What changed in this filing

/stocks — the workspaceLOADING

Item 8. Financial Statements and Supplementary Data

2021-11-18 compared with 2020-11-20 · 284 added, 356 removed, 1039 unchanged (38% of the section changed)

11 unchanged sentences

Land held for sale 25.4 28.3

Rental properties 821.8 —

Total inventory 16,479.1 12,237.4

33 unchanged sentences

Selling, general and administrative expense 2,556.2 2,047.8 1,832.5

Equity in earnings of unconsolidated entities ( 0.7 ) ( 0.5 ) ( 2.8 )

Gain on sale of assets ( 14.0 ) ( 59.5 ) ( 53.9 )

Loss on extinguishment of debt 18.1 — —

Other (income) expense ( 41.6 ) ( 33.4 ) ( 31.9 )

22 unchanged sentences

$ 3.9 $ 3,085.0 $ 6,217.9 $ ( 322.4 ) $ 174.5 $ 9,158.9

Noncontrolling interest acquired — — — — 175.2 175.2

Cumulative effect of adoption of ASC 606 — — 27.1 — — 27.1

Net income — — 1,618.5 — 0.1 1,618.6

10 unchanged sentences

Distributions to noncontrolling interests — — — — ( 3.9 ) ( 3.9 )

Change of ownership interest in Forestar — ( 2.1 ) — — 103.5 101.4

Balances at September 30, 2019 ( 368,431,454 shares)

$ 3.9 $ 3,179.1 $ 7,640.1 $ ( 802.2 ) $ 274.2 $ 10,295.1

Cumulative effect of adoption of ASC 606

— — 27.1 — — 27.1

Net income — — 2,373.7 — 6.8 2,380.5

10 unchanged sentences

Distributions to noncontrolling interests — — — — ( 0.7 ) ( 0.7 )

— — — — ( 3.9 ) ( 3.9 )

Change of ownership interest in Forestar — ( 1.2 ) — — 1.2 —

— ( 2.1 ) — — 103.5 101.4

Balances at September 30, 2020 ( 363,999,982 shares)

12 unchanged sentences

Distributions to noncontrolling interests — — — — ( 0.1 ) ( 0.1 )

— — — — ( 0.7 ) ( 0.7 )

Change of ownership interest in Forestar — ( 1.7 ) — — 32.9 31.2

— ( 1.2 ) — — 1.2 —

Balances at September 30, 2021 ( 356,015,843 shares)

13 unchanged sentences

Equity in earnings of unconsolidated entities ( 1.0 ) ( 0.7 ) —

Distributions of earnings of unconsolidated entities — 0.5 2.0

Deferred income taxes ( 10.0 ) 14.1 20.1

1 unchanged sentence

Gain on sale of assets ( 14.0 ) ( 59.5 ) ( 53.9 )

Loss on extinguishment of debt 18.1 — —

Changes in operating assets and liabilities:

3 unchanged sentences

( 1,720.6 ) ( 324.4 ) ( 676.4 )

Increase in rental properties ( 303.6 ) — —

Increase in other assets ( 439.7 ) ( 150.7 ) ( 161.6 )

Net increase in mortgage loans held for sale ( 457.0 ) ( 275.6 ) ( 208.8 )

Increase in mortgage loans held for sale ( 498.3 ) ( 457.0 ) ( 275.6 )

Increase in accounts payable, accrued expenses and other liabilities 845.1 566.2 126.2

4 unchanged sentences

Expenditures related to rental properties ( 173.9 ) ( 190.3 ) ( 96.9 )

Return of investment in unconsolidated entities 4.3 4.4 17.5

Net principal increase of other mortgage loans and real estate owned ( 3.7 ) ( 2.3 ) ( 1.2 )

Proceeds from debt securities collateralized by residential real estate — — 7.3

Payments related to business acquisitions, net of cash acquired ( 24.5 ) ( 9.7 ) ( 315.8 )

Net cash (used in) provided by investing activities ( 166.1 ) ( 394.0 ) 19.0

Other investing activities 2.1 0.6 2.1

Net cash used in investing activities ( 252.2 ) ( 166.1 ) ( 394.0 )

FINANCING ACTIVITIES

6 unchanged sentences

Repurchases of common stock ( 848.4 ) ( 360.4 ) ( 479.8 )

( 360.4 ) ( 479.8 ) ( 127.5 )

Distributions to noncontrolling interests, net ( 0.1 ) ( 0.7 ) ( 3.9 )

( 0.7 ) ( 3.9 ) ( 3.2 )

Net proceeds from issuance of Forestar common stock 33.5 — 100.7

Other financing activities ( 2.3 ) ( 4.4 ) —

Net cash provided by (used in) financing activities 270.6 ( 490.1 ) ( 82.5 )

Net cash (used in) provided by financing activities ( 85.1 ) 270.6 ( 490.1 )

Net increase in cash, cash equivalents and restricted cash 197.1 1,526.1 8.0

11 unchanged sentences

Stock issued under employee incentive plans $ 124.7 $ 84.4 $ 49.6

Accrued expenditures for property and equipment $ 17.3 $ 14.1 $ 10.7

Accrual for holdback payment related to acquisition $ 1.1 $ 0.7 $ 10.1

Repurchase of common stock not settled $ 25.6 $ — $ —

See accompanying notes to consolidated financial statements.

7 unchanged sentences

Noncontrolling interests represent the proportionate equity interests in consolidated entities that are not 100% owned by the Company.

The Company owns a 65 % controlling interest in Forestar Group Inc.

As of September 30, 2021, the Company owns a 63 % controlling interest in Forestar Group Inc.

(Forestar) and therefore is required to consolidate 100% of Forestar within its consolidated financial statements, and the 37 % interest the Company does not own is accounted for as noncontrolling interests.

1 unchanged sentence

Reclassifications

Certain prior period amounts have been reclassified to conform to the current year presentation.

At the beginning of fiscal 2020, the Company reclassified its single-family rental properties from other assets to property and equipment in its homebuilding segment.

Reclassification of the prior period amount resulted in a $ 37.0 million decrease in other assets with a corresponding increase in property and equipment at September 30, 2019.

This reclassification had no effect on the Company’s consolidated financial position or results of operations.

During the third quarter of fiscal 2021, the Company changed the presentation of its single and multi-family rental operations in its consolidated financial statements.

Bulk sales of rental properties are now presented as revenues and cost of sales, rental assets previously recorded as property and equipment have been reclassified to inventory, and related cash flows for the single and multi-family rental operations are now included in operating activities.

Prior to the third quarter of fiscal 2021, bulk sales of rental properties were presented on a net basis as a gain on sale of assets, and the majority of the cash flow activities were included in investing activities.

This change in presentation was implemented as a result of the Company’s change in strategic focus during the third quarter of fiscal 2021, which included increased levels of rental property activity during that quarter and plans for future investment in the Company’s single and multi-family rental operations.

This presentation was effected on a prospective basis in the Company’s consolidated financial statements beginning in the third quarter of fiscal 2021.

Additionally, during the fourth quarter of fiscal 2021, the Company changed its internal organization and reporting of its operating segments and reportable segments to combine its single-family rental operations and its multi-family rental operations into a new reporting segment to reflect the method by which the chief operating decision makers manage the business, evaluate internal results and allocate financial resources.

The Company’s single-family rental operations had previously been reported in its homebuilding segment and its multi-family operations had previously been reported in its other segment.

Additionally, the Company realigned the aggregation of its homebuilding operating segments into six new reportable segments to better allocate its homebuilding operating segments across geographic reporting regions.

In the Company’s segment information in Note B and in Management’s Discussion and Analysis of Financial Condition and Results of Operations, the prior presentation has been conformed to the current presentation for all periods presented to be consistent with how management evaluates segment performance.

Use of Estimates

2 unchanged sentences

Actual results could differ materially from those estimates.

Adoption of New Accounting Standards

In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-02, “Leases,” which requires that lease assets and liabilities be recognized on the balance sheet and that key information about leasing arrangements be disclosed.

The guidance was effective for the Company beginning October 1, 2019 and did not have a material impact on its consolidated financial position, results of operations or cash flows.

As a result of the adoption of this standard on October 1, 2019, the Company recorded right of use assets of $ 39.0 million and lease liabilities of $ 40.3 million.

Lease right of use assets are included in other assets and lease liabilities are included in accrued expenses and other liabilities in the consolidated balance sheet.

In March 2020, the Securities and Exchange Commission (SEC) adopted amendments to the financial disclosure requirements applicable to registered debt offerings that include credit enhancements, such as subsidiary guarantees, in Rule 3-10 of Regulation S-X.

The amended rule focuses on providing material, relevant and decision-useful information regarding guarantees and other credit enhancements, while eliminating certain prescriptive requirements.

The Company adopted these amendments on March 31, 2020.

Accordingly, summarized financial information has been presented only for the issuers and guarantors of the Company's registered securities for the most recent fiscal year and as permitted, this information is included in Management’s Discussion and Analysis of Financial Condition and Results of Operations.

In October 2020, the FASB issued ASU 2020-09, “Debt (Topic 470) - Amendments to SEC Paragraphs Pursuant to SEC Release No.

