What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-04-27 compared with 2022-02-02 · 378 added, 244 removed, 514 unchanged (55% of the section changed)

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

Our homebuilding operations are our core business and primarily include the construction and sale of single-family homes with sales prices generally ranging from $150,000 to more than $1,000,000, with an average closing price of $361,800 during the three months ended December 31, 2021.

Approximately 91% of our home sales revenue in the three months ended December 31, 2021 was generated from the sale of single-family detached homes, with the remainder from the sale of attached homes, such as townhomes, duplexes and triplexes.

Approximately 91% of our home sales revenue in the six months ended March 31, 2022 was generated from the sale of single-family detached homes, with the remainder from the sale of attached homes, such as townhomes, duplexes and triplexes.

Our position as the most geographically diverse and largest volume homebuilder in the United States provides a strong platform for us to compete for new home sales.

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

At December 31, 2021, we owned 63% of the outstanding shares of Forestar Group Inc.

At March 31, 2022, we owned 63% of the outstanding shares of Forestar Group Inc.

(Forestar), a publicly traded residential lot development company listed on the New York Stock Exchange under the ticker symbol “FOR.” Forestar is a key part of our homebuilding strategy to enhance operational and capital efficiency and returns by expanding relationships with land developers and increasing the portion of our land and lot position controlled through land purchase contracts.

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Our financial services operations provide mortgage financing and title agency services to homebuyers in many of our homebuilding markets.

DHI Mortgage, our 100% owned subsidiary, provides mortgage financing services primarily to our homebuyers and sells substantially all of the mortgages it originates and the related servicing rights to third-party purchasers.

DHI Mortgage, our wholly-owned subsidiary, provides mortgage financing services primarily to our homebuyers and sells substantially all of the mortgages it originates and the related servicing rights to third-party purchasers.

DHI Mortgage originates loans in accordance with purchaser guidelines and sells substantially all of its mortgage production after origination.

Our 100% owned subsidiary title companies serve as title insurance agents by providing title insurance policies, examination, underwriting and closing services, primarily related to our homebuilding transactions.

Our wholly-owned subsidiary title companies serve as title insurance agents by providing title insurance policies, examination, underwriting and closing services, primarily related to our homebuilding transactions.

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

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

During the three months ended December 31, 2021, the number and value of our net sales orders increased 5% and 29%, respectively, compared to the prior year period.

During the three months ended December 31, 2021, our number of homes closed decreased 2%, while our home sales revenues increased 17% compared to the prior year.

During the six months ended March 31, 2022, the number of our net sales orders decreased 3%, while the value of those sales orders increased 18% compared to the prior year period.

Our number of homes closed decreased 1%, while our home sales revenues increased 19% compared to the prior year period.

Our consolidated revenues increased 22% to $15.1 billion compared to $12.4 billion in the prior year period.

Our pre-tax income was $1.5 billion in the three months ended December 31, 2021 compared to $1.0 billion in the prior year period, and our pre-tax operating margin was 21.2% compared to 17.4%.

Net income was $1.1 billion in the three months ended December 31, 2021 compared to $795.2 million in the prior year period, and our diluted earnings per share was $3.17 compared to $2.14.

In the trailing twelve months ended December 31, 2021, our return on equity (ROE) was 32.4% compared to 24.4% in the prior year period, and our homebuilding return on inventory (ROI) was 38.5% compared to 27.9%.

Our pre-tax income was $3.4 billion in the six months ended March 31, 2022 compared to $2.2 billion in the prior year period, and our pre-tax operating margin was 22.5% compared to 17.9%.

Net income was $2.6 billion in the six months ended March 31, 2022 compared to $1.7 billion in the prior year period, and our diluted earnings per share was $7.20 compared to $4.67.

In the trailing twelve months ended March 31, 2022, our return on equity (ROE) was 34.0% compared to 27.1% in the prior year period, and our homebuilding return on inventory (ROI) was 40.3% compared to 31.1%.

ROE is calculated as net income attributable to D.R.

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

During 2020, the impacts of the COVID-19 pandemic significantly disrupted economic activity across the United States.

As economic activity resumed, demand for our homes improved significantly and has remained strong throughout fiscal 2021 and into fiscal 2022.

We believe the increase in demand has been fueled by historically low interest rates on mortgage loans and the limited supply of homes at affordable price points across most of our markets.

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

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

During the first half of fiscal 2022, demand for our homes remained strong despite increased inflationary pressures and increases in interest rates on mortgage loans.

We believe demand for our homes is supported by the limited supply of homes at affordable price points across most of our markets.

We are well-positioned to meet this demand with our affordable product offerings, lot supply and housing inventory.

However, multiple disruptions in the supply chain have resulted in shortages in certain building materials, which, together with tightness in the labor market, has caused our construction cycle to lengthen.

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

Based on the current availability of labor and materials, the stage of completion of our current homes in inventory, production schedules and capacity, we expect to continue restricting the pace of our sales orders as necessary in our communities in the near term to match our production levels.

Within our homebuilding land and lot portfolio, our lots controlled through purchase contracts represent 76% of the lots owned and controlled at both December 31, 2021 and September 30, 2021 compared to 72% at December 31, 2020.

Based on the current availability of labor and materials, the stage of completion of our current homes in inventory, production schedules and capacity, we expect to continue restricting the pace of our sales orders in most of our communities in the near term to match our production levels.

Within our homebuilding land and lot portfolio, our lots controlled through purchase contracts represent 77% of the lots owned and controlled at March 31, 2022 compared to 76% and 75% at September 30, 2021 and March 31, 2021, respectively.

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

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

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

Key financial results as of and for the three months ended March 31, 2022, as compared to the same period of 2021, were as follows:

Homebuilding:

• Homebuilding revenues increased 21% to $7.5 billion compared to $6.2 billion.

• Homes closed decreased 2% to 18,396 homes, while the average closing price of those homes increased 19% to $361,800.

• Net sales orders increased 5% to 21,522 homes, and the value of net sales orders increased 29% to $8.3 billion.

• Sales order backlog increased 3% to 29,347 homes, and the value of sales order backlog increased 24% to $11.1 billion.

• Homes closed increased 1% to 19,828 homes, and the average closing price of those homes increased 21% to $378,200.

• Net sales orders decreased 10% to 24,340 homes, while the value of net sales orders increased 10% to $9.7 billion.

• Sales order backlog decreased 6% to 33,859 homes, while the value of sales order backlog increased 15% to $13.3 billion.

• Home sales gross margin was 28.9% compared to 24.6%.

• Homebuilding SG&A expense was 6.8% of homebuilding revenues compared to 7.6%.

• Homebuilding pre-tax income was $1.3 billion compared to $922.6 million.

• Homebuilding pre-tax income was $1.7 billion compared to $1.1 billion.

• Homebuilding pre-tax income was 22.0% of homebuilding revenues compared to 17.0%.

• Homebuilding cash and cash equivalents totaled $2.1 billion compared to $3.0 billion and $2.1 billion at September 30, 2021 and December 31, 2020, respectively.

• Homebuilding inventories totaled $15.3 billion compared to $13.9 billion and $12.1 billion at September 30, 2021 and December 31, 2020, respectively.

• Homes in inventory totaled 54,800 compared to 47,800 and 42,100 at September 30, 2021 and December 31, 2020, respectively.

• Owned lots totaled 131,900 compared to 127,800 and 122,000 at September 30, 2021 and December 31, 2020, respectively.

Lots controlled through purchase contracts increased to 419,500 from 402,500 and 318,700 at September 30, 2021 and December 31, 2020, respectively.

• Homebuilding debt was $3.3 billion compared to $3.2 billion and $2.6 billion at September 30, 2021 and December 31, 2020, respectively.

• Homebuilding debt to total capital was 17.3% compared to 17.8% and 17.3% at September 30, 2021 and December 31, 2020, respectively.

Net homebuilding debt to total capital was 6.9% compared to 1.7% and 3.9% at September 30, 2021 and December 31, 2020, respectively.

• Homebuilding cash and cash equivalents totaled $1.2 billion compared to $3.0 billion and $1.9 billion at September 30, 2021 and March 31, 2021, respectively.

• Homebuilding inventories totaled $16.6 billion compared to $13.9 billion and $12.9 billion at September 30, 2021 and March 31, 2021, respectively.

• Homes in inventory totaled 59,800 compared to 47,800 and 46,100 at September 30, 2021 and March 31, 2021, respectively.

• Owned lots totaled 131,200 compared to 127,800 and 121,500 at September 30, 2021 and March 31, 2021, respectively.

Lots controlled through purchase contracts increased to 442,800 from 402,500 and 365,200 at September 30, 2021 and March 31, 2021, respectively.

• Homebuilding debt was $3.3 billion compared to $3.2 billion and $2.6 billion at September 30, 2021 and March 31, 2021, respectively.

• Homebuilding debt to total capital was 16.4% compared to 17.8% and 16.8% at September 30, 2021 and March 31, 2021, respectively.

Net homebuilding debt to total capital was 11.2% compared to 1.7% and 5.3% at September 30, 2021 and March 31, 2021, respectively.

• Forestar’s revenues increased 47% to $421.6 million compared to $287.1 million.

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• Forestar’s pre-tax income was 15.0% of revenues compared to 13.1%.

• Forestar’s cash and cash equivalents totaled $162.5 million compared to $153.6 million and $237.4 million at September 30, 2021 and December 31, 2020, respectively.

• Forestar’s inventories totaled $2.0 billion compared to $1.9 billion and $1.5 billion at September 30, 2021 and December 31, 2020, respectively.

• Forestar’s owned and controlled lots totaled 103,300 compared to 97,000 and 77,500 at September 30, 2021 and December 31, 2020, respectively.

• Forestar’s cash and cash equivalents totaled $233.7 million compared to $153.6 million and $167.2 million at September 30, 2021 and March 31, 2021, respectively.

