What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-04-24 compared with 2023-01-25 · 369 added, 254 removed, 549 unchanged (53% of the section changed)

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

Our homebuilding operations are our core business and primarily include the construction and sale of single-family homes with sales prices generally ranging from $200,000 to more than $1,000,000, with an average closing price of $386,900 during the three months ended December 31, 2022.

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.

Approximately 90% of our home sales revenue in the six months ended March 31, 2023 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.

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.

Forestar has made significant investments in land acquisition and development over the last few years to expand its business across our homebuilding operating footprint.

At March 31, 2023, 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 controlling a large portion of our land and lot position through land purchase contracts.

Forestar has significantly expanded its business across many of our homebuilding operating markets over the last five years.

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

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

During the three months ended December 31, 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%.

During the six months ended March 31, 2023, our number of homes closed decreased 3%, while our home sales revenues were essentially flat compared to the prior year period.

Our consolidated revenues increased 1% to $15.2 billion in the six months ended March 31, 2023 compared to $15.1 billion in the prior year period.

Our pre-tax income was $2.5 billion in the six months ended March 31, 2023 compared to $3.4 billion in the prior year period, and our pre-tax operating margin was 16.5% compared to 22.5%.

Net income was $1.9 billion in the six months ended March 31, 2023 compared to $2.6 billion in the prior year period, and our diluted earnings per share was $5.50 compared to $7.20.

In the trailing twelve months ended March 31, 2023, our return on equity (ROE) was 27.2% compared to 34.0% in the prior year period, and our homebuilding return on inventory (ROI) was 35.1% compared to 40.3%.

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.

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 .

As the spring selling season began during the three months ended March 31, 2023, our net sales orders increased 73% from the first quarter.

Although inflationary pressures and mortgage interest rates remain elevated, demand improved during the quarter due to typical seasonal factors, coupled with our use of incentives and pricing adjustments to adapt to market conditions and higher mortgage interest rates.

The disruptions in the supply chain for certain building materials and tightness in the labor market that caused our construction cycle to lengthen during the past two years have largely subsided, and our cycle times on more recent home starts are improving.

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, and demographics supporting housing demand remain favorable.

We believe we are well-positioned to meet 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 March 31, 2023 compared to 77% at both September 30, 2022 and March 31, 2022.

We remain focused on our relationships with Forestar and other land developers across the country and expect to continue to control a substantial majority of our lot pipeline 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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• Offering new home communities that appeal to a broad range of entry-level, move-up, active adult and luxury homebuyers based on consumer demand in each market.

• Modifying product offerings, sales pace, home prices and sales incentives as necessary in each of our markets to meet consumer demand and maintain affordability.

• Modifying product offerings, sales pace, home prices and incentives as necessary in each of our markets to meet consumer demand and maintain affordability.

• Delivering high quality homes and a positive experience to our customers both during and after the sale.

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• 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.

• Continuing to seek opportunities to control a significant portion of our land and finished lot position through purchase contracts with Forestar and other land developers.

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

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

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

Key financial results as of and for the three months ended March 31, 2023, as compared to the same period of 2022 unless otherwise indicated, were as follows:

Homebuilding:

• 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.

• Homebuilding revenues were $7.5 billion in both periods.

• Homes closed decreased 1% to 19,664 homes, while the average closing price of those homes increased slightly to $378,800.

• Net sales orders decreased 5% to 23,142 homes, and the value of net sales orders decreased 11% to $8.6 billion.

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• Homebuilding pre-tax income was 14.3% of homebuilding revenues compared to 22.0%.

• 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.

• Homebuilding cash and cash equivalents totaled $2.4 billion compared to $2.0 billion and $1.2 billion at September 30, 2022 and March 31, 2022, respectively.

• Homebuilding inventories totaled $17.6 billion compared to $17.3 billion and $16.6 billion at September 30, 2022 and March 31, 2022, respectively.

• Homes in inventory totaled 43,600 compared to 46,400 and 59,800 at September 30, 2022 and March 31, 2022, respectively.

• Owned lots totaled 136,300 compared to 131,100 and 131,200 at September 30, 2022 and March 31, 2022, respectively.

Lots controlled through purchase contracts totaled 410,700 compared to 442,100 and 442,800 at September 30, 2022 and March 31, 2022, respectively.

• Homebuilding debt was $2.7 billion compared to $2.9 billion and $3.3 billion at September 30, 2022 and March 31, 2022, respectively.

• Homebuilding debt to total capital was 11.5% compared to 13.2% and 16.4% at September 30, 2022 and March 31, 2022, respectively.

Net homebuilding debt to total capital was 1.5% compared to 4.4% and 11.2% at September 30, 2022 and March 31, 2022, respectively.

• Forestar’s revenues decreased 28% to $301.5 million compared to $421.6 million.

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• Forestar’s pre-tax income was 11.9% of revenues compared to 15.0%.

• 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.

• Forestar’s cash and cash equivalents totaled $286.7 million compared to $264.8 million and $233.7 million at September 30, 2022 and March 31, 2022, respectively.

• Forestar’s inventories totaled $2.0 billion, consistent with $2.0 billion at both September 30, 2022 and March 31, 2022.

• Forestar’s owned and controlled lots totaled 76,400 compared to 90,100 and 96,500 at September 30, 2022 and March 31, 2022, respectively.

Of these lots, 31,500 were under contract to sell to or subject to a right of first offer with D.R.

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.

Horton compared to 36,700 at both September 30, 2022 and March 31, 2022.

