DR HORTON The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included in this quarterly report and with our annual report on Form 10-K for the fiscal year endedSeptember 30, 2019 . Some of the information contained in this discussion and analysis constitutes forward-looking statements that involve risks and uncertainties. Actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to these differences include, but are not limited to, those described in the "Forward-Looking Statements" section following this discussion.
BUSINESS
D.R. Horton, Inc. is the largest homebuilding company inthe United States as measured by number of homes closed. We construct and sell homes through our operating divisions in 90 markets across 29 states, primarily under the names ofD.R. Horton , America's Builder;Emerald Homes ;Express Homes andFreedom Homes . Our common stock is included in the S&P 500 Index and listed on theNew York Stock Exchange under the ticker symbol "DHI." Unless the context otherwise requires, the terms "D.R. Horton ," the "Company," "we" and "our" used herein refer toD.R. Horton, Inc. , aDelaware corporation, and its predecessors and subsidiaries. Our business operations consist of homebuilding, a majority-owned residential lot development company, financial services 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$100,000 to more than$1,000,000 , with an average closing price of$298,100 during the three months endedDecember 31, 2019 . Approximately 91% of our home sales revenue in the three months endedDecember 31, 2019 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. During fiscal 2018, we acquired 75% of the outstanding shares ofForestar Group Inc. (Forestar), for$558.3 million in cash. Forestar is a publicly traded residential lot development company listed on theNew York Stock Exchange under the ticker symbol "FOR." Forestar is a component of our homebuilding strategy to enhance operational efficiency and returns by expanding relationships with land developers and increasing the portion of our land and lot position controlled under land purchase contracts. We owned approximately 65% of Forestar's outstanding common stock atDecember 31, 2019 . Our financial services operations provide mortgage financing and title agency services to homebuyers in many of our homebuilding markets.DHI Mortgage , our 100% owned subsidiary, provides mortgage financing services primarily to our homebuyers and generally sells the mortgages it originates and the related servicing rights to third-party purchasers.DHI Mortgage originates loans in accordance with purchaser guidelines and sells substantially all of its mortgage production shortly after origination. Our 100% owned subsidiary title companies serve as title insurance agents by providing title insurance policies, examination and closing services, primarily to our homebuyers. In addition to our homebuilding, Forestar and financial services operations, we have subsidiaries that engage in other business activities. These subsidiaries conduct insurance-related operations, construct and own income-producing multi-family rental properties, own non-residential real estate including ranch land and improvements and own and operate oil and gas related assets. The operating results of these subsidiaries are immaterial for separate reporting and therefore are grouped together and presented as other. One of these subsidiaries, DHI Communities, develops, constructs and owns multi-family residential properties that produce rental income. DHI Communities is primarily focused on constructing garden style multi-family products, which typically accommodate 200 to 400 dwelling units, in high growth suburban markets. After DHI Communities has completed construction and achieved a stabilized occupancy rate, the property is typically marketed for sale. We currently have four projects under active construction and one project that is substantially complete. InNovember 2019 , DHI Communities sold a multi-family rental property for$61.5 million and recorded a gain on the sale of$31.2 million . AtDecember 31, 2019 andSeptember 30, 2019 , our consolidated balance sheets included$209.8 million and$204.0 million , respectively, of assets owned by DHI Communities. The combined assets of all of our subsidiaries engaged in other business activities totaled$333.4 million and$317.9 million atDecember 31, 2019 andSeptember 30, 2019 , respectively, and the combined pre-tax income of these subsidiaries was$29.6 million in the three months endedDecember 31, 2019 compared to$1.0 million in the prior year period. 35
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OVERVIEW
The improvement in the housing market that we have experienced in recent quarters continued during the first quarter of 2020. As interest rates on mortgage loans remained low and demand strengthened, we reduced sales incentives compared to the prior year quarter. We continue to see solid economic fundamentals and a limited supply of homes at affordable prices across most of our markets. We believe our business is well positioned with a broad geographic footprint; affordable product offerings; a balanced supply of finished lots, land and homes; a strong balance sheet and liquidity position; and experienced personnel across our operating markets. We remain focused on growing our revenues and profitability, generating consistently strong annual cash flows from our homebuilding operations and managing our product offerings, pricing, sales pace and inventory levels to optimize the return on our inventory investments. We are monitoring our sales pace, pricing and homes in inventory in each of our communities, and we will adjust sales pace, home pricing and incentives based on local housing market conditions. During the three months endedDecember 31, 2019 , our number of homes closed and home sales revenues both increased 13% compared to the prior year period, and our consolidated revenues increased 14% to$4.0 billion compared to$3.5 billion in the prior year period. Our pre-tax income was$523.3 million in the three months endedDecember 31, 2019 compared to$375.7 million in the prior year period, and our pre-tax operating margin was 13.0% compared to 10.7%. Net income was$432.5 million in the three months endedDecember 31, 2019 compared to$286.7 million in the prior year period. The current quarter results include a tax benefit of$32.9 million related to the retroactive reinstatement of the federal energy efficient homes tax credit. Cash used in our homebuilding operations was$178.4 million in the three months endedDecember 31, 2019 compared to$396.8 million in the prior year period. In the trailing twelve months endedDecember 31, 2019 , our homebuilding return on inventory (ROI) was 18.7% compared to 19.3% in the prior year period. Homebuilding ROI is calculated as homebuilding pre-tax income for the year divided by average inventory. Average inventory in the ROI calculation is the sum of ending inventory balances for the trailing five quarters divided by five. Within our homebuilding land and lot portfolio, our lots controlled under purchase contracts represent 61% of the lots owned and controlled atDecember 31, 2019 compared to 60% atSeptember 30, 2019 and 58% atDecember 31, 2018 . Growing our majority-owned Forestar lot development operations is advancing our homebuilding strategy of increasing our controlled finished lot pipeline. We believe that housing demand in our individual operating markets is tied closely to each market's economy. Therefore, we expect that housing market conditions will vary across our markets. If theU.S. economy continues to grow, we expect to see solid housing demand, concentrated in markets where job growth is occurring and new home prices remain affordable relative to household incomes. The pace and sustainability of new home demand and our future results could be negatively affected by weakening economic conditions, decreases in the level of employment and housing demand, decreased home affordability, increases in mortgage interest rates or tightening of mortgage lending standards. 36
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STRATEGY
Our operating strategy focuses on enhancing long-term value to our shareholders
by leveraging our financial and competitive position in our core homebuilding
business to increase the returns on our inventory investments and generate
strong profitability and cash flows, while managing risk and maintaining
financial flexibility to make opportunistic strategic investments. This strategy
includes the following initiatives:
• Developing and retaining highly experienced and productive teams of
personnel throughout our company that are aligned and focused on
continuous improvement in our operational execution and financial
performance.
