pre-tax 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 for our homebuilding, lot development, financial services and rental 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.

We may be adversely affected during periods of high inflation, primarily because of higher financing, land, labor and material construction costs.

We attempt to offset cost increases in one component with savings in another, and we increase our sales prices and reduce customer sales incentives when housing market conditions permit.

However, during periods when housing market conditions are challenging, we may not be able to offset cost increases with higher selling prices.

In addition, higher mortgage interest rates reduce the affordability of our homes to prospective homebuyers.

Forward-Looking Statements

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

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

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

• the cyclical nature of the homebuilding, lot development and rental housing industries and changes in economic, real estate or 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;

• the risks associated with our land, lot and rental inventory;

• our ability to effect our growth strategies, acquisitions or investments successfully;

• the impact of an inflationary, deflationary or higher interest rate environment;

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

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

• the effects of weather conditions and natural disasters on our business and financial results;

• 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;

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

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

• competitive conditions within the industries in which we operate;

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

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• the effects of the loss of key personnel;

• actions by activist stockholders;

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

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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 Item 1A, “Risk Factors” under Part I of this annual report on Form 10-K.

Critical Accounting Policies

Critical Accounting Policies and Estimates

General — A comprehensive enumeration of the significant accounting policies of D.R.

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The Audit Committee of our Board of Directors has reviewed and approved the accounting policies selected.

We believe the following critical accounting policies describe the more significant judgments and estimates used in the preparation of our consolidated financial statements.

Revenue Recognition — We generally recognize homebuilding revenue and related profit at the time of the closing of a sale, when title to and possession of the property are transferred to the buyer.

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We either retain or refund to the homebuyer deposits on cancelled sales contracts, depending upon the applicable provisions of the contract or other circumstances.

We rarely purchase land for resale, but periodically may elect to sell parcels of land that no longer fit into our strategic operating plans.

Forestar’s land and lot sales revenue and related profit are generally recognized at the time of the closing of a sale, when title to and possession of the property are transferred to a third-party buyer.

Forestar’s revenues from land and lot sales to D.R.

Horton are eliminated in the consolidated financial statements.

We rarely purchase unimproved land for resale, but periodically may elect to sell parcels of land that no longer fit into our strategic operating plans.

Revenue from land sales is typically recognized on the closing date, which is generally when performance obligations are satisfied.

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Expected gains and losses from the sale of servicing rights are included in the measurement of all written loan commitments that are accounted for at fair value through revenues at the time of commitment.

We sell substantially all of the mortgages we originate and the majority of the related servicing rights to third-party purchasers.

We sell substantially all of the mortgages we originate and the related servicing rights to third-party purchasers.

Interest income is earned from the date a mortgage loan is originated until the loan is sold.

Mortgage loans are sold with limited recourse provisions, which can result in repurchases of loans previously sold to investors or payments to reimburse investors for loan losses.

Based on historical experience, discussions with our mortgage purchasers, analysis of the volume of mortgages we originated and current housing and credit market conditions, we estimate and record a loss reserve for mortgage loans held in portfolio and mortgage loans held for sale, as well as known and projected mortgage loan repurchase requests.

We collect insurance commissions on homeowner policies placed with third party carriers through our 100% owned insurance agency.

We recognize revenue and a contract asset for estimated future renewals of these policies upon issuance of the initial policy, the date at which the performance obligation is satisfied.

Inventories and Cost of Sales — Inventory includes the costs of direct land acquisition, land development and home construction, capitalized interest, real estate taxes and direct overhead costs incurred during development and home construction.

Costs that we incur after development projects or homes are substantially complete, such as utilities, maintenance, and cleaning, are charged to SG&A expense as incurred.

Based on historical experience, analysis of the volume of mortgages we originated, discussions with our mortgage purchasers and current housing and credit market conditions, we estimate and record a loss reserve for mortgage loans held in portfolio and mortgage loans held for sale, as well as known and projected mortgage loan repurchase requests.

Inventories and Cost of Sales — Inventory includes the costs of direct land acquisition, land development and construction, capitalized interest, real estate taxes and direct overhead costs incurred during development and construction.

Costs that we incur after projects or homes are substantially complete, such as utilities, maintenance, and cleaning, are charged to SG&A expense as incurred.

All indirect overhead costs, such as compensation of sales personnel, division and region management, and the costs of advertising and builder’s risk insurance are charged to SG&A expense as incurred.

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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.

We generally review our inventory for impairment indicators at the community level, and the inventory within each community is categorized as land held for development, residential land and lots developed and under development, land held for sale and construction in progress and finished homes, based on the stage of production or plans for future development or sale.

We generally review our inventory for impairment indicators at the community level, and the inventory within each community is categorized as land held for development, residential land and lots developed and under development, land held for sale, rental properties and construction in progress and finished homes, based on the stage of production or plans for future development or sale.