• Forestar’s debt was $706.8 million compared to $706.0 million and $705.3 million at September 30, 2022 and March 31, 2022, respectively.

• Forestar’s debt to total capital was 36.2% compared to 37.1% and 38.9% at September 30, 2022 and March 31, 2022, respectively.

Forestar’s net debt to total capital was 25.2% compared to 26.9% and 29.9% at September 30, 2022 and March 31, 2022, respectively.

Financial Services:

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• Rental pre-tax income was $34.6 million compared to $102.5 million.

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

• Rental inventory totaled $3.3 billion compared to $2.6 billion and $1.5 billion at September 30, 2022 and March 31, 2022, respectively.

• There were no multi-family rental units closed compared to 126.

• Single-family rental homes closed totaled 721 compared to 368.

Consolidated Results:

• Consolidated revenues were $8.0 billion in both periods.

• Consolidated pre-tax income decreased 34% to $1.2 billion compared to $1.9 billion.

• Consolidated pre-tax income was 15.6% of consolidated revenues compared to 23.5%.

• Income tax expense was $295.7 million compared to $441.0 million, and our effective tax rate was 23.7% compared to 23.4%.

• Net income attributable to D.R.

Horton decreased 34% to $942.2 million compared to $1.4 billion.

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

Horton decreased 32% to $2.73 compared to $4.03.

• Stockholders’ equity was $20.7 billion compared to $19.4 billion and $16.8 billion at September 30, 2022 and March 31, 2022, respectively.

• Book value per common share increased to $60.73 compared to $56.39 and $47.66 at September 30, 2022 and March 31, 2022, respectively.

• Debt to total capital was 22.4% compared to 23.8% and 24.9% at September 30, 2022 and March 31, 2022, respectively.

Net debt to total capital was 12.3% compared to 15.4% and 18.9% at September 30, 2022 and March 31, 2022, respectively.

Key financial results for the six months ended March 31, 2023, as compared to the same period of 2022, were as follows:

Homebuilding:

• Homebuilding revenues were $14.2 billion in both periods.

• Homes closed decreased 3% to 37,004 homes, while the average closing price of those homes increased 3% to $382,600.

• Net sales orders decreased 20% to 36,524 homes, and the value of net sales orders decreased 25% to $13.6 billion.

• Home sales gross margin was 22.7% compared to 28.2%.

• Homebuilding SG&A expense was 7.5% of homebuilding revenues compared to 7.1%.

• Homebuilding pre-tax income was $2.2 billion compared to $3.0 billion.

• Homebuilding pre-tax income was 15.2% of homebuilding revenues compared to 21.0%.

• Net cash provided by homebuilding operations was $1.5 billion compared to net cash used of $416.2 million.

• Forestar’s revenues decreased 38% to $518.2 million compared to $829.2 million.

Revenues in the current and prior year periods included $442.9 million and $719.8 million, respectively, of revenue from land and lot sales to our homebuilding segment.

• Forestar’s lots sold decreased 49% to 5,242 compared to 10,304.

Lots sold to D.R.

Horton totaled 4,760 compared to 8,785.

• Forestar’s pre-tax income was $63.8 million compared to $116.7 million.

• Forestar’s pre-tax income was 12.3% of revenues compared to 14.1%.

Financial Services:

• Financial services revenues decreased 13% to $353.4 million compared to $406.4 million.

• Financial services pre-tax income decreased 35% to $103.8 million compared to $159.9 million.

• Financial services pre-tax income was 29.4% of financial services revenues compared to 39.3%.

• Rental revenues were $551.6 million compared to $379.4 million.

• Rental pre-tax income was $144.9 million compared to $172.5 million.

• Multi-family rental units closed totaled 300 compared to 477.

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• Net income attributable to D.R.

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

Horton decreased 26% to $1.9 billion compared to $2.6 billion.

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

Horton decreased 24% to $5.50 compared to $7.20.

• 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.

• Net cash provided by operations was $1.5 billion compared to net cash used of $834.6 million.

RESULTS OF OPERATIONS - HOMEBUILDING

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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.

Tulsa Northeast Tennessee

Texas Abilene

Austin North Region

Beaumont Delaware Central Delaware

Bryan/College Station Northern Delaware

Corpus Christi Illinois Chicago

Dallas Indiana Fort Wayne

Fort Worth Indianapolis

Houston Northwest Indiana

Killeen/Temple/Waco Iowa Des Moines

Lubbock Iowa City/Cedar Rapids

Midland/Odessa Kentucky Louisville

New Braunfels/San Marcos Maryland Baltimore

San Antonio Suburban Washington, D.C.

Western Maryland

Southeast Region Minnesota Minneapolis/St.

Alabama Birmingham Nebraska Omaha

Huntsville New Jersey Northern New Jersey

Mobile/Baldwin County Southern New Jersey

Montgomery Ohio Cincinnati

Tuscaloosa Columbus

Florida Fort Myers/Naples Pennsylvania Central Pennsylvania

Gainesville Philadelphia

Jacksonville Virginia Northern Virginia

Lakeland Richmond

Melbourne/Vero Beach Virginia Beach/Williamsburg

Miami/Fort Lauderdale 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 six months ended March 31, 2023 and 2022.