• Maintaining a strong cash balance and overall liquidity position and
controlling our level of debt.
• Allocating and actively managing our inventory investments across our
operating markets to diversify our geographic risk.
• 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.
• Delivering high quality homes and a positive experience to our customers
both during and after the sale.
• Managing our inventory of homes under construction relative to demand in
each of our markets, including starting construction on unsold homes to
capture new home demand and actively controlling the number of unsold,
completed homes in inventory.
• Investing in land and land development in desirable markets, whilecontrolling the level of land and lots we own in each of our markets
relative to the local new home demand.
• Increasing the amount of land and finished lots controlled through
purchase contracts by expanding relationships with land developers across
the country and continuing to assist our majority-owned Forestar lot
development subsidiary with the growth of their operations.
• Opportunistically pursuing acquisitions to enhance our operations and
improve returns.
• Controlling the cost of goods purchased from both vendors and subcontractors.
• Improving the efficiency of our land development, construction, sales and
other key operational activities.
• Controlling our selling, general and administrative (SG&A) expense
infrastructure to match production levels.
• Ensuring that our financial services business provides high quality
mortgage and title services to homebuyers efficiently and effectively.
• Investing in the construction of garden style multi-family rental
properties to meet rental demand in high growth suburban markets and
selling these properties profitably.
We believe our operating strategy, which has produced positive results in recent
years, will allow us to maintain and improve our financial and competitive
position and balance sheet strength. However, we cannot provide any assurances
that the initiatives listed above will continue to be successful, and we may
need to adjust components of our strategy to meet future market conditions.
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Table of Contents KEY RESULTS
Key financial results as of and for the three months ended
Homebuilding:
• Homebuilding revenues increased 14% to
• Homes closed increased 13% to 12,959 homes, and the average closing price
of those homes was $298,100 .
• Net sales orders increased 19% to 13,126 homes, and the value of net
sales orders increased 22% to $3.9 billion .
• Sales order backlog increased 2% to 13,780 homes, and the value of sales
order backlog increased 5% to
• Home sales gross margin was 21.0% compared to 20.0%.
• Homebuilding SG&A expense was 9.2% of homebuilding revenues compared to 9.5%.
• Homebuilding pre-tax income was$461.6 million compared to$354.3 million . • Homebuilding pre-tax income was 11.9% of homebuilding revenues compared
to 10.4%.
• Net cash used in homebuilding operations was
• Homebuilding cash and cash equivalents totaled
$1.0 billion and$537.5 million atSeptember 30, 2019 andDecember 31, 2018 , respectively.
• Homebuilding inventories totaled
and $10.9 billion at September 30, 2019 and December 31, 2018 ,
respectively.
• Homes in inventory totaled 30,200 compared to 27,700 and 31,800 at
September 30, 2019 and December 31, 2018 , respectively.
• Owned lots totaled 123,400 compared to 121,400 and 128,500 atthrough purchase contracts increased to 195,600 from 185,900 and 180,900
at September 30, 2019 and December 31, 2018 , respectively.
• Homebuilding debt was $2.5 billion compared to $2.0 billion and $2.7
billion at September 30, 2019 and December 31, 2018 , respectively.
• Homebuilding debt to total capital was 19.5% compared to 17.0% and 23.2%
at September 30, 2019 and December 31, 2018 , respectively.
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Forestar:
• Forestar's revenues increased 542% to$247.2 million compared to$38.5 million . Revenues in the current and prior year quarters included$221.2 million and$29.0 million , respectively, of revenue from land and lot sales to our homebuilding segment. • Forestar's lot sales increased 368% to 2,422 compared to 518. Lot sales toD.R. Horton were 2,390 compared to 455.
• Forestar's pre-tax income was
• Forestar's pre-tax income was 9.0% of Forestar revenues compared to 12.7%.
• Forestar's cash and cash equivalents totaled
2018, respectively.
• Forestar's inventories totaled
• Owned and controlled lots totaled 44,500 compared to 38,300 and 25,600 at
25,600 were under contract to sell to or subject to a right of first
offer with D.R. Horton , compared to 23,400 and 18,800 at September 30,
2019 and December 31, 2018 , respectively.
• Forestar's debt was
million at
• Forestar's debt to total capital was 35.9% compared to 36.3% and 14.3% at
Financial Services:
• Financial services revenues increased 21% to
• Financial services pre-tax income increased 29% to
to $23.6 million .
• Financial services pre-tax income was 29.6% of financial services
revenues compared to 27.7%.
Consolidated Results:
• Consolidated pre-tax income increased 39% to
• Consolidated pre-tax income was 13.0% of consolidated revenues compared
to 10.7%.
• Income tax expense was $90.8 million compared to $89.0 million .