33-10762,” to reflect the SEC’s new disclosure rules on guaranteed debt securities offerings adopted by the Company in March 2020.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Revenue Recognition

2 unchanged sentences

Proceeds from home closings held for the Company’s benefit at title companies are included in homebuilding cash and cash equivalents in the consolidated balance sheets.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

When the Company executes sales contracts with its homebuyers, or when it requires advance payment from homebuyers for custom changes, upgrades or options related to their homes, the cash deposits received are recorded as liabilities until the homes are closed or the contracts are cancelled.

The Company either retains or refunds to the homebuyer deposits on cancelled sales contracts, depending upon the applicable provisions of the contract or other circumstances.

The Company rarely purchases land for resale, but periodically may elect to sell parcels of land that no longer fit into its 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.

The Company rarely purchases unimproved land for resale, but periodically may elect to sell parcels of land that no longer fit into its strategic operating plans.

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

The Company’s rental operations develop, construct, lease, own and ultimately sell multi-family and single-family rental properties.

Revenue is recognized from the sale of these properties on the closing date, which is when performance obligations are satisfied.

Rental income from these properties is recognized as other income.

Financial services revenues associated with the Company’s title operations are recognized as closing services are rendered and title insurance policies are issued, both of which generally occur simultaneously as each home is closed.

2 unchanged sentences

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.

The Company sells substantially all of the mortgages it originates and the majority of the related servicing rights to third-party purchasers.

The Company sells substantially all of the mortgages it originates 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.

The Company collects insurance commissions on homeowner policies placed with third party carriers through its 100% owned insurance agency.

The Company recognizes 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.

Cash and Cash Equivalents

9 unchanged sentences

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 incurred after development projects or homes are substantially complete, such as utilities, maintenance, and cleaning, are charged to selling, general and administrative (SG&A) expense as incurred.

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 incurred after projects or homes are substantially complete, such as utilities, maintenance, and cleaning, are charged to selling, general and administrative (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.

4 unchanged sentences

Any changes to the estimated total development costs subsequent to the initial home or lot closings in a community are generally allocated on a pro-rata basis to the remaining homes or lots in the community associated with the relevant development activity.

Development and construction costs incurred related to the rental operations are recorded as rental property inventory.

Cost of sales related to the rental operations include the specific construction costs and all applicable land acquisition, land development and related costs for each rental project.

When a home is closed, the Company generally has not paid all incurred costs necessary to complete the home.

7 unchanged sentences

If so, impairment charges are recorded to cost of sales if the fair value of such assets is less than their carrying amounts.

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.

The key assumptions relating to inventory valuations are impacted by local market and economic conditions and are inherently uncertain.

11 unchanged sentences

Under the terms of many of the purchase contracts, the deposits are not refundable in the event the Company elects to terminate the contract.

Land purchase contract deposits and capitalized pre-acquisition costs are expensed to inventory and land option charges when the Company believes it is probable that it will not acquire the property under contract and will not be able to recover these costs through other means.

Land purchase contract deposits and capitalized pre-acquisition costs are expensed to cost of sales when the Company believes it is probable that it will not acquire the property under contract and will not be able to recover these costs through other means.

See Notes C and L.

1 unchanged sentence

Land purchase contracts can result in the creation of a variable interest in the entity holding the land parcel under contract.

There were no variable interest entities reported in the consolidated balance sheet at September 30, 2020 because, with regard to each entity, the Company determined it did not control the activities that most significantly impact the variable interest entity’s economic performance.

At September 30, 2019, there was one variable interest entity reported in the Company’s consolidated balance sheet as a result of the related party transaction described in Note O.

There were no variable interest entities reported in the consolidated balance sheets at September 30, 2021 or 2020 because, with regard to each entity, the Company determined it did not control the activities that most significantly impact the variable interest entity’s economic performance.

The maximum exposure to losses related to the Company’s unconsolidated variable interest entities is limited to the amounts of the Company’s related deposits.

3 unchanged sentences

Repairs and maintenance costs are expensed as incurred.

Property under construction is not depreciated until the property is placed in service.

Depreciation generally is recorded using the straight-line method over the estimated useful life of the asset.

The depreciable life of model home furniture is 2 years, depreciable lives of other furniture and equipment typically range from 2 to 5 years, and depreciable lives of buildings and improvements typically range from 5 to 30 years.

The depreciable lives of single-family rental homes and multi-family rental buildings typically range from 25 to 30 years.

Business Acquisitions

5 unchanged sentences

Unanticipated market or macroeconomic events and circumstances may occur, which could affect the accuracy or validity of the estimates and assumptions.

In October 2020, the Company 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.

AND SUBSIDIARIES

4 unchanged sentences

The estimated fair value is determined by discounting the future cash flows of the operating segment to present value.

If the carrying value of the operating segment exceeds its fair value, the Company determines if an impairment exists based on the implied fair value of the operating segment’s goodwill.

If the carrying value of the operating segment exceeds its fair value, the Company records a goodwill impairment by the amount that an operating segment’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill.

As a result of the qualitative assessments performed in fiscal 2021, 2020 and 2019, no impairment charges were indicated or recorded.

2 unchanged sentences

(In millions)

East $ 26.4 $ 26.4

Midwest 49.7 49.7

Southeast 40.1 40.1

South Central 15.9 15.9

Northwest $ 2.2 $ 2.2

Southwest — —

South Central 15.9 15.9

Southeast 6.0 6.0

East 60.5 60.5

North 49.7 49.7

Forestar 29.2 29.2

1 unchanged sentence

Warranty Claims

The Company typically provides its homebuyers with a ten-year limited warranty for major defects in structural elements such as framing components and foundation systems, a two-year limited warranty on major mechanical systems and a one-year limited warranty on other construction components.

The Company provides its homebuyers with a ten-year limited warranty for major defects in structural elements such as framing components and foundation systems, a two-year limited warranty on major mechanical systems and a one-year limited warranty on other construction components.

Since the Company subcontracts its construction work to subcontractors who typically provide it with an indemnity and a certificate of insurance prior to receiving payments for their work, claims relating to workmanship and materials are generally the primary responsibility of the subcontractors.

6 unchanged sentences

The Company estimates and records receivables under its applicable insurance policies for these legal claims when recovery is probable.

However, because the self-insured retentions under these policies are significant, the Company anticipates it will largely be self-insured.

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

16 unchanged sentences

Changes in the recognition or measurement of uncertain tax positions could result in increases or decreases in the Company’s income tax expense in the period in which the change is made.

The Company’s unrecognized tax benefits totaled $ 8.9 million at September 30, 2020 and were insignificant at September 30, 2019.

The Company’s unrecognized tax benefits totaled $ 2.9 million and $ 8.9 million at September 30, 2021 and 2020, respectively.

Earnings Per Share

17 unchanged sentences

Fair Value Measurements

The FASB’s authoritative guidance for fair value measurements establishes a three-level hierarchy based upon the inputs to the valuation model of an asset or liability.

The Financial Accounting Standards Board’s (FASB) authoritative guidance for fair value measurements establishes a three-level hierarchy based upon the inputs to the valuation model of an asset or liability.

When available, the Company uses quoted market prices in active markets to determine fair value.

The Company considers the principal market and nonperformance risk associated with the Company’s counterparties when determining the fair value measurements, if applicable.

Fair value measurements are used for the Company’s mortgage loans held for sale, debt securities collateralized by residential real estate, mortgage servicing rights, interest rate lock commitments and other derivative instruments on a recurring basis and are used for inventories, other mortgage loans and real estate owned on a nonrecurring basis, when events and circumstances indicate that the carrying value is not recoverable.

Fair value measurements are used for the Company’s mortgage loans held for sale, mortgage servicing rights, interest rate lock commitments and other derivative instruments on a recurring basis and are used for inventories, other mortgage loans, rental properties and real estate owned on a nonrecurring basis, when events and circumstances indicate that the carrying value is not recoverable.

Pending Accounting Standards

In June 2016, the FASB issued 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 the Company beginning October 1, 2020 and is not expected to have a material impact on its 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 that 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.

The guidance is effective for the Company beginning October 1, 2020 and is not expected to have a material impact on its 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 the Company beginning October 1, 2021, although early adoption is permitted.

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

The guidance is effective for the Company beginning October 1, 2021 and is not expected to have a material impact on its 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.

1 unchanged sentence

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

The Company will adopt this standard when LIBOR is discontinued and does not expect it to have a material impact on its 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.

The Company will adopt these standards when LIBOR is discontinued and does not expect them to have a material impact on its 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 the Company beginning October 1, 2023 and interim periods therein, with early adoption permitted.

The Company is currently evaluating the impact of this guidance on its consolidated financial position, results of operations and cash flows.

AND SUBSIDIARIES

1 unchanged sentence

NOTE B – SEGMENT INFORMATION

The Company’s operating segments are its 53 homebuilding divisions, its majority-owned Forestar residential lot development operations, its financial services operations and its other business activities.

The Company’s reporting segments are its homebuilding reporting segments, its Forestar lot development segment and its financial services segment.

The homebuilding operating segments are aggregated into the following six reporting segments:

East, Midwest, Southeast, South Central, Southwest and West.

These reporting segments 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

The Company’s operating segments are its 56 homebuilding divisions, its majority-owned Forestar residential lot development operations, its financial services operations, its rental operations and its other business activities.