• Forestar’s inventories totaled $2.0 billion compared to $1.9 billion and $1.7 billion at September 30, 2021 and March 31, 2021, respectively.

• Forestar’s owned and controlled lots totaled 96,500 compared to 97,000 and 84,500 at September 30, 2021 and March 31, 2021, respectively.

Of these lots, 36,700 were under contract to sell to or subject to a right of first offer with D.R.

Horton compared to 39,200 and 34,900 at September 30, 2021 and December 31, 2020, respectively.

• Forestar’s debt was $704.9 million compared to $704.5 million and $654.1 million at September 30, 2021 and December 31, 2020, respectively.

• Forestar’s debt to total capital was 40.0% compared to 41.0% and 42.3% at September 30, 2021 and December 31, 2020, respectively.

Forestar’s net debt to total capital was 33.9% compared to 35.2% and 31.8% at September 30, 2021 and December 31, 2020, respectively.

Horton compared to 39,200 and 37,100 at September 30, 2021 and March 31, 2021, respectively.

• Forestar’s debt was $705.3 million compared to $704.5 million and $654.6 million at September 30, 2021 and March 31, 2021, respectively.

• Forestar’s debt to total capital was 38.9% compared to 41.0% at both September 30, 2021 and March 31, 2021.

Forestar’s net debt to total capital was 29.9% compared to 35.2% and 34.1% at September 30, 2021 and March 31, 2021, respectively.

Financial Services:

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• Financial services pre-tax income was 41.8% of financial services revenues compared to 47.8%.

• Rental revenues were $222.9 million compared to no revenue in the prior year quarter.

• Rental pre-tax income was $102.5 million compared to a pre-tax loss of $6.4 million.

• Rental inventory totaled $1.5 billion compared to $840.9 million and $543.5 million at September 30, 2021 and March 31, 2021, respectively.

• Rental units closed totaled 494 compared to none closed in the prior year quarter.

Consolidated Results:

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Horton increased 59% to $4.03 compared to $2.53.

• Stockholders’ equity was $15.7 billion compared to $14.9 billion and $12.5 billion at September 30, 2021 and December 31, 2020, respectively.

• Book value per common share increased to $44.25 compared to $41.81 and $34.33 at September 30, 2021 and December 31, 2020, respectively.

• Debt to total capital was 25.1% compared to 26.7% and 25.3% at September 30, 2021 and December 31, 2020, respectively.

Net debt to total capital was 15.2% compared to 12.9% and 12.4% at September 30, 2021 and December 31, 2020, respectively.

• Stockholders’ equity was $16.8 billion compared to $14.9 billion and $13.0 billion at September 30, 2021 and March 31, 2021, respectively.

• Book value per common share increased to $47.66 compared to $41.81 and $35.96 at September 30, 2021 and March 31, 2021, respectively.

• Debt to total capital was 24.9% compared to 26.7% and 25.7% at September 30, 2021 and March 31, 2021, respectively.

Net debt to total capital was 18.9% compared to 12.9% and 14.9% at September 30, 2021 and March 31, 2021, respectively.

Key financial results for the six months ended March 31, 2022, as compared to the same period of 2021, were as follows:

Homebuilding:

• Homebuilding revenues increased 19% to $14.2 billion compared to $11.9 billion.

• Homes closed decreased 1% to 38,224 homes, while the average closing price of those homes increased 20% to $370,300.

• Net sales orders decreased 3% to 45,862 homes, while the value of net sales orders increased 18% to $18.0 billion.

• Home sales gross margin was 28.2% compared to 24.4%.

• Homebuilding SG&A expense was 7.1% of homebuilding revenues compared to 7.7%.

• Homebuilding pre-tax income was $3.0 billion compared to $2.0 billion.

• Homebuilding pre-tax income was 21.0% of homebuilding revenues compared to 16.6%.

• Net cash used by homebuilding operations was $416.2 million compared to net cash provided by homebuilding operations of $190.5 million.

• Forestar’s revenues increased 40% to $829.2 million compared to $594.2 million.

Revenues in the current and prior year periods included $719.8 million and $562.5 million, respectively, of revenue from land and lot sales to our homebuilding segment.

• Forestar’s lots sold increased 44% to 10,304 compared to 7,155.

Lots sold to D.R.

Horton totaled 8,785 compared to 6,747.

• Forestar’s pre-tax income was $116.7 million compared to $66.8 million.

• Forestar’s pre-tax income was 14.1% of revenues compared to 11.2%.

Financial Services:

• Financial services revenues decreased 1% to $406.4 million compared to $412.3 million.

• Financial services pre-tax income decreased 17% to $159.9 million compared to $191.8 million.

• Financial services pre-tax income was 39.3% of financial services revenues compared to 46.5%.

• Rental revenues were $379.4 million compared to $31.8 million.

• Rental pre-tax income was $172.5 million compared to $2.2 million.

• Rental units closed totaled 1,071 compared to 124.

Consolidated Results:

• Consolidated revenues increased 22% to $15.1 billion compared to $12.4 billion.

• Consolidated pre-tax income increased 53% to $3.4 billion compared to $2.2 billion.

• Consolidated pre-tax income was 22.5% of consolidated revenues compared to 17.9%.

• Income tax expense was $792.5 million compared to $485.1 million, and our effective tax rate was 23.4% compared to 21.9%.

• Net income attributable to D.R.

Horton increased 50% to $2.6 billion compared to $1.7 billion.

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

Horton increased 54% to $7.20 compared to $4.67.

• Net cash used in operations was $834.6 million compared to $154.9 million.

RESULTS OF OPERATIONS - HOMEBUILDING

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George Fort Worth

Washington Seattle/Tacoma/Everett/Olympia Houston

Spokane Killeen/Temple/Waco

Vancouver Lubbock

Midland/Odessa

Southwest Region New Braunfels/San Marcos

Arizona Phoenix San Antonio

California Bakersfield East Region

Bay Area Georgia Atlanta

Fresno/Tulare Augusta

Los Angeles County Savannah

Modesto/Merced/Stockton North Carolina Asheville

Riverside County Charlotte

Sacramento Greensboro/Winston-Salem

Washington Central Washington Houston

Seattle/Tacoma/Everett/Olympia Killeen/Temple/Waco

Spokane Lubbock

Vancouver Midland/Odessa

New Braunfels/San Marcos

Southwest Region San Antonio

Arizona Phoenix

Tucson East Region

California Bakersfield Georgia Atlanta

Bay Area Augusta

Fresno/Tulare Savannah

Los Angeles County North Carolina Asheville

Modesto/Merced/Stockton Charlotte

Riverside County Greensboro/Winston-Salem

Sacramento New Bern/Greenville

San Bernardino County Raleigh/Durham

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West Virginia Eastern West Virginia

The following tables and related discussion set forth key operating and financial data for our homebuilding operations by reporting segment as of and for the three months ended December 31, 2021 and 2020.

The following tables and related discussion set forth key operating and financial data for our homebuilding operations by reporting segment as of and for the three and six months ended March 31, 2022 and 2021.

During the fourth quarter of fiscal 2021, we reassessed our operating segments and reportable segments and realigned the aggregation of our homebuilding operating segments into six new reportable segments to better allocate our homebuilding operating segments across geographic reporting regions.

Segment information for the three months ended December 31, 2020 has been reclassified to conform to the current presentation.

Segment information for the three and six months ended March 31, 2021 has been reclassified to conform to the current presentation.

Net Sales Orders (1)

Three Months Ended December 31,

Three Months Ended March 31,

Net Homes Sold Value (In millions) Average Selling Price

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24,340 27,059 (10) % $ 9,749.4 $ 8,849.0 10 % $ 400,600 $ 327,000 23 %

Six Months Ended March 31,

Net Homes Sold Value (In millions) Average Selling Price

Change 2022 2021 %

Northwest 2,570 2,472 4 % $ 1,425.3 $ 1,187.1 20 % $ 554,600 $ 480,200 15 %

Southwest 4,896 5,194 (6) % 2,587.0 2,153.3 20 % 528,400 414,600 27 %

South Central 13,190 13,870 (5) % 4,458.0 3,856.3 16 % 338,000 278,000 22 %

Southeast 13,243 14,572 (9) % 4,925.7 4,363.2 13 % 371,900 299,400 24 %

East 7,745 8,075 (4) % 2,868.0 2,486.2 15 % 370,300 307,900 20 %

North 4,218 3,294 28 % 1,741.8 1,218.9 43 % 412,900 370,000 12 %

45,862 47,477 (3) % $ 18,005.8 $ 15,265.0 18 % $ 392,600 $ 321,500 22 %

Sales Order Cancellations

Three Months Ended December 31,

Three Months Ended March 31,

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

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4,508 4,917 $ 1,628.7 $ 1,478.6 16 % 15 %

Six Months Ended March 31,

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

2022 2021 2022 2021 2022 2021

Northwest 287 316 $ 150.5 $ 149.0 10 % 11 %

Southwest 889 754 411.7 282.1 15 % 13 %

South Central 2,789 2,729 910.0 724.6 17 % 16 %

Southeast 2,480 3,200 842.6 916.6 16 % 18 %

East 1,379 1,811 475.2 528.7 15 % 18 %

North 604 515 238.8 175.2 13 % 14 %

8,428 9,325 $ 3,028.8 $ 2,776.2 16 % 16 %

________________________

(1) Net sales orders represent the number and dollar value of new sales contracts executed with customers (gross sales orders), net of cancelled sales orders.

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Net Sales Orders

The number of net sales orders increased 5% in the three months ended December 31, 2021 compared to the prior year period.

The value of net sales orders increased 29% to $8.3 billion (21,522 homes) compared to $6.4 billion (20,418 homes) in the prior year period, primarily due to the increase in our average selling price.