• Net income attributable to
compared to
• Diluted net income per common share attributable to
53% to
• Net cash used in operations was$113.8 million compared to$373.1 million . • Stockholders' equity was$10.2 billion compared to$10.0 billion and$9.1
billion at
• Book value per common share increased to
• Debt to total capital was 27.0% compared to 25.3% at
and 26.8% at December 31, 2018 .
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RESULTS OF OPERATIONS - HOMEBUILDING
We conduct our homebuilding operations in the geographic regions, states and markets listed below, and we conduct our financial services operations in many of these markets. Our homebuilding operating divisions are aggregated into six reporting segments, also referred to as reporting regions, which comprise the markets below. Our financial statements and the notes thereto contain additional information regarding segment performance. State Reporting Region/Market State
East Region Southeast Region
Delaware Central Delaware Alabama Birmingham
Northern Delaware Huntsville
Georgia Savannah Mobile/Baldwin County
Maryland Baltimore Montgomery
Suburban Washington, D.C. Tuscaloosa
New Jersey Northern New Jersey Florida Fort Myers/Naples
Southern New Jersey Gainesville
North Carolina Asheville Jacksonville
Charlotte Lakeland
Greensboro/Winston-Salem Raleigh/Durham
Wilmington Ocala
Pennsylvania Philadelphia Orlando
South Carolina Charleston Pensacola/Panama City
Columbia Port St. Lucie
Greenville/Spartanburg Tampa/Sarasota
Hilton Head Volusia County
Myrtle Beach West Palm Beach
Virginia Northern Virginia Georgia Atlanta
Southern Virginia Augusta
Mississippi Gulf Coast
Midwest Region Tennessee Chattanooga
Colorado Denver Knoxville
Fort Collins Memphis
Illinois Chicago Nashville
Indiana Fort Wayne
Indianapolis West Region
Iowa Des Moines California Bakersfield
Minnesota Minneapolis/St. Paul Bay Area
Ohio Cincinnati Fresno
Columbus Los Angeles County
Modesto/Merced
South Central Region Riverside County Louisiana Baton Rouge Sacramento Lafayette San Bernardino County
Oklahoma Oklahoma City San Diego County
Texas Austin Ventura County
Bryan/College Station Hawaii Hawaii
Dallas Maui
Fort Worth Oahu
Houston Nevada Las Vegas
Killeen/Temple/Waco Reno
Midland/Odessa Oregon Bend
New Braunfels/San Marcos Portland/Salem
San Antonio Utah Salt Lake City
Washington
Southwest Region Spokane
Arizona Phoenix Vancouver
Tucson
New Mexico Albuquerque
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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
Net Sales Orders (1) Three Months Ended
Net Homes Sold Value (In millions) Average Selling Price
% % %
2019 2018 Change 2019 2018 Change 2019 2018 Change
East 1,841 1,570 17 % $ 546.8 $ 444.9 23 % $ 297,000 $ 283,400 5 %
Midwest 714 532 34 % 255.4 196.9 30 % 357,700 370,100 (3 )%
Southeast 4,374 3,616 21 % 1,191.8 963.3 24 % 272,500 266,400 2 %
South Central 3,775 3,395 11 % 964.2 855.8 13 % 255,400 252,100 1 %
Southwest 667 530 26 % 199.7 134.9 48 % 299,400 254,500 18 %
West 1,755 1,399 25 % 791.9 629.4 26 % 451,200 449,900 - %
13,126 11,042 19 % $ 3,949.8 $ 3,225.2 22 % $ 300,900 $ 292,100 3 %
Sales Order Cancellations
Three Months Ended December 31,
Cancelled Sales Orders Value (In millions)
Cancellation Rate (2)
2019 2018 2019 2018 2019 2018
East 430 499 $ 123.1 $ 140.0 19 % 24 %
Midwest 161 107 51.2 38.0 18 % 17 %
Southeast 1,171 1,219 320.7 326.7 21 % 25 %
South Central 994 1,056 254.4 263.7 21 % 24 %
Southwest 160 286 44.6 71.1 19 % 35 %
West 291 319 129.9 147.4 14 % 19 %
3,207 3,486 $ 923.9 $ 986.9 20 % 24 %
___________________________________________
(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.
(2) Cancellation rate represents the number of cancelled sales orders divided
by gross sales orders.
The number of net sales orders increased 19% in the three months endedDecember 31, 2019 compared to the prior year period, with increases in all of our regions. The value of net sales orders increased 22% to$3.9 billion (13,126 homes) for the three months endedDecember 31, 2019 compared to$3.2 billion (11,042 homes) in the prior year period. The average selling price of net sales orders during the three months endedDecember 31, 2019 was$300,900 , up 3% from the prior year period. The markets contributing most to the increases in sales volumes in our regions were as follows: Carolina markets in the East;Iowa ,Minnesota andIndiana markets in the Midwest;Florida markets in the Southeast;Fort Worth andHouston markets in theSouth Central ; thePhoenix market in the Southwest; andPortland andSeattle markets in the West.
Our sales order cancellation rate (cancelled sales orders divided by gross sales
orders for the period) was 20% in the three months ended
We believe our business is well positioned to continue to generate increased
sales volume; however, our future sales volumes will depend on new home demand
in each of our operating markets and our ability to successfully implement our
operating strategies.