A particular community often includes inventory in more than one category.

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• projected gross margins based on community budgets;

• projected gross margins of rental property sales;

• trends in gross margins, average selling prices or cost of sales;

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When an impairment charge for a community is determined, the charge is then allocated to each lot in the community in the same manner as land and development costs are allocated to each lot.

Impairment charges are also recorded on finished homes in substantially completed communities when events or circumstances indicate that the carrying values are greater than the fair values less estimated costs to sell these homes.

Impairment charges are also recorded on finished homes in substantially completed communities and completed rental properties when events or circumstances indicate that the carrying values are greater than the fair values less estimated costs to sell these homes.

We rarely purchase land for resale.

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A 10% change in the historical warranty rates used to estimate our warranty accrual would not result in a material change in our accrual.

For additional information regarding our warranty liability, see Note L, “Commitments and Contingencies,” to our consolidated financial statements included elsewhere in this report.

Legal Claims and Insurance — We are named as a defendant in various claims, complaints and other legal actions in the ordinary course of business.

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At September 30, 2021 and 2020, we had reserves for approximately 380 and 260 pending construction defect claims, respectively, and no individual existing claim was material to our financial statements.

During fiscal 2020, we established reserves for approximately 175 new construction defect claims and resolved 95 construction defect claims for a total cost of $25.8 million.

During fiscal 2021, we were notified of approximately 235 new construction defect claims and resolved 115 construction defect claims for a total cost of $16.5 million.

We have closed a significant number of homes during recent years, and we may be subject to future construction defect claims on these homes.

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We estimate and record receivables under the applicable insurance policies related to our estimated contingencies for known claims and anticipated future construction defect claims on previously closed homes and other legal claims and lawsuits incurred in the ordinary course of business when recovery is probable.

However, because the self-insured retentions under these policies are significant, we anticipate we will largely be self-insured.

Additionally, we may have the ability to recover a portion of our losses from our subcontractors and their insurance carriers when we have been named as an additional insured on their insurance policies.

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A 10% decrease in the claim frequency and the average cost per claim would result in a decrease of approximately $91.8 million in our reserves and a $43.8 million decrease in our receivable, resulting in a reduction in expense of $48.0 million.

For additional information regarding our legal claims reserves, see Note L, “Commitments and Contingencies,” to our consolidated financial statements included elsewhere in this report.

Pending Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-13, “Financial Instruments - Credit Losses,” which replaces the current incurred loss impairment methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information in determining credit loss estimates.

The guidance is effective for us beginning October 1, 2020 and is not expected to have a material impact on our consolidated financial position, results of operations or cash flows.

In January 2017, the FASB issued ASU 2017-04, “Intangibles - Goodwill and Other,” which simplifies the measurement of goodwill impairment by removing the second step of the goodwill impairment test and requires the determination of the fair value of individual assets and liabilities of a reporting unit.

Under the new guidance, goodwill impairment is measured as the amount by which a reporting unit’s carrying amount exceeds its fair value with the loss recognized limited to the total amount of goodwill allocated to the reporting unit.

In December 2019, the Financial Accounting Standards Board (FASB) issued ASU 2019-12 related to simplifying the accounting for income taxes.

The guidance is effective for us beginning October 1, 2021 and is not expected to have a material impact on our consolidated financial position, results of operations or cash flows.

In December 2019, the FASB issued ASU 2019-12 related to simplifying the accounting for income taxes.

The guidance is effective for us beginning October 1, 2021, although early adoption is permitted.

We are currently evaluating the impact of this guidance, and it is not expected to have a material impact on our consolidated financial position, results of operations or cash flows.

In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform,” which provides optional expedients and exceptions for applying U.S.

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The guidance was effective beginning March 12, 2020 and can be applied prospectively through December 31, 2022.

We will adopt this standard when LIBOR is discontinued and do not expect it to have a material impact on our consolidated financial statements or related disclosures.

In January 2021, the FASB issued ASU 2021-01, “Reference Rate Reform - Scope,” which clarified the scope and application of the original guidance.

We will adopt these standards when LIBOR is discontinued and do not expect them to have a material impact on our consolidated financial statements or related disclosures.

In October 2021, the FASB issued ASU 2021-08, which requires application of ASC 606, “Revenue from Contracts with Customers,” to recognize and measure contract assets and liabilities from contracts with customers acquired in a business combination.

ASU 2021-08 creates an exception to the general recognition and measurement principle in ASC 805 and will result in recognition of contract assets and contract liabilities consistent with those recorded by the acquiree immediately before the acquisition date.

The guidance is effective for us beginning October 1, 2023 and interim periods therein, with early adoption permitted.

We are currently evaluating the impact of this guidance on our consolidated financial position, results of operations and cash flows.

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

What changed 10-K

Item 7. Management’s Discussion and Analysis