Net Sales Orders (1)

Three Months Ended December 31,

Three Months Ended March 31,

Net Homes Sold Value (In millions) Average Selling Price

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23,142 24,340 (5) % $ 8,629.9 $ 9,749.4 (11) % $ 372,900 $ 400,600 (7) %

Six Months Ended March 31,

Net Homes Sold Value (In millions) Average Selling Price

Change 2023 2022 %

Northwest 2,283 2,570 (11) % $ 1,183.9 $ 1,425.3 (17) % $ 518,600 $ 554,600 (6) %

Southwest 3,249 4,896 (34) % 1,534.2 2,587.0 (41) % 472,200 528,400 (11) %

South Central 9,827 13,190 (25) % 3,115.6 4,458.0 (30) % 317,000 338,000 (6) %

Southeast 10,596 13,243 (20) % 3,789.9 4,925.7 (23) % 357,700 371,900 (4) %

East 6,795 7,745 (12) % 2,416.4 2,868.0 (16) % 355,600 370,300 (4) %

North 3,774 4,218 (11) % 1,513.2 1,741.8 (13) % 401,000 412,900 (3) %

36,524 45,862 (20) % $ 13,553.2 $ 18,005.8 (25) % $ 371,100 $ 392,600 (5) %

Sales Order Cancellations

Three Months Ended December 31,

Three Months Ended March 31,

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

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5,033 4,508 $ 1,925.4 $ 1,628.7 18 % 16 %

Six Months Ended March 31,

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

2023 2022 2023 2022 2023 2022

Northwest 482 287 $ 265.5 $ 150.5 17 % 10 %

Southwest 953 889 478.9 411.7 23 % 15 %

South Central 3,178 2,789 1,102.6 910.0 24 % 17 %

Southeast 2,967 2,480 1,104.8 842.6 22 % 16 %

East 1,508 1,379 565.1 475.2 18 % 15 %

North 833 604 341.0 238.8 18 % 13 %

9,921 8,428 $ 3,857.9 $ 3,028.8 21 % 16 %

________________________

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

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Net Sales Orders

The number of net sales orders 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 number of net sales orders decreased 5% and 20% in the three and six months ended March 31, 2023, respectively, compared to the prior year periods.

The value of net sales orders decreased 11% to $8.6 billion (23,142 homes) and 25% to $13.6 billion (36,524 homes) for the three and six months ended March 31, 2023, respectively, compared to $9.7 billion (24,340 homes) and $18.0 billion (45,862 homes) in the prior year periods.

The average selling price of net sales orders during the three and six months ended March 31, 2023 was $372,900 and $371,100, respectively, down 7% and 5% from the prior year periods.

As the spring selling season began during the three months ended March 31, 2023, our net sales orders increased 73% from the first quarter.

Although inflationary pressures and mortgage interest rates remain elevated, demand improved during the quarter due to typical seasonal factors, coupled with an increased use of incentives and pricing adjustments to adapt to changing market conditions.

We believe we are well-positioned to meet changing market conditions with our affordable product offerings and lot supply.

The number of net sales orders decreased 5% in the three months ended March 31, 2023 compared to the prior year period.

The markets contributing most to the decreases in sales order volume were the Phoenix and Southern California markets in the Southwest and the Dallas, San Antonio and Austin markets in the South Central.

The markets contributing most to the increase in sales order volume in the East were the Carolina markets.

The number of net sales orders decreased 20% in the six months ended March 31, 2023 compared to the prior year period.

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 Phoenix and Southern California markets in the Southwest;

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

the Florida markets in the Southeast;

the Atlanta and Carolina markets in the East;

the Atlanta market 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.

Our sales order cancellation rate (cancelled sales orders divided by gross sales orders for the period) was 18% and 21% in the three and six months ended March 31, 2023, respectively, compared to 16% in both of the prior year periods.

Sales Order Backlog

As of December 31,

As of March 31,

Homes in Backlog Value (In millions) Average Selling Price

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Homes Closed and Home Sales Revenue

Three Months Ended December 31,

Three Months Ended March 31,

Homes Closed Value (In millions) Average Selling Price

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19,664 19,828 (1) % $ 7,449.7 $ 7,499.2 (1) % $ 378,800 $ 378,200 — %

Six Months Ended March 31,

Homes Closed Value (In millions) Average Selling Price

Change 2023 2022 %

Northwest 2,262 2,171 4 % $ 1,210.8 $ 1,185.4 2 % $ 535,300 $ 546,000 (2) %

Southwest 3,580 4,265 (16) % 1,708.2 2,046.5 (17) % 477,200 479,800 (1) %

South Central 10,416 11,047 (6) % 3,440.2 3,528.8 (3) % 330,300 319,400 3 %

Southeast 11,038 10,828 2 % 4,099.1 3,756.5 9 % 371,400 346,900 7 %

East 6,367 6,597 (3) % 2,349.7 2,291.5 3 % 369,000 347,400 6 %

North 3,341 3,316 1 % 1,350.9 1,346.9 — % 404,300 406,200 — %

37,004 38,224 (3) % $ 14,158.9 $ 14,155.6 — % $ 382,600 $ 370,300 3 %

Home Sales Revenue

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.

Revenues from home sales were $7.4 billion (19,664 homes closed) for the three months ended March 31, 2023 and $7.5 billion (19,828 homes closed) in the prior year period.

Revenues from home sales were $14.2 billion for the six months ended March 31, 2023 and 2022 (37,004 homes closed and 38,224 homes closed, respectively).

The number of homes closed was relatively flat between the periods, decreasing 1% and 3% in the three and six months ended March 31, 2023, respectively, compared to the prior year periods.

The largest decrease in closings volume was in our Southwest region and was primarily due to our California markets.

The largest increase in closings volume was in our Northwest region and was primarily due to our Salt Lake City and Seattle markets.