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Sales Order Backlog
As of December 31,
Homes in Backlog Value (In millions) Average Selling Price
% % %
2019 2018 Change 2019 2018 Change 2019 2018 Change
East 1,959 1,915 2 % $ 602.5 $ 569.0 6 % $ 307,600 $ 297,100 4 %
Midwest 964 893 8 % 337.8 302.9 12 % 350,400 339,200 3 %
Southeast 4,420 4,054 9 % 1,262.0 1,122.1 12 % 285,500 276,800 3 %
South Central 4,161 4,409 (6 )% 1,090.2 1,135.2 (4 )% 262,000 257,500 2 %
Southwest 819 897 (9 )% 245.4 242.9 1 % 299,600 270,800 11 %
West 1,457 1,397 4 % 688.7 664.2 4 % 472,700 475,400 (1 )%
13,780 13,565 2 % $ 4,226.6 $ 4,036.3 5 % $ 306,700 $ 297,600 3 %
Sales Order Backlog
Sales order backlog represents homes under contract but not yet closed at the
end of the period. Many of the contracts in our sales order backlog are subject
to contingencies, including mortgage loan approval and buyers selling their
existing homes, which can result in cancellations. A portion of the contracts in
backlog will not result in closings due to cancellations.
Homes Closed and Home Sales Revenue
Three Months Ended December 31,
Homes Closed Value (In millions) Average Selling Price
% % %
2019 2018 Change 2019 2018 Change 2019 2018 Change
East 1,798 1,558 15 % $ 520.4 $ 445.9 17 % $ 289,400 $ 286,200 1 %
Midwest 813 671 21 % 282.2 244.7 15 % 347,100 364,700 (5 )%
Southeast 4,231 3,783 12 % 1,149.3 1,013.4 13 % 271,600 267,900 1 %
South Central 3,780 3,478 9 % 958.0 872.4 10 % 253,400 250,800 1 %
Southwest 663 561 18 % 196.0 143.6 36 % 295,600 256,000 15 %
West 1,674 1,449 16 % 757.4 690.6 10 % 452,400 476,600 (5 )%
12,959 11,500 13 % $ 3,863.3 $ 3,410.6 13 % $ 298,100 $ 296,600 1 %
Home Sales Revenue
Revenues from home sales increased 13% to $3.9 billion (12,959 homes closed) for
the three months ended December 31, 2019 from $3.4 billion (11,500 homes closed)
in the prior year period. Home sales revenues increased in all of our regions
primarily due to an increase in the number of homes closed, as well as an
increase in the average selling price of those homes in our Southwest region.
The number of homes closed increased 13% in the three months ended December 31,
2019 compared to the prior year period. The markets contributing most to the
increases in closing volumes in our regions were as follows: Carolina markets in
the East; Indiana and Iowa markets in the Midwest; Florida markets in the
Southeast; the Houston market in the South Central ; the Phoenix market in the
Southwest; and California markets in the West.
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Homebuilding Operating Margin Analysis
Percentages of Related Revenues
Three Months Ended
December 31,
2019 2018
Gross profit - home sales 21.0 % 20.0 %
Gross profit - land/lot sales and other 32.5 % 23.9 %
Inventory and land option charges (0.1 )% (0.2 )%
Gross profit - total homebuilding 21.0 % 19.8 %
Selling, general and administrative expense 9.2 % 9.5 %
Gain on sale of assets - % (0.1 )%
Other (income) expense (0.1 )% (0.1 )%
Homebuilding pre-tax income 11.9 % 10.4 %
Home Sales Gross Profit
Gross profit from home sales increased to $811.7 million in the three months
ended December 31, 2019 from $681.4 million in the prior year period and
increased 100 basis points to 21.0% as a percentage of home sales revenues. The
percentage increase resulted from improvements of 90 basis points due to a
decrease in the average cost of our homes closed while the average selling price
increased slightly, 20 basis points from a decrease in the amount of purchase
accounting adjustments related to prior year acquisitions and 10 basis points
due to a decrease in the amortization of capitalized interest, partially offset
by a 20 basis point decrease due to increased warranty and construction defect
costs.
We remain focused on managing the pricing, incentives and sales pace in each of
our communities to optimize the returns on our inventory investments and adjust
to local market conditions and new home demand. These actions could cause our
gross profit margins to fluctuate in future periods.
Land/Lot Sales and Other Revenues
Land sales and other revenues from our homebuilding operations were$19.7 million and$6.7 million in the three months endedDecember 31, 2019 and 2018, respectively. We continually evaluate our land and lot supply, and fluctuations in revenues and profitability from land sales occur based on how we manage our inventory levels in various markets. We generally purchase land and lots with the intent to build and sell homes on them. However, some of the land that we purchase includes commercially zoned parcels that we may sell to commercial developers. We may also sell residential lots or land parcels to manage our supply or for other strategic reasons. As ofDecember 31, 2019 , our homebuilding operations had$22.9 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. AtDecember 31, 2019 , we performed detailed impairment evaluations of communities and land inventories with a combined carrying value of$34.2 million and determined that no communities or land inventories were impaired. Accordingly, no impairment charges were recorded during the three months endedDecember 31, 2019 compared to$4.2 million of impairment charges recorded in the prior year period. 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. Also, if housing or economic conditions weaken in specific markets in which we operate, or if conditions weaken in the broader economy or homebuilding industry, we may be required to evaluate additional communities for potential impairment. These evaluations could result in additional impairment charges.
During the three months ended
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Selling, General and Administrative (SG&A) Expense
SG&A expense from homebuilding activities increased 10% to$358.4 million in the three months endedDecember 31, 2019 from$324.7 million in the prior year period. SG&A expense as a percentage of homebuilding revenues was 9.2% in the three months endedDecember 31, 2019 compared to 9.5% in the prior year period. Employee compensation and related costs represented 73% and 70% of SG&A costs in the three months endedDecember 31, 2019 and 2018, respectively. These costs increased 16% to$262.0 million in the three months endedDecember 31, 2019 due to an increase in the amount of incentive compensation as compared to the prior year period. Our homebuilding operations employed 6,811 and 6,849 employees atDecember 31, 2019 and 2018, respectively.
We attempt to control our SG&A costs while ensuring that our infrastructure adequately supports our operations; however, we cannot make assurances that we will be able to maintain or improve upon the current SG&A expense as a percentage of revenues.