The Company’s reporting segments are its homebuilding reporting segments, its Forestar lot development segment, its financial services segment and its rental operations segment.

During the fourth quarter of fiscal 2021, the Company changed its internal organization and reporting of its operating segments and reportable segments to combine its single-family rental operations and its multi-family rental operations into a new reporting segment to reflect the method by which the chief operating decision makers manage the business, evaluate internal results and allocate financial resources.

The Company’s single-family rental operations had previously been reported in its homebuilding segment and its multi-family rental operations had previously been reported in its other segment.

Segment information reported in prior year periods has been reclassified to conform to the 2021 presentation.

Based on the new aggregation described above, the six reporting segments and the states in which the Company has 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

Homebuilding is the Company’s core business, generating 97 % of consolidated revenues in fiscal 2020, 2019 and 2018.

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

Homebuilding is the Company’s core business, generating 96 % of consolidated revenues in fiscal 2021 and 97 % of consolidated revenues in fiscal 2020 and 2019.

The Company’s homebuilding divisions are primarily engaged in the acquisition and development of land and the construction and sale of residential homes, with operations in 98 markets across 31 states.

4 unchanged sentences

Forestar’s segment results are presented on their historical cost basis, consistent with the manner in which management evaluates segment performance.

Financial Services

The Company’s financial services segment provides mortgage financing and title agency services to homebuyers in many of the Company’s homebuilding markets.

The segment generates the substantial majority of its revenues from originating and selling mortgages and collecting fees for title insurance agency and closing services.

The Company sells substantially all of the mortgages it originates and the majority of the related servicing rights to third-party purchasers.

In addition to its homebuilding, Forestar and financial services operations, the Company has subsidiaries that engage in other business activities.

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

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

One of these subsidiaries, DHI Communities, constructs multi-family rental properties and 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.

During fiscal 2020 and 2019, DHI Communities sold two properties each year representing 540 and 820 multi-family rental units, respectively, for $ 128.5 million and $ 133.4 million, and recorded gains on sale totaling $ 59.4 million and $ 51.9 million.

At September 30, 2020 and 2019, the consolidated balance sheets included $ 246.2 million and $ 204.0 million, respectively, of assets related to DHI Communities.

The Company sells substantially all of the mortgages it originates and the related servicing rights to third-party purchasers.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The Company’s 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.

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

In addition to its homebuilding, Forestar, financial services and rental operations, the Company engages in other business activities through its subsidiaries.

The Company conducts insurance-related operations, owns non-residential real estate including ranch land and improvements and owns and operates energy related assets.

The results of these operations are immaterial for separate reporting and therefore are grouped together and presented as other within the Eliminations and Other column in the tables that follow.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The accounting policies of the reporting segments are described throughout Note A.

1 unchanged sentence

September 30, 2021

Homebuilding Forestar (1) Financial Services Other (2) Eliminations (3) Other Adjustments (4) Consolidated

Homebuilding Forestar (1) Financial Services Rental Eliminations and Other (2) Consolidated

(In millions)

11 unchanged sentences

25.4 — — — — 25.4

Rental properties — — — 840.9 ( 19.1 ) 821.8

13,907.8 1,905.2 — 840.9 ( 174.8 ) 16,479.1

16 unchanged sentences

(1) Amounts are presented on Forestar’s historical cost basis, consistent with the manner in which management evaluates segment performance.

All purchase accounting adjustments are included in the Other Adjustments column.

(2) Amounts represent the aggregate balances of certain subsidiaries that are immaterial for separate reporting.

(3) Amounts represent the elimination of intercompany transactions.

(4) Amounts represent purchase accounting adjustments related to the Forestar acquisition.

(2) Amounts include the balances of the Company’s other businesses, reconciling amounts between segment and consolidated balances, the elimination of intercompany transactions and, to a lesser extent, purchase accounting adjustments related to the Forestar acquisition.

AND SUBSIDIARIES

1 unchanged sentence

September 30, 2020

Homebuilding Forestar (1) Financial Services Other (2) Eliminations (3) Other Adjustments (4) Consolidated

Homebuilding Forestar (1) Financial Services Rental Eliminations and Other (2) Consolidated

(In millions)

2 unchanged sentences

Construction in progress and finished homes

6,037.5 — — — ( 53.4 ) 5,984.1

Residential land and lots — developed and under development

4,901.4 1,304.3 — — ( 33.9 ) 6,171.8

Land held for development

47.8 5.4 — — — 53.2

Land held for sale

28.3 — — — — 28.3

Rental properties — — — 316.0 ( 316.0 ) —

11,015.0 1,309.7 — 316.0 ( 403.3 ) 12,237.4

Mortgage loans held for sale — — 1,529.0 — — 1,529.0

10 unchanged sentences

(1) Amounts are presented on Forestar’s historical cost basis, consistent with the manner in which management evaluates segment performance.

All purchase accounting adjustments are included in the Other Adjustments column.

(2) Amounts represent the aggregate balances of certain subsidiaries that are immaterial for separate reporting.

(3) Amounts represent the elimination of intercompany transactions.

(4) Amounts represent purchase accounting adjustments related to the Forestar acquisition.

AND SUBSIDIARIES

1 unchanged sentence

Year Ended September 30, 2021

Homebuilding Forestar (1) Financial Services Other (2) Eliminations (3) Other Adjustments (4) Consolidated

Homebuilding Forestar (1) Financial Services Rental Eliminations and Other (2) Consolidated

(In millions)

2 unchanged sentences

75.0 1,325.8 — — ( 1,188.8 ) 212.0

Rental property sales — — — 267.8 ( 31.8 ) 236.0

Financial services

6 unchanged sentences

56.2 1,093.6 — — ( 1,030.5 ) 119.3

Rental property sales — — — 160.8 ( 17.8 ) 143.0

Inventory and land option charges

2 unchanged sentences

Selling, general and administrative expense 1,945.6 68.4 488.3 44.6 9.3 2,556.2

Equity in earnings of unconsolidated entities

— ( 0.7 ) — — — — ( 0.7 )

Gain on sale of assets

— ( 2.5 ) — — ( 11.5 ) ( 14.0 )

Loss on extinguishment of debt — 18.1 — — — 18.1

Other (income) expense ( 10.3 ) ( 1.4 ) ( 29.3 ) ( 24.8 ) 24.2 ( 41.6 )

7 unchanged sentences

(1) Results are presented on Forestar’s historical cost basis, consistent with the manner in which management evaluates segment performance.

All purchase accounting adjustments are included in the Other Adjustments column.

(2) Amounts represent the aggregate results of certain subsidiaries that are immaterial for separate reporting.

(3) Amounts represent the elimination of intercompany transactions.

(4) Amounts represent purchase accounting adjustments related to the Forestar acquisition.

(5) Amount in the Eliminations column represents the profit on lots sold from Forestar to the homebuilding segment.

(2) Amounts include the results of the Company’s other businesses, reconciling amounts between segment and consolidated balances, the elimination of intercompany transactions and, to a lesser extent, purchase accounting adjustments related to the Forestar acquisition.

(3) Amount in the Eliminations and Other column represents the recognition of profit on lots sold from Forestar to the homebuilding segment.

Intercompany profit is eliminated in the consolidated financial statements when Forestar sells lots to the homebuilding segment and is recognized in the consolidated financial statements when the homebuilding segment closes homes on the lots to homebuyers.

2 unchanged sentences

Year Ended September 30, 2020

Homebuilding Forestar (1) Financial Services Other (2) Eliminations (3) Other Adjustments (4) Consolidated

Homebuilding Forestar (1) Financial Services Rental Eliminations and Other (2) Consolidated

(In millions)

2 unchanged sentences

80.7 931.8 — — ( 847.1 ) 165.4

Rental property sales — — — 128.5 ( 128.5 ) —

Financial services

6 unchanged sentences

58.3 812.8 — — ( 768.9 ) 102.2

Rental property sales — — — 69.0 ( 69.0 ) —

Inventory and land option charges

2 unchanged sentences

Selling, general and administrative expense 1,600.7 45.7 364.7 27.8 8.9 2,047.8

Equity in earnings of unconsolidated entities

— ( 0.5 ) — — — — ( 0.5 )

Gain on sale of assets — ( 0.1 ) — — ( 59.4 ) ( 59.5 )

8 unchanged sentences

(1) Results are presented on Forestar’s historical cost basis, consistent with the manner in which management evaluates segment performance.

All purchase accounting adjustments are included in the Other Adjustments column.

(2) Amounts represent the aggregate results of certain subsidiaries that are immaterial for separate reporting.

(3) Amounts represent the elimination of intercompany transactions.

(4) Amounts represent purchase accounting adjustments related to the Forestar acquisition.

(5) Amount in the Eliminations column represents the profit on lots sold from Forestar to the homebuilding segment.

(3) Amount in the Eliminations and Other column represents the recognition of profit on lots sold from Forestar to the homebuilding segment.