Homebuilding Operating Margin Analysis

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Three Months Ended

March 31, Six Months Ended

2023 2022 2023 2022

Gross profit – home sales 21.6 % 28.9 % 22.7 % 28.2 %

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Home Sales Gross Profit

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.

Gross profit from home sales decreased to $1.6 billion in the three months ended March 31, 2023 from $2.2 billion in the prior year period and decreased 730 basis points to 21.6% as a percentage of home sales revenues.

The percentage decrease resulted from a decrease of 740 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 decreased warranty and construction defect costs of 10 basis points.

Gross profit from home sales decreased to $3.2 billion in the six months ended March 31, 2023 from $4.0 billion in the prior year period and decreased 550 basis points to 22.7% as a percentage of home sales revenues.

The percentage decrease resulted from a decrease of 560 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.

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.

To adjust to changing market conditions and higher mortgage interest rates, we have increased our use of incentives, and we have reduced home prices and sizes of our home offerings where necessary to provide better affordability to homebuyers.

We expect to continue offering a higher level of incentives throughout fiscal 2023.

Land/Lot Sales and Other Revenues

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.

Land/lot sales and other revenues from our homebuilding operations were $19.9 million and $54.7 million in the three and six months ended March 31, 2023, respectively, and $7.6 million and $30.5 million in the comparable periods of fiscal 2022.

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

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

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

As of March 31, 2023, our homebuilding operations had $20.4 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 $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 a result of this review, there were $0.9 million and $5.7 million of impairments recorded in our homebuilding segment during the three and six months ended March 31, 2023, respectively.

There were no impairment charges recorded in our homebuilding segment in the prior year periods.

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 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.

During the three and six months ended March 31, 2023, earnest money and pre-acquisition cost write-offs related to our homebuilding segment’s land purchase contracts that we have terminated or expect to terminate were $13.3 million and $32.7 million, respectively, compared to $9.8 million and $13.7 million in the same periods of fiscal 2022.

Selling, General and Administrative (SG&A) Expense

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.

SG&A expense from homebuilding activities increased 8% to $545.6 million and 7% to $1.1 billion in the three and six months ended March 31, 2023, respectively, from $507.3 million and $1.0 billion in the prior year periods.

SG&A expense as a percentage of homebuilding revenues was 7.3% and 7.5% in the three and six months ended March 31, 2023, respectively, compared to 6.8% and 7.1% in the prior year periods.

Employee compensation and related costs were $452.9 million and $878.2 million in the three and six months ended March 31, 2023, respectively, compared to $420.4 million and $830.1 million in the same periods of fiscal 2022.

Employee compensation and related costs represented 83% and 82% of SG&A costs in the three and six months ended March 31, 2023, respectively, compared to 83% in both of the prior year periods.

These costs increased 8% and 6% in the three and six months ended March 31, 2023, respectively, from the prior year periods.

Our homebuilding operations employed 9,369 and 9,160 people at March 31, 2023 and 2022, 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 $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.

Interest incurred by our homebuilding operations was $19.0 million and $39.9 million in the three and six months ended March 31, 2023, respectively, compared to $25.6 million and $50.4 million in the prior year periods.

Interest charged to cost of sales was 0.4% of homebuilding cost of sales (excluding inventory and land option charges) in both the three and six months ended March 31, 2023 compared to 0.5% in both of the prior year periods.

Other income, net of other expenses, included in our homebuilding operations increased to $14.5 million and $27.7 million in the three and six months ended March 31, 2023, respectively, from $1.6 million and $7.9 million in the prior year periods, 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.

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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.

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

Homebuilding Results by Reporting Region

Three Months Ended December 31,

Three Months Ended March 31,

Revenues Homebuilding

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$ 7,469.6 $ 1,067.9 14.3 % $ 7,506.8 $ 1,652.8 22.0 %

Six Months Ended March 31,

Revenues Homebuilding

Income (1) % of

Revenues Homebuilding

Income (1) % of

(In millions)

Northwest $ 1,211.5 $ 155.0 12.8 % $ 1,205.9 $ 260.0 21.6 %

Southwest 1,723.9 165.7 9.6 % 2,046.7 385.9 18.9 %

South Central 3,447.9 549.5 15.9 % 3,532.7 770.3 21.8 %

Southeast 4,102.4 793.0 19.3 % 3,757.5 897.7 23.9 %

East 2,350.8 373.0 15.9 % 2,294.3 468.2 20.4 %

North 1,377.1 126.1 9.2 % 1,349.0 203.8 15.1 %

$ 14,213.6 $ 2,162.3 15.2 % $ 14,186.1 $ 2,985.9 21.0 %

____________________

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

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

Northwest Region — Homebuilding revenues 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.

Northwest Region — Homebuilding revenues increased 8% in the three months and were essentially flat in the six months ended March 31, 2023 compared to the prior year periods.

The increase for the three month period was primarily due to increases in the number of homes closed in our Seattle and Salt Lake City markets.

The region generated pre-tax income of $96.4 million and $155.0 million in the three and six months ended March 31, 2023, respectively, compared to $148.2 million and $260.0 million in the prior year periods.

Gross profit from home sales as a percentage of home sales revenue (home sales gross profit percentage) decreased by 910 and 860 basis points in the three and six months ended March 31, 2023, respectively, compared to the prior year periods, 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 were essentially flat in the three months and increased 40 basis points in the six months ended March 31, 2023 compared to the prior year periods, primarily due to a slight increase in SG&A expenses.