Interest Incurred
We capitalize interest costs incurred to inventory during active development and construction (active inventory). Capitalized interest is charged to cost of sales as the related inventory is delivered to the buyer. Interest incurred by our homebuilding operations decreased 10% to$24.3 million in the three months endedDecember 31, 2019 from$27.1 million in the prior year period. The decrease was due to a 5% decrease in our average homebuilding debt and a lower average interest rate on our homebuilding debt during the period. Interest charged to cost of sales was 0.8% and 0.9% of total cost of sales (excluding inventory and land option charges) in the three months endedDecember 31, 2019 and 2018, respectively. Other Income Other income, net of other expenses, included in our homebuilding operations was$5.4 million in the three months endedDecember 31, 2019 compared to$2.0 million in the prior year period. Other income consists of interest income, rental income and various other types of ancillary income, gains, expenses and losses not directly associated with sales of homes, land and lots. The activities that result in this ancillary income are not significant, either individually or in the aggregate. 44
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Homebuilding Results by
Three Months Ended December 31,
2019 2018
Homebuilding Homebuilding
Homebuilding Pre-tax % of Homebuilding Pre-tax % of
Revenues Income (1) Revenues Revenues Income (1) Revenues
(In millions)
East $ 520.5 $ 59.9 11.5 % $ 447.5 $ 38.0 8.5 %
Midwest 282.6 18.6 6.6 % 249.0 10.6 4.3 %
Southeast 1,150.6 146.3 12.7 % 1,013.9 112.3 11.1 %
South Central 958.7 132.6 13.8 % 872.5 106.0 12.1 %
Southwest 211.0 34.5 16.4 % 143.6 17.6 12.3 %
West 759.6 69.7 9.2 % 690.8 69.8 10.1 %
$ 3,883.0 $ 461.6 11.9 % $ 3,417.3 $ 354.3 10.4 %
______________
(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.
East Region - Homebuilding revenues increased 16% in the three months ended
December 31, 2019 compared to the prior year period, primarily due to an
increase in the number of homes closed in our Carolina markets. The region
generated pre-tax income of $59.9 million in the three months ended December 31,
2019 compared to $38.0 million in the prior year period. Gross profit from home
sales as a percentage of home sales revenue (home sales gross profit percentage)
increased by 280 basis points in the three months ended December 31, 2019
compared to the prior year period, due to an increase in the average selling
price of homes closed while the average cost of those homes decreased slightly.
As a percentage of homebuilding revenues, SG&A expenses increased by 10 basis
points in the three months ended December 31, 2019 compared to the prior year
period.
Midwest Region - Homebuilding revenues increased 13% in the three months ended
December 31, 2019 compared to the prior year period, primarily due to an
increase in the number of homes closed from our acquisitions of Westport Homes
and Classic Builders . The region generated pre-tax income of $18.6 million in
the three months ended December 31, 2019 compared to $10.6 million in the prior
year period. Home sales gross profit percentage increased by 330 basis points in
the three months ended December 31, 2019 compared to the prior year period,
largely due to a decrease in purchase accounting adjustments related to the two
acquisitions. As a percentage of homebuilding revenues, SG&A expenses increased
by 160 basis points in the three months ended December 31, 2019 , primarily due
to increases in employee compensation.
Southeast Region - Homebuilding revenues increased 13% in the three months ended
December 31, 2019 compared to the prior year period, primarily due to increases
in the number of homes closed in our Florida markets. The region generated
pre-tax income of $146.3 million in the three months ended December 31, 2019
compared to $112.3 million in the prior year period. Home sales gross profit
percentage increased by 140 basis points in the three months ended December 31,
2019 compared to the prior year period, primarily due to an increase in the
average selling price of homes closed while the average cost of those homes
decreased slightly. As a percentage of homebuilding revenues, SG&A expenses
decreased by 30 basis points in the three months ended December 31, 2019
compared to the prior year period.
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South Central Region - Homebuilding revenues increased 10% in the three months endedDecember 31, 2019 compared to the prior year period, primarily due to an increase in the number of homes closed in ourHouston market. The region generated pre-tax income of$132.6 million in the three months endedDecember 31, 2019 compared to$106.0 million in the prior year period. Home sales gross profit percentage increased by 160 basis points in the three months endedDecember 31, 2019 compared to the prior year period, primarily due to an increase in the average selling price of homes closed while the average cost of those homes decreased slightly. As a percentage of homebuilding revenues, SG&A expenses decreased by 10 basis points in the three months endedDecember 31, 2019 compared to the prior year period.Southwest Region - Homebuilding revenues increased 47% in the three months endedDecember 31, 2019 compared to the prior year period, primarily due to an increase in the average selling price and number of homes closed in ourPhoenix market. The region generated pre-tax income of$34.5 million in the three months endedDecember 31, 2019 compared to$17.6 million in the prior year period. Home sales gross profit percentage increased by 160 basis points in the three months endedDecember 31, 2019 compared to the prior year period, primarily due to the average selling price of homes closed increasing by more than the average cost. As a percentage of homebuilding revenues, SG&A expenses decreased by 220 basis points in the three months endedDecember 31, 2019 compared to the prior year period, primarily due to the significant increase in homebuilding revenues.West Region - Homebuilding revenues increased 10% in the three months endedDecember 31, 2019 compared to the prior year period, due to an increase in the number of homes closed in most markets, partially offset by a decrease in the average selling price of homes closed. The region generated pre-tax income of$69.7 million in the three months endedDecember 31, 2019 compared to$69.8 million in the prior year period. Home sales gross profit percentage decreased by 240 basis points in the three months endedDecember 31, 2019 compared to the prior year period, primarily due to the average selling price decreasing by more than the average cost of the homes closed. As a percentage of homebuilding revenues, SG&A expenses decreased by 80 basis points in the three months endedDecember 31, 2019 compared to the prior year period, primarily due to an increase in homebuilding revenues. 46