2 unchanged sentences

Year Ended September 30, 2019

Homebuilding Forestar (1) Financial Services Other (2) Eliminations (3) Other Adjustments (4) Consolidated

Homebuilding Forestar (1) Financial Services Rental Eliminations and Other (2) Consolidated

(In millions)

2 unchanged sentences

91.9 428.3 — — ( 294.0 ) 226.2

Rental property sales — — — 133.4 ( 133.4 ) —

Financial services

6 unchanged sentences

75.1 361.9 — — ( 268.9 ) 168.1

Rental property sales — — — 81.8 ( 81.8 ) —

Inventory and land option charges

2 unchanged sentences

Selling, general and administrative expense 1,482.3 28.9 293.0 20.3 8.0 1,832.5

Equity in earnings of unconsolidated entities

— ( 12.4 ) — — 2.5 7.1 ( 2.8 )

Gain on sale of assets ( 2.0 ) ( 3.0 ) — — ( 48.9 ) ( 53.9 )

Interest expense — 5.8 — — ( 5.8 ) — —

Other (income) expense ( 9.5 ) ( 6.0 ) ( 17.6 ) ( 10.0 ) 11.2 ( 31.9 )

Income (loss) before income taxes $ 1,957.2 $ 48.7 $ 117.8 $ ( 7.7 ) $ ( 4.5 ) $ ( 51.5 ) $ 2,060.0

Income before income taxes $ 1,910.7 $ 45.7 $ 166.3 $ 41.3 $ ( 38.7 ) $ 2,125.3

Summary Cash Flow Information

4 unchanged sentences

_____________

(1) Results are presented from the date of acquisition and on Forestar’s historical cost basis, consistent with the manner in which management evaluates segment performance.

All purchase accounting adjustments are included in the Other Adjustments column.

(2) Amounts represent the aggregate results of certain subsidiaries that are immaterial for separate reporting.

(3) Amounts represent the elimination of intercompany transactions and the reclassification of Forestar interest expense to inventory.

(4) Amounts represent purchase accounting adjustments related to the Forestar acquisition.

(5) Amount in the Eliminations column represents the profit on lots sold from Forestar to the homebuilding segment.

(1) Results are presented on Forestar’s historical cost basis, consistent with the manner in which management evaluates segment performance.

(3) Amount in the Eliminations and Other column represents the recognition of profit on lots sold from Forestar to the homebuilding segment.

4 unchanged sentences

(In millions)

East $ 1,328.3 $ 1,288.8

Midwest 958.5 836.8

Southeast 2,919.9 2,768.0

South Central 2,879.9 2,533.2

Northwest $ 1,307.5 $ 984.6

Southwest 2,445.6 2,063.3

West 2,009.1 2,056.0

South Central 3,479.3 2,577.6

Southeast 3,178.6 2,648.9

East 1,919.6 1,540.2

North 1,368.9 976.9

Corporate and unallocated (2)

6 unchanged sentences

(In millions)

East $ 2,642.3 $ 2,290.2 $ 1,893.4

Midwest 1,429.0 1,123.1 858.9

Southeast 5,845.2 4,977.8 4,578.6

South Central 4,998.1 4,202.4 3,769.9

Northwest $ 2,516.6 $ 1,953.4 $ 1,721.5

Southwest 4,071.0 3,230.3 3,050.8

West 3,847.7 3,650.8 3,754.3

South Central 6,111.2 4,625.9 3,944.0

Southeast 7,079.6 4,871.5 4,023.5

East 4,459.0 3,410.1 3,081.2

North 2,340.2 1,550.3 1,195.9

$ 26,577.6 $ 19,641.5 $ 17,016.9

Inventory and Land Option Charges

East $ 1.8 $ 2.7 $ 2.3

Midwest 2.2 3.5 5.1

Southeast 7.8 10.7 28.8

South Central 6.7 11.6 4.6

Northwest $ 0.6 $ 1.3 $ 6.3

Southwest 3.0 3.5 18.6

West 4.3 24.2 7.1

South Central 5.3 6.4 11.2

Southeast 10.2 5.9 8.3

East 2.4 3.0 3.9

North 3.4 2.8 4.9

$ 24.9 $ 22.9 $ 53.2

Income Before Income Taxes (1)

East $ 357.0 $ 238.8 $ 217.3

Midwest 128.8 57.7 77.5

Southeast 841.0 584.7 536.0

South Central 758.0 551.1 506.1

Northwest $ 510.8 $ 264.5 $ 222.9

Southwest 653.1 366.1 284.5

West 443.3 378.0 522.9

South Central 1,150.2 714.9 527.6

Southeast 1,371.9 709.5 477.8

East 795.1 484.3 361.9

North 331.7 126.2 36.0

$ 4,812.8 $ 2,665.5 $ 1,910.7

________________________

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

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

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

3 unchanged sentences

At the end of each quarter, the Company reviews the performance and outlook for all of its communities and land inventories for indicators of potential impairment and performs detailed impairment evaluations and analyses when necessary.

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

Impairment charges during fiscal 2020, 2019 and 2018 were $ 1.7 million, $ 25.7 million and $ 11.8 million, respectively.

As of September 30, 2021, the Company 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 impairment charges recorded during fiscal 2021 compared to $ 1.7 million and $ 25.7 million of impairment charges recorded in fiscal 2020 and 2019, respectively.

During fiscal 2021, 2020 and 2019, earnest money and pre-acquisition cost write-offs related to land purchase contracts that the Company has terminated or expects to terminate were $ 23.0 million, $ 22.1 million and $ 28.3 million, respectively.

Total inventory and land option charges for fiscal 2018 also included a charge of $ 24.5 million related to the settlement of an outstanding dispute associated with a land transaction.

Inventory impairments and land option charges are included in cost of sales in the consolidated statements of operations.

13 unchanged sentences

1.3 % senior notes due 2026 (2)

1.4 % senior notes due 2027 (2)

Other secured notes (3)

1 unchanged sentence

Revolving credit facility — —

3.75 % convertible senior notes due 2020 (3)

8.0 % senior notes due 2024 (4)(5)

3.85 % senior notes due 2026 (5)

5.0 % senior notes due 2028 (5)

Other secured notes 12.5 —

Financial Services:

2 unchanged sentences

_____________

See footnotes on following page.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(1) The Company’s $375 million 364-day senior unsecured homebuilding revolving credit facility was not renewed upon its maturity in May 2021.

(2) Debt issuance costs that were deducted from the carrying amounts of the homebuilding senior notes totaled $ 16.5 million and $ 10.7 million at September 30, 2021 and 2020, respectively.

(2) Homebuilding other secured notes at September 30, 2020 excludes $ 4.8 million of earnest money notes payable due to Forestar.

(3) Homebuilding other secured notes excludes $ 0.7 million and $ 4.8 million of earnest money notes payable to Forestar at September 30, 2021 and 2020, respectively.

These intercompany notes are eliminated in consolidation.

(3) Forestar’s 3.75 % convertible senior notes due March 2020 included an unamortized fair value adjustment of $ 2.4 million at September 30, 2019.

(4) Forestar’s 8.0 % senior notes due April 2024 were redeemed in May 2021.

(5) Debt issuance costs that were deducted from the carrying amount of Forestar’s senior notes totaled $ 8.0 million and $ 8.9 million at September 30, 2021 and 2020, respectively.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

As of September 30, 2020, maturities of consolidated notes payable, assuming the mortgage repurchase facility is not extended or renewed, are $ 1.6 billion in fiscal 2021, $ 350.3 million in fiscal 2022, $ 700.4 million in fiscal 2023, $ 352.7 million in fiscal 2024, $ 500.4 million in fiscal 2025 and $ 800.8 million thereafter.

As of September 30, 2021, maturities of consolidated notes payable, assuming the mortgage repurchase facility is not extended or renewed, are $ 1.9 billion in fiscal 2022, $ 700.3 million in fiscal 2023, $ 13.7 million in fiscal 2024, $ 500.4 million in fiscal 2025, $ 900.4 million in fiscal 2026 and $ 1.4 billion thereafter.

Homebuilding:

The Company has 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.

In April 2021, the Company’s 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.

1 unchanged sentence

The interest rate on borrowings under the 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 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, the Company 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.

The Company’s homebuilding revolving credit facilities impose restrictions on its operations and activities, including requiring the maintenance of a maximum allowable leverage ratio and a borrowing base restriction if the 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 and the indentures governing the senior notes also impose restrictions on the creation of secured debt and liens.

At September 30, 2020, the Company was in compliance with all of the covenants, limitations and restrictions of its homebuilding revolving credit facilities and public debt obligations.

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

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.

The Company’s homebuilding revolving credit facility imposes restrictions on its operations and activities, including requiring the maintenance of a maximum allowable leverage ratio and a borrowing base restriction if the 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 and the indentures governing the senior notes also impose restrictions on the creation of secured debt and liens.

At September 30, 2021, the Company was in compliance with all of the covenants, limitations and restrictions of its homebuilding revolving credit facility and public debt obligations.

Horton has an automatically effective universal shelf registration statement filed with the SEC in July 2021, registering debt and equity securities that the Company may issue from time to time in amounts to be determined.

In October 2020, the Company 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, the Company repaid $ 500 million principal amount of its 4.0 % senior notes at maturity.

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

The annual effective interest rate of these notes after giving effect to the amortization of the discount and financing costs is 2.8 %.

In October 2020, the Company issued $ 500 million principal amount of 1.4 % senior notes due October 15, 2027 , with interest payable semi-annually.

In December 2020, the Company repaid $ 400 million principal amount of its 2.55 % senior notes at maturity.

In August 2021, the Company 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 %.