Southwest Region — Homebuilding revenues decreased 19% and 16% in the three and six months ended March 31, 2023, respectively, compared to the prior year periods, due to decreases in the number of homes closed, particularly in our California markets.

The region generated pre-tax income of $81.7 million and $165.7 million in the three and six months ended March 31, 2023, respectively, compared to $226.6 million and $385.9 million in the prior year periods.

Home sales gross profit percentage decreased by 960 and 770 basis points in the three and six months ended March 31, 2023, respectively, compared to the prior year periods, primarily due to the average cost of homes closed increasing while the average selling price decreased slightly.

As a percentage of homebuilding revenues, SG&A expenses increased by 160 and 140 basis points in the three and six months ended March 31, 2023, respectively, compared to the prior year periods, primarily due to the decrease in homebuilding revenues.

South Central Region — Homebuilding revenues decreased 2% in both the three and six months ended March 31, 2023 compared to the prior year periods, due to decreases in the number of homes closed, particularly in our Houston market.

The region generated pre-tax income of $267.9 million and $549.5 million in the three and six months ended March 31, 2023, respectively, compared to $416.0 million and $770.3 million in the prior year periods.

Home sales gross profit percentage decreased by 790 and 560 basis points in the three and six months ended March 31, 2023, respectively, compared to the prior year periods, 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 were essentially flat in the three months and increased 30 basis points in the six months ended March 31, 2023 compared to the prior year periods, primarily due to increases in SG&A expenses.

Southeast Region — Homebuilding revenues increased 8% and 9% in the three and six months ended March 31, 2023, respectively, compared to the prior year periods, due to the increases in the average selling price of homes closed in most markets.

The region generated pre-tax income of $381.7 million and $793.0 million in the three and six months ended March 31, 2023, respectively, compared to $482.2 million and $897.7 million in the prior year periods.

Home sales gross profit percentage decreased by 630 and 440 basis points in the three and six months ended March 31, 2023, respectively, compared to the prior year periods, 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 and 20 basis points in the three and six months ended March 31, 2023, respectively, compared to the prior year periods, primarily due to increases in SG&A expenses.

East Region — Homebuilding revenues decreased 1% and increased 2% in the three and six months ended March 31, 2023, respectively, compared to the prior year periods.

The region generated pre-tax income of $183.5 million and $373.0 million in the three and six months ended March 31, 2023, respectively, compared to $265.9 million and $468.2 million in the prior year periods.

Home sales gross profit percentage decreased by 620 and 420 basis points in the three and six months ended March 31, 2023, respectively, compared to the prior year periods, 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 and 40 basis points in the three and six months ended March 31, 2023, respectively, compared to the prior year periods, primarily due to increases in SG&A expenses.

North Region — Homebuilding revenues increased 1% and 2% in the three and six months ended March 31, 2023, respectively, compared to the prior year periods.

The region generated pre-tax income of $56.7 million and $126.1 million in the three and six months ended March 31, 2023, respectively, compared to $113.9 million and $203.8 million in the prior year periods.

Home sales gross profit percentage decreased by 690 and 610 basis points in the three and six months ended March 31, 2023, respectively, compared to the prior year periods, primarily due to the average cost of homes closed increasing while the average selling price decreased slightly.

As a percentage of homebuilding revenues, SG&A expenses increased by 110 and 90 basis points in the three and six months ended March 31, 2023, respectively, compared to the prior year periods, 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 December 31, 2022 and September 30, 2022 are summarized as follows:

December 31, 2022

Our homebuilding segment’s inventories at March 31, 2023 and September 30, 2022 are summarized as follows:

March 31, 2023

Construction in Progress and

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

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

December 31, 2022

Our land and lot position and homes in inventory at March 31, 2023 and September 30, 2022 are summarized as follows:

March 31, 2023

Owned (1) Lots Controlled

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___________________

(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.

(1) Land/lots owned included approximately 43,700 and 37,600 owned lots that are fully developed and ready for home construction at March 31, 2023 and September 30, 2022, respectively.

Land/lots owned also included land held for development representing 400 lots at both March 31, 2023 and September 30, 2022.

(2) The total remaining purchase price of lots controlled through land and lot purchase contracts at March 31, 2023 and September 30, 2022 was $19.2 billion and $19.7 billion, respectively, secured by earnest money deposits of $1.6 billion at both dates.

The total remaining purchase price of lots controlled through land and lot purchase contracts at March 31, 2023 and September 30, 2022 included $1.2 billion and $1.4 billion, respectively, related to lot purchase contracts with Forestar, secured by $124.3 million and $131.7 million, respectively, of earnest money.

(3) Lots controlled at March 31, 2023 included approximately 31,500 lots owned or controlled by Forestar, 14,200 of which our homebuilding divisions had under contract to purchase and 17,300 of which our homebuilding divisions had a right of first offer to purchase.

Of these, approximately 13,500 lots were in our Southeast region, 6,100 lots were in our East region, 4,700 lots were in our South Central region, 3,300 lots were in our Southwest region, 3,300 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 27,800 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.

(4) Approximately 24,800 and 27,200 of our homes in inventory were unsold at March 31, 2023 and September 30, 2022, respectively.

At March 31, 2023, approximately 6,400 of our unsold homes were completed, of which approximately 510 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 December 31, 2022 and September 30, 2022.

Homes in inventory exclude approximately 1,900 and 1,800 model homes at March 31, 2023 and September 30, 2022, respectively.

RESULTS OF OPERATIONS – FORESTAR

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.

At March 31, 2023, 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 March 31, 2023.