The average selling price of net sales orders during the three months ended December 31, 2021 was $383,600, up 22% from the prior year period.

During fiscal 2021 and in the first quarter of fiscal 2022, demand for homes remained strong.

The number of net sales orders decreased 10% and 3% in the three and six months ended March 31, 2022, respectively, compared to the prior year periods.

The value of net sales orders increased 10% to $9.7 billion (24,340 homes) and 18% to $18.0 billion (45,862 homes) for the three and six months ended March 31, 2022, respectively, compared to $8.8 billion (27,059 homes) and $15.3 billion (47,477 homes) in the prior year periods, due to the increase in our average selling price.

The average selling price of net sales orders during the three and six months ended March 31, 2022 was $400,600 and $392,600, respectively, up 23% and 22% from the prior year periods.

Demand for our homes during the first half of fiscal 2022 remained strong.

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Although these challenges may persist to some degree for some time, we currently expect to close more homes in fiscal 2022 than we closed in fiscal 2021.

The markets contributing most to the increase in sales volume in the Northwest were Salt Lake City and Portland, and those contributing most to the increase in the North were Indianapolis and Suburban Washington, D.C.

Our sales order cancellation rate (cancelled sales orders divided by gross sales orders for the period) was 15% in the three months ended December 31, 2021 compared to 18% in the prior year period.

The number of net sales orders decreased 10% in the three months ended March 31, 2022 compared to the prior year period.

In regions with a decrease in sales order volume, the markets contributing most to the decreases were:

the Seattle and Denver markets in the Northwest;

the Phoenix market in the Southwest;

the Fort Worth market in the South Central;

the Louisiana, Tampa and Orlando markets in the Southeast;

and the Charlotte, Greenville and Atlanta markets in the East.

The markets contributing most to the increase in sales order volume in the North were the Indianapolis, Ohio and Chicago markets.

The number of net sales orders decreased 3% in the six months ended March 31, 2022 compared to the prior year period.

In regions with a decrease in sales order volume, the markets contributing most to the decreases were:

the Arizona markets in the Southwest;

the Fort Worth market in the South Central;

the Louisiana and Orlando markets in the Southeast;

and the Atlanta and Charlotte markets in the East.

In regions with an increase in sales order volume, the markets contributing most to the increases were:

the Portland and Salt Lake City markets in the Northwest and the Indianapolis, Chicago and Iowa markets in the North.

Our sales order cancellation rate (cancelled sales orders divided by gross sales orders for the period) was 16% in both the three and six months ended March 31, 2022 compared to 15% and 16% in the prior year periods.

Sales Order Backlog

As of December 31,

As of March 31,

Homes in Backlog Value (In millions) Average Selling Price

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Homes Closed and Home Sales Revenue

Three Months Ended December 31,

Three Months Ended March 31,

Homes Closed Value (In millions) Average Selling Price

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19,828 19,701 1 % $ 7,499.2 $ 6,170.4 22 % $ 378,200 $ 313,200 21 %

Six Months Ended March 31,

Homes Closed Value (In millions) Average Selling Price

Change 2022 2021 %

Northwest 2,171 2,368 (8) % $ 1,185.4 $ 1,095.7 8 % $ 546,000 $ 462,700 18 %

Southwest 4,265 4,402 (3) % 2,046.5 1,738.4 18 % 479,800 394,900 21 %

South Central 11,047 10,431 6 % 3,528.8 2,746.0 29 % 319,400 263,300 21 %

Southeast 10,828 11,225 (4) % 3,756.5 3,174.9 18 % 346,900 282,800 23 %

East 6,597 7,087 (7) % 2,291.5 2,073.8 10 % 347,400 292,600 19 %

North 3,316 2,927 13 % 1,346.9 1,040.3 29 % 406,200 355,400 14 %

38,224 38,440 (1) % $ 14,155.6 $ 11,869.1 19 % $ 370,300 $ 308,800 20 %

Home Sales Revenue

Revenues from home sales increased 17% to $6.7 billion (18,396 homes closed) for the three months ended December 31, 2021 from $5.7 billion (18,739 homes closed) in the prior year period.

Home sales revenues increased in all of our regions, primarily due to an increase in average selling price.

The number of homes closed decreased 2% in the three months ended December 31, 2021 compared to the prior year period, reflecting the effect of supply chain disruptions in recent quarters.

In regions with a decrease in closings volume, the markets contributing most to the decreases were as follows:

the Seattle and Portland markets in the Northwest;

Revenues from home sales increased 22% to $7.5 billion (19,828 homes closed) for the three months ended March 31, 2022 from $6.2 billion (19,701 homes closed) in the prior year period.

Revenues from home sales increased 19% to $14.2 billion (38,224 homes closed) for the six months ended March 31, 2022 from $11.9 billion (38,440 homes closed) in the prior year period.

Although home closings in recent quarters have been negatively impacted by supply chain disruptions, home sales revenues increased in all of our regions due to an increase in average selling price.

The number of homes closed increased 1% in the three months ended March 31, 2022 compared to the prior year period.

In regions with an increase in closings volume, the markets contributing most to the increases were:

the Phoenix market in the Southwest;

the Dallas and Houston markets in the South Central;

and the Chicago, Iowa and New Jersey markets in the North.

In regions with a decrease in closings volume, the markets contributing most to the decreases were:

the Seattle market in the Northwest;

the Orlando market in the Southeast;

and the Atlanta market in the East.

The number of homes closed decreased 1% in the six months ended March 31, 2022 compared to the prior year period.

In regions with a decrease in closings volume, the markets contributing most to the decreases were:

the Seattle market in the Northwest;

the Las Vegas market in the Southwest;

the Orlando market in the Southeast;

and the Atlanta market in the East.

In regions with an increase in closings volume, the markets contributing most to the increases were:

the Dallas and Fort Worth markets in the South Central and the Chicago and New Jersey markets in the North.

Homebuilding Operating Margin Analysis

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Three Months Ended

March 31, Six Months Ended

2022 2021 2022 2021

Gross profit – home sales 28.9 % 24.6 % 28.2 % 24.4 %

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Home Sales Gross Profit

Gross profit from home sales increased to $1.8 billion in the three months ended December 31, 2021 from $1.4 billion in the prior year period and increased 330 basis points to 27.4% as a percentage of home sales revenues.

The percentage increase resulted from improvements of 310 basis points due to the average selling price of our homes closed increasing by more than the average cost of those homes, 10 basis points due to a decrease in the amortization of capitalized interest and 10 basis points due to a decrease in warranty and construction defect costs.

Gross profit from home sales increased to $2.2 billion in the three months ended March 31, 2022 from $1.5 billion in the prior year period and increased 430 basis points to 28.9% as a percentage of home sales revenues.

The percentage increase resulted from improvements of 420 basis points due to the average selling price of our homes closed increasing by more than the average cost of those homes and 20 basis points due to a decrease in the amortization of capitalized interest, partially offset by increased warranty and construction defect costs of 10 basis points.

Gross profit from home sales increased to $4.0 billion in the six months ended March 31, 2022 from $2.9 billion in the prior year period and increased 380 basis points to 28.2% as a percentage of home sales revenues.

The percentage increase resulted from improvements of 380 basis points due to the average selling price of our homes closed increasing by more than the average cost of those homes and 10 basis points due to a decrease in the amortization of capitalized interest, partially offset by increased warranty and construction defect costs of 10 basis points.

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

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Land/Lot Sales and Other Revenues

Land/lot sales and other revenues from our homebuilding operations were $23.0 million and $17.9 million in the three months ended December 31, 2021 and 2020, respectively.

Land/lot sales and other revenues from our homebuilding operations were $7.6 million and $30.5 million in the three and six months ended March 31, 2022, respectively, and $15.4 million and $33.3 million in the comparable periods of fiscal 2021.

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

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

As of December 31, 2021, our homebuilding operations had $24.8 million of land held for sale that we expect to sell in the next twelve months.

As of March 31, 2022, our homebuilding operations had $21.6 million of land held for sale that we expect to sell in the next twelve months.

Inventory and Land Option Charges

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

As of December 31, 2021, we determined that no communities were impaired, and no impairment charges were recorded during the three months ended December 31, 2021 compared to $5.6 million of impairment charges recorded in the prior year period.

As a result of this review, there were no impairments recorded in our homebuilding segment during the three and six months ended March 31, 2022.

There were no impairment charges recorded in the prior year quarter and $5.6 million of impairment charges recorded in our homebuilding segment in the six months ended March 31, 2021.

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

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

During the three months ended December 31, 2021, earnest money and pre-acquisition cost write-offs related to land purchase contracts that we have terminated or expect to terminate were $3.9 million compared to $2.3 million in the same period of fiscal 2020.

During the three and six months ended March 31, 2022, earnest money and pre-acquisition cost write-offs related to land purchase contracts that we have terminated or expect to terminate were $9.8 million and $13.7 million, respectively, compared to $3.2 million and $5.6 million in the same periods of fiscal 2021.

Selling, General and Administrative (SG&A) Expense

SG&A expense from homebuilding activities increased 11% to $497.7 million in the three months ended December 31, 2021 from $449.4 million in the prior year period.

SG&A expense as a percentage of homebuilding revenues was 7.5% and 7.9% in the three months ended December 31, 2021 and 2020, respectively.

Employee compensation and related costs were $409.6 million and $356.0 million in the three months ended December 31, 2021 and 2020, respectively, representing 82% and 79% of SG&A costs in those periods.

These costs increased 15% in the three months ended December 31, 2021 from the prior year period.

Our homebuilding operations employed 8,699 and 7,583 people at December 31, 2021 and 2020, respectively.

SG&A expense from homebuilding activities increased 8% to $507.3 million and 10% to $1.0 billion in the three and six months ended March 31, 2022, respectively, from $467.6 million and $917.0 million in the prior year periods.