6 unchanged sentences

(In millions)

2.55% senior notes $ 400 December 2017 December 1, 2020 Yes 2.8 %

4.375% senior notes $ 350 September 2012 September 15, 2022 Yes 4.5 %

3 unchanged sentences

2.6% senior notes $ 500 May 2020 October 15, 2025 Yes 2.8 %

1.3% senior notes $ 600 August 2021 October 15, 2026 Yes 1.5 %

1.4% senior notes $ 500 October 2020 October 15, 2027 Yes 1.6 %

_____________

(1) The Company may redeem the notes in whole at any time or in part from time to time, at a redemption price equal to the greater of 100 % of their principal amount or the present value of the remaining scheduled payments discounted to the redemption date, plus accrued and unpaid interest.

In addition, the 4.375 % senior notes, 4.75 % senior notes and 5.75 % senior notes are redeemable at a redemption price of 100 % of their principal amount, plus accrued and unpaid interest, on or after the date that is three months prior to the final maturity date of the notes, and the 2.5 % senior notes and 2.6 % senior notes are redeemable at a redemption price of 100 % of their principal amount, plus accrued and unpaid interest, on or after the date that is one month prior to the final maturity date of the notes.

The 2.5 % senior notes, the 2.6 % senior notes and the 1.3 % senior notes are redeemable at a redemption price of 100 % of their principal amount, plus accrued and unpaid interest, on or after the date that is one month prior to the final maturity date of the notes.

The 1.4 % senior notes are redeemable at a redemption price of 100 % of their principal amount, plus accrued and unpaid interest, on or after the date that is two months prior to the final maturity of the notes.

(2) Interest is payable semi-annually on each of the series of senior notes.

The annual effective interest rate is calculated after giving effect to the amortization of debt issuance costs.

The annual effective interest rate is calculated after giving effect to the amortization of debt issuance costs and the discount, if applicable.

All series of homebuilding senior notes and borrowings under the homebuilding revolving credit facility are senior obligations and rank pari passu in right of payment to all existing and future unsecured indebtedness and senior to all existing and future indebtedness expressly subordinated to them.

5 unchanged sentences

All of the $ 500 million authorization was remaining at September 30, 2021.

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.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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.

1 unchanged sentence

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.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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

2 unchanged sentences

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 %.

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

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

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

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

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.

8 unchanged sentences

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.

As a result of advance paydowns totaling $ 362.4 million, DHI Mortgage had an obligation of $ 1.5 billion outstanding under the mortgage repurchase facility at September 30, 2021 at a 2.1 % annual interest rate.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The mortgage repurchase facility is not guaranteed by D.R.

3 unchanged sentences

At September 30, 2021, DHI Mortgage was in compliance with all of the conditions and covenants of the mortgage repurchase facility.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

NOTE E – CAPITALIZED INTEREST

9 unchanged sentences

_________________________

(1) Interest incurred included interest on the Company's mortgage repurchase facility of $ 19.1 million, $ 16.1 million and $ 12.1 million in fiscal 2020, 2019 and 2018, respectively.

(1) Interest incurred includes interest on the Company's mortgage repurchase facility of $ 17.0 million, $ 19.1 million and $ 16.1 million in fiscal 2021, 2020 and 2019, respectively.

Also included in interest incurred is Forestar interest of $ 41.6 million, $ 41.2 million and $ 19.4 million in fiscal 2021, 2020 and 2019, respectively.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

NOTE F – PROPERTY AND EQUIPMENT

6 unchanged sentences

Land 32.6 32.3

Single-family rental operations

Single-family rental properties (1)

Total single-family rental operations 87.2 6.4

Single-family rental properties — 68.1

Total single-family rental properties — 87.2

Accumulated depreciation ( 276.6 ) ( 256.2 )

1 unchanged sentence

Other Businesses

Multi-family rental operations

Multi-family rental properties (1)

Land 58.3 38.0

Total multi-family rental operations 232.1 154.1

Oil and gas related assets 69.7 56.9

Multi-family rental properties — 173.8

Total multi-family rental properties — 232.1

Energy related assets 79.0 69.7

Office furniture and equipment 15.9 15.6

4 unchanged sentences

Financial services, net 3.5 3.9

Rental, net 0.6 —

Eliminations — ( 3.0 )

Property and equipment, net $ 392.9 $ 683.7

__________________

(1) Single-family and multi-family rental property assets totaling $ 415.8 million and $ 425.1 million, respectively, are recorded as rental property inventory at September 30, 2021.

Depreciation expense was $ 73.3 million, $ 69.4 million and $ 66.1 million in fiscal 2021, 2020 and 2019, respectively.

4 unchanged sentences

Mortgage loans held for sale consist primarily of single-family residential loans collateralized by the underlying property.

The Company typically sells the servicing rights for the majority of loans when the loans are sold.

Servicing rights retained are typically sold within six months of loan origination.

At September 30, 2021, mortgage loans held for sale had an aggregate carrying value of $ 2.03 billion and an aggregate outstanding principal balance of $ 1.97 billion.

4 unchanged sentences

During fiscal 2021, approximately 52 % of the Company’s mortgage loans were sold directly to Fannie Mae or into securities backed by Ginnie Mae, and 41 % were sold to two other major financial entities.

In response to C-19, the U.S.

government has taken various actions to support the economy and the continued functioning of the financial markets.

On March 27, 2020, Congress passed the Coronavirus Aid, Relief, and Economic Security Act, which included changes to current forbearance options for government-backed loans designed to keep homeowners in their homes.

Due to the uncertainty surrounding these forbearance options, servicing values declined rapidly at the end of March.

As a result, the Company began retaining the servicing rights on a portion of its loan originations.

Servicing values have since improved, and the Company expects to sell these rights to third parties.

At September 30, 2020, the fair value of mortgage servicing rights was $ 17.1 million and is included in other assets in the consolidated balance sheet.

To manage the interest rate risk inherent in its mortgage operations, the Company hedges its risk using derivative instruments, generally forward sales of mortgage-backed securities (MBS), which are referred to as “hedging instruments” in the following discussion.

5 unchanged sentences

The net fair value change, which for the years ended September 30, 2021, 2020 and 2019 was not significant, is recognized in revenues in the consolidated statements of operations.

At September 30, 2020 and 2019, the Company’s mortgage loans held for sale that were not committed to third-party purchasers totaled $ 1.2 billion and $ 663.8 million, respectively.

At September 30, 2021 and 2020, the Company’s mortgage loans held for sale that were not committed to third-party purchasers totaled $ 1.3 billion and $ 1.2 billion, respectively.

The Company also uses hedging instruments as part of a program to offer below market interest rate financing to its homebuyers.

At September 30, 2020 and 2019, the Company had MBS totaling $ 1.1 billion and $ 111.4 million, respectively, that did not yet have interest rate lock commitments or closed loans created or assigned and recorded a liability of $ 5.3 million and $ 0.5 million for the fair value of such MBS position.

At September 30, 2021 and 2020, the Company had MBS totaling $ 834.6 million and $ 1.1 billion, respectively, that did not yet have interest rate lock commitments (IRLCs) or closed loans created or assigned and recorded an asset of $ 1.1 million at September 30, 2021 and a liability of $ 5.3 million at September 30, 2020 for the fair value of such MBS position.

Loan Commitments and Related Derivatives

The Company is party to interest rate lock commitments (IRLCs), which are extended to borrowers who have applied for loan funding and meet defined credit and underwriting criteria.

At September 30, 2020 and 2019, the notional amount of IRLCs, which are accounted for as derivative instruments recorded at fair value, totaled $ 1.8 billion and $ 727.9 million, respectively.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The Company is party to IRLCs, which are extended to borrowers who have applied for loan funding and meet defined credit and underwriting criteria.

At September 30, 2021 and 2020, the notional amount of IRLCs, which are accounted for as derivative instruments recorded at fair value, totaled $ 1.5 billion and $ 1.8 billion, respectively.

The Company manages interest rate risk related to its IRLCs through the use of best-efforts whole loan delivery commitments and hedging instruments.

These instruments are considered derivatives in an economic hedge and are accounted for at fair value with gains and losses recognized in revenues in the consolidated statements of operations.

At September 30, 2020 and 2019, the notional amount of best-efforts whole loan delivery commitments totaled $ 84.6 million and $ 25.2 million, respectively, and the notional amount of hedging instruments related to IRLCs not yet committed to purchasers totaled $ 1.6 billion and $ 636.2 million, respectively.

At September 30, 2021 and 2020, the notional amount of best-efforts whole loan delivery commitments totaled $ 88.8 million and $ 84.6 million, respectively, and the notional amount of hedging instruments related to IRLCs not yet committed to purchasers totaled $ 1.4 billion and $ 1.6 billion, respectively.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Other Mortgage Loans and Loss Reserves

6 unchanged sentences

The Company has recorded reserves for estimated losses on other mortgage loans, real estate owned and future loan repurchase obligations due to the limited recourse provisions, all of which are recorded as reductions of revenue.

The loss reserve for loan repurchase and settlement obligations is estimated based on analysis of the volume of mortgages originated, loan repurchase requests received, actual repurchases and losses through the disposition of such loans or requests and discussions with mortgage purchasers.