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

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

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

Results of operations for the Forestar segment for the three and six months ended March 31, 2023 and 2022 were as follows:

Three Months Ended

March 31, Six Months Ended

2023 2022 2023 2022

(In millions)

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Income before income taxes $ 35.9 $ 63.2 $ 63.8 $ 116.7

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,

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

The following tables provide further information regarding Forestar’s revenues and lot position as of and for the three and six months ended March 31, 2023 and 2022:

Three Months Ended March 31,

Lots Closed Value (In millions)

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Total lots sold 2,979 5,788 $ 252.9 $ 409.0

Tract acres sold to D.R.

Horton 379 — $ 32.5 $ —

Six Months Ended March 31,

Lots Closed Value (In millions)

2023 2022 2023 2022

Residential single-family lots sold

Lots sold to D.R.

Horton 4,760 8,785 $ 410.4 $ 719.8

Total lots sold 5,242 10,304 $ 459.5 $ 813.1

Tract acres sold to D.R.

Horton 379 — $ 32.5 $ —

2023 September 30,

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Owned lots fully developed 9,100 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.

At both March 31, 2023 and September 30, 2022, Forestar’s inventory, which includes land and lots developed, under development and held for development, totaled $2.0 billion.

Inventory and land option charges during the three and six months ended March 31, 2023 included inventory impairment charges of $19.4 million compared to $3.8 million in both of the prior year periods.

SG&A expense for the three and six months ended March 31, 2023 included charges of $0.9 million and $1.9 million, respectively, related to the shared services agreement between Forestar and D.R.

Horton whereby D.R.

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

Shared services charges were $1.0 million and $2.0 million, respectively, in the same periods of fiscal 2022.

RESULTS OF OPERATIONS – FINANCIAL SERVICES

The following tables and related discussion set forth key operating and financial data for our financial services operations, comprising DHI Mortgage and our subsidiary title companies, for the three months ended December 31, 2022 and 2021.

Three Months Ended December 31,

2022 2021 % Change

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

2023 2022 % Change 2023 2022 % 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 13,984 12,527 12 % 29,151 25,598 14 %

Three Months Ended December 31,

2022 2021 % Change

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

2023 2022 % Change 2023 2022 % Change

(In millions)

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Three Months Ended

March 31, Six Months Ended

2023 2022 2023 2022

General and administrative expense 67.9 % 62.1 % 79.5 % 64.8 %

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

In the three months ended December 31, 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.

In the three and six months ended March 31, 2023, while the number of homes closed by our homebuilding operations decreased 1% and 3%, respectively, from the prior year periods, the volume of first-lien loans originated or brokered by DHI Mortgage for our homebuyers increased 10% in both periods 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 both the three and six months ended March 31, 2023 compared to 99% and 98%, respectively, in the prior year periods.

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

The number of loans sold increased 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.

The number of loans sold increased 12% and 14% in the three and six months ended March 31, 2023, respectively, compared to the prior year periods.

Virtually all of the mortgage loans held for sale on March 31, 2023 were eligible for sale to the Federal National Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage Corporation (Freddie Mac) or the Government National Mortgage Association (Ginnie Mae).

During the six months ended March 31, 2023, approximately 53% of our mortgage loans were sold directly to Fannie Mae, Freddie Mac or into securities backed by Ginnie Mae, and 43% were sold to one other major financial entity.

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

Financial Services Revenues and Expenses

Revenues from our mortgage operations decreased 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.

Revenues from our mortgage operations decreased 4% to $172.5 million and 17% to $268.3 million in the three and six months ended March 31, 2023, respectively, from $179.9 million and $324.0 million in the prior year periods.

The decreases were 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 4% to $43.9 million and 3% to $85.1 million in the three and six months ended March 31, 2023, respectively, from $42.2 million and $82.4 million in the prior year periods.

General and administrative (G&A) expense related to our financial services operations increased 6% to $146.9 million and 7% to $281.0 million in the three and six months ended March 31, 2023, respectively, from $138.0 million and $263.2 million in the prior year periods.

As a percentage of financial services revenues, G&A expense was 67.9% and 79.5% in the three and six months ended March 31, 2023, respectively, compared to 62.1% and 64.8% in the prior year periods.

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

Our financial services operations employed 2,897 and 2,942 people at December 31, 2022 and 2021, respectively.

Our financial services operations employed 2,849 and 2,990 people at March 31, 2023 and 2022, respectively.

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

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.

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 35% to $103.8 million in the six months ended March 31, 2023 from $159.9 million in the prior year period.

RESULTS OF OPERATIONS - RENTAL

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

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

Results of operations for the rental segment for the three and six months ended March 31, 2023 and 2022 were as follows:

Three Months Ended

March 31, Six Months Ended

2023 2022 2023 2022

(In millions)

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Income before income taxes $ 34.6 $ 102.5 $ 144.9 $ 172.5

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,

At March 31, 2023, our rental property inventory of $3.3 billion included $2.1 billion of inventory related to our single-family rental operations and $1.2 billion 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 inventory related to our single-family rental operations and $897.2 million of inventory related to our multi-family rental operations.

The following tables provide further information regarding our rental operations as of and for the three and six months ended March 31, 2023 and 2022:

Rental Homes/Units Sold and Closed

Three Months Ended March 31,

Homes/Units Closed Value (In millions)

2023 2022 2023 2022

Rental homes/units sold and closed

Single-family rental homes 721 368 $ 224.1 $ 172.9

Multi-family rental units — 126 — 50.0

721 494 $ 224.1 $ 222.9

Six Months Ended March 31,

Homes/Units Closed Value (In millions)

2023 2022 2023 2022

Single-family rental homes 1,415 594 $ 452.1 $ 253.2

Multi-family rental units 300 477 99.5 126.2

1,715 1,071 $ 551.6 $ 379.4

Rental Inventory

2023 September 30,

Rental homes/units and lots in inventory

Single-family rental homes (1) 8,630 7,400

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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.