SG&A expense as a percentage of homebuilding revenues was 6.8% and 7.1% in the three and six months ended March 31, 2022, respectively, compared to 7.6% and 7.7% in the prior year periods.

Employee compensation and related costs were $420.4 million and $830.1 million in the three and six months ended March 31, 2022, respectively, compared to $382.3 million and $738.3 million in the same periods of fiscal 2021.

Employee compensation and related costs represented 83% of SG&A costs in both the three and six months ended March 31, 2022 compared to 82% and 81%, respectively, in the prior year periods.

These costs increased 10% and 12% in the three and six months ended March 31, 2022, respectively, from the prior year periods.

Our homebuilding operations employed 9,160 and 7,916 people at March 31, 2022 and 2021, respectively.

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

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

Interest incurred by our homebuilding operations was $24.8 million and $24.4 million in the three months ended December 31, 2021 and 2020, respectively.

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

Other income, net of other expenses, included in our homebuilding operations was $6.2 million and $2.1 million in the three months ended December 31, 2021 and 2020, respectively.

Interest incurred by our homebuilding operations was $25.6 million and $50.4 million in the three and six months ended March 31, 2022, respectively, compared to $22.6 million and $47.0 million in the prior year periods.

Interest charged to cost of sales was 0.7% of total cost of sales (excluding inventory and land option charges) in both the three and six months ended March 31, 2022 compared to 0.7% and 0.8% in the prior year periods.

Other income, net of other expenses, included in our homebuilding operations was $1.6 million and $7.9 million in the three and six months ended March 31, 2022, respectively, compared to $1.8 million and $3.9 million in the prior year periods.

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

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Homebuilding Results by Reporting Region

Three Months Ended December 31,

Three Months Ended March 31,

Revenues Homebuilding

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

Income (1) % of

Revenues Homebuilding

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

Revenues Homebuilding

Income (1) % of

(In millions)

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$ 7,506.8 $ 1,652.8 22.0 % $ 6,185.8 $ 1,052.1 17.0 %

Six Months Ended March 31,

Revenues Homebuilding

Income (1) % of

Revenues Homebuilding

Income (1) % of

(In millions)

Northwest $ 1,205.9 $ 260.0 21.6 % $ 1,096.5 $ 180.7 16.5 %

Southwest 2,046.7 385.9 18.9 % 1,751.5 245.7 14.0 %

South Central 3,532.7 770.3 21.8 % 2,748.2 491.9 17.9 %

Southeast 3,757.5 897.7 23.9 % 3,185.7 564.4 17.7 %

East 2,294.3 468.2 20.4 % 2,078.6 355.9 17.1 %

North 1,349.0 203.8 15.1 % 1,041.9 136.1 13.1 %

$ 14,186.1 $ 2,985.9 21.0 % $ 11,902.4 $ 1,974.7 16.6 %

______________

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

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

Northwest Region — Homebuilding revenues increased 4% in the three months ended December 31, 2021 compared to the prior year period, due to increases in the average selling price of homes closed in all markets, while the number of homes closed decreased, particularly in the Seattle and Portland markets.

The region generated pre-tax income of $111.8 million in the three months ended December 31, 2021 compared to $86.8 million in the prior year period.

Gross profit from home sales as a percentage of home sales revenue (home sales gross profit percentage) increased by 480 basis points in the three months ended December 31, 2021 compared to the prior year period, primarily due to the average selling price of homes closed increasing by more than the average cost of those homes.

As a percentage of homebuilding revenues, SG&A expenses increased by 40 basis points in the three months ended December 31, 2021 compared to the prior year period due to increases in employee compensation and related costs.

Southwest Region — Homebuilding revenues increased 9% in the three months ended December 31, 2021 compared to the prior year period, primarily due to increases in the average selling price of homes closed in most markets, while the number of homes closed decreased, particularly in the Las Vegas market.

The region generated pre-tax income of $159.3 million in the three months ended December 31, 2021 compared to $115.2 million in the prior year period.

Home sales gross profit percentage increased by 350 basis points in the three months ended December 31, 2021 compared to the prior year period, primarily due to the average selling price of homes closed increasing by more than the average cost of those homes.

As a percentage of homebuilding revenues, SG&A expenses decreased by 20 basis points in the three months ended December 31, 2021 compared to the prior year period.

South Central Region — Homebuilding revenues increased 24% in the three months ended December 31, 2021 compared to the prior year period, primarily due to increases in the average selling price of homes closed in all markets, as well as a slight increase in the number of homes closed.

The region generated pre-tax income of $354.3 million in the three months ended December 31, 2021 compared to $240.0 million in the prior year period.

Home sales gross profit percentage increased by 250 basis points in the three months ended December 31, 2021 compared to the prior year period, primarily due to the average selling price of homes closed increasing by more than the average cost of those homes.

As a percentage of homebuilding revenues, SG&A expenses decreased by 80 basis points in the three months ended December 31, 2021 compared to the prior year period, primarily due to the increase in homebuilding revenues.

Southeast Region — Homebuilding revenues increased 24% in the three months ended December 31, 2021 compared to the prior year period, primarily due to increases in the average selling price of homes closed in all markets, as well as a slight increase in the number of homes closed.

The region generated pre-tax income of $415.4 million in the three months ended December 31, 2021 compared to $247.2 million in the prior year period.

Home sales gross profit percentage increased by 460 basis points in the three months ended December 31, 2021 compared to the prior year period, primarily due to the average selling price of homes closed increasing by more than the average cost of those homes.

As a percentage of homebuilding revenues, SG&A expenses decreased by 90 basis points in the three months ended December 31, 2021 compared to the prior year period, primarily due to the increase in homebuilding revenues.

East Region — Homebuilding revenues increased 7% in the three months ended December 31, 2021 compared to the prior year period, due to increases in the average selling price of homes closed in all markets, while the number of homes closed decreased, particularly in the Atlanta market.

The region generated pre-tax income of $202.3 million in the three months ended December 31, 2021 compared to $170.7 million in the prior year period.

Home sales gross profit percentage increased by 170 basis points in the three months ended December 31, 2021 compared to the prior year period, primarily due to the average selling price of homes closed increasing by more than the average cost of those homes.

As a percentage of homebuilding revenues, SG&A expenses increased by 10 basis points in the three months ended December 31, 2021 compared to the prior year period.

North Region — Homebuilding revenues increased 25% in the three months ended December 31, 2021 compared to the prior year period, primarily due to increases in the average selling price of homes closed in all markets, as well as increases in the number of homes closed in several markets.

The region generated pre-tax income of $89.9 million in the three months ended December 31, 2021 compared to $62.7 million in the prior year period.

Home sales gross profit percentage increased by 200 basis points in the three months ended December 31, 2021 compared to the prior year period, primarily due to the average selling price of homes closed increasing by more than the average cost of those homes.

As a percentage of homebuilding revenues, SG&A expenses were unchanged in the three months ended December 31, 2021 compared to the prior year period as employee compensation and related costs increased at a similar rate as revenues.

Northwest Region — Homebuilding revenues increased 16% and 10% in the three and six months ended March 31, 2022, respectively, compared to the prior year periods, due to increases in the average selling price of homes closed in all markets.

The region generated pre-tax income of $148.2 million and $260.0 million in the three and six months ended March 31, 2022, respectively, compared to $93.9 million and $180.7 million in the prior year periods.

Gross profit from home sales as a percentage of home sales revenue (home sales gross profit percentage) increased by 560 and 530 basis points in the three and six months ended March 31, 2022, respectively, compared to the prior year periods, primarily due to the average selling price of homes closed increasing by more than the average cost of those homes.

As a percentage of homebuilding revenues, SG&A expenses decreased by 60 and 10 basis points in the three and six months ended March 31, 2022, respectively, compared to the prior year periods, primarily due to the increase in homebuilding revenues.

Southwest Region — Homebuilding revenues increased 24% and 17% in the three and six months ended March 31, 2022, respectively, compared to the prior year periods, primarily due to increases in the average selling price of homes closed in most markets.

The region generated pre-tax income of $226.6 million and $385.9 million in the three and six months ended March 31, 2022, respectively, compared to $130.5 million and $245.7 million in the prior year periods.

Home sales gross profit percentage increased by 440 and 400 basis points in the three and six months ended March 31, 2022, respectively, compared to the prior year periods, primarily due to the average selling price of homes closed increasing by more than the average cost of those homes.

As a percentage of homebuilding revenues, SG&A expenses decreased by 120 and 80 basis points in the three and six months ended March 31, 2022, respectively, compared to the prior year periods, primarily due to the increase in homebuilding revenues.

South Central Region — Homebuilding revenues increased 33% and 29% in the three and six months ended March 31, 2022, respectively, compared to the prior year periods, primarily due to increases in the average selling price of homes closed in all markets.

The region generated pre-tax income of $416.0 million and $770.3 million in the three and six months ended March 31, 2022, respectively, compared to $251.9 million and $491.9 million in the prior year periods.

Home sales gross profit percentage increased by 360 and 310 basis points in the three and six months ended March 31, 2022, respectively, compared to the prior year periods, primarily due to the average selling price of homes closed increasing by more than the average cost of those homes.

As a percentage of homebuilding revenues, SG&A expenses decreased by 100 and 90 basis points in the three and six months ended March 31, 2022, respectively, compared to the prior year periods, primarily due to the increase in homebuilding revenues.

Southeast Region — Homebuilding revenues increased 13% and 18% in the three and six months ended March 31, 2022, respectively, compared to the prior year periods, due to the increases in the average selling price of homes closed in most markets.

The region generated pre-tax income of $482.2 million and $897.7 million in the three and six months ended March 31, 2022, respectively, compared to $317.2 million and $564.4 million in the prior year periods.

Home sales gross profit percentage increased by 550 and 510 basis points in the three and six months ended March 31, 2022, respectively, compared to the prior year periods, primarily due to the average selling price of homes closed increasing by more than the average cost of those homes.