The loss reserve for loan repurchase and settlement obligations is estimated based on historical experience, analysis of the volume of mortgages originated, discussions with mortgage purchasers and current housing and credit market conditions, as well as known and projected mortgage loan repurchase requests.

The reserve balances at September 30, 2021 and 2020 totaled $ 5.1 million and $ 8.9 million, respectively.

Other mortgage loans and real estate owned net of the related loss reserves are included in other assets, while loan repurchase obligations are included in accrued expenses and other liabilities in the Company’s consolidated balance sheets.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

NOTE H – INCOME TAXES

13 unchanged sentences

Total income tax expense $ 1,165.1 $ 602.5 $ 506.7

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The Company’s effective tax rate was 21.8 %, 20.2 % and 23.8 % in fiscal 2021, 2020 and 2019, respectively.

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 the Company’s state deferred tax assets.

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

The effective tax rate for fiscal 2018 included the remeasurement of the Company’s deferred tax assets and liabilities as a result of the Tax Cuts and Jobs Act which, among other items, reduced the federal corporate tax rate from 35 % to 21 % and repealed the domestic production activities deduction effective for the Company beginning October 1, 2018.

For fiscal year companies, the change in law required an application of a blended tax rate in the year of change, which for the Company was 24.5 % for fiscal 2018.

The effective tax rate for fiscal 2018 also included a tax benefit related to the retroactive reinstatement of the federal energy efficient homes tax credit to homes closed through December 31, 2017 and the release of a valuation allowance against deferred tax assets related to Forestar.

The effective tax rates for all years include an expense for state income taxes and tax benefits related to stock-based compensation.

The effective tax rates for fiscal 2021 and 2020 include a reduction of 2.2 % and 3.1 %, respectively, for tax benefits related to the federal energy efficient homes tax credit.

The 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 the Company’s state deferred tax assets.

Reconciliation of Expected Income Tax Expense

Differences between income tax expense and tax computed by applying the federal statutory rate of 21 % in fiscal 2020 and 2019, and 24.5 % in fiscal 2018 to income before income taxes during each year is due to the following:

Differences between income tax expense and tax computed by applying the federal statutory rate of 21 % to income before income taxes during each year is due to the following:

Year Ended September 30,

4 unchanged sentences

State income taxes, net of federal benefit 166.9 79.1 69.1

Domestic production activities deduction — — ( 36.7 )

Valuation allowance ( 3.3 ) ( 11.2 ) ( 0.2 )

1 unchanged sentence

Excess tax benefit from stock-based compensation ( 38.4 ) ( 22.3 ) ( 16.1 )

Tax law change — — 108.7

Tax contingencies ( 6.0 ) 8.9 —

26 unchanged sentences

Horton has $ 10.3 million of tax benefits for state net operating loss (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.

4 unchanged sentences

The Company has 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 NOL carryforwards that are more likely than not to expire before being realized.

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

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

4 unchanged sentences

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

A reconciliation of the beginning and ending amounts of unrecognized tax benefits for fiscal 2020 is as follows.

A reconciliation of the beginning and ending amounts of unrecognized tax benefits for fiscal 2021 and 2020 is as follows:

Year Ended September 30,

12 unchanged sentences

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.

The Company is 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 2018 is currently under audit by the Internal Revenue Service.

Horton is under audit by various states, however, the Company is 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.

19 unchanged sentences

NOTE J – STOCKHOLDERS’ EQUITY

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

At September 30, 2021, the Company had 397,190,100 shares of common stock issued and 356,015,843 shares outstanding.

No shares of preferred stock were issued or outstanding.

Effective July 30, 2019, the Board of Directors authorized the repurchase of up to $ 1.0 billion of the Company’s common stock.

At September 30, 2021, Forestar had an effective shelf registration statement filed with the SEC in September 2018, registering $ 500 million of equity securities, of which $ 100 million was reserved for sales under its at-the-market equity offering program.

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.

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.

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

The authorization has no expiration date.

During fiscal 2021, the Company repurchased 10.4 million shares of its common stock for $ 874.0 million.

At September 30, 2020, the Company’s remaining stock repurchase authorization was $ 535.3 million.

At September 30, 2021, there was $ 546.2 million remaining on the repurchase authorization.

The 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, the 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.

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

As of September 30, 2020, $ 394.3 million remained available for issuance under Forestar’s shelf registration statement, $ 100 million of which is reserved for sales under its at-the-market equity offering program that became effective in August 2020.

As of September 30, 2020, no shares had been issued under the at-the-market equity offering program.

In October 2021, the 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.

AND SUBSIDIARIES

1 unchanged sentence

NOTE K – EMPLOYEE BENEFIT PLANS

The Company offers its employees a comprehensive compensation and benefits package, which includes a broad range of benefits, including medical, dental and vision healthcare insurance and paid parental leave.

In addition to base pay, eligible employees may participate in the Company’s 401(k) plan, employee stock purchase plan, short-term incentive bonus program and/or its stock compensation plans, as described below.

Deferred Compensation Plans

1 unchanged sentence

The Company matches portions of employees’ voluntary contributions.

Additional employer contributions in the form of profit sharing may also be made at the Company’s discretion.

The Company recorded $ 30.3 million, $ 23.4 million and $ 21.7 million of expense for matching contributions in fiscal 2021, 2020 and 2019, respectively.

19 unchanged sentences

Compensation expense related to these plans was $ 61.6 million, $ 34.3 million and $ 24.4 million in fiscal 2021, 2020 and 2019, respectively.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Stock-Based Compensation

2 unchanged sentences

At September 30, 2021, the Company had 11.9 million shares of common stock reserved for issuance and 7.0 million shares available for future grants under the Stock Incentive Plan.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Stock Options

Stock options are granted at exercise prices which equal the market value of the Company’s common stock at the date of the grant.

The options outstanding at September 30, 2020 are all exercisable and expire 10 years after the dates on which they were granted.

The Company did not grant stock options during fiscal 2020, 2019 or 2018.

The following table provides information related to stock option activity during those years.

Time-Based Restricted Stock Unit (RSU) Equity Awards

Time-based RSUs represent the contingent right to receive one share of the Company’s common stock if the vesting conditions are satisfied.

The time-based RSUs have no dividend or voting rights during the vesting period.

During fiscal 2021, 2020 and 2019, time-based RSUs were granted to the Company’s executive officers, other key employees and non-management directors (collectively, approximately 1,030 , 960 and 900 recipients, respectively).

These awards vest annually in equal installments over periods of three to five years .

The following table provides additional information related to time-based RSU activity during fiscal 2021, 2020 and 2019.

The number of restricted stock units vested includes shares of common stock withheld by the Company on behalf of employees to satisfy the tax withholding requirements.

Year Ended September 30,

2021 2020 2019

Stock Options Weighted Average

Exercise Price Stock Options Weighted Average

Exercise Price

Restricted Stock Units Weighted Average

Grant Date Fair Value Number of

Restricted Stock Units Weighted Average

Grant Date Fair Value Number of

Restricted Stock Units Weighted Average

Grant Date Fair Value

Outstanding at beginning of year 4,725,701 $ 34.79 4,889,534 $ 33.01 4,797,922 $ 31.77

Exercised ( 959,742 ) 18.58 ( 2,634,802 ) 14.47 ( 2,547,139 ) 16.10

Cancelled or expired — — ( 38,000 ) 18.98 ( 27,250 ) 22.08

Granted 856,615 83.13 1,657,935 35.98 1,796,200 33.75

Vested ( 1,644,263 ) 33.26 ( 1,651,840 ) 30.85 ( 1,430,826 ) 29.83

Cancelled ( 120,788 ) 39.16 ( 169,928 ) 33.24 ( 273,762 ) 32.82

Outstanding at end of year 3,817,265 $ 46.16 4,725,701 $ 34.79 4,889,534 $ 33.01

Exercisable at end of year 2,224,415 $ 19.94 3,184,157 $ 19.53 4,955,392 $ 17.07

The aggregate intrinsic value of options exercised during fiscal 2020, 2019 and 2018 was $ 41.2 million, $ 70.6 million and $ 76.8 million, respectively.

The intrinsic value of a stock option is the amount by which the market value of the underlying stock exceeds the option exercise price.

The aggregate intrinsic value of options outstanding and exercisable at September 30, 2020 was $ 123.9 million.

Exercise prices for options outstanding at September 30, 2020 ranged from $ 9.97 to $ 23.86 .

The weighted average remaining contractual lives of options outstanding and exercisable at September 30, 2020 is 2.4 years.

During fiscal 2020, there was no compensation expense related to stock options as all stock option awards were fully vested at September 30, 2019.

For fiscal 2019 and 2018, compensation expense related to stock options was $ 1.0 million and $ 6.9 million, respectively.

The total fair value of shares vested on the vesting date during fiscal 2021, 2020 and 2019 was $ 131.3 million, $ 95.6 million and $ 56.9 million, respectively.

For fiscal 2021, 2020 and 2019, compensation expense related to time-based RSUs was $ 56.5 million, $ 50.6 million and $ 51.8 million, respectively.

At September 30, 2021, there was $ 130.3 million of unrecognized compensation expense related to unvested time-based RSU awards.

This expense is expected to be recognized over a weighted average period of 2.6 years.