See footnotes on following page.

(1) Single-family rental homes include 5,980 and 3,530 completed homes at March 31, 2023 and September 30, 2022, respectively.

(2) Single-family rental lots include 930 and 1,770 finished lots at March 31, 2023 and September 30, 2022, respectively.

(3) Multi-family rental units at March 31, 2023 consist of 6,730 units under active construction and 480 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.

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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 $9.4 million in the three months ended December 31, 2022 compared to $10.7 million in the prior year period.

The pre-tax income of all of our subsidiaries engaged in other business activities was $12.5 million and $21.9 million in the three and six months ended March 31, 2023, respectively, compared to $13.6 million and $24.3 million in the prior year periods.

RESULTS OF OPERATIONS - CONSOLIDATED

Income before Income Taxes

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.

Pre-tax income for the three and six months ended March 31, 2023 was $1.2 billion and $2.5 billion, respectively, compared to $1.9 billion and $3.4 billion in the prior year periods.

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.

Our income tax expense for the three and six months ended March 31, 2023 was $295.7 million and $594.6 million, respectively, compared to $441.0 million and $792.5 million in the prior year periods.

Our effective tax rate was 23.7% for both the three and six months ended March 31, 2023 compared to 23.4% in both of the prior year periods.

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

Our deferred tax assets, net of deferred tax liabilities, were $130.1 million at March 31, 2023 compared to $159.0 million at September 30, 2022.

We have a valuation allowance of $17.8 million and $17.9 million at March 31, 2023 and September 30, 2022, respectively, 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.

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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.

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.

At March 31, 2023, 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 $1.6 billion outstanding under the mortgage repurchase facility and $400 million principal amount of 5.75% homebuilding senior notes maturing in August 2023.

At March 31, 2023, our ratio of debt to total capital (notes payable divided by stockholders’ equity plus notes payable) was 22.4% compared to 23.8% at September 30, 2022 and 24.9% at March 31, 2022.

Our net debt to total capital (notes payable net of cash divided by stockholders’ equity plus notes payable net of cash) was 12.3% at March 31, 2023 compared to 15.4% at September 30, 2022 and 18.9% at March 31, 2022.

At March 31, 2023, our ratio of homebuilding debt to total capital (homebuilding notes payable divided by stockholders’ equity plus homebuilding notes payable) was 11.5% compared to 13.2% at September 30, 2022 and 16.4% at March 31, 2022.

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 1.5% at March 31, 2023 compared to 4.4% at September 30, 2022 and 11.2% at March 31, 2022.

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.

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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 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.

At March 31, 2023, we had outstanding letters of credit of $245.2 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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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 (ATM) program that became effective in November 2021.

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.

At March 31, 2023, $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.

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Capital Resources - Homebuilding

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

Cash and Cash Equivalents — At March 31, 2023, cash and cash equivalents of our homebuilding segment totaled $2.4 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.

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.

The maturity date of the facility is October 28, 2027.

At March 31, 2023, there were no borrowings outstanding and $202.6 million of letters of credit issued under the revolving credit facility, resulting in available capacity of $1.99 billion.

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

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

At December 31, 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.

At March 31, 2023, we were in compliance with all of the covenants, limitations and restrictions of our homebuilding revolving credit facility.

Public Unsecured Debt — We have $2.5 billion principal amount of homebuilding senior notes outstanding as of March 31, 2023 that mature from August 2023 through October 2027.

In February 2023, we repaid $300 million principal amount of our 4.75% senior notes at maturity.

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

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

At March 31, 2023, 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 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.

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

During the six months ended March 31, 2023, we repurchased 4.5 million shares at a total cost including commissions and excise taxes of $421.3 million.

At March 31, 2023, the full amount of the debt repurchase authorization was remaining, and $17.0 million of the stock repurchase authorization was remaining.

In April 2023, our Board of Directors authorized the repurchase of up to $1.0 billion of our common stock, replacing the previous common stock repurchase authorization.

The debt and stock repurchase authorizations have no expiration date.

Capital Resources - Forestar

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

At December 31, 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.

At March 31, 2023, Forestar’s ratio of debt to total capital (notes payable divided by stockholders’ equity plus notes payable) was 36.2% compared to 37.1% at September 30, 2022 and 38.9% at March 31, 2022.

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 25.2% compared to 26.9% at September 30, 2022 and 29.9% at March 31, 2022.

Cash and Cash Equivalents — At March 31, 2023, Forestar had cash and cash equivalents of $286.7 million.

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

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

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 maturity date of the facility is October 28, 2026.

At March 31, 2023, there were no borrowings outstanding and $42.6 million of letters of credit issued under the revolving credit facility, resulting in available capacity of $367.4 million.

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

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

Unsecured Debt — As of December 31, 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 March 31, 2023, 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.

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

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.

At March 31, 2023, Forestar was in compliance with all of the covenants, limitations and restrictions of its revolving credit facility and senior note obligations.

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

All of the $30 million authorization was remaining at December 31, 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.

All of the $30 million authorization was remaining at March 31, 2023, and the authorization has no expiration date.

Issuance of Common Stock — During the six months ended March 31, 2023, there were no shares of common stock issued under Forestar’s ATM program.

At March 31, 2023, $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 December 31, 2022, cash and cash equivalents of our financial services segment totaled $198.4 million.

Cash and Cash Equivalents — At March 31, 2023, cash and cash equivalents of our financial services segment totaled $285.5 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.

The total capacity of the facility is $1.6 billion;

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

The total capacity of the facility at December 31, 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.

In February 2023, the mortgage repurchase facility was amended to increase its capacity to $2.0 billion and extend its maturity date to February 16, 2024.

The capacity of the facility can be increased to $2.3 billion subject to the availability of additional commitments.

As of March 31, 2023, $2.14 billion of mortgage loans held for sale with a collateral value of $2.10 billion were pledged under the mortgage repurchase facility.

As a result of advance paydowns totaling $541.0 million, DHI Mortgage had an obligation of $1.55 billion outstanding under the mortgage repurchase facility at March 31, 2023 at a 6.4% 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 December 31, 2022, DHI Mortgage was in compliance with all of the conditions and covenants of the mortgage repurchase facility.

At March 31, 2023, 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.

The liquidity of our financial services business depends upon its continued ability to renew and extend the mortgage repurchase facility or to obtain other additional financing in sufficient capacities.

Uncommitted Mortgage Repurchase Facility — In April 2023, DHI Mortgage entered into a master repurchase agreement pursuant to which DHI Mortgage may from time to time sell to the counterparty, and later repurchase, eligible loans.

The new mortgage repurchase facility provides DHI Mortgage with uncommitted borrowing capacity of up to $300 million and includes customary affirmative and negative covenants, events of default and financial covenants similar to those in the committed mortgage repurchase facility.

The obligations of DHI Mortgage under this facility are not guaranteed by D.R.

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

Capital Resources - Rental

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.

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.

During the first half of fiscal 2023, we continued to increase the investment in our rental operations.

The inventory in our rental segment totaled $3.3 billion at March 31, 2023 compared to $2.6 billion at September 30, 2022 and $1.5 billion at March 31, 2022.

Cash and Cash Equivalents — At March 31, 2023, cash and cash equivalents of our rental segment totaled $89.8 million.

Bank Credit Facility — Our rental subsidiary, DRH Rental, has a $1.025 billion 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.

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.

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

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.

Borrowings and repayments under the facility totaled $575 million and $350 million, respectively, during the six months ended March 31, 2023.

At March 31, 2023, the capacity of the facility was fully utilized, with $1.025 billion of borrowings outstanding at a 7.2% annual interest rate.

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

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

At March 31, 2023, 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.

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Operating Cash Flow Activities

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.

In the six months ended March 31, 2023, net cash provided by operating activities was $1.5 billion compared to $834.6 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 $1.5 billion, $232.2 million and $21.3 million of cash provided by our homebuilding, financial services and Forestar segments, respectively, partially offset by $263.3 million of cash used in our rental segment.

Cash provided by a decrease in construction in progress and finished home inventory was $537.3 million in the current year period compared to cash used to increase construction in progress and finished home inventory of $2.1 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 $668.7 million in the current year period compared to $528.4 million in the prior year period.

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

In the six months ended March 31, 2023, cash used to increase our rental inventories was $689.2 million compared to $655.9 million in the prior year period, which reflects our ongoing efforts to expand our rental platform.

Investing Cash Flow Activities

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 six months ended March 31, 2023, net cash used in investing activities was $180.6 million compared to $68.7 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 for $103.5 million and purchases of property and equipment totaling $79.2 million.

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

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

During the three months ended December 31, 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.

During the six months ended March 31, 2023, net cash used in financing activities was $791.3 million, consisting primarily of repayment of $300 million principal amount of our 4.75% homebuilding senior notes, net payments of $63.4 million on our mortgage repurchase facility, cash used to repurchase shares of our common stock of $419.8 million and payment of cash dividends totaling $171.7 million.

These uses of cash were partially offset by net borrowings on DRH Rental’s revolving credit facility of $225 million.

During the six months ended March 31, 2022, net cash used in financing activities was $644.8 million, consisting primarily of cash used to repurchase shares of our common stock of $569.8 million and payment of cash dividends totaling $159.2 million, partially offset by net borrowings of $84.3 million on our mortgage repurchase facility.

During each of the first two quarters of fiscal 2023, our Board of Directors approved a quarterly cash dividend of $0.25 per common share, the most recent of which was paid on February 14, 2023 to stockholders of record on February 7, 2023.

In April 2023, our Board of Directors approved a quarterly cash dividend of $0.25 per common share, payable on May 10, 2023 to stockholders of record on May 3, 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 December 31, 2022, D.R.

As of March 31, 2023, D.R.

had $2.5 billion principal amount of homebuilding senior notes outstanding due through October 2027 and no amounts outstanding on its homebuilding revolving credit facility.

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and Guarantor Subsidiaries

Summarized Balance Sheet Data December 31,

Summarized Balance Sheet Data March 31,

2023 September 30,

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18,722.0 17,655.2

Summarized Statement of Operations Data Three Months Ended

December 31, 2022 Year Ended

Summarized Statement of Operations Data Six Months Ended

March 31, 2023 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 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.

At March 31, 2023 and September 30, 2022, we had reserves for approximately 600 and 560 pending construction defect claims, respectively, and no individual existing claim was material to our financial statements.

During the six months ended March 31, 2023, we established reserves for approximately 150 new construction defect claims and resolved 110 construction defect claims for a total cost of $16.6 million.

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

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

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.

33 unchanged sentences

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