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HOMEBUILDING INVENTORIES, LAND AND LOT POSITION AND HOMES IN INVENTORY
We routinely enter into contracts to purchase land or developed residential lots at predetermined prices on a defined schedule commensurate with planned development or anticipated new home demand. At the time of purchase, the undeveloped land is generally vested with the rights to begin development or construction work, and we plan and coordinate the development of our land into residential lots for use in our homebuilding business. 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
As of December 31, 2019
Residential
Land/Lots
Construction in Developed and
Progress and Under Land Held Land Held Total
Finished Homes Development for Development for Sale Inventory
(In millions)
East $ 726.3 $ 568.4 $ 10.7 $ - $ 1,305.4
Midwest 500.3 416.9 1.8 - 919.0
Southeast 1,540.0 1,341.4 32.0 2.0 2,915.4
South Central 1,322.4 1,371.5 0.3 9.6 2,703.8
Southwest 222.4 385.9 1.6 2.2 612.1
West 1,170.7 996.7 19.4 8.8 2,195.6
Corporate and unallocated (1) 121.2 111.9 0.9 0.3 234.3
$ 5,603.3 $ 5,192.7 $ 66.7 $ 22.9 $ 10,885.6
As of September 30, 2019
Residential
Land/Lots
Construction in Developed and
Progress and Under Land Held Land Held Total
Finished Homes Development for Development for Sale Inventory
(In millions)
East $ 697.1 $ 581.2 $ 10.5 $ - $ 1,288.8
Midwest 473.9 361.1 1.8 - 836.8
Southeast 1,434.7 1,299.9 31.8 1.6 2,768.0
South Central 1,215.4 1,317.5 0.3 - 2,533.2
Southwest 221.8 335.6 1.6 15.4 574.4
West 1,089.0 950.6 13.9 2.5 2,056.0
Corporate and unallocated (1) 117.1 110.2 0.8 0.3 228.4
$ 5,249.0 $ 4,956.1 $ 60.7 $ 19.8 $ 10,285.6
__________
(1) Corporate and unallocated inventory consists primarily of capitalized
interest and property taxes.
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Our homebuilding segment's land and lot position and homes in inventory at
As of December 31, 2019
Lots Controlled
Under Total
Land and Lot Land/Lots Homes
Land/Lots Purchase Owned and in
Owned (1) Contracts (2)(3) Controlled Inventory (4)
East 10,200 34,300 44,500 4,200
Midwest 8,600 11,500 20,100 2,300
Southeast 34,100 76,300 110,400 9,300
South Central 44,200 53,600 97,800 9,000
Southwest 7,500 5,600 13,100 1,400
West 18,800 14,300 33,100 4,000
123,400 195,600 319,000 30,200
39 % 61 % 100 %
As of September 30, 2019
Lots Controlled
Under Total
Land and Lot Land/Lots Homes
Land/Lots Purchase Owned and in
Owned (1) Contracts (2)(3) Controlled Inventory (4)
East 11,000 30,500 41,500 3,900
Midwest 8,300 10,900 19,200 2,200
Southeast 34,800 73,300 108,100 8,900
South Central 41,600 51,400 93,000 7,900
Southwest 6,700 5,800 12,500 1,300
West 19,000 14,000 33,000 3,500
121,400 185,900 307,300 27,700
40 % 60 % 100 %
___________________
(1) Land/lots owned include approximately 40,500 and 36,100 owned lots that are
fully developed and ready for home construction at
development representing 1,800 and 1,700 lots at
(2) The total remaining purchase price of lots controlled through land and lot
purchase contracts at
billion and
price of lots controlled through land and lot purchase contracts at
million, respectively, related to lot purchase contracts with Forestar,
secured by
(3) Lots controlled at
or controlled by Forestar, 12,700 of which our homebuilding divisions have
under contract to purchase and 12,900 of which our homebuilding divisions
have a right of first offer to purchase. Of these, approximately 10,100 lots
were in our Southeast region, 4,800 lots were in our West region, 4,100 lots
were in our
lots were in our Southwest region and 1,500 lots were in our Midwest region.
Lots controlled at
owned or controlled by Forestar, 12,800 of which our homebuilding divisions
had under contract to purchase and 10,600 of which our homebuilding divisions
had a right of first offer to purchase.
(4) Approximately 18,400 and 16,000 of our homes in inventory were unsold at
approximately 5,600 of our unsold homes were completed, of which
approximately 1,000 homes had been completed for more than six months. At
of which approximately 800 homes had been completed for more than six months.
Homes in inventory exclude approximately 1,900 model homes at both
December 31, 2019 and September 30, 2019 .
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RESULTS OF OPERATIONS - FORESTAR
InOctober 2017 , we acquired 75% of the outstanding shares of Forestar, and as ofDecember 31, 2019 we owned approximately 65% of its outstanding shares. Forestar is a publicly traded residential lot development company with operations in 51 markets across 20 states as ofDecember 31, 2019 . Forestar's segment results are presented on their historical cost basis, consistent with the manner in which management evaluates segment performance. (See Note B for additional Forestar segment information and purchase accounting adjustments.)
Results of operations for the Forestar segment for the three months ended
Three Months Ended
December 31,
2019 2018
(In millions)
Residential land and lot sales $ 247.1 $ 34.7
Commercial tract sales - 3.5
Other 0.1 0.3
Total revenues $ 247.2 $ 38.5
Cost of sales 216.6 30.7
Selling, general and administrative expense 10.5 5.7 Loss (gain) on sale of assets
0.1 (0.9 )
Other (income) expense (2.2 ) (1.9 )
Income before income taxes $ 22.2 $ 4.9
At December 31, 2019 , Forestar owned directly or controlled through land and lot
purchase contracts approximately 44,500 residential lots, of which approximately
4,100 are fully developed. Approximately 25,600 of these lots are under contract
to sell to D.R. Horton or subject to a right of first offer under the master
supply agreement with D.R. Horton . Approximately 200 of these lots are under
contract to sell to other builders.