Performance-Based Restricted Stock Unit (RSU) Equity Awards

16 unchanged sentences

$ 29.8 $ 16.0 $ 6.1

In November 2020, the Compensation Committee approved the payout of the performance-based RSUs that vested in September 2020 in the form of 577,500 shares of common stock to satisfy the awards.

Time-Based Restricted Stock Unit (RSU) Equity Awards

Time-based RSUs represent the contingent right to receive one share of the Company’s common stock if the vesting conditions are satisfied.

The time-based RSUs have no dividend or voting rights during the vesting period.

During fiscal 2020, 2019 and 2018, time-based RSUs were granted to the Company’s executive officers, other key employees and non-management directors (collectively, approximately 960 , 900 and 920 recipients, respectively).

These awards vest annually in equal installments over periods of three to five years .

The following table provides additional information related to time-based RSU activity during fiscal 2020, 2019 and 2018.

The number of restricted stock units vested in fiscal 2020 and 2019 includes shares of common stock withheld by the Company on behalf of employees to satisfy the tax withholding requirements.

In October 2021, the Compensation Committee approved the issuance of the performance-based RSUs that vested in September 2021 in the form of 630,000 shares of common stock to satisfy the awards.

Stock Options

Stock options are granted at exercise prices which equal the market value of the Company’s common stock at the date of the grant.

The options outstanding at September 30, 2021 are all exercisable and expire 10 years after the dates on which they were granted.

The Company did not grant stock options during fiscal 2021, 2020 or 2019.

The following table provides information related to stock option activity during those years.

Year Ended September 30,

2021 2020 2019

Restricted Stock Units Weighted Average

Grant Date Fair Value Number of

Restricted Stock Units Weighted Average

Grant Date Fair Value Number of

Restricted Stock Units Weighted Average

Grant Date Fair Value

Stock Options Weighted Average

Exercise Price Stock Options Weighted Average

Exercise Price

Outstanding at beginning of year 2,224,415 $ 19.94 3,184,157 $ 19.53 5,856,959 $ 17.25

Granted 1,657,935 35.98 1,796,200 33.75 1,747,870 41.82

Vested ( 1,651,840 ) 30.85 ( 1,430,826 ) 29.83 ( 1,149,055 ) 25.80

Cancelled ( 169,928 ) 33.24 ( 273,762 ) 32.82 ( 166,675 ) 29.56

Exercised ( 1,108,639 ) 16.02 ( 959,742 ) 18.58 ( 2,634,802 ) 14.47

Cancelled or expired — — — — ( 38,000 ) 18.98

Outstanding at end of year 1,115,776 $ 23.84 2,224,415 $ 19.94 3,184,157 $ 19.53

The total fair value of shares vested on the vesting date during fiscal 2020, 2019 and 2018 was $ 95.6 million, $ 56.9 million and $ 51.0 million, respectively.

For fiscal 2020, 2019 and 2018, compensation expense related to time-based RSUs was $ 50.6 million, $ 51.8 million and $ 39.3 million, respectively.

At September 30, 2020, there was $ 120.6 million of unrecognized compensation expense related to unvested time-based RSU awards.

This expense is expected to be recognized over a weighted average period of 2.7 years.

Exercisable at end of year 1,115,776 $ 23.84 2,224,415 $ 19.94 3,184,157 $ 19.53

The aggregate intrinsic value of options exercised during fiscal 2021, 2020 and 2019 was $ 82.5 million, $ 41.2 million and $ 70.6 million, respectively.

The intrinsic value of a stock option is the amount by which the market value of the underlying stock exceeds the option exercise price.

The aggregate intrinsic value of options outstanding and exercisable at September 30, 2021 was $ 67.1 million.

Exercise prices for options outstanding at September 30, 2021 ranged from $ 23.57 to $ 23.86 .

The weighted average remaining contractual lives of options outstanding and exercisable at September 30, 2021 is 2.1 years.

AND SUBSIDIARIES

15 unchanged sentences

Warranty liability, end of year $ 376.3 $ 310.2

The change in liabilities for pre-existing warranties was $ 25.5 million and $ 32.0 million in fiscal 2020 and 2019, respectively.

These amounts reflect the Company’s ongoing efforts to improve its customer service and relations, which in many cases results in the performance of warranty service after the original warranty period has expired.

The Company has increased the amount of its warranties issued as a percentage of home cost of sales to reflect this increase in warranty costs.

Legal Claims and Insurance

25 unchanged sentences

Reserves for legal claims, end of year $ 577.5 $ 473.8

In the majority of states in which it operates, the Company has, and requires the majority of the subcontractors it uses to have, general liability insurance which includes construction defect coverage.

In the majority of states in which it operates, the Company generally has, and requires the majority of the subcontractors it uses to have, general liability insurance which includes construction defect coverage.

The Company’s general liability insurance policies protect it against a portion of its risk of loss from construction defect and other claims and lawsuits.

1 unchanged sentence

However, because the self-insured retentions under these policies are significant, the Company anticipates it will largely be self-insured.

The Company’s estimated insurance receivables from estimated losses for pending legal claims and anticipated future claims relate to previously closed homes over the last 15 years.

These receivables totaled $ 81.2 million and $ 75.1 million at September 30, 2020 and 2019, respectively, and are included in other assets in the consolidated balance sheets.

The Company’s estimated insurance receivables from estimated losses for pending legal claims and anticipated future claims related to previously closed homes totaled $ 109.5 million and $ 81.2 million at September 30, 2021 and 2020, respectively, and are included in other assets in the consolidated balance sheets.

1 unchanged sentence

In these states, the Company purchases insurance policies from either third-party carriers or its 100% owned captive insurance subsidiary and names certain subcontractors as additional insureds.

The policies issued by the captive insurance subsidiary represent self-insurance of these risks by the Company.

The policies issued by the captive insurance subsidiary and the policies issued on or after June 1, 2020 by third-party carriers essentially represent self-insurance of these risks by the Company.

The Company is self-insured for the deductible amounts under its workers’ compensation insurance policies.

7 unchanged sentences

The Company enters into land and lot purchase contracts to acquire land or lots for the construction of homes.

At September 30, 2020, the Company’s homebuilding segment had total deposits of $ 653.4 million, consisting of cash deposits of $ 584.5 million and promissory notes and surety bonds of $ 68.9 million, related to contracts to purchase land and lots with a total remaining purchase price of approximately $ 9.9 billion.

At September 30, 2021, the Company had total deposits of $ 1.1 billion, consisting of cash deposits of $ 989.3 million and promissory notes and surety bonds of $ 79.8 million, related to contracts to purchase land and lots with a total remaining purchase price of approximately $ 15.5 billion.

The majority of land and lots under contract are currently expected to be purchased within three years.

13 unchanged sentences

Fiscal 2026 1.2

Thereafter 0.1

Rent expense was $ 31.7 million, $ 31.5 million and $ 30.5 million for fiscal 2021, 2020 and 2019, respectively.

9 unchanged sentences

Prepaid assets 51.6 46.0

Interest rate lock commitments 31.3 19.2

Margin deposits 16.2 19.6

Multi-family rental property held for sale — 28.9

Contract assets - insurance agency commissions 58.6 47.1

Lease right of use assets 35.6 34.7

Interest rate lock commitments 17.9 31.3

Margin deposits 0.9 16.2

Mortgage servicing rights 4.1 17.1

Mortgage hedging instruments and commitments 8.7 5.3

Other 40.3 34.6

6 unchanged sentences

Warranty liability 376.3 310.2

Mortgage hedging instruments and loan commitments 16.5 —

Accrued interest 35.3 26.3

Federal and state income tax liabilities 42.6 33.4

Inventory related accruals 59.7 61.5

Customer deposits 193.4 93.1

Inventory related accruals 261.2 93.9

Federal and state income tax liabilities 88.2 42.6

Accrued property taxes 51.0 44.1

Lease liabilities 37.0 37.0

Accrued interest 31.5 35.3

Mortgage hedging instruments and commitments 1.7 16.5

Other 100.4 84.4

3 unchanged sentences

NOTE N – FAIR VALUE MEASUREMENTS

Fair value measurements are used for the Company’s mortgage loans held for sale, debt securities collateralized by residential real estate, mortgage servicing rights, IRLCs and other derivative instruments on a recurring basis and are used for inventories, other mortgage loans, rental properties and real estate owned on a nonrecurring basis, when events and circumstances indicate that the carrying value is not recoverable.

Fair value measurements are used for the Company’s mortgage loans held for sale, mortgage servicing rights, IRLCs and other derivative instruments on a recurring basis and are used for inventories, other mortgage loans, rental properties and real estate owned on a nonrecurring basis, when events and circumstances indicate that the carrying value is not recoverable.

The fair value hierarchy and its application to the Company’s assets and liabilities is as follows:

21 unchanged sentences

• Level 3 – Valuation is typically derived from model-based techniques in which at least one significant input is unobservable and based on the Company’s own estimates about the assumptions that market participants would use to value the asset or liability.

The Company’s assets measured at fair value using Level 3 inputs on a recurring basis are its debt securities collateralized by residential real estate, mortgage servicing rights and a limited number of mortgage loans held for sale with some degree of impairment affecting their marketability and for which reference to quoted prices in the secondary markets is not available.

The Company’s assets measured at fair value using Level 3 inputs on a recurring basis are its mortgage servicing rights and a limited number of mortgage loans held for sale with some degree of impairment affecting their marketability and for which reference to quoted prices in the secondary markets is not available.