As a percentage of homebuilding revenues, SG&A expenses decreased by 70 and 80 basis points in the three and six months ended March 31, 2022, respectively, compared to the prior year periods, primarily due to the increase in homebuilding revenues.

East Region — Homebuilding revenues increased 14% and 10% in the three and six months ended March 31, 2022, respectively, compared to the prior year periods, due to increases in the average selling price of homes closed in all markets.

The region generated pre-tax income of $265.9 million and $468.2 million in the three and six months ended March 31, 2022, respectively, compared to $185.2 million and $355.9 million in the prior year periods.

Home sales gross profit percentage increased by 420 and 310 basis points in the three and six months ended March 31, 2022, respectively, compared to the prior year periods, primarily due to the average selling price of homes closed increasing by more than the average cost of those homes.

As a percentage of homebuilding revenues, SG&A expenses decreased by 50 and 20 basis points in the three and six months ended March 31, 2022, respectively, compared to the prior year periods, primarily due to the increase in homebuilding revenues.

North Region — Homebuilding revenues increased 33% and 29% in the three and six months ended March 31, 2022, respectively, compared to the prior year periods, primarily due to increases in the average selling price of homes closed in all markets.

The region generated pre-tax income of $113.9 million and $203.8 million in the three and six months ended March 31, 2022, respectively, compared to $73.4 million and $136.1 million in the prior year periods.

Home sales gross profit percentage increased by 170 and 180 basis points in the three and six months ended March 31, 2022, respectively, compared to the prior year periods, primarily due to the average selling price of homes closed increasing by more than the average cost of those homes.

As a percentage of homebuilding revenues, SG&A expenses decreased by 60 and 30 basis points in the three and six months ended March 31, 2022, respectively, compared to the prior year periods, primarily due to the increase in homebuilding revenues.

HOMEBUILDING INVENTORIES, LAND AND LOT POSITION AND HOMES IN INVENTORY

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

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

As of December 31, 2021

Our homebuilding segment’s inventories at March 31, 2022 and September 30, 2021 are summarized as follows:

As of March 31, 2022

Construction in Progress and

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

Our land and lot position and homes in inventory at December 31, 2021 and September 30, 2021 are summarized as follows:

As of December 31, 2021

Our land and lot position and homes in inventory at March 31, 2022 and September 30, 2021 are summarized as follows:

As of March 31, 2022

Owned (1) Lots Controlled

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___________________

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

Land/lots owned also included land held for development representing 600 and 1,300 lots at December 31, 2021 and September 30, 2021, respectively.

(2) The total remaining purchase price of lots controlled through land and lot purchase contracts at December 31, 2021 and September 30, 2021 was $17.1 billion and $15.5 billion, respectively, secured by earnest money deposits of $1.3 billion and $1.1 billion, respectively.

The total remaining purchase price of lots controlled through land and lot purchase contracts at December 31, 2021 and September 30, 2021 included $1.5 billion and $1.6 billion, respectively, related to lot purchase contracts with Forestar, secured by $141.5 million and $151.0 million, respectively, of earnest money.

(3) Lots controlled at December 31, 2021 included approximately 38,300 lots owned or controlled by Forestar, 20,000 of which our homebuilding divisions have under contract to purchase and 18,300 of which our homebuilding divisions have a right of first offer to purchase.

Of these, approximately 16,700 lots were in our Southeast region, 6,900 lots were in our East region, 5,700 lots were in our Southwest, 4,300 lots were in our South Central region, 3,400 lots were in our North region and 1,300 lots were in our Northwest region.

(1) Land/lots owned included approximately 30,200 and 30,800 owned lots that are fully developed and ready for home construction at March 31, 2022 and September 30, 2021, respectively.

Land/lots owned also included land held for development representing 600 and 1,300 lots at March 31, 2022 and September 30, 2021, respectively.

(2) The total remaining purchase price of lots controlled through land and lot purchase contracts at March 31, 2022 and September 30, 2021 was $18.7 billion and $15.5 billion, respectively, secured by earnest money deposits of $1.4 billion and $1.1 billion, respectively.

The total remaining purchase price of lots controlled through land and lot purchase contracts at March 31, 2022 and September 30, 2021 included $1.5 billion and $1.6 billion, respectively, related to lot purchase contracts with Forestar, secured by $137.7 million and $151.0 million, respectively, of earnest money.

(3) Lots controlled at March 31, 2022 included approximately 36,700 lots owned or controlled by Forestar, 19,100 of which our homebuilding divisions have under contract to purchase and 17,600 of which our homebuilding divisions have a right of first offer to purchase.

Of these, approximately 15,500 lots were in our Southeast region, 6,300 lots were in our East region, 5,400 lots were in our Southwest region, 4,600 lots were in our South Central region, 3,600 lots were in our North region and 1,300 lots were in our Northwest region.

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

(4) Approximately 25,600 and 21,700 of our homes in inventory were unsold at December 31, 2021 and September 30, 2021, respectively.

At December 31, 2021, approximately 1,000 of our unsold homes were completed, of which approximately 100 homes had been completed for more than six months.

(4) Approximately 26,000 and 21,700 of our homes in inventory were unsold at March 31, 2022 and September 30, 2021, respectively.

At March 31, 2022, approximately 600 of our unsold homes were completed, of which approximately 60 homes had been completed for more than six months.

At September 30, 2021, approximately 900 of our unsold homes were completed, of which approximately 100 homes had been completed for more than six months.

Homes in inventory exclude approximately 1,800 model homes at both December 31, 2021 and September 30, 2021.

Homes in inventory exclude approximately 1,800 model homes at both March 31, 2022 and September 30, 2021.

RESULTS OF OPERATIONS – FORESTAR

In fiscal 2018, we acquired 75% of the outstanding shares of Forestar and at December 31, 2021, we owned 63% of its outstanding shares.

Forestar is a publicly traded residential lot development company with operations in 55 markets across 23 states as of December 31, 2021.

In fiscal 2018, we acquired 75% of the outstanding shares of Forestar and at March 31, 2022, we owned 63% of its outstanding shares.

Forestar is a publicly traded residential lot development company with operations in 53 markets across 23 states as of March 31, 2022.

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

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

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

Results of operations for the Forestar segment for the three and six months ended March 31, 2022 and 2021 were as follows:

Three Months Ended

March 31, Six Months Ended

2022 2021 2022 2021

(In millions)

Residential lot sales $ 404.1 $ 307.0

Tract sales and other 3.5 0.1

Total revenues $ 421.6 $ 287.1 $ 829.2 $ 594.2

Cost of sales 334.2 262.9

Cost of land/lot sales and other 328.7 233.2 662.3 495.8

Inventory and land option charges 5.4 0.6 6.0 0.9

Total cost of sales $ 334.1 $ 233.8 $ 668.3 $ 496.7

Selling, general and administrative expense 24.3 16.3 45.8 31.8

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Income before income taxes $ 63.2 $ 37.6 $ 116.7 $ 66.8

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

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

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

Three Months Ended

($ in millions)

Total residential single-family lots sold 4,516 3,567

Residential single-family lots sold to D.R.

Horton 4,014 3,389

Residential lot sales revenues from sales to D.R.

Horton $ 330.1 $ 294.2

SG&A expense for the three months ended December 31, 2021 and 2020 included charges of $1.0 million and $1.1 million, respectively, related to the shared services agreement between Forestar and D.R.

Revenues are primarily derived from sales of single-family residential lots to local, regional and national homebuilders.

During the three and six months ended March 31, 2022, Forestar sold 5,788 and 10,304 single-family lots, respectively, compared to 3,588 and 7,155 single-family lots in the prior year periods.

Of the total lots sold, Forestar sold 4,771 lots to D.R.

Horton for $389.7 million and 8,785 lots for $719.8 million during the three and six months ended March 31, 2022, respectively, compared to 3,358 lots for $265.3 million and 6,747 lots for $559.5 million in the prior year periods.

SG&A expense for the three and six months ended March 31, 2022 included charges of $1.0 million and $2.0 million, respectively, related to the shared services agreement between Forestar and D.R.

Horton whereby D.R.

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

At December 31, 2021, Forestar owned directly or controlled through land and lot purchase contracts approximately 103,300 residential lots, of which 4,900 are fully developed.

Shared services charges were $0.9 million and $2.0 million, respectively, in the same periods of fiscal 2021.

At March 31, 2022, Forestar owned directly or controlled through land and lot purchase contracts approximately 96,500 residential lots, of which 5,100 are fully developed.

Approximately 36,700 of these lots are under contract to sell to D.R.

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RESULTS OF OPERATIONS – FINANCIAL SERVICES

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

Three Months Ended December 31,

2021 2020 % Change

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

2022 2021 % Change 2022 2021 % Change

Number of first-lien loans originated or brokered by DHI Mortgage for D.R.

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Loans sold by DHI Mortgage to third parties 12,527 12,371 1 % 25,598 25,829 (1) %

Three Months Ended December 31,

2021 2020 % Change

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

2022 2021 % Change 2022 2021 % Change

(In millions)

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Three Months Ended

March 31, Six Months Ended

2022 2021 2022 2021

General and administrative expense 62.1 % 55.0 % 64.8 % 56.6 %

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

In the three months ended December 31, 2021, the volume of first-lien loans originated or brokered by DHI Mortgage for our homebuyers decreased 5% from the prior year period due to a decrease in the number of homes closed by our homebuilding operations and in the percentage of homes closed for which DHI Mortgage handled our homebuyers’ financing.

Homes closed by our homebuilding operations constituted 98% and 97% of DHI Mortgage loan originations in the three months ended December 31, 2021 and 2020, respectively.