Residential land and lot sales primarily consist of the sale of single-family
lots to local, regional and national homebuilders. During the three months ended
December 31, 2019 and 2018, Forestar's land and lot sales, including the portion
sold to D.R. Horton and the revenues generated from those sales, were as
follows.
Three Months Ended
December 31,
2019 2018
($ in millions)
Total residential single-family lots sold 2,422 518
Residential single-family lots sold toD.R. Horton 2,390
455
Residential lot sales revenues from sales to
36 -
Residential land sales revenues from sales to
SG&A expense for the three months endedDecember 31, 2019 and 2018 includes charges of$1.3 million and$0.5 million , respectively, related to the shared services agreement between Forestar andD.R. Horton wherebyD.R. Horton provides Forestar with certain administrative, compliance, operational and procurement services. 49
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RESULTS OF OPERATIONS - FINANCIAL SERVICES
The following tables and related discussion set forth key operating and financial data for our financial services operations, comprisingDHI Mortgage and our subsidiary title companies, for the three months endedDecember 31, 2019 and 2018. Three Months Ended December 31, 2019 2018 % Change Number of first-lien loans originated or brokered byDHI Mortgage forD.R. Horton homebuyers 8,401 6,244 35 % Number of homes closed by D.R. Horton 12,959 11,500 13 % Percentage ofD.R. Horton homes financed by DHI Mortgage 65 % 54 % Number of total loans originated or brokered by DHI Mortgage for D.R. Horton homebuyers 8,442 6,261 35 % Total number of loans originated or brokered by DHI Mortgage 8,723 6,398 36 % Captive business percentage 97 % 98 % Loans sold by DHI Mortgage to third parties 8,745 7,047 24 % Three Months Ended December 31, 2019 2018 % Change (In
millions)
Loan origination fees$ 0.9 $ 3.2 (72 )% Sale of servicing rights and gains from sale of mortgage loans 73.6 59.9 23 % Other revenues 6.6 4.5 47 % Total mortgage operations revenues 81.1 67.6 20 % Title policy premiums 21.8 17.7 23 % Total revenues 102.9 85.3 21 % General and administrative expense 77.9 65.6 19 % Other (income) expense (5.5 ) (3.9 ) 41 % Financial services pre-tax income$ 30.5 $ 23.6 29 % Financial Services Operating Margin Analysis Percentages of Financial Services Revenues Three Months Ended December 31, 2019 2018 General and administrative expense 75.7 % 76.9 % Other (income) expense (5.3 )% (4.6 )% Financial services pre-tax income 29.6 % 27.7 % 50
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Table of Contents Mortgage Loan Activity 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 endedDecember 31, 2019 , the volume of first-lien loans originated or brokered byDHI Mortgage for our homebuyers increased 35% from the prior year period, primarily due to the 13% increase in the number of homes closed by our homebuilding operations and an increase in the percentage of homes closed for whichDHI Mortgage handled the homebuyers' financing from 54% in the prior year period to 65% in the current period. The increase in the portion of home closings financed byDHI Mortgage was primarily due to the Company's program to offer below market interest rates toD.R. Horton homebuyers, expanded coverage in certain markets and increased efficiencies resulting from technology advances. Homes closed by our homebuilding operations constituted 97% and 98% ofDHI Mortgage loan originations in the three months endedDecember 31, 2019 and 2018, respectively. These percentages reflectDHI Mortgage's consistent focus on the captive business provided by our homebuilding operations. The number of loans sold increased 24% in the three months endedDecember 31, 2019 compared to the prior year period. Virtually all of the mortgage loans held for sale onDecember 31, 2019 were eligible for sale to the Federal National Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage Corporation (Freddie Mac) or theGovernment National Mortgage Association (Ginnie Mae ). Approximately 86% of the mortgage loans sold byDHI Mortgage during the three months endedDecember 31, 2019 were sold to four major financial entities, of which one entity purchased 31%.
Financial Services Revenues and Expenses
Revenues from our mortgage operations increased 20% to
General and administrative (G&A) expense related to our financial services operations increased 19% to$77.9 million in the three months endedDecember 31, 2019 from$65.6 million in the prior year period. The increase was primarily due to an increase in employee related costs. Our financial services operations employed 1,882 and 1,925 employees atDecember 31, 2019 and 2018, respectively. As a percentage of financial services revenues, G&A expense was 75.7% in the three months endedDecember 31, 2019 compared to 76.9% in the prior year period. Fluctuations in financial services G&A expense as a percentage of revenues can be expected to occur, as some components of revenue may fluctuate differently than loan volumes, and some expenses are not directly related to mortgage loan volume or to changes in the amount of revenue earned.
Other income, net of other expense, included in our financial services operations consists primarily of the interest income of our mortgage subsidiary.
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RESULTS OF OPERATIONS - OTHER BUSINESSES
Through DHI Communities, a 100% owned subsidiary, we develop, construct and own multi-family residential properties that produce rental income. DHI Communities is primarily focused on constructing garden style multi-family products, which typically accommodate 200 to 400 dwelling units, in high growth suburban markets. After DHI Communities has completed construction and achieved a stabilized occupancy rate, the property is typically marketed for sale. We currently have four projects under active construction and one project that is substantially complete. InNovember 2019 , DHI Communities sold a multi-family rental property for$61.5 million and recorded a gain on the sale of$31.2 million .