The Company’s assets measured at fair value using Level 3 inputs that are typically reported at the lower of carrying value or fair value on a nonrecurring basis are as follows:

◦ Inventory held and used - In determining the fair values of its inventory held and used in its impairment evaluations, the Company performs an analysis of the undiscounted cash flows estimated to be generated by those assets.

◦ Inventory held and used - In assessing impairment indicators of of its inventory held and used, the Company performs an analysis of the undiscounted cash flows estimated to be generated by those assets.

The most significant factors used to estimate undiscounted future cash flows include pricing and incentive levels actually realized by the community, the rate at which the homes are sold and the costs incurred to develop the lots and construct the homes.

13 unchanged sentences

(In millions)

Debt securities collateralized by residential real estate Other assets $ — $ — $ 3.9 $ 3.9

Mortgage loans held for sale (1) Mortgage loans held for sale $ — $ 2,009.4 $ 11.7 $ 2,021.1

2 unchanged sentences

Interest rate lock commitments (4) Other assets — 17.2 — 17.2

Forward sales of mortgage-backed securities Other liabilities — ( 16.2 ) — ( 16.2 )

Forward sales of mortgage-backed securities Other assets — 8.5 — 8.5

Fair Value at September 30, 2020

3 unchanged sentences

Mortgage loans held for sale (1) Mortgage loans held for sale — 1,503.2 15.1 1,518.3

Mortgage servicing rights (2) Other assets — — 17.1 17.1

Derivatives not designated as hedging instruments (3):

1 unchanged sentence

Forward sales of mortgage-backed securities Other liabilities — ( 16.2 ) — ( 16.2 )

Best-efforts and mandatory commitments Other liabilities — ( 1.0 ) — ( 1.0 )

Level 3 Assets at Fair Value for the Year Ended September 30, 2021

15 unchanged sentences

9.8 0.2 — ( 2.6 ) — 7.7 15.1

Mortgage servicing rights (2) — 1.9 15.2 — — — 17.1

___________________________________________

2 unchanged sentences

Mortgage loans held for sale valued using Level 3 inputs at September 30, 2021 and 2020 include $ 11.7 million and $ 15.1 million, respectively, of loans for which the Company elected the fair value option upon origination and did not sell into the secondary market.

Mortgage loans held for sale totaling $ 7.7 million and $ 6.5 million were transferred to Level 3 during fiscal 2020 and 2019, respectively, due to significant unobservable inputs used in determining the fair value of these loans.

Mortgage loans held for sale totaling $ 7.7 million were transferred to Level 3 during fiscal 2020 due to significant unobservable inputs used in determining the fair value of these loans.

The fair value of these mortgage loans held for sale is generally calculated considering pricing in the secondary market and adjusted for the value of the underlying collateral, including interest rate risk, liquidity risk and prepayment risk.

The Company plans to sell these loans as market conditions permit.

Mortgage loans totaling $ 0.4 million were transferred to Level 2 during fiscal 2021 because their fair value was based on actual quoted prices related to the pending sale of those loans in the secondary market.

(2) Although the majority of the Company’s mortgage loans are sold on a servicing-released basis, when the servicing rights are retained, the Company records them at fair value using third-party valuations.

1 unchanged sentence

The key assumptions used in the valuation, which are generally unobservable inputs, are mortgage prepayment rates, discount rates and delinquency rates, which were 11 %, 11 % and 6 %, respectively, at September 30, 2021.

(3) Fair value measurements of these derivatives represent changes in fair value, as calculated by reference to quoted prices for similar assets, and are reflected in the balance sheet as other assets or accrued expenses and other liabilities.

Changes in the fair value of these derivatives are included in revenues in the consolidated statements of operations.

The net fair value change in fiscal 2020 and 2019 was not significant.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Changes in the fair value of these derivatives are included in revenues in the consolidated statements of operations.

The net fair value change in fiscal 2021 and 2020 recognized in revenues in the consolidated statements of operations was not significant.

(4) The fair value of interest rate lock commitments at September 30, 2021 reflects $ 17.9 million of servicing release premiums in other assets and a change in fair value of $ 0.7 million in other liabilities.

The following table summarizes the Company’s assets measured at fair value on a nonrecurring basis at September 30, 2021 and 2020.

3 unchanged sentences

(In millions)

Inventory held and used (1) (2)

Inventories $ — $ — $ — $ 4.5

Mortgage loans held for sale (1) (2)

4 unchanged sentences

(1) The fair values included in the table above represent only those assets whose carrying values were adjusted to fair value as a result of impairment in the respective period and were held at the end of the period.

(2) In performing its impairment analysis of communities, discount rates ranging from 16 % to 18 % were used in the periods presented.

(2) These mortgage loans have some degree of impairment affecting their marketability and are valued at the lower of carrying value or fair value.

1 unchanged sentence

otherwise, a cash flow valuation model is used to determine fair value (Level 3).

(4) The fair values of other mortgage loans was determined based on the value of the underlying collateral .

(3) The fair values of other mortgage loans were determined based on the value of the underlying collateral .

For the financial assets and liabilities that the Company does not reflect at fair value, the following tables present both their respective carrying value and fair value at September 30, 2021 and 2020.

20 unchanged sentences

(2) The fair value of the senior notes is determined based on quoted prices, which is classified as Level 2 within the fair value hierarchy.

(3) The fair values of other secured notes and borrowings on the revolving credit facilities and the mortgage repurchase facility approximate carrying value due to their short-term nature or floating interest rate terms, as applicable, and are classified as Level 3 within the fair value hierarchy.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

NOTE O – RELATED PARTY TRANSACTIONS

In March 2019, the Company assigned its rights under a land purchase contract it entered into in December 2017 to R&R Riverview LLC (R&R), an entity owned by Ryan Horton and Reagan Horton, the adult sons of Donald R.

Horton, the Company’s Chairman.

In March 2019, R&R exercised its rights under the purchase contract and paid $ 77.5 million for 119 acres of undeveloped land in Arizona.

In connection with the transaction, Donald R.

Horton loaned R&R $ 77.5 million at a 2.55 % annual interest rate and obtained a security interest in the land.

Concurrent with the contract assignment to R&R, the Company entered into a land purchase contract with R&R to purchase the 119 acres for R&R’s cost plus an annualized return of 16 %.

In accordance with the Company’s policy on related party transactions, this transaction was reviewed and approved by a committee of the Board of Directors composed of independent directors.

The Company determined that R&R was a variable interest entity, and the Company had the power through its rights in its land purchase contract with R&R to control the activities that most significantly impact the entity’s economic performance, and the Company is the primary beneficiary.

Accordingly, the Company consolidated the variable interest entity in its consolidated financial statements by increasing inventory and notes payable by $ 77.5 million, and this amount was included in those balances at September 30, 2019.

In October 2019, the Company paid R&R $ 84.2 million for all 119 acres of land and deconsolidated the variable interest entity from the financial statements.

The purchase transaction was also reviewed and approved by a committee of the Board of Directors composed of independent directors.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

NOTE P – QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

Consolidated quarterly results of operations for fiscal 2020 and 2019 were (in millions, except per share amounts):

1st Quarter 2nd Quarter 3rd Quarter 4th Quarter

Revenues $ 4,020.7 $ 4,500.0 $ 5,390.0 $ 6,400.4

Income before income taxes 523.3 621.3 782.4 1,056.1

Income tax expense (1)

90.8 137.3 149.5 224.9

Net income 432.5 484.0 632.9 831.2

Net income attributable to noncontrolling interests 1.2 1.3 2.2 2.2

Net income attributable to D.R.

431.3 482.7 630.7 829.0

Basic net income per common share attributable to D.R.

1.17 1.32 1.73 2.28

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

1.16 1.30 1.72 2.24

1st Quarter 2nd Quarter 3rd Quarter 4th Quarter

Revenues $ 3,519.0 $ 4,128.7 $ 4,906.3 $ 5,038.9

Income before income taxes 375.7 462.8 626.7 660.1

Income tax expense 89.0 108.4 153.1 156.2

Net income 286.7 354.4 473.6 503.9

Net (loss) income attributable to noncontrolling interests ( 0.5 ) 3.1 ( 1.2 ) ( 1.4 )

Net income attributable to D.R.

287.2 351.3 474.8 505.3

Basic net income per common share attributable to D.R.

0.77 0.94 1.28 1.37

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

0.76 0.93 1.26 1.35

___________________

(1) Income tax expense in the first, second, third and fourth quarters of fiscal 2020 include a tax benefit of $ 32.9 million, $ 6.6 million, $ 38.1 million and $ 15.8 million, respectively, related to federal energy efficient homes tax credits that were retroactively reinstated during the first quarter.

The Company experiences variability in its results of operations from quarter to quarter due to the seasonal nature of its homebuilding business.

The Company generally closes more homes and has greater revenues and income before income taxes in the third and fourth quarters (June and September) than in the first and second quarters (December and March) of its fiscal year.

(3) The fair values of other secured notes and borrowings on the revolving credit facility and the mortgage repurchase facility approximate carrying value due to their short-term nature or floating interest rate terms, as applicable, and are classified as Level 3 within the fair value hierarchy.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

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 8. Financial Statements and Supplementary Data