In the three and six months ended March 31, 2022, the volume of first-lien loans originated or brokered by DHI Mortgage for our homebuyers increased 2% and decreased 1%, respectively, from the prior year periods corresponding to the change in the number of homes closed by our homebuilding operations.

Homes closed by our homebuilding operations constituted 99% and 98% of DHI Mortgage loan originations in the three and six months ended March 31, 2022, respectively, compared to 98% in both prior year periods.

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

The number of loans sold decreased 3% in the three months ended December 31, 2021 compared to the prior year period.

Virtually all of the mortgage loans held for sale on December 31, 2021 were eligible for sale to the Federal National Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage Corporation (Freddie Mac) or the Government National Mortgage Association (Ginnie Mae).

During the three months ended December 31, 2021, approximately 61% of our mortgage loans were sold directly to Fannie Mae, Freddie Mac or into securities backed by Ginnie Mae, and 30% were sold to one other major financial entity.

The number of loans sold increased 1% and decreased 1% in the three and six months ended March 31, 2022, respectively, compared to the prior year periods.

Virtually all of the mortgage loans held for sale on March 31, 2022 were eligible for sale to the Federal National Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage Corporation (Freddie Mac) or the Government National Mortgage Association (Ginnie Mae).

During the six months ended March 31, 2022, approximately 68% of our mortgage loans were sold directly to Fannie Mae, Freddie Mac or into securities backed by Ginnie Mae, and 24% were sold to one other major financial entity.

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

Financial Services Revenues and Expenses

Revenues from our mortgage operations decreased 5% to $144.1 million in the three months ended December 31, 2021 from $152.4 million in the prior year period, primarily due to the decrease in mortgage loan originations.

Revenues from our title operations increased 16% to $40.2 million in the three months ended December 31, 2021 from $34.8 million in the prior year period, primarily due to an increase in the average premium collected on closing transactions.

General and administrative (G&A) expense related to our financial services operations increased 14% to $125.3 million in the three months ended December 31, 2021 from $109.5 million in the prior year period.

As a percentage of financial services revenues, G&A expense was 68.0% in the three months ended December 31, 2021 compared to 58.5% in the prior year period.

The increase was primarily due to an increase in the number of employees to support increased volume in the fourth quarter of fiscal 2021 and expected increased volume for the remainder of fiscal 2022.

Revenues from our mortgage operations decreased 5% to $179.9 million and $324.0 million in the three and six months ended March 31, 2022, respectively, from $190.3 million and $342.7 million in the prior year periods, primarily due to competitive pricing pressure in the secondary mortgage market.

Revenues from our title operations increased 21% to $42.2 million and 18% to $82.4 million in the three and six months ended March 31, 2022, respectively, from $34.8 million and $69.6 million in the prior year periods, primarily due to an increase in the average premium collected on closing transactions.

General and administrative (G&A) expense related to our financial services operations increased 12% to $138.0 million and 13% to $263.2 million in the three and six months ended March 31, 2022, respectively, from $123.7 million and $233.3 million in the prior year periods.

As a percentage of financial services revenues, G&A expense was 62.1% and 64.8% in the three and six months ended March 31, 2022, respectively, compared to 55.0% and 56.6% in the prior year periods.

The increase was primarily due to an increase in the number of employees to support expected increased volume for the remainder of fiscal 2022.

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

Our financial services operations employed 2,942 and 2,403 people at December 31, 2021 and 2020, respectively.

Our financial services operations employed 2,990 and 2,578 people at March 31, 2022 and 2021, respectively.

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

As a result of the revenue decrease from a lower volume of mortgage originations and an increase in employee related G&A expenses, pre-tax income from our financial services operations decreased 20% to $67.1 million in the three months ended December 31, 2021 from $84.1 million in the prior year period.

As a result of the revenue decrease from competitive pricing pressure in the secondary mortgage market and an increase in employee related G&A expenses, pre-tax income from our financial services operations decreased 17% to $159.9 million in the six months ended March 31, 2022 from $191.8 million in the prior year period.

RESULTS OF OPERATIONS - RENTAL

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

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

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

The multi-family rental operations develop, construct, lease and sell residential rental properties, with a primary focus on constructing garden style multi-family rental communities typically accommodating 200 to 400 dwelling units in high growth suburban markets.

The single-family rental operations primarily construct and lease single-family homes and then market the community for a bulk sale of rental homes.

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

Results of operations for the rental segment for the three months ended December 31, 2021 and 2020 were as follows:

Results of operations for the rental segment for the three and six months ended March 31, 2022 and 2021 were as follows:

Three Months Ended

March 31, Six Months Ended

2022 2021 2022 2021

(In millions)

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Income before income taxes $ 102.5 $ (6.4) $ 172.5 $ 2.2

During the three months ended December 31, 2021, we sold one multi-family rental property for $76.2 million (350 total units).

There were no sales of multi-family rental properties during the prior year quarter.

During the three months ended December 31, 2021, we sold two single-family rental properties (225 total homes) for $80.3 million compared to one property sold (124 total homes) for $31.8 million in the prior year quarter.

At December 31, 2021, our rental property inventory of $1.2 billion included $519.2 million of inventory related to our multi-family rental operations and $641.9 million of inventory related to our single-family rental operations.

At December 31, 2021, we had 16 multi-family rental properties, consisting of 4,870 units, under active construction and one community, consisting of 130 units, that was substantially complete and in the lease-up phase.

At December 31, 2021, our single-family rental properties (74 total communities) included 4,800 homes and finished lots, of which 1,100 homes were completed, and 3,400 expected lots that were unimproved or under development.

During the three months ended March 31, 2022, we sold one multi-family rental property (126 total units) for $50.0 million, and during the six months ended March 31, 2022, we sold two multi-family rental properties (477 total units) for $126.2 million.

There were no sales of multi-family rental properties during the prior year periods.

During the three months ended March 31, 2022, we sold three single-family rental properties (368 total homes) for $172.9 million, and during the six months ended March 31, 2022, we sold five single-family rental properties (594 total homes) for $253.2 million.

There were no sales of single-family rental properties during the prior year quarter and one property (124 total homes) sold for $31.8 million in the prior year six month period.

At March 31, 2022, our rental property inventory of $1.5 billion included $597.4 million of inventory related to our multi-family rental operations and $902.7 million of inventory related to our single-family rental operations.

At March 31, 2022, we had 16 multi-family rental properties, consisting of 4,830 units, under active construction and one community, consisting of 300 units, that was substantially complete and in the lease-up phase.

At March 31, 2022, we had 98 single-family rental properties that included 6,350 homes and finished lots, of which 1,300 homes were completed, and 4,000 expected lots that were unimproved or under development.

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

At September 30, 2021, we had 15 multi-family rental properties, consisting of 4,340 units, under active construction and one community, consisting of 350 units, that was substantially complete and in the lease-up phase.

At September 30, 2021, our single-family rental properties (55 total communities) included 2,650 homes and finished lots, of which 865 homes were completed, and 3,200 expected lots that were unimproved or under development.

At September 30, 2021, we had 55 single-family rental properties that included 2,650 homes and finished lots, of which 865 homes were completed, and 3,200 expected lots that were unimproved or under development.

RESULTS OF OPERATIONS - OTHER BUSINESSES

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

The pre-tax income of all of our subsidiaries engaged in other business activities was $10.7 million in the three months ended December 31, 2021 compared to $6.2 million in the prior year period.

The pre-tax income of all of our subsidiaries engaged in other business activities was $13.6 million and $24.3 million in the three and six months ended March 31, 2022, respectively, compared to $6.5 million and $12.7 million in the prior year periods.

RESULTS OF OPERATIONS - CONSOLIDATED

Income before Income Taxes

Pre-tax income for the three months ended December 31, 2021 was $1.5 billion compared to $1.0 billion in the prior year period.

Pre-tax income for the three and six months ended March 31, 2022 was $1.9 billion and $3.4 billion, respectively, compared to $1.2 billion and $2.2 billion in the prior year periods.

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

Our income tax expense for the three months ended December 31, 2021 and 2020 was $351.5 million and $239.1 million, respectively.

Our effective tax rate was 23.5% for the three months ended December 31, 2021 compared to 23.1% in the prior year period.

The effective tax rates for both periods include an expense for state income taxes and tax benefits related to stock-based compensation and the federal energy efficient homes tax credit.

The federal energy efficient homes tax credit expires for homes closed after December 31, 2021.

Our deferred tax assets, net of deferred tax liabilities, were $141.7 million at December 31, 2021 compared to $159.5 million at September 30, 2021.

We have a valuation allowance of $4.1 million and $4.2 million at December 31, 2021 and September 30, 2021, respectively, related to state deferred tax assets for net operating loss (NOL) carryforwards that are more likely than not to expire before being realized.

Our income tax expense for the three and six months ended March 31, 2022 was $441.0 million and $792.5 million, respectively, compared to $246.0 million and $485.1 million in the prior year periods.

Our effective tax rate was 23.4% for both the three and six months ended March 31, 2022 compared to 20.8% and 21.9%, respectively, in the prior year periods.

The effective tax rates for all periods include an expense for state income taxes and tax benefits related to stock-based compensation and the federal energy efficient homes tax credit.

The federal energy efficient homes tax credit expired for homes closed after December 31, 2021.

Our deferred tax assets, net of deferred tax liabilities, were $135.7 million at March 31, 2022 compared to $159.5 million at September 30, 2021.

We have a valuation allowance of $4.0 million and $4.2 million at March 31, 2022 and September 30, 2021, respectively, related to state deferred tax assets for net operating loss (NOL) carryforwards that are more likely than not to expire before being realized.

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

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

As of December 31, 2021, we had outstanding notes payable with varying maturities totaling an aggregate principal amount of $5.3 billion, with $1.8 billion payable within 12 months, including $1.3 billion outstanding under the mortgage repurchase facility.