RESULTS OF OPERATIONS - CONSOLIDATED
Income before Income Taxes
Pre-tax income for the three months endedDecember 31, 2019 was$523.3 million compared to$375.7 million in the prior year period. The increase was primarily due to an increase in pre-tax income generated by our homebuilding operations as a result of higher revenues from increased home closings and an increase in home sales gross margin. Income Taxes Our income tax expense for the three months endedDecember 31, 2019 and 2018 was$90.8 million and$89.0 million , respectively. Our effective tax rate was 17.4% for the three months endedDecember 31, 2019 compared to 23.7% in the prior year period. The effective tax rate for the three months endedDecember 31, 2019 includes a tax benefit of$32.9 million from the enactment of the Taxpayer Certainty and Disaster Tax Relief Act of 2019 (the Act). The Act retroactively reinstated the federal energy efficient homes tax credit that expired onDecember 31, 2017 to homes closed fromJanuary 1, 2018 toDecember 31, 2020 . The effective tax rates for both periods include an expense for state income taxes, reduced by tax benefits related to stock-based compensation. Our deferred tax assets, net of deferred tax liabilities, were$172.4 million atDecember 31, 2019 compared to$181.8 million atSeptember 30, 2019 . We have a valuation allowance of$18.3 million atDecember 31, 2019 and$18.7 million atSeptember 30, 2019 related to state deferred tax assets for net operating loss (NOL) carryforwards that are more likely than not to expire before being realized. We will continue to evaluate both the positive and negative evidence in determining the need for a valuation allowance with respect to our remaining state NOL carryforwards. Any reversal of the valuation allowance in future periods will impact our effective tax rate. The accounting for deferred taxes is based upon estimates of future results. Differences between the anticipated and actual outcomes of these future results could have a material impact on our consolidated results of operations or financial position. Also, changes in existing federal and state tax laws and tax rates could affect future tax results and the valuation of our deferred tax assets. 52
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CAPITAL RESOURCES AND LIQUIDITY
We have historically funded our operations with cash flows from operating activities, borrowings under bank credit facilities and the issuance of new debt securities. Our current levels of cash, borrowing capacity and balance sheet leverage provide us with the operational flexibility to adjust to changes in market conditions by increasing our investments in homes, finished lots, land and land development to expand our operations and grow our revenues and profitability, as well as to consider opportunistic strategic investments as they arise. AtDecember 31, 2019 , our ratio of debt to total capital (notes payable divided by stockholders' equity plus notes payable) was 27.0% compared to 25.3% atSeptember 30, 2019 and 26.8% atDecember 31, 2018 . Our ratio of homebuilding debt to total capital (homebuilding notes payable divided by stockholders' equity plus homebuilding notes payable) was 19.5% compared to 17.0% atSeptember 30, 2019 and 23.2% atDecember 31, 2018 . Over the long term, we intend to maintain our ratio of homebuilding debt to total capital below 35%, and we expect it to remain significantly lower than 35% throughout fiscal 2020. We believe that the ratio of homebuilding debt to total capital is useful in understanding the leverage employed in our homebuilding operations and comparing our capital structure with other homebuilders. We exclude the debt of Forestar and our financial services business because they are separately capitalized and not guaranteed by our parent company or any of our homebuilding entities. We regularly assess our projected capital requirements to fund growth in our business, repay debt obligations, pay dividends, repurchase our common stock and support other general corporate and operational needs, and we regularly evaluate our opportunities to raise additional capital.D.R. Horton has an automatically effective universal shelf registration statement filed with theSecurities and Exchange Commission (SEC) inAugust 2018 , registering debt and equity securities that may be issued from time to time in amounts to be determined. Forestar also has an effective shelf registration statement filed with theSEC inSeptember 2018 , registering$500 million of equity securities, of which$394.3 million remains available. As market conditions permit, we may issue new debt or equity securities through the capital markets or obtain additional bank financing to fund our projected capital requirements or provide additional liquidity. We believe that our existing cash resources, revolving credit facilities, mortgage repurchase facility and ability to access the capital markets will provide sufficient liquidity to fund our near-term working capital needs and debt obligations, including the maturity of$500 million principal amount of homebuilding senior notes inFebruary 2020 and$118.9 million principal amount of Forestar's convertible senior notes inMarch 2020 .
Capital Resources - Homebuilding
Cash and Cash Equivalents - At
Bank Credit Facility - We have a$1.59 billion senior unsecured homebuilding revolving credit facility with an uncommitted accordion feature that could increase the size of the facility to$2.5 billion , subject to certain conditions and availability of additional bank commitments. The facility also provides for the issuance of letters of credit with a sublimit equal to 100% of the revolving credit commitment. Letters of credit issued under the facility reduce the available borrowing capacity. The interest rate on borrowings under the revolving credit facility may be based on either the Prime Rate orLondon Interbank Offered Rate (LIBOR) plus an applicable margin, as defined in the credit agreement governing the facility. The maturity date of the facility isOctober 2, 2024 . AtDecember 31, 2019 , there were no borrowings outstanding and$141.7 million of letters of credit issued under the revolving credit facility, resulting in available capacity of$1.4 billion . There were no borrowings or repayments under the facility during the three months endedDecember 31, 2019 . Our homebuilding revolving credit facility imposes restrictions on our operations and activities, including requiring the maintenance of a maximum allowable leverage ratio and a borrowing base restriction if our leverage ratio exceeds a certain level. These covenants are measured as defined in the credit agreement governing the facility and are reported to the lenders quarterly. A failure to comply with these financial covenants could allow the lending banks to terminate the availability of funds under the revolving credit facility or cause any outstanding borrowings to become due and payable prior to maturity. The credit agreement governing the facility imposes restrictions on the creation of secured debt and liens. AtDecember 31, 2019 , we were in compliance with all of the covenants, limitations and restrictions of our homebuilding revolving credit facility. 53
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Public Unsecured Debt - We have$2.45 billion principal amount of homebuilding