What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-01-25 compared with 2022-07-22 · 343 added, 430 removed, 460 unchanged (63% of the section changed)

11 unchanged sentences

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 $200,000 to more than $1,000,000, with an average closing price of $377,800 during the nine months ended June 30, 2022.

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

Approximately 90% of our home sales revenue in the three months ended December 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.

Our product offerings include a broad range of homes for entry-level, move-up, active adult and luxury buyers.

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

At June 30, 2022, we owned 63% of the outstanding shares of Forestar Group Inc.

At December 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 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 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.

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

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

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

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

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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 nine months ended June 30, 2022, our number of homes closed decreased 1%, while our home sales revenues increased 19% compared to the prior year period.

Our consolidated revenues increased 21% to $23.8 billion compared to $19.7 billion in the prior year period.

Our pre-tax income was $5.6 billion in the nine months ended June 30, 2022 compared to $3.6 billion in the prior year period, and our pre-tax operating margin was 23.3% compared to 18.5%.

Net income was $4.2 billion in the nine months ended June 30, 2022 compared to $2.8 billion in the prior year period, and our diluted earnings per share was $11.85 compared to $7.73.

In the trailing twelve months ended June 30, 2022, our return on equity (ROE) was 35.1% compared to 29.5% in the prior year period, and our homebuilding return on inventory (ROI) was 41.7% compared to 34.9%.

During the three months ended December 31, 2022, our number of homes closed decreased 6%, while our home sales revenues increased 1% compared to the prior year period.

Our consolidated revenues increased 3% to $7.3 billion in the three months ended December 31, 2022 compared to $7.1 billion in the prior year period.

Our pre-tax income was $1.3 billion in the three months ended December 31, 2022 compared to $1.5 billion in the prior year period, and our pre-tax operating margin was 17.5% compared to 21.2%.

Net income was $968.3 million in the three months ended December 31, 2022 compared to $1.1 billion in the prior year period, and our diluted earnings per share was $2.76 compared to $3.17.

In the trailing twelve months ended December 31, 2022, our return on equity (ROE) was 31.5% compared to 32.4% in the prior year period, and our homebuilding return on inventory (ROI) was 39.5% compared to 38.5%.

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 the first half of fiscal 2022 and for most of the third quarter, demand for our homes remained strong.

The supply of homes at affordable price points remains limited across most of our markets, and disruptions in the supply chains for certain building materials and tightness in the labor market have caused our construction cycle to lengthen.

In June 2022, we began to see a moderation in housing demand as mortgage interest rates increased substantially and inflationary pressures remained elevated.

Although these pressures may persist for some time, we believe we are well-positioned to meet these changing market conditions with our affordable product offerings and lot supply, and we will manage our homes in inventory based on the level of homebuyer demand.

Within our homebuilding land and lot portfolio, our lots controlled through purchase contracts represent 78% of the lots owned and controlled at June 30, 2022 compared to 76% at both September 30, 2021 and June 30, 2021.

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 .

In June 2022, we began to see a moderation in housing demand that persisted through the end of the first fiscal quarter as mortgage interest rates increased substantially and inflationary pressures remained elevated.

Disruptions in the supply chain for certain building materials and tightness in the labor market have caused our construction cycle to lengthen during the past two years;

however, we expect this to improve for homes started during fiscal 2023 as supply chain and labor issues are resolved.

Although higher interest rates and economic uncertainty may persist for some time, the supply of both new and existing homes at affordable price points remains limited across most of our markets, and demographics supporting housing demand remain favorable.

We believe we are well-positioned to meet these changing market conditions with our affordable product offerings and lot supply and will manage our home pricing, sales incentives and number of homes in inventory based on the level of homebuyer demand.

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

We remain focused on our relationships with Forestar and other land developers across the country and expect to continue to maintain a substantial majority of our lot pipeline controlled through purchase contracts .

We believe our strong balance sheet and liquidity position provide us with the flexibility to operate effectively through changing economic conditions.

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• Managing our inventory of homes under construction relative to demand in each of our markets, including starting construction on unsold homes to capture new home demand and actively controlling the number of unsold, completed homes in inventory.

• Investing in land and land development in desirable markets, while controlling the level of land and lots we own in each market relative to the local new home demand.

• Investing in lots, land and land development in desirable markets, while controlling the level of land and lots we own in each market relative to the local new home demand.

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

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

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

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

• Opportunistically evaluating potential acquisitions to enhance our operating platform.

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

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

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

Key financial results as of and for the three months ended June 30, 2022, as compared to the same period of 2021, were as follows:

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

Homebuilding:

• Homebuilding revenues increased 18% to $8.3 billion compared to $7.0 billion.

• Homebuilding revenues were $6.74 billion compared to $6.68 billion.

• Homes closed decreased 6% to 17,340 homes, while the average closing price of those homes increased 7% to $386,900.

• Net sales orders decreased 7% to 16,693 homes, while the value of net sales orders increased 8% to $6.9 billion.

• Sales order backlog decreased 9% to 29,244 homes, while the value of sales order backlog increased 8% to $11.9 billion.

• Net sales orders decreased 38% to 13,382 homes, and the value of net sales orders decreased 40% to $4.9 billion.

• Sales order backlog decreased 46% to 15,759 homes, and the value of sales order backlog decreased 44% to $6.2 billion.

• Home sales gross margin was 23.9% compared to 27.4%.

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• Homebuilding pre-tax income was 16.2% of homebuilding revenues compared to 20.0%.

• Homebuilding cash and cash equivalents totaled $1.2 billion compared to $3.0 billion and $1.7 billion at September 30, 2021 and June 30, 2021, respectively.

• Homebuilding inventories totaled $17.9 billion compared to $13.9 billion and $13.5 billion at September 30, 2021 and June 30, 2021, respectively.

• Homes in inventory totaled 56,400 compared to 47,800 and 47,300 at September 30, 2021 and June 30, 2021, respectively.

• Owned lots totaled 131,100 compared to 127,800 and 123,900 at September 30, 2021 and June 30, 2021, respectively.

Lots controlled through purchase contracts increased to 467,100 from 402,500 and 393,200 at September 30, 2021 and June 30, 2021, respectively.

• Homebuilding debt was $3.7 billion compared to $3.2 billion and $2.6 billion at September 30, 2021 and June 30, 2021, respectively.

• Homebuilding debt to total capital was 17.0% compared to 17.8% and 16.0% at September 30, 2021 and June 30, 2021, respectively.

Net homebuilding debt to total capital was 12.1% compared to 1.7% and 6.4% at September 30, 2021 and June 30, 2021, respectively.

• Homebuilding cash and cash equivalents totaled $2.0 billion compared to $2.0 billion and $2.1 billion at September 30, 2022 and December 31, 2021, respectively.

• Homebuilding inventories totaled $17.7 billion compared to $17.3 billion and $15.3 billion at September 30, 2022 and December 31, 2021, respectively.

• Homes in inventory totaled 43,200 compared to 46,400 and 54,800 at September 30, 2022 and December 31, 2021, respectively.

• Owned lots totaled 136,400 compared to 131,100 and 131,900 at September 30, 2022 and December 31, 2021, respectively.

Lots controlled through purchase contracts totaled 414,600 compared to 442,100 and 419,500 at September 30, 2022 and December 31, 2021, respectively.

• Homebuilding debt was $3.0 billion compared to $2.9 billion and $3.3 billion at September 30, 2022 and December 31, 2021, respectively.

• Homebuilding debt to total capital was 12.8% compared to 13.2% and 17.3% at September 30, 2022 and December 31, 2021, respectively.

Net homebuilding debt to total capital was 4.4% compared to 4.4% and 6.9% at September 30, 2022 and December 31, 2021, respectively.

• Forestar’s revenues decreased 47% to $216.7 million compared to $407.6 million.

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• Forestar’s pre-tax income was 12.9% of revenues compared to 13.1%.

• Forestar’s cash and cash equivalents totaled $146.3 million compared to $153.6 million and $116.0 million at September 30, 2021 and June 30, 2021, respectively.

• Forestar’s inventories totaled $2.1 billion compared to $1.9 billion at both September 30, 2021 and June 30, 2021.

• Forestar’s owned and controlled lots totaled 97,000 at both June 30, 2022 and September 30, 2021 and 96,600 at June 30, 2021.

• Forestar’s cash and cash equivalents totaled $216.4 million compared to $264.8 million and $162.5 million at September 30, 2022 and December 31, 2021, respectively.

• Forestar’s inventories totaled $2.1 billion compared to $2.0 billion at both September 30, 2022 and December 31, 2021.

• Forestar’s owned and controlled lots totaled 82,300 compared to 90,100 and 103,300 at September 30, 2022 and December 31, 2021, respectively.

Of these lots, 35,000 were under contract to sell to or subject to a right of first offer with D.R.

Horton compared to 39,200 and 39,400 at September 30, 2021 and June 30, 2021, respectively.

• Forestar’s debt was $705.6 million compared to $704.5 million and $704.1 million at September 30, 2021 and June 30, 2021, respectively.

• Forestar’s debt to total capital was 38.1% compared to 41.0% and 42.1% at September 30, 2021 and June 30, 2021, respectively.

Forestar’s net debt to total capital was 32.8% compared to 35.2% and 37.8% at September 30, 2021 and June 30, 2021, respectively.

Horton compared to 36,700 and 38,300 at September 30, 2022 and December 31, 2021, respectively.

• Forestar’s debt was $706.4 million compared to $706.0 million and $704.9 million at September 30, 2022 and December 31, 2021, respectively.

• Forestar’s debt to total capital was 36.7% compared to 37.1% and 40.0% at September 30, 2022 and December 31, 2021, respectively.

Forestar’s net debt to total capital was 28.7% compared to 26.9% and 33.9% at September 30, 2022 and December 31, 2021, respectively.

Financial Services:

• Financial services revenues increased 35% to $254.3 million compared to $188.7 million.

• Financial services pre-tax income increased 83% to $128.3 million compared to $70.3 million.

• Financial services revenues decreased 26% to $137.0 million compared to $184.3 million.

• Financial services pre-tax income decreased 73% to $18.2 million compared to $67.1 million.

• Financial services pre-tax income was 13.3% of financial services revenues compared to 36.4%.

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• Rental pre-tax income was $110.3 million compared to $70.1 million.

• Rental inventory totaled $2.0 billion compared to $840.9 million and $760.2 million at September 30, 2021 and June 30, 2021, respectively.

• Single-family rental homes and multi-family rental units closed totaled 382 compared to 69.

• Rental inventory totaled $2.9 billion compared to $2.6 billion and $1.2 billion at September 30, 2022 and December 31, 2021, respectively.

• Multi-family rental units closed totaled 300 compared to 351.

• Single-family rental homes closed totaled 694 compared to 226.

Consolidated Results:

• Consolidated revenues increased 3% to $7.3 billion compared to $7.1 billion.

• Consolidated pre-tax income increased 54% to $2.2 billion compared to $1.4 billion.

• Consolidated pre-tax income decreased 15% to $1.3 billion compared to $1.5 billion.

• Consolidated pre-tax income was 17.5% of consolidated revenues compared to 21.2%.

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• Net income attributable to D.R.

Horton increased 48% to $1.6 billion compared to $1.1 billion.

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

Horton increased 53% to $4.67 compared to $3.06.

• Stockholders’ equity was $18.1 billion compared to $14.9 billion and $13.8 billion at September 30, 2021 and June 30, 2021, respectively.

• Book value per common share increased to $52.00 compared to $41.81 and $38.54 at September 30, 2021 and June 30, 2021, respectively.

• Debt to total capital was 24.9% compared to 26.7% and 24.2% at September 30, 2021 and June 30, 2021, respectively.

Net debt to total capital was 19.3% compared to 12.9% and 15.2% at September 30, 2021 and June 30, 2021, respectively.

Key financial results for the nine months ended June 30, 2022, as compared to the same period of 2021, were as follows:

Homebuilding:

• Homebuilding revenues increased 19% to $22.5 billion compared to $18.9 billion.

• Homes closed decreased 1% to 59,532 homes, while the average closing price of those homes increased 20% to $377,800.

• Net sales orders decreased 4% to 62,555 homes, while the value of net sales orders increased 15% to $24.9 billion.

• Home sales gross margin was 28.9% compared to 24.9%.

• Homebuilding SG&A expense was 6.9% of homebuilding revenues compared to 7.5%.

• Homebuilding pre-tax income was $4.9 billion compared to $3.3 billion.

• Homebuilding pre-tax income was 21.9% of homebuilding revenues compared to 17.4%.

• Net cash provided by homebuilding operations was $124.5 million compared to $450.7 million.

• Forestar’s revenues increased 25% to $1.1 billion compared to $907.1 million.

Revenues in the current and prior year periods included $977.8 million and $865.8 million, respectively, of revenue from land and lot sales to our homebuilding segment.

• Forestar’s lots sold increased 25% to 13,777 compared to 11,013.

Lots sold to D.R.

Horton totaled 11,823 compared to 10,466.

• Forestar’s pre-tax income was $169.4 million compared to $87.9 million.

• Forestar’s pre-tax income was 14.9% of revenues compared to 9.7%.

Financial Services:

• Financial services revenues increased 10% to $660.8 million compared to $601.1 million.

• Financial services pre-tax income increased 10% to $288.2 million compared to $262.1 million.

• Financial services pre-tax income was 43.6% of financial services revenues in both periods.

• Rental revenues were $489.1 million compared to $54.9 million.

• Rental pre-tax income was $215.1 million compared to $12.0 million.

• Single-family rental homes and multi-family rental units closed totaled 1,453 compared to 193.

Consolidated Results:

• Consolidated revenues increased 21% to $23.8 billion compared to $19.7 billion.

• Consolidated pre-tax income increased 53% to $5.6 billion compared to $3.6 billion.

• Consolidated pre-tax income was 23.3% of consolidated revenues compared to 18.5%.

• Income tax expense was $1.3 billion compared to $784.1 million, and our effective tax rate was 23.7% compared to 21.6%.

• Net income attributable to D.R.

Horton increased 49% to $4.2 billion compared to $2.8 billion.

Horton decreased 16% to $958.7 million compared to $1.1 billion.

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

Horton increased 53% to $11.85 compared to $7.73.

• Net cash used in operations was $562.8 million compared to $34.5 million.

Horton decreased 13% to $2.76 compared to $3.17.

• Stockholders’ equity was $20.2 billion compared to $19.4 billion and $15.7 billion at September 30, 2022 and December 31, 2021, respectively.

• Book value per common share increased to $58.71 compared to $56.39 and $44.25 at September 30, 2022 and December 31, 2021, respectively.

• Debt to total capital was 22.0% compared to 23.8% and 25.1% at September 30, 2022 and December 31, 2021, respectively.

Net debt to total capital was 13.3% compared to 15.4% and 15.2% at September 30, 2022 and December 31, 2021, respectively.

RESULTS OF OPERATIONS - HOMEBUILDING

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State Reporting Region/Market State Reporting Region/Market

Northwest Region South Central Region

Colorado Colorado Springs Arkansas Northwest Arkansas

Denver Oklahoma Oklahoma City

Fort Collins Tulsa

Oregon Bend Texas Austin

Eugene/Springfield Beaumont

Portland/Salem Bryan/College Station

Utah Salt Lake City Corpus Christi

George Dallas

Washington Central Washington Fort Worth

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

San Bernardino County New Bern/Greenville

San Diego County Raleigh/Durham

Hawaii Oahu Wilmington

Nevada Las Vegas South Carolina Charleston

Reno Columbia

New Mexico Albuquerque Greenville/Spartanburg

Southeast Region Myrtle Beach

Alabama Birmingham Tennessee Chattanooga

Huntsville Knoxville

Mobile/Baldwin County Memphis

Montgomery Nashville

Florida Fort Myers/Naples North Region

Gainesville Delaware Central Delaware

Jacksonville Northern Delaware

Lakeland Illinois Chicago

Melbourne/Vero Beach Indiana Fort Wayne

Miami/Fort Lauderdale Indianapolis

Ocala Northwest Indiana

Orlando Iowa Des Moines

Pensacola/Panama City Iowa City/Cedar Rapids

Lucie Kentucky Louisville

Tallahassee Maryland Baltimore

Tampa/Sarasota Suburban Washington, D.C.

Volusia County Western Maryland

West Palm Beach Minnesota Minneapolis/St.

Louisiana Baton Rouge Nebraska Omaha

Lake Charles/Lafayette New Jersey Northern New Jersey

Mississippi Gulf Coast Southern New Jersey

Ohio Cincinnati

Pennsylvania Central Pennsylvania

Virginia Northern Virginia

Southern Virginia

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 and nine months ended June 30, 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 and nine months ended June 30, 2021 has been reclassified to conform to the current presentation.

Northwest Region Southeast Region (Continued)

Colorado Colorado Springs Florida Ocala

Denver Orlando

Fort Collins Pensacola/Panama City

Oregon Bend Port St.

Eugene/Springfield Tallahassee

Portland/Salem Tampa/Sarasota

Utah Salt Lake City Volusia County

George West Palm Beach

Washington Central Washington Louisiana Baton Rouge

Seattle/Tacoma/Everett/Olympia Lake Charles/Lafayette

Spokane Mississippi Gulf Coast

Southwest Region Georgia Atlanta

Arizona Phoenix Augusta

Tucson Central Georgia

California Bakersfield Savannah

Bay Area Valdosta

Fresno/Tulare North Carolina Asheville

Los Angeles County Charlotte

Modesto/Merced/Stockton Greensboro/Winston-Salem

Redding/Chico/Yuba City New Bern/Greenville

Riverside County Raleigh/Durham

Sacramento Wilmington

San Bernardino County South Carolina Charleston

Hawaii Oahu Columbia

Nevada Las Vegas Greenville/Spartanburg

Reno Hilton Head

New Mexico Albuquerque Myrtle Beach

Tennessee Chattanooga

South Central Region Knoxville

Arkansas Northwest Arkansas Memphis

Oklahoma Oklahoma City Nashville

Texas Abilene North Region

Austin Delaware Central Delaware

Beaumont Northern Delaware

Bryan/College Station Illinois Chicago

Corpus Christi Indiana Fort Wayne

Dallas Indianapolis

Fort Worth Northwest Indiana

Houston Iowa Des Moines

Killeen/Temple/Waco Iowa City/Cedar Rapids

Lubbock Kentucky Louisville

Midland/Odessa Maryland Baltimore

New Braunfels/San Marcos Suburban Washington, D.C.

San Antonio Western Maryland

Minnesota Minneapolis/St.

Southeast Region Nebraska Omaha

Alabama Birmingham New Jersey Northern New Jersey

Huntsville Southern New Jersey

Mobile/Baldwin County Ohio Cincinnati

Montgomery Columbus

Tuscaloosa Pennsylvania Central Pennsylvania

Florida Fort Myers/Naples Philadelphia

Gainesville Virginia Northern Virginia

Jacksonville Richmond

Lakeland Virginia Beach/Williamsburg

Melbourne/Vero Beach West Virginia Eastern West Virginia

Miami/Fort Lauderdale

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, 2022 and 2021.

Net Sales Orders (1)

Three Months Ended June 30,

Net Homes Sold Value (In millions) Average Selling Price

Change 2022 2021 %

Northwest 886 1,086 (18) % $ 532.8 $ 592.7 (10) % $ 601,400 $ 545,800 10 %

Southwest 1,967 2,439 (19) % 1,038.1 1,114.8 (7) % 527,800 457,100 15 %

South Central 5,176 5,203 (1) % 1,888.3 1,633.9 16 % 364,800 314,000 16 %

Southeast 3,979 5,415 (27) % 1,612.7 1,784.1 (10) % 405,300 329,500 23 %

East 3,274 2,750 19 % 1,265.8 889.9 42 % 386,600 323,600 19 %

North 1,411 1,059 33 % 603.0 433.5 39 % 427,400 409,300 4 %

16,693 17,952 (7) % $ 6,940.7 $ 6,448.9 8 % $ 415,800 $ 359,200 16 %

Nine Months Ended June 30,

Three Months Ended December 31,

Net Homes Sold Value (In millions) Average Selling Price

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Sales Order Cancellations

Three Months Ended June 30,

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

2022 2021 2022 2021 2022 2021

Northwest 204 124 $ 120.7 $ 66.9 19 % 10 %

Southwest 646 346 314.7 143.2 25 % 12 %

South Central 1,801 1,232 614.2 363.9 26 % 19 %

Southeast 1,450 1,101 522.1 331.3 27 % 17 %

East 668 678 248.3 208.4 17 % 20 %

North 382 231 156.9 85.9 21 % 18 %

5,151 3,712 $ 1,976.9 $ 1,199.6 24 % 17 %

Nine Months Ended June 30,

Three Months Ended December 31,

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

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Net Sales Orders

The number of net sales orders decreased 7% and 4% in the three and nine months ended June 30, 2022, respectively, compared to the prior year periods.

The value of net sales orders increased 8% to $6.9 billion (16,693 homes) and 15% to $24.9 billion (62,555 homes) for the three and nine months ended June 30, 2022, respectively, compared to $6.4 billion (17,952 homes) and $21.7 billion (65,429 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 nine months ended June 30, 2022 was $415,800 and $398,800, respectively, up 16% and 20% from the prior year periods.

During the first half of fiscal 2022 and for most of the third quarter, demand for our homes remained strong.

We continued restricting our sales order pace during the third quarter in most of our communities to match our longer construction cycles, which have resulted from disruptions in the supply chains for certain building materials and tightness in the labor market.

In June 2022, we began to see a moderation in demand for our homes as mortgage interest rates increased substantially and inflationary pressures remained elevated.

Although these pressures may persist for some time, we believe we are well-positioned to meet these changing market conditions with our affordable product offerings.

The number of net sales orders decreased 7% in the three months ended June 30, 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 Portland markets in the Northwest;

the California and Arizona markets in the Southwest;

the Austin market in the South Central;

and the Louisiana and Tampa markets in the Southeast.

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

the Myrtle Beach market in the East and the New Jersey and Minnesota markets in the North.

The number of net sales orders decreased 4% in the nine months ended June 30, 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 Arizona and California markets in the Southwest;

the Austin and Fort Worth markets in the South Central;

and the Louisiana, Tampa and Orlando markets in the Southeast.

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

the Myrtle Beach market in the East and the Indianapolis and Ohio markets in the North.

Our sales order cancellation rate (cancelled sales orders divided by gross sales orders for the period) was 24% and 18% in the three and nine months ended June 30, 2022, respectively, compared to 17% in both prior year periods.

The increase in our cancellation rate in the current quarter primarily reflects the moderation in demand we experienced in June 2022 as mortgage interest rates increased substantially and inflationary pressures remained elevated.

The number of net sales orders decreased 38% in the three months ended December 31, 2022 compared to the prior year period.

The value of net sales orders decreased 40% to $4.9 billion (13,382 homes) compared to $8.3 billion (21,522 homes) in the prior year period.

The average selling price of net sales orders during the three months ended December 31, 2022 was $367,900, down 4% from the prior year period.

During most of fiscal 2022, demand for our homes remained strong.

In June 2022, we began to see a moderation in housing demand as mortgage interest rates increased substantially and inflationary pressures remained elevated.

Although these pressures continued through the first quarter of fiscal 2023 and may persist for some time, we believe we are well-positioned to meet these changing market conditions with our affordable product offerings.

The markets contributing most to the decreases in sales order volume were:

the Denver and Portland markets in the Northwest;

the Phoenix and California markets in the Southwest;

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

the Florida markets in the Southeast;

the Atlanta and Carolina markets in the East;

and the Indianapolis market in the North.

Our sales order cancellation rate (cancelled sales orders divided by gross sales orders for the period) was 27% in the three months ended December 31, 2022 compared to 15% in the prior year period.

The higher current period cancellation rate reflects the moderation in demand we have experienced as mortgage rates increased substantially and inflationary pressures remain elevated, while the prior year cancellation rate was historically low due to strong demand.

Sales Order Backlog

As of June 30,

As of December 31,

Homes in Backlog Value (In millions) Average Selling Price

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Homes Closed and Home Sales Revenue

Three Months Ended June 30,

Homes Closed Value (In millions) Average Selling Price

Change 2022 2021 %

Northwest 1,194 1,348 (11) % $ 673.9 $ 662.5 2 % $ 564,400 $ 491,500 15 %

Southwest 2,539 2,465 3 % 1,288.9 1,020.5 26 % 507,600 414,000 23 %

South Central 6,117 5,575 10 % 2,077.3 1,542.9 35 % 339,600 276,800 23 %

Southeast 5,740 6,558 (12) % 2,111.7 1,960.6 8 % 367,900 299,000 23 %

East 3,782 3,975 (5) % 1,385.4 1,227.9 13 % 366,300 308,900 19 %

North 1,936 1,667 16 % 799.2 625.7 28 % 412,800 375,300 10 %

21,308 21,588 (1) % $ 8,336.4 $ 7,040.1 18 % $ 391,200 $ 326,100 20 %

Nine Months Ended June 30,

Three Months Ended December 31,

Homes Closed Value (In millions) Average Selling Price

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Home Sales Revenue

Revenues from home sales increased 18% to $8.3 billion (21,308 homes closed) for the three months ended June 30, 2022 from $7.0 billion (21,588 homes closed) in the prior year period.

Revenues from home sales increased 19% to $22.5 billion (59,532 homes closed) for the nine months ended June 30, 2022 from $18.9 billion (60,028 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 decreased 1% in the three months ended June 30, 2022 compared to the prior year period.

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

the Hawaii markets in the Southwest;

the Houston and Dallas markets in the South Central;

and the Ohio, Chicago 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 and Denver markets in the Northwest;

the Orlando market in the Southeast;

and the Charlotte and Atlanta markets in the East.

The number of homes closed decreased 1% in the nine months ended June 30, 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 and Charlotte markets in the East.

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

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

Revenues from home sales were $6.71 billion (17,340 homes closed) for the three months ended December 31, 2022 and $6.66 billion (18,396 homes closed) in the prior year period.

The number of homes closed decreased 6% in the three months ended December 31, 2022 compared to the prior year period.

The markets contributing most to the decreases in closings volume were:

the Denver market in the Northwest;

the California markets in the Southwest;

the Houston and Fort Worth markets in the South Central;

the Alabama and Louisiana markets in the Southeast;

the Atlanta market in the East;

and the Delaware and Ohio markets in the North.

Homebuilding Operating Margin Analysis

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Three Months Ended

June 30, Nine Months Ended

2022 2021 2022 2021

Gross profit – home sales 23.9 % 27.4 %

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Home Sales Gross Profit

Gross profit from home sales increased to $2.5 billion in the three months ended June 30, 2022 from $1.8 billion in the prior year period and increased 420 basis points to 30.1% as a percentage of home sales revenues.

The percentage increase resulted from improvements of 460 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 50 basis points.

Gross profit from home sales increased to $6.5 billion in the nine months ended June 30, 2022 from $4.7 billion in the prior year period and increased 400 basis points to 28.9% as a percentage of home sales revenues.

The percentage increase resulted from improvements of 400 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 20 basis points.

Gross profit from home sales decreased to $1.6 billion in the three months ended December 31, 2022 from $1.8 billion in the prior year period and decreased 350 basis points to 23.9% as a percentage of home sales revenues.

The percentage decrease resulted from a decrease of 360 basis points due to the average cost of our homes closed increasing by more than the average selling price of those homes, partially offset by 10 basis points due to a decrease in the amortization of capitalized interest.

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

As we adjust to current market conditions, we expect the pace of sales price increases to slow and our incentive levels to increase from historical lows which would cause our gross profit margins in future periods to decline.

To adjust to current market conditions, we have recently increased our use of incentives across all of our markets.

We have also reduced home prices and sizes of our home offerings where necessary to provide better affordability to homebuyers in the current higher mortgage rate environment.

We expect to continue offering a higher level of incentives throughout fiscal 2023 and also expect our average sales price to decrease, which will cause our gross profit margins to decline from current levels.

Land/Lot Sales and Other Revenues

Land/lot sales and other revenues from our homebuilding operations were $11.4 million and $42.0 million in the three and nine months ended June 30, 2022, respectively, and $7.1 million and $40.5 million in the comparable periods of fiscal 2021.

Land/lot sales and other revenues from our homebuilding operations were $34.8 million and $23.0 million in the three months ended December 31, 2022 and 2021, respectively.

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

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

As of June 30, 2022, our homebuilding operations had $32.7 million of land held for sale that we expect to sell in the next twelve months.

As of December 31, 2022, our homebuilding operations had $29.5 million of land held for sale that we expect to sell in the next twelve months.

Inventory and Land Option Charges

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

As a result of this review, there were no impairments recorded in our homebuilding segment during the three and nine months ended June 30, 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 nine months ended June 30, 2021.

As a result of this review, there were $4.8 million of impairments recorded in our homebuilding segment during the three months ended December 31, 2022.

There were no impairment charges recorded in the prior year quarter.

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 impairment charges, which could be significant.

During the three and nine months ended June 30, 2022, earnest money and pre-acquisition cost write-offs related to land purchase contracts that we have terminated or expect to terminate were $9.5 million and $23.2 million, respectively, compared to $4.9 million and $10.4 million in the same periods of fiscal 2021.

During the three months ended December 31, 2022, earnest money and pre-acquisition cost write-offs related to land purchase contracts that we have terminated or expect to terminate were $19.4 million compared to $3.9 million in the same period of fiscal 2022.

Selling, General and Administrative (SG&A) Expense

SG&A expense from homebuilding activities increased 10% to $553.2 million and $1.6 billion in the three and nine months ended June 30, 2022, respectively, from $500.7 million and $1.4 billion in the prior year periods.

SG&A expense as a percentage of homebuilding revenues was 6.6% and 6.9% in the three and nine months ended June 30, 2022, respectively, compared to 7.1% and 7.5% in the prior year periods.

Employee compensation and related costs were $445.7 million and $1.3 billion in the three and nine months ended June 30, 2022, respectively, compared to $411.6 million and $1.1 billion in the same periods of fiscal 2021.

Employee compensation and related costs represented 81% and 82% of SG&A costs in the three and nine months ended June 30, 2022, respectively, compared to 82% and 81% in the prior year periods.

These costs increased 8% and 11% in the three and nine months ended June 30, 2022, respectively, from the prior year periods.

Our homebuilding operations employed 9,590 and 8,203 people at June 30, 2022 and 2021, respectively.

SG&A expense from homebuilding activities increased 6% to $527.1 million in the three months ended December 31, 2022 from $497.7 million in the prior year period.

SG&A expense as a percentage of homebuilding revenues was 7.8% in the three months ended December 31, 2022 compared to 7.5% in the prior year period.

Employee compensation and related costs were $425.3 million in the three months ended December 31, 2022 compared to $409.6 million in the same period of fiscal 2022.

Employee compensation and related costs represented 81% of SG&A costs in the three months ended December 31, 2022 compared to 82% in the prior year period.

These costs increased 4% in the three months ended December 31, 2022 from the prior year period.

Our homebuilding operations employed 9,473 and 8,699 people at December 31, 2022 and 2021, respectively.

We attempt to control our homebuilding 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 $27.9 million and $78.3 million in the three and nine months ended June 30, 2022, respectively, compared to $22.7 million and $69.7 million in the prior year periods.

Interest charged to cost of sales was 0.6% of total cost of sales (excluding inventory and land option charges) in both the three and nine months ended June 30, 2022 compared to 0.7% in both prior year periods.

Other income, net of other expenses, included in our homebuilding operations was $3.7 million and $11.6 million in the three and nine months ended June 30, 2022, respectively, compared to $4.9 million and $8.7 million in the prior year periods.

Interest incurred by our homebuilding operations was $20.9 million in the three months ended December 31, 2022 compared to $24.8 million in the prior year period.

Interest charged to cost of sales was 0.4% of homebuilding cost of sales (excluding inventory and land option charges) in the three months ended December 31, 2022 compared to 0.5% in the prior year period.

Other income, net of other expenses, included in our homebuilding operations increased to $13.3 million in the three months ended December 31, 2022 from $6.2 million in the prior year period, primarily due to an increase in interest income.

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

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

Business Acquisition

In December 2022, we acquired the homebuilding operations of Riggins Custom Homes in Northwest Arkansas for approximately $107 million in cash.

The assets acquired included approximately 170 homes in inventory, 3,000 lots and a sales order backlog of approximately 100 homes.

Homebuilding Results by Reporting Region

Three Months Ended June 30,

Revenues Homebuilding

Income (1) % of

Revenues Homebuilding

Income (1) % of

(In millions)

Northwest $ 674.0 $ 161.0 23.9 % $ 662.6 $ 146.7 22.1 %

Southwest 1,289.2 288.3 22.4 % 1,021.7 167.5 16.4 %

South Central 2,080.4 527.2 25.3 % 1,547.5 299.0 19.3 %

Southeast 2,118.9 532.4 25.1 % 1,961.3 396.1 20.2 %

East 1,385.8 309.9 22.4 % 1,228.0 222.8 18.1 %

North 799.5 135.9 17.0 % 626.1 92.5 14.8 %

$ 8,347.8 $ 1,954.7 23.4 % $ 7,047.2 $ 1,324.6 18.8 %

Nine Months Ended June 30,

Three Months Ended December 31,

Revenues Homebuilding

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

Northwest Region — Homebuilding revenues increased 2% and 7% in the three and nine months ended June 30, 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 $161.0 million and $421.0 million in the three and nine months ended June 30, 2022, respectively, compared to $146.7 million and $327.4 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 190 and 400 basis points in the three and nine months ended June 30, 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 increased by 20 basis points in the three month period and were unchanged in the nine month period ended June 30, 2022 compared to the prior year periods.

Southwest Region — Homebuilding revenues increased 26% and 20% in the three and nine months ended June 30, 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 $288.3 million and $674.2 million in the three and nine months ended June 30, 2022, respectively, compared to $167.5 million and $413.2 million in the prior year periods.

Home sales gross profit percentage increased by 500 and 440 basis points in the three and nine months ended June 30, 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 nine months ended June 30, 2022, respectively, compared to the prior year periods, primarily due to the increase in homebuilding revenues.

South Central Region — Homebuilding revenues increased 34% and 31% in the three and nine months ended June 30, 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 $527.2 million and $1.3 billion in the three and nine months ended June 30, 2022, respectively, compared to $299.0 million and $790.9 million in the prior year periods.

Home sales gross profit percentage increased by 510 and 380 basis points in the three and nine months ended June 30, 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.

Southeast Region — Homebuilding revenues increased 8% and 14% in the three and nine months ended June 30, 2022, respectively, compared to the prior year periods, due to the increases in the average selling price of homes closed in all markets.

The region generated pre-tax income of $532.4 million and $1.4 billion in the three and nine months ended June 30, 2022, respectively, compared to $396.1 million and $960.5 million in the prior year periods.

Home sales gross profit percentage increased by 500 basis points in both the three and nine months ended June 30, 2022 compared to the prior year periods, primarily due to the average selling price of homes closed increasing by more than the average cost of those homes.

As a percentage of homebuilding revenues, SG&A expenses decreased by 10 and 50 basis points in the three and nine months ended June 30, 2022, respectively, compared to the prior year periods, primarily due to the increase in homebuilding revenues.

East Region — Homebuilding revenues increased 13% and 11% in the three and nine months ended June 30, 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 $309.9 million and $778.1 million in the three and nine months ended June 30, 2022, respectively, compared to $222.8 million and $578.7 million in the prior year periods.

Home sales gross profit percentage increased by 400 and 340 basis points in the three and nine months ended June 30, 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 30 and 20 basis points in the three and nine months ended June 30, 2022, respectively, compared to the prior year periods, primarily due to the increase in homebuilding revenues.

North Region — Homebuilding revenues increased 28% and 29% in the three and nine months ended June 30, 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 $135.9 million and $339.7 million in the three and nine months ended June 30, 2022, respectively, compared to $92.5 million and $228.6 million in the prior year periods.

Home sales gross profit percentage increased by 200 and 190 basis points in the three and nine months ended June 30, 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 30 basis points in both the three and nine months ended June 30, 2022 compared to the prior year periods, primarily due to the increase in homebuilding revenues.

Northwest Region — Homebuilding revenues decreased 9% in the three months ended December 31, 2022 compared to the prior year period, due to decreases in the number of homes closed and the average selling price of those homes.

The region generated pre-tax income of $58.7 million in the three months ended December 31, 2022 compared to $111.8 million in the prior year period.

Gross profit from home sales as a percentage of home sales revenue (home sales gross profit percentage) decreased by 820 basis points in the three months ended December 31, 2022 compared to the prior year period, primarily due to an increase in the average cost of homes closed as well as a slight decrease in the average selling price.

As a percentage of homebuilding revenues, SG&A expenses increased by 90 basis points in the three months ended December 31, 2022 compared to the prior year period, primarily due to the decrease in homebuilding revenues.

Southwest Region — Homebuilding revenues decreased 12% in the three months ended December 31, 2022 compared to the prior year period, due to decreases in the number of homes closed, particularly in our California markets.

The region generated pre-tax income of $84.0 million in the three months ended December 31, 2022 compared to $159.3 million in the prior year period.

Home sales gross profit percentage decreased by 550 basis points in the three months ended December 31, 2022 compared to the prior year period, primarily due to the average cost of homes closed increasing by more than the average selling price.

As a percentage of homebuilding revenues, SG&A expenses increased by 120 basis points in the three months ended December 31, 2022 compared to the prior year period, primarily due to the decrease in homebuilding revenues.

South Central Region — Homebuilding revenues decreased 3% in the three months ended December 31, 2022 compared to the prior year period, due to decreases in the number of homes closed, particularly in our Houston and Fort Worth markets.

The region generated pre-tax income of $281.6 million in the three months ended December 31, 2022 compared to $354.3 million in the prior year period.

Home sales gross profit percentage decreased by 310 basis points in the three months ended December 31, 2022 compared to the prior year period, primarily due to the average cost of homes closed increasing by more than the average selling price.

As a percentage of homebuilding revenues, SG&A expenses increased by 50 basis points in the three months ended December 31, 2022 compared to the prior year period, primarily due to increases in SG&A expenses.

Southeast Region — Homebuilding revenues increased 10% in the three months ended December 31, 2022 compared to the prior year period, due to the increases in the average selling price of homes closed in most markets.

The region generated pre-tax income of $411.3 million in the three months ended December 31, 2022 compared to $415.4 million in the prior year period.

Home sales gross profit percentage decreased by 240 basis points in the three months ended December 31, 2022 compared to the prior year period, primarily due to the average cost of homes closed increasing by more than the average selling price.

As a percentage of homebuilding revenues, SG&A expenses decreased by 30 basis points in the three months ended December 31, 2022 compared to the prior year period, primarily due to the increase in homebuilding revenues.

East Region — Homebuilding revenues increased 6% in the three months ended December 31, 2022 compared to the prior year period, due to increases in the average selling price of homes closed in most markets.

The region generated pre-tax income of $189.4 million in the three months ended December 31, 2022 compared to $202.3 million in the prior year period.

Home sales gross profit percentage decreased by 200 basis points in the three months ended December 31, 2022 compared to the prior year period, primarily due to the average cost of homes closed increasing by more than the average selling price.

As a percentage of homebuilding revenues, SG&A expenses increased by 30 basis points in the three months ended December 31, 2022 compared to the prior year period, primarily due to increases in SG&A expenses.

North Region — Homebuilding revenues increased 3% in the three months ended December 31, 2022 compared to the prior year period, primarily due to the sale of a parcel of land in one of our markets.

The region generated pre-tax income of $69.4 million in the three months ended December 31, 2022 compared to $89.9 million in the prior year period.

Home sales gross profit percentage decreased by 520 basis points in the three months ended December 31, 2022 compared to the prior year period, primarily due to the average cost of homes closed increasing by more than the average selling price.

As a percentage of homebuilding revenues, SG&A expenses increased by 60 basis points in the three months ended December 31, 2022 compared to the prior year period, primarily due to increases in SG&A expenses.

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 June 30, 2022 and September 30, 2021 are summarized as follows:

June 30, 2022

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

December 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 June 30, 2022 and September 30, 2021 are summarized as follows:

June 30, 2022

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

December 31, 2022

Owned (1) Lots Controlled

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___________________

(1) Land/lots owned included approximately 31,900 and 30,800 owned lots that are fully developed and ready for home construction at June 30, 2022 and September 30, 2021, respectively.

Land/lots owned also included land held for development representing 400 and 1,300 lots at June 30, 2022 and September 30, 2021, respectively.

(2) The total remaining purchase price of lots controlled through land and lot purchase contracts at June 30, 2022 and September 30, 2021 was $20.2 billion and $15.5 billion, respectively, secured by earnest money deposits of $1.6 billion and $1.1 billion, respectively.

The total remaining purchase price of lots controlled through land and lot purchase contracts at June 30, 2022 and September 30, 2021 included $1.5 billion and $1.6 billion, respectively, related to lot purchase contracts with Forestar, secured by $144.9 million and $151.0 million, respectively, of earnest money.

(3) Lots controlled at June 30, 2022 included approximately 38,400 lots owned or controlled by Forestar, 19,300 of which our homebuilding divisions have under contract to purchase and 19,100 of which our homebuilding divisions have a right of first offer to purchase.

Of these, approximately 14,800 lots were in our Southeast region, 7,400 lots were in our East region, 5,800 lots were in our Southwest region, 5,200 lots were in our South Central region, 4,200 lots were in our North region and 1,000 lots were in our Northwest region.

(1) Land/lots owned included approximately 43,500 and 37,600 owned lots that are fully developed and ready for home construction at December 31, 2022 and September 30, 2022, respectively.

Land/lots owned also included land held for development representing 400 lots at both December 31, 2022 and September 30, 2022.

(2) The total remaining purchase price of lots controlled through land and lot purchase contracts at December 31, 2022 and September 30, 2022 was $19.0 billion and $19.7 billion, respectively, secured by earnest money deposits of $1.6 billion in both periods.

The total remaining purchase price of lots controlled through land and lot purchase contracts at both December 31, 2022 and September 30, 2022 included $1.4 billion related to lot purchase contracts with Forestar, secured by $140.4 million and $131.7 million, respectively, of earnest money.

Our lots controlled under land and lot purchase contracts include 439 and 4,077 lots at December 31, 2022 and September 30, 2022, respectively, representing lots controlled under contracts for which we do not expect to exercise our option to purchase the land or lots, but the underlying contracts have yet to be terminated.

We have reserved the deposits related to these contracts if the deposits are not refundable.

(3) Lots controlled at December 31, 2022 included approximately 35,000 lots owned or controlled by Forestar, 17,000 of which our homebuilding divisions had under contract to purchase and 18,000 of which our homebuilding divisions had a right of first offer to purchase.

Of these, approximately 13,300 lots were in our Southeast region, 6,700 lots were in our East region, 6,100 lots were in our South Central region, 4,600 lots were in our Southwest region, 3,700 lots were in our North region and 600 lots were in our Northwest region.

Lots controlled at September 30, 2022 included approximately 36,700 lots owned or controlled by Forestar, 17,800 of which our homebuilding divisions had under contract to purchase and 18,900 of which our homebuilding divisions had a right of first offer to purchase.

(4) Approximately 27,200 and 21,700 of our homes in inventory were unsold at June 30, 2022 and September 30, 2021, respectively.

At June 30, 2022, approximately 1,400 of our unsold homes were completed, of which approximately 60 homes had been completed for more than six months.

(4) Approximately 27,800 and 27,200 of our homes in inventory were unsold at December 31, 2022 and September 30, 2022, respectively.

At December 31, 2022, approximately 7,100 of our unsold homes were completed, of which approximately 190 homes had been completed for more than six months.

At September 30, 2022, approximately 4,400 of our unsold homes were completed, of which approximately 90 homes had been completed for more than six months.

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

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

RESULTS OF OPERATIONS – FORESTAR

In fiscal 2018, we acquired 75% of the outstanding shares of Forestar and at June 30, 2022, we owned 63% of its outstanding shares.

Forestar is a publicly traded residential lot development company with operations in 52 markets across 22 states as of June 30, 2022.

At December 31, 2022, we owned 63% of the outstanding shares of Forestar.

Forestar is a publicly traded residential lot development company with operations in 52 markets across 20 states as of December 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 and nine months ended June 30, 2022 and 2021 were as follows:

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

Three Months Ended

June 30, Nine Months Ended

2022 2021 2022 2021

(In millions)

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Selling, general and administrative expense 22.9 21.5

Loss on extinguishment of debt — 18.1 — 18.1

Other (income) expense (3.3) (1.6)

Income before income taxes $ 27.9 $ 53.5

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

During the three and nine months ended June 30, 2022, Forestar sold 3,473 and 13,777 single-family lots, respectively, compared to 3,858 and 11,013 single-family lots in the prior year periods.

Of the total lots sold, Forestar sold 3,038 lots to D.R.

Horton for $258.1 million and 11,823 lots for $977.8 million during the three and nine months ended June 30, 2022, respectively, compared to 3,719 lots for $300.2 million and 10,466 lots for $859.8 million in the prior year periods.

SG&A expense for the three and nine months ended June 30, 2022 included charges of $1.1 million and $3.1 million, respectively, related to the shared services agreement between Forestar and D.R.

Forestar’s revenues are primarily derived from sales of single-family residential lots to local, regional and national homebuilders.

The following tables provide further information regarding Forestar’s revenues and lot position as of and for the three months ended December 31, 2022 and 2021.

Three Months Ended December 31,

Lots Closed Value (In millions)

2022 2021 2022 2021

Residential single-family lots sold

Lots sold to D.R.

Horton 2,094 4,014 $ 189.8 $ 330.1

Total lots sold 2,263 4,516 $ 206.7 $ 404.1

2022 September 30,

Residential single-family lots in inventory and under contract

Lots owned 61,500 61,800

Lots controlled through land purchase contracts 20,800 28,300

Total lots owned and controlled 82,300 90,100

Owned lots under contract to sell to D.R.

Horton 17,000 17,800

Owned lots under contract to customers other than D.R.

Horton 1,400 1,400

Total owned lots under contract 18,400 19,200

Owned lots subject to right of first offer with D.R.

Horton 18,000 18,900

Owned lots fully developed 7,600 5,500

At December 31, 2022 and September 30, 2022, Forestar’s inventory, which includes land and lots developed, under development and held for development, totaled $2.1 billion and $2.0 billion, respectively.

SG&A expense for the three months ended December 31, 2022 and 2021 included charges of $0.9 million and $1.0 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.

Shared services charges were $1.0 million and $2.9 million, respectively, in the same periods of fiscal 2021.

At June 30, 2022, Forestar owned directly or controlled through land and lot purchase contracts approximately 97,000 residential lots, of which 5,300 are fully developed.

Approximately 38,400 of these lots are under contract to sell to D.R.

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

Horton, and 1,000 of these lots are under contract to sell to other builders.

RESULTS OF OPERATIONS – FINANCIAL SERVICES

The following tables and related discussion set forth key operating and financial data for our financial services operations, comprising DHI Mortgage and our subsidiary title companies, for the three and nine months ended June 30, 2022 and 2021.

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

2022 2021 % Change 2022 2021 % Change

Three Months Ended December 31,

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 15,167 13,071 16 %

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

2022 2021 % Change 2022 2021 % Change

Three Months Ended December 31,

2022 2021 % Change

(In millions)

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Three Months Ended

June 30, Nine Months Ended

2022 2021 2022 2021

General and administrative expense 97.9 % 68.0 %

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

In the three and nine months ended June 30, 2022, while the number of homes closed by our homebuilding operations decreased slightly from the prior year periods, the volume of first-lien loans originated or brokered by DHI Mortgage for our homebuyers increased slightly due to an increase in the percentage of homes closed for which DHI Mortgage handled our homebuyers’ financing.

Homes closed by our homebuilding operations constituted 99% and 98% of DHI Mortgage loan originations in the three and nine months ended June 30, 2022, respectively, compared to 98% in both prior year periods.

In the three months ended December 31, 2022, while the number of homes closed by our homebuilding operations decreased 6% from the prior year period, the volume of first-lien loans originated or brokered by DHI Mortgage for our homebuyers increased 10% due to an increase in the percentage of homes closed for which DHI Mortgage handled our homebuyers’ financing.

Homes closed by our homebuilding operations constituted 99% of DHI Mortgage loan originations in the three months ended December 31, 2022 compared to 98% in the prior year period.

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

The number of loans sold increased 3% in the three month period and were essentially unchanged in the nine month period ended June 30, 2022 compared to the prior year periods.

Virtually all of the mortgage loans held for sale on June 30, 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 nine months ended June 30, 2022, approximately 67% 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.

The number of loans sold increased 16% in the three months ended December 31, 2022 compared to the prior year period.

Virtually all of the mortgage loans held for sale on December 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 three months ended December 31, 2022, approximately 58% of our mortgage loans were sold directly to Fannie Mae, Freddie Mac or into securities backed by Ginnie Mae, and 39% 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 increased 41% to $209.7 million and 8% to $533.7 million in the three and nine months ended June 30, 2022, respectively, from $149.1 million and $491.9 million in the prior year periods, primarily due to significantly higher interest rate lock commitment volume, and to a lesser extent from an increase in our average loan amount.

Revenues from our title operations increased 13% to $44.6 million and 16% to $127.1 million in the three and nine months ended June 30, 2022, respectively, from $39.6 million and $109.2 million in the prior year periods, primarily due to an increase in the average premium collected on closing transactions due to higher sales prices of homes closed by our homebuilding operations, as well as expansion of our title insurance operations.

General and administrative (G&A) expense related to our financial services operations increased 8% to $137.3 million and 11% to $400.6 million in the three and nine months ended June 30, 2022, respectively, from $127.0 million and $360.4 million in the prior year periods.

As a percentage of financial services revenues, G&A expense was 54.0% and 60.6% in the three and nine months ended June 30, 2022, respectively, compared to 67.3% and 60.0% in the prior year periods.

Revenues from our mortgage operations decreased 34% to $95.7 million in the three months ended December 31, 2022 from $144.1 million in the prior year period.

The decrease was primarily due to lower gains on sales of mortgages resulting from a more competitive environment in the mortgage industry due to rising interest rates.

Revenues from our title operations increased 3% to $41.3 million in the three months ended December 31, 2022 from $40.2 million in the prior year period.

General and administrative (G&A) expense related to our financial services operations increased 7% to $134.1 million in the three months ended December 31, 2022 from $125.3 million in the prior year period.

As a percentage of financial services revenues, G&A expense was 97.9% in the three months ended December 31, 2022 compared to 68.0% in the prior year period.

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 3,069 and 2,755 people at June 30, 2022 and 2021, respectively.

Our financial services operations employed 2,897 and 2,942 people at December 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 increase from increased interest rate lock commitments and from title operations during the current quarter, pre-tax income from our financial services operations increased 10% to $288.2 million in the nine months ended June 30, 2022 from $262.1 million in the prior year period.

Primarily as a result of the reduction in revenue and operating margin of our mortgage operations, pre-tax income from our financial services operations decreased 73% to $18.2 million in the three months ended December 31, 2022 from $67.1 million in the prior year period.

RESULTS OF OPERATIONS - RENTAL

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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 each community for a bulk sale of rental homes.

The single-family rental operations primarily construct and lease single-family homes within a community and then market each 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 and nine months ended June 30, 2022 and 2021 were as follows:

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

Three Months Ended

June 30, Nine Months Ended

2022 2021 2022 2021

(In millions)

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Income before income taxes $ 110.3 $ 70.1

During the three months ended June 30, 2022, we sold one multi-family rental property (298 total units) for $69.3 million, and during the nine months ended June 30, 2022, we sold three multi-family rental properties (775 total units) for $195.5 million.

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

During the three months ended June 30, 2022, we sold one single-family rental property (84 total homes) for $39.5 million, and during the nine months ended June 30, 2022, we sold six single-family rental properties (678 total homes) for $292.7 million.

There was one single-family rental property (69 total homes) sold for $23.1 million during the prior year quarter and two properties (193 total homes) sold for $54.9 million in the prior year nine month period.

At June 30, 2022, our rental property inventory of $2.0 billion included $692.0 million of inventory related to our multi-family rental operations and $1.3 billion of inventory related to our single-family rental operations.

At June 30, 2022, we had 20 multi-family rental properties, consisting of 5,810 units, under active construction and one community, consisting of 300 units, that was substantially complete and in the lease-up phase.

At June 30, 2022, we had 115 single-family rental properties that included 7,710 homes and finished lots, of which 2,390 homes were completed, and 4,340 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, 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.

At December 31, 2022, our rental property inventory of $2.9 billion included $1.9 billion of inventory related to our single-family rental operations and $997.9 million of inventory related to our multi-family rental operations.

At September 30, 2022, our rental property inventory of $2.6 billion included $1.7 billion of assets related to our single-family rental operations and $897.2 million of assets related to our multi-family rental operations.

The following tables provide further information regarding our rental operations as of and for the three months ended December 31, 2022 and 2021.

Three Months Ended December 31,

Homes/Units Closed Value (In millions)

2022 2021 2022 2021

Rental homes/units sold and closed

Single-family rental homes 694 226 $ 228.0 $ 80.3

Multi-family rental units 300 351 $ 99.5 $ 76.2

2022 September 30,

Rental homes/units and lots in inventory

Single-family rental homes (1) 8,240 7,400

Single-family rental lots (2) 6,120 6,680

Multi-family rental units (3) 6,340 6,110

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(1) Single-family rental homes include 4,240 and 3,530 completed homes at December 31, 2022 and September 30, 2022, respectively.

(2) Single-family rental lots include 1,700 and 1,770 finished lots at December 31, 2022 and September 30, 2022, respectively.

(3) Multi-family rental units at December 31, 2022 consist of 6,110 units under active construction and 230 units that were substantially complete and in the lease-up phase.

Multi-family rental units at September 30, 2022 consist of 5,810 units under active construction and 300 units that were substantially complete and in the lease-up phase.

RESULTS OF OPERATIONS - OTHER BUSINESSES

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We conduct insurance-related operations, own water rights and other water-related assets, 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 $16.0 million and $40.2 million in the three and nine months ended June 30, 2022, respectively, compared to $10.1 million and $23.0 million in the prior year periods.

The pre-tax income of all of our subsidiaries engaged in other business activities was $9.4 million in the three months ended December 31, 2022 compared to $10.7 million in the prior year period.

RESULTS OF OPERATIONS - CONSOLIDATED

Income before Income Taxes

Pre-tax income for the three and nine months ended June 30, 2022 was $2.2 billion and $5.6 billion, respectively, compared to $1.4 billion and $3.6 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 and nine months ended June 30, 2022 was $524.0 million and $1.3 billion, respectively, compared to $299.1 million and $784.1 million in the prior year periods.

Our effective tax rate was 24.0% and 23.7% for the three and nine months ended June 30, 2022, respectively, compared to 21.1% and 21.6% in the prior year periods.

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

The effective tax rates for the three and nine months ended June 30, 2022 are higher than the prior year periods due to the expiration of the federal energy efficient homes tax credit for homes closed after December 31, 2021.

Our deferred tax assets, net of deferred tax liabilities, were $177.7 million at June 30, 2022 compared to $159.5 million at September 30, 2021.

We have a valuation allowance of $20.3 million and $4.2 million at June 30, 2022 and September 30, 2021, respectively, related to deferred tax assets for net operating loss (NOL) and tax credit 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 and tax credit carryforwards.

Pre-tax income for the three months ended December 31, 2022 was $1.3 billion compared to $1.5 billion in the prior year period.

The decrease was primarily due to a decrease in the pre-tax income of our homebuilding operations as a result of a decrease in home sales gross margin.

Our income tax expense for the three months ended December 31, 2022 was $298.9 million compared to $351.5 million in the prior year period.

Our effective tax rate was 23.6% for the three months ended December 31, 2022 compared to 23.5% 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 federal energy efficient homes tax credits.

Our deferred tax assets, net of deferred tax liabilities, were $155.8 million at December 31, 2022 compared to $159.0 million at September 30, 2022.

We have a valuation allowance of $17.9 million at December 31, 2022 and September 30, 2022 related to deferred tax assets for state net operating loss (NOL), state capital loss and tax credit carryforwards that are expected 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, state capital loss and tax credit carryforwards.

Any reversal of the valuation allowance in future periods will impact our effective tax rate.

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

We have continued to increase our investments in homebuilding inventories and single-family and multi-family rental properties to expand our operations and grow our revenues and profitability.

We have continued to increase our investments in homebuilding inventories and single-family and multi-family rental properties to expand our operations.

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

We are maintaining significant homebuilding cash balances and liquidity 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 June 30, 2022, we had outstanding notes payable with varying maturities totaling an aggregate principal amount of $6.0 billion, of which $2.2 billion is payable within 12 months and includes $1.4 billion outstanding under the mortgage repurchase facility.

At June 30, 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 24.2% at June 30, 2021.

Our net debt to total capital (notes payable net of cash divided by stockholders’ equity plus notes payable net of cash) was 19.3% at June 30, 2022 compared to 12.9% at September 30, 2021 and 15.2% and June 30, 2021.

At June 30, 2022, our ratio of homebuilding debt to total capital (homebuilding notes payable divided by stockholders’ equity plus homebuilding notes payable) was 17.0% compared to 17.8% at September 30, 2021 and 16.0% at June 30, 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 12.1% at June 30, 2022 compared to 1.7% at September 30, 2021 and 6.4% at June 30, 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% through the remainder of fiscal 2022 and during fiscal 2023.

At December 31, 2022, we had outstanding notes payable with varying maturities totaling an aggregate principal amount of $5.7 billion, of which $2.1 billion is payable within 12 months and includes $1.2 billion outstanding under the mortgage repurchase facility.

At December 31, 2022, our ratio of debt to total capital (notes payable divided by stockholders’ equity plus notes payable) was 22.0% compared to 23.8% at September 30, 2022 and 25.1% at December 31, 2021.

Our net debt to total capital (notes payable net of cash divided by stockholders’ equity plus notes payable net of cash) was 13.3% at December 31, 2022 compared to 15.4% at September 30, 2022 and 15.2% at December 31, 2021.

At December 31, 2022, our ratio of homebuilding debt to total capital (homebuilding notes payable divided by stockholders’ equity plus homebuilding notes payable) was 12.8% compared to 13.2% at September 30, 2022 and 17.3% at December 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 4.4% at December 31, 2022 compared to 4.4% at September 30, 2022 and 6.9% at December 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 below 20% throughout fiscal 2023.

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

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

At June 30, 2022, we had outstanding letters of credit of $244.7 million and surety bonds of $2.7 billion, issued by third parties to secure performance under various contracts.

At December 31, 2022, we had outstanding letters of credit of $258.1 million and surety bonds of $2.9 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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Horton has an automatically effective universal shelf registration statement filed with the Securities and Exchange Commission (SEC) in July 2021, registering debt and equity securities that may be issued from time to time in amounts to be determined.

Forestar also has an effective shelf registration statement filed with the SEC in 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 June 30, 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.

At December 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 ATM program.

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

We believe that our existing cash resources, revolving credit facilities, mortgage repurchase facility and ability to access the capital markets or obtain additional bank financing will provide sufficient liquidity to fund our near-term working capital needs and debt obligations for the next 12 months and thereafter for the foreseeable future.

Capital Resources - Homebuilding

Cash and Cash Equivalents — At June 30, 2022, cash and cash equivalents of our homebuilding segment totaled $1.2 billion.

Cash and Cash Equivalents — At December 31, 2022, cash and cash equivalents of our homebuilding segment totaled $2.0 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.

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

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

Borrowings and repayments under the facility totaled $2.5 billion and $2.1 billion, respectively, during the nine months ended June 30, 2022.

At June 30, 2022, there were $400 million of borrowings outstanding at a 4.8% annual interest rate and $188.7 million of letters of credit issued under the revolving credit facility, resulting in available capacity of $1.60 billion.

In October 2022, our senior unsecured homebuilding revolving credit facility was amended to extend its maturity date to October 28, 2027.

At December 31, 2022, there were no borrowings outstanding and $214.3 million of letters of credit issued under the revolving credit facility, resulting in available capacity of $1.98 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 June 30, 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 June 30, 2022 that mature from September 2022 through October 2027.

At December 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 $2.8 billion principal amount of homebuilding senior notes outstanding as of December 31, 2022 that mature from February 2023 through October 2027.

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

At June 30, 2022, we were in compliance with all of the limitations and restrictions associated with our public debt obligations.

At December 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.

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

During the nine months ended June 30, 2022, we repurchased 10.5 million shares of our common stock for $854.2 million.

At June 30, 2022, the full amount of the debt repurchase authorization was remaining, and $690.0 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 previous authorization.

During the three months ended December 31, 2022, we repurchased 1.4 million shares of our common stock for $118.1 million.

At December 31, 2022, the full amount of the debt repurchase authorization was remaining, and $320.2 million of the stock repurchase authorization was remaining.

These authorizations have no expiration date.

Capital Resources - Forestar

The achievement of Forestar’s long-term growth objectives will depend on its ability to obtain financing and generate cash flows from operations in sufficient capacities.

The achievement of Forestar’s long-term growth objectives will depend on its ability to obtain financing and generate sufficient cash flows from operations.

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

At June 30, 2022, Forestar’s ratio of debt to total capital (notes payable divided by stockholders’ equity plus notes payable) was 38.1% compared to 41.0% at September 30, 2021 and 42.1% at June 30, 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 32.8% compared to 35.2% at September 30, 2021 and 37.8% at June 30, 2021.

Cash and Cash Equivalents — At June 30, 2022, Forestar had cash and cash equivalents of $146.3 million.

At December 31, 2022, Forestar’s ratio of debt to total capital (notes payable divided by stockholders’ equity plus notes payable) was 36.7% compared to 37.1% at September 30, 2022 and 40.0% at December 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 28.7% compared to 26.9% at September 30, 2022 and 33.9% at December 31, 2021.

Cash and Cash Equivalents — At December 31, 2022, Forestar had cash and cash equivalents of $216.4 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.

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

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

At June 30, 2022, there were no borrowings outstanding and $56.0 million of letters of credit issued under the revolving credit facility, resulting in available capacity of $354.0 million.

In October 2022, Forestar’s senior unsecured revolving credit facility was amended to extend its maturity date to October 28, 2026.

At December 31, 2022, there were no borrowings outstanding and $43.8 million of letters of credit issued under the revolving credit facility, resulting in available capacity of $366.2 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 June 30, 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.

Unsecured Debt — As of December 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.

Forestar’s revolving credit facility and its senior notes are guaranteed by Forestar’s wholly-owned subsidiaries that are not immaterial subsidiaries or have not been designated as unrestricted subsidiaries.

They are not guaranteed by D.R.

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

At June 30, 2022, Forestar was in compliance with all of the covenants, limitations and restrictions of its revolving credit facility and senior note obligations.

At December 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 June 30, 2022, and the authorization has no expiration date.

Issuance of Common Stock — During the nine months ended June 30, 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.

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

Issuance of Common Stock — During the three months ended December 31, 2022, there were no shares of common stock issued under Forestar’s ATM program.

At December 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 ATM program.

Capital Resources - Financial Services

Cash and Cash Equivalents — At June 30, 2022, cash and cash equivalents of our financial services segment totaled $126.3 million.

Cash and Cash Equivalents — At December 31, 2022, cash and cash equivalents of our financial services segment totaled $198.4 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 June 30, 2022 was $2.1 billion.

As of June 30, 2022, $2.1 billion of mortgage loans held for sale with a collateral value of $2.0 billion were pledged under the mortgage repurchase facility.

As a result of advance paydowns totaling $632.0 million, DHI Mortgage had an obligation of $1.4 billion outstanding under the mortgage repurchase facility at June 30, 2022 at a 3.3% annual interest rate.

The total capacity of the facility at December 31, 2022 was $1.8 billion, and its maturity date is February 17, 2023.

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

As of December 31, 2022, $1.8 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 $526.3 million, DHI Mortgage had an obligation of $1.2 billion outstanding under the mortgage repurchase facility at December 31, 2022 at a 6.0% annual interest rate.

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

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These covenants are measured and reported to the lenders monthly.

At June 30, 2022, DHI Mortgage was in compliance with all of the conditions and covenants of the mortgage repurchase facility.

At December 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 June 30, 2022, cash and cash equivalents of our rental segment totaled $133.9 million.

During fiscal 2022, we continued to increase the investment in our rental operations.

The inventory in our rental segment totaled $2.0 billion at June 30, 2022 compared to $840.9 million at September 30, 2021 and $760.2 million at June 30, 2021.

During the first quarter, we continued to increase the investment in our rental operations.

The inventory in our rental segment totaled $2.9 billion at December 31, 2022 compared to $2.6 billion at September 30, 2022 and $1.2 billion at December 31, 2021.

Cash and Cash Equivalents — At December 31, 2022, cash and cash equivalents of our rental segment totaled $111.4 million.

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.

DRH Rental utilized the accordion feature to obtain additional commitments, which increased the size of the facility to $1.025 billion at December 31, 2022.

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.

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.

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

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 June 30, 2022, the borrowing base limited the available capacity under the facility to $649.6 million.

At June 30, 2022, there were $175 million of borrowings outstanding at a 3.1% annual interest rate and no letters of credit issued under the facility, resulting in available capacity of $474.6 million.

Borrowings and repayments under the facility totaled $300 million each during the three months ended December 31, 2022.

At December 31, 2022, there were $800 million of borrowings outstanding at a 6.2% annual interest rate and no letters of credit issued under the facility, resulting in available capacity of $225 million.

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

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At June 30, 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.

At December 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 guaranteed by DRH Rental’s wholly-owned subsidiaries that are not immaterial subsidiaries or have not been designated as unrestricted subsidiaries.

The rental 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 nine months ended June 30, 2022, net cash used in operating activities was $562.8 million compared to $34.5 million in the prior year period.

Cash used in operating activities in the current year period primarily consisted of $826.4 million and $10.2 million used in our rental and Forestar segments, respectively, partially offset by $150.1 million and $124.5 million of cash provided by our financial services and homebuilding segments, respectively.

Cash used to increase construction in progress and finished home inventory was $3.1 billion in the current year period compared to $1.7 billion in the prior year period, reflecting an increase in our homes in inventory as well as the elongation of our construction cycle in the current period.

Cash used to increase residential land and lots was $1.0 billion in the current year period compared to $1.3 billion in the prior year period.

In the three months ended December 31, 2022, net cash provided by operating activities was $829.1 million compared to $174.1 million of cash used in operating activities in the prior year period.

Cash provided by operating activities in the current year period primarily consisted of $493.1 million, $313.9 million and $49.4 million of cash provided by our financial services, homebuilding and rental segments, respectively, partially offset by $49.8 million of cash used in our Forestar segment.

Cash provided by a decrease in construction in progress and finished home inventory was $320.7 million in the current year period compared to cash used to increase construction in progress and finished home inventory of $1.0 billion in the prior year period, reflecting a decrease in our homes in inventory in the current period.

Cash used to increase residential land and lots was $637.5 million in the current year period compared to $340.7 million in the prior year period.

Of these amounts, $49.9 million and $55.5 million, respectively, related to Forestar.

During the nine months ended June 30, 2022, cash used to increase our single-family and multi-family rental properties was $1.1 billion 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 nine months ended June 30, 2022, net cash used in investing activities was $372.9 million compared to $206.9 million in the prior year period.

In the current year period, uses of cash included the acquisition of Vidler Water Resources, Inc.

for $271.5 million, net of the cash acquired, and purchases of property and equipment totaling $108.0 million.

In the prior year period, uses of cash included expenditures related to our rental operations totaling $173.9 million, the acquisition of the homebuilding operations of Braselton Homes for $23.0 million and purchases of property and equipment totaling $46.0 million, partially offset by proceeds from the sale of a single-family rental community for $31.8 million.

In the three months ended December 31, 2022, net cash used in investing activities was $142.9 million compared to $26.5 million in the prior year period.

In the current year period, uses of cash included the acquisition of the homebuilding operations of Riggins Custom Homes whereby $97.1 million of the purchase price was paid in the current year period, and purchases of property and equipment totaling $47.5 million.

In the prior year period, uses of cash included purchases of property and equipment totaling $30.9 million.

Financing Cash Flow Activities

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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 nine months ended June 30, 2022, net cash used in financing activities was $617.2 million, consisting primarily of repayments of amounts drawn on our homebuilding revolving credit facility totaling $2.1 billion, cash used to repurchase shares of our common stock of $859.7 million, payment of cash dividends totaling $238.4 million and net payments on our mortgage repurchase facility of $88.9 million.

These uses of cash were partially offset by draws on our homebuilding revolving credit facility of $2.5 billion and draws on DRH Rental’s revolving credit facility of $175 million.

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

These uses of cash were partially offset by note proceeds from our issuance of $500 million principal amount of 1.4% homebuilding senior notes and Forestar’s issuance of $400 million principal amount of 3.85% senior notes.

During each of the first three 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 May 18, 2022 to stockholders of record on May 9, 2022.

In July 2022, our Board of Directors approved a quarterly cash dividend of $0.225 per common share, payable on August 11, 2022 to stockholders of record on August 4, 2022.

During the three months ended December 31, 2022, net cash used in financing activities was $646.6 million, consisting primarily of net payments on our mortgage repurchase facility of $404.4 million, cash used to repurchase shares of our common stock of $118.1 million and payment of cash dividends totaling $86.1 million.

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, 2022, our Board of Directors approved a quarterly cash dividend of $0.25 per common share, which was paid on December 12, 2022 to stockholders of record on December 2, 2022.

In January 2023, our Board of Directors approved a quarterly cash dividend of $0.25 per common share, payable on February 14, 2023 to stockholders of record on February 7, 2023.

Cash dividends of $0.225 per common share were approved and paid in each quarter of fiscal 2022.

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SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION

As of June 30, 2022, D.R.

had $3.15 billion principal amount of homebuilding senior notes outstanding due through October 2027 and $400 million outstanding on its homebuilding revolving credit facility.

As of December 31, 2022, D.R.

had $2.8 billion principal amount of homebuilding senior notes outstanding due through October 2027 and no amounts outstanding on its homebuilding revolving credit facility.

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

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and Guarantor Subsidiaries

Summarized Balance Sheet Data June 30,

Summarized Balance Sheet Data December 31,

2022 September 30,

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18,289.7 17,655.2

Summarized Statement of Operations Data Nine Months Ended

June 30, 2022 Year Ended

Summarized Statement of Operations Data Three Months Ended

December 31, 2022 Year Ended

September 30, 2022

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As disclosed in our critical accounting policies in our Form 10-K for the fiscal year ended September 30, 2022, our reserves for construction defect claims include the estimated costs of both known claims and anticipated future claims.

At June 30, 2022 and September 30, 2021, we had reserves for approximately 540 and 380 pending construction defect claims, respectively, and no individual existing claim was material to our financial statements.

During the nine months ended June 30, 2022, we established reserves for approximately 285 new construction defect claims and resolved 125 construction defect claims for a total cost of $19.4 million.

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

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

At December 31, 2022 and September 30, 2022, we had reserves for approximately 570 and 560 pending construction defect claims, respectively, and no individual existing claim was material to our financial statements.

During the three months ended December 31, 2022, we established reserves for approximately 60 new construction defect claims and resolved 50 construction defect claims for a total cost of $4.6 million.

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.

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