At December 31, 2021, our ratio of debt to total capital (notes payable divided by stockholders’ equity plus notes payable) was 25.1% compared to 26.7% at September 30, 2021 and 25.3% at December 31, 2020.

Our net debt to total capital (notes payable net of cash divided by stockholders’ equity plus notes payable net of cash) was 15.2% at December 31, 2021 compared to 12.9% at September 30, 2021 and 12.4% and December 31, 2020.

At December 31, 2021, our ratio of homebuilding debt to total capital (homebuilding notes payable divided by stockholders’ equity plus homebuilding notes payable) was 17.3% compared to 17.8% at September 30, 2021 and 17.3% at December 31, 2020.

Our net homebuilding debt to total capital (homebuilding notes payable net of cash divided by stockholders’ equity plus homebuilding notes payable net of cash) was 6.9% at December 31, 2021 compared to 1.7% at September 30, 2021 and 3.9% at December 31, 2020.

As of March 31, 2022, we had outstanding notes payable with varying maturities totaling an aggregate principal amount of $5.6 billion, with $2.4 billion payable within 12 months, including $1.6 billion outstanding under the mortgage repurchase facility.

At March 31, 2022, our ratio of debt to total capital (notes payable divided by stockholders’ equity plus notes payable) was 24.9% compared to 26.7% at September 30, 2021 and 25.7% at March 31, 2021.

Our net debt to total capital (notes payable net of cash divided by stockholders’ equity plus notes payable net of cash) was 18.9% at March 31, 2022 compared to 12.9% at September 30, 2021 and 14.9% and March 31, 2021.

At March 31, 2022, our ratio of homebuilding debt to total capital (homebuilding notes payable divided by stockholders’ equity plus homebuilding notes payable) was 16.4% compared to 17.8% at September 30, 2021 and 16.8% at March 31, 2021.

Our net homebuilding debt to total capital (homebuilding notes payable net of cash divided by stockholders’ equity plus homebuilding notes payable net of cash) was 11.2% at March 31, 2022 compared to 1.7% at September 30, 2021 and 5.3% at March 31, 2021.

Over the long term, we intend to maintain our ratio of homebuilding debt to total capital below 30%, and we expect it to remain significantly lower than 30% throughout fiscal 2022.

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

At December 31, 2021, we had outstanding letters of credit of $253.5 million and surety bonds of $2.4 billion, issued by third parties to secure performance under various contracts.

At March 31, 2022, we had outstanding letters of credit of $236.1 million and surety bonds of $2.5 billion, issued by third parties to secure performance under various contracts.

We expect that our performance obligations secured by these letters of credit and bonds will generally be completed in the ordinary course of business and in accordance with the applicable contractual terms.

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Forestar also has an effective shelf registration statement filed with the SEC in October 2021, registering $750 million of equity securities, of which $300 million was reserved for sales under its at-the-market equity offering program that became effective in November 2021.

At December 31, 2021, $748.2 million remained available for issuance under Forestar’s shelf registration statement, of which $298.2 million was reserved for sales under its at-the-market equity offering program.

At March 31, 2022, $748.2 million remained available for issuance under Forestar’s shelf registration statement, of which $298.2 million was reserved for sales under its at-the-market equity offering program.

As market conditions permit, we may issue new debt or equity securities through the capital markets or obtain additional bank financing to fund our projected capital requirements or provide additional liquidity.

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Capital Resources - Homebuilding

Cash and Cash Equivalents — At December 31, 2021, cash and cash equivalents of our homebuilding segment totaled $2.1 billion.

Cash and Cash Equivalents — At March 31, 2022, cash and cash equivalents of our homebuilding segment totaled $1.2 billion.

Bank Credit Facility — We have a $2.19 billion senior unsecured homebuilding revolving credit facility with an uncommitted accordion feature that could increase the size of the facility to $3.0 billion, subject to certain conditions and availability of additional bank commitments.

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

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

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

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

The maturity date of the facility is April 20, 2026.

At December 31, 2021, there were no borrowings outstanding and $187.2 million of letters of credit issued under the revolving credit facility, resulting in available capacity of $2.0 billion.

Borrowings and repayments under the facility totaled $750 million each during the six months ended March 31, 2022.

At March 31, 2022, there were no borrowings outstanding and $175.6 million of letters of credit issued under the revolving credit facility, resulting in available capacity of $2.0 billion.

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

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

At December 31, 2021, we were in compliance with all of the covenants, limitations and restrictions of our homebuilding revolving credit facility.

Public Unsecured Debt — We have $3.15 billion principal amount of homebuilding senior notes outstanding as of December 31, 2021 that mature from September 2022 through October 2027.

At March 31, 2022, we were in compliance with all of the covenants, limitations and restrictions of our homebuilding revolving credit facility.

Public Unsecured Debt — We have $3.15 billion principal amount of homebuilding senior notes outstanding as of March 31, 2022 that mature from September 2022 through October 2027.

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

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

At March 31, 2022, we were in compliance with all of the limitations and restrictions associated with our public debt obligations.

Our homebuilding revolving credit facility and senior notes are guaranteed by D.R.

Horton, Inc.’s significant wholly-owned homebuilding subsidiaries.

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

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

During the three months ended December 31, 2021, we repurchased 2.7 million shares of our common stock for $278.2 million.

At December 31, 2021, the full amount of the debt repurchase authorization was remaining, and $268.0 million of the stock repurchase authorization was remaining.

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

During the six months ended March 31, 2022, we repurchased 5.8 million shares of our common stock for $544.2 million.

At March 31, 2022, the full amount of the debt repurchase authorization was remaining, and $2.0 million of the stock repurchase authorization was remaining.

In April 2022, our Board of Directors authorized the repurchase of up to $1.0 billion of our common stock, replacing the prior stock repurchase authorization.

These authorizations have no expiration date.

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

At December 31, 2021, Forestar’s ratio of debt to total capital (notes payable divided by stockholders’ equity plus notes payable) was 40.0% compared to 41.0% at September 30, 2021 and 42.3% at December 31, 2020.

Forestar’s ratio of net debt to total capital (notes payable net of cash divided by stockholders’ equity plus notes payable net of cash) was 33.9% compared to 35.2% at September 30, 2021 and 31.8% at December 31, 2020.

Cash and Cash Equivalents — At December 31, 2021, Forestar had cash and cash equivalents of $162.5 million.

At March 31, 2022, Forestar’s ratio of debt to total capital (notes payable divided by stockholders’ equity plus notes payable) was 38.9% compared to 41.0% at both September 30, 2021 and March 31, 2021.

Forestar’s ratio of net debt to total capital (notes payable net of cash divided by stockholders’ equity plus notes payable net of cash) was 29.9% compared to 35.2% at September 30, 2021 and 34.1% at March 31, 2021.

Cash and Cash Equivalents — At March 31, 2022, Forestar had cash and cash equivalents of $233.7 million.

Bank Credit Facility — Forestar has a $410 million senior unsecured revolving credit facility with an uncommitted accordion feature that could increase the size of the facility to $600 million, subject to certain conditions and availability of additional bank commitments.

The facility also provides for the issuance of letters of credit with a sublimit equal to the greater of $100 million and 50% of the revolving credit commitment.

Borrowings under the revolving credit facility are subject to a borrowing base calculation based on Forestar’s book value of its real estate assets and unrestricted cash.

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 total revolving credit commitments.

Borrowings under the revolving credit facility are subject to a borrowing base calculation based on the book value of Forestar’s real estate assets and unrestricted cash.

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

The maturity date of the facility is April 16, 2025.

At December 31, 2021, there were no borrowings outstanding and $66.3 million of letters of credit issued under the revolving credit facility, resulting in available capacity of $343.7 million.

At March 31, 2022, there were no borrowings outstanding and $60.5 million of letters of credit issued under the revolving credit facility, resulting in available capacity of $349.5 million.

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

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

Unsecured Debt — As of December 31, 2021, Forestar had $700 million principal amount of senior notes issued pursuant to Rule 144A and Regulation S under the Securities Act of 1933, as amended, which represent unsecured obligations of Forestar.

Unsecured Debt — As of March 31, 2022, Forestar had $700 million principal amount of senior notes issued pursuant to Rule 144A and Regulation S under the Securities Act of 1933, as amended, which represent unsecured obligations of Forestar.

These notes include $400 million principal amount of 3.85% senior notes that mature in May 2026 and $300 million principal amount of 5.0% senior notes that mature in March 2028.

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

or any of the subsidiaries that guarantee our homebuilding debt.

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

or any of the subsidiaries that guarantee the debt of our homebuilding, financial services or rental operations.

At March 31, 2022, Forestar was in compliance with all of the covenants, limitations and restrictions of its revolving credit facility and senior note obligations.

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

All of the $30 million authorization was remaining at December 31, 2021, and the authorization has no expiration date.

Issuance of Common Stock — During the three months ended December 31, 2021, Forestar issued 84,547 shares of common stock under its at-the-market equity offering program for proceeds of $1.7 million, net of commissions and other issuance costs totaling $0.1 million.

All of the $30 million authorization was remaining at March 31, 2022, and the authorization has no expiration date.

Issuance of Common Stock — During the six months ended March 31, 2022, Forestar issued 84,547 shares of common stock under its at-the-market equity offering program for proceeds of $1.7 million, net of commissions and other issuance costs totaling $0.1 million.

Capital Resources - Financial Services

Cash and Cash Equivalents — At December 31, 2021, cash and cash equivalents of our financial services operations totaled $88.2 million.

Cash and Cash Equivalents — At March 31, 2022, cash and cash equivalents of our financial services operations totaled $102.1 million.

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

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

In February 2022, the mortgage repurchase facility was amended to increase its capacity and extend its maturity date to February 17, 2023.

The total capacity of the facility is $1.6 billion;

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 December 31, 2021 was $1.633 billion, and its maturity date is February 18, 2022.

DHI Mortgage expects to renew and extend the maturity date of the facility.

As of December 31, 2021, $1.7 billion of mortgage loans held for sale with a collateral value of $1.7 billion were pledged under the mortgage repurchase facility.

As a result of advance paydowns totaling $436.5 million, DHI Mortgage had an obligation of $1.3 billion outstanding under the mortgage repurchase facility at December 31, 2021 at a 2.1% annual interest rate.

The total capacity of the facility at March 31, 2022 was $2.1 billion.

As of March 31, 2022, $2.2 billion of mortgage loans held for sale with a collateral value of $2.2 billion were pledged under the mortgage repurchase facility.

As a result of advance paydowns totaling $619.9 million, DHI Mortgage had an obligation of $1.6 billion outstanding under the mortgage repurchase facility at March 31, 2022 at a 1.9% annual interest rate.

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

or any of the subsidiaries that guarantee our homebuilding debt.

or any of the subsidiaries that guarantee the debt of our homebuilding, Forestar or rental operations.

The facility contains financial covenants as to the mortgage subsidiary’s minimum required tangible net worth, its maximum allowable leverage ratio and its minimum required liquidity.

These covenants are measured and reported to the lenders monthly.

At December 31, 2021, DHI Mortgage was in compliance with all of the conditions and covenants of the mortgage repurchase facility.

At March 31, 2022, DHI Mortgage was in compliance with all of the conditions and covenants of the mortgage repurchase facility.

In the past, DHI Mortgage has been able to renew or extend its mortgage credit facility at a sufficient capacity and on satisfactory terms prior to its maturity and obtain temporary additional commitments through amendments to the credit agreement during periods of higher than normal volumes of mortgages held for sale.

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Capital Resources - Rental

Cash and Cash Equivalents — At December 31, 2021, cash and cash equivalents of our rental operations segment totaled $44.2 million.

During fiscal 2021 and through the first quarter of fiscal 2022, we substantially increased the investment in our rental operations.

The inventory in our rental segment totaled $1.2 billion at December 31, 2021 compared to $840.9 million at September 30, 2021 and $385.6 million at December 31, 2020.

Cash and Cash Equivalents — At March 31, 2022, cash and cash equivalents of our rental operations segment totaled $141.1 million.

During fiscal 2021 and through the first half of fiscal 2022, we substantially increased the investment in our rental operations.

The inventory in our rental segment totaled $1.5 billion at March 31, 2022 compared to $840.9 million at September 30, 2021 and $543.5 million at March 31, 2021.

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

Our rental operations had no debt outstanding at December 31, 2021;

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

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

Bank Credit Facility — In March 2022, our rental subsidiary, DRH Rental, entered into a $625 million senior unsecured revolving credit facility with an uncommitted accordion feature that could increase the size of the facility to $1.25 billion, subject to certain conditions and availability of additional bank commitments.

On March 17, 2022, DRH Rental utilized the accordion feature and increased the size of the facility to $750 million through an additional commitment.

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 total revolving credit commitments.

Availability under the revolving credit facility is subject to a borrowing base calculation based on the book value of DRH Rental’s real estate assets and unrestricted cash.

At March 31, 2022, the borrowing base limited the available capacity under the facility to $486 million and there were no borrowings outstanding or letters of credit issued under the facility.

The maturity date of the facility is March 4, 2026.

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

The financial covenants require DRH Rental to maintain a minimum level of tangible net worth, a minimum level of liquidity and a maximum allowable leverage ratio.

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

At March 31, 2022, DRH Rental was in compliance with all of the covenants, limitations and restrictions of its revolving credit facility.

DRH Rental’s revolving credit facility is not guaranteed by D.R.

or any of the subsidiaries that guarantee the debt of our homebuilding, Forestar or financial services operations.

Operating Cash Flow Activities

In the three months ended December 31, 2021, net cash used in operating activities was $174.1 million compared to $252.1 million in the prior year period.

Cash used in operating activities in the current year period primarily consisted of $255.9 million and $114.7 million of cash used in our rental and homebuilding segments, respectively, partially offset by $247.5 million and $5.8 million of cash provided by our financial services and Forestar segments.

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

Cash used to increase construction in progress and finished home inventory was $1.0 billion in the current year period compared to $591.2 million in the prior year period.

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

In the six months ended March 31, 2022, net cash used in operating activities was $834.6 million compared to $154.9 million in the prior year period.

Cash used in operating activities in the current year period primarily consisted of $416.2 million, $409.1 million and $63.0 million of cash used in our homebuilding, rental and financial services segments, respectively, partially offset by $76.6 million of cash provided by our Forestar segment.

Cash used to increase construction in progress and finished home inventory was $2.1 billion in the current year period compared to $1.3 billion in the prior year period, reflecting an increase in our homes in inventory in the current period.

Cash used to increase residential land and lots was $528.4 million in the current year period compared to $975.2 million in the prior year period.

Of these amounts, $61.1 million and $377.2 million, respectively, related to Forestar.

During the three months ended December 31, 2021, we increased our single-family and multi-family rental properties by $319.5 million, which is reflected as cash used in operating activities.

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

During the three month period ended December 31, 2020, expenditures related to rental properties were $86.2 million and are reflected as cash used in investing activities.

During the six months ended March 31, 2022, cash used to increase our single-family and multi-family rental properties was $655.9 million and is reflected as cash used in operating activities.

Prior to the third quarter of fiscal 2021, cash activities related to rental properties were presented as investing activities.

During the six month period ended March 31, 2021, expenditures related to rental properties were $173.9 million.

Investing Cash Flow Activities

In the three months ended December 31, 2021, net cash used in investing activities was $26.5 million compared to $91.4 million in the prior year period.

In the six months ended March 31, 2022, net cash used in investing activities was $68.7 million compared to $196.1 million in the prior year period.

In the current year period, uses of cash included purchases of property and equipment totaling $72.5 million.

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

During the three months ended December 31, 2021, net cash used in financing activities was $572.0 million, consisting primarily of cash used to repurchase shares of our common stock of $303.8 million, net payments of $234.6 million on our mortgage repurchase facility and payment of cash dividends totaling $80.1 million.

During the three months ended December 31, 2020, net cash used in financing activities was $221.7 million, consisting primarily of repayment of $400 million principal amount of our 2.55% homebuilding senior notes at maturity, net payments of $163.5 million on our mortgage repurchase facility, payment of cash dividends totaling $72.9 million and cash used to repurchase shares of our common stock of $53.8 million.

These uses of cash were partially offset by note proceeds from our issuance of $500 million principal amount of 1.4% homebuilding senior notes.

During the three months ended December 31, 2021, our Board of Directors approved a quarterly cash dividend of $0.225 per common share, which was paid on December 15, 2021 to stockholders of record on December 6, 2021.

In January 2022, our Board of Directors approved a quarterly cash dividend of $0.225 per common share, payable on February 25, 2022 to stockholders of record on February 17, 2022.

During the six months ended March 31, 2022, net cash used in financing activities was $644.8 million, consisting primarily of repayments of amounts drawn on our homebuilding revolving credit facility totaling $750 million, cash used to repurchase shares of our common stock of $569.8 million and payment of cash dividends totaling $159.2 million.

These uses of cash were partially offset by draws on our homebuilding revolving credit facility of $750 million and net advances of $84.3 million on our mortgage repurchase facility.

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

These uses of cash were partially offset by note proceeds from our issuance of $500 million principal amount of 1.4% homebuilding senior notes and net advances of $70.9 million on our mortgage repurchase facility.

During each of the first two quarters of fiscal 2022, our Board of Directors approved a quarterly cash dividend of $0.225 per common share, the most recent of which was paid on February 25, 2022 to stockholders of record on February 17, 2022.

In April 2022, our Board of Directors approved a quarterly cash dividend of $0.225 per common share, payable on May 18, 2022 to stockholders of record on May 9, 2022.

Cash dividends of $0.20 per common share were approved and paid in each quarter of fiscal 2021.

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SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION

As of December 31, 2021, D.R.

As of March 31, 2022, D.R.

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

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

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

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

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

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and Guarantor Subsidiaries

Summarized Balance Sheet Data December 31,

Summarized Balance Sheet Data March 31,

2022 September 30,

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15,148.2 13,567.5

Summarized Statement of Operations Data Three Months Ended

December 31, 2021 Year Ended

Summarized Statement of Operations Data Six Months Ended

March 31, 2022 Year Ended

September 30, 2021

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Net income 2,294.5 3,786.5

CRITICAL ACCOUNTING POLICIES

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

As disclosed in our annual report on Form 10-K for the fiscal year ended September 30, 2021, our most critical accounting policies relate to revenue recognition, inventories and cost of sales, warranty and legal claims and insurance.

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As disclosed in our critical accounting policies in our Form 10-K for the fiscal year ended September 30, 2021, our reserves for construction defect claims include the estimated costs of both known claims and anticipated future claims.

At December 31, 2021 and September 30, 2021, we had reserves for approximately 410 and 380 pending construction defect claims, respectively, and no individual existing claim was material to our financial statements.

During the three months ended December 31, 2021, we established reserves for approximately 70 new construction defect claims and resolved 40 construction defect claims for a total cost of $4.3 million.

At December 31, 2020 and September 30, 2020, we had reserves for approximately 270 and 260 pending construction defect claims, respectively, and no individual existing claim was material to our financial statements.

During the three months ended December 31, 2020, we established reserves for approximately 30 new construction defect claims and resolved 20 construction defect claims for a total cost of $2.3 million.

At March 31, 2022 and September 30, 2021, we had reserves for approximately 455 and 380 pending construction defect claims, respectively, and no individual existing claim was material to our financial statements.

During the six months ended March 31, 2022, we established reserves for approximately 180 new construction defect claims and resolved 105 construction defect claims for a total cost of $12.8 million.

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

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

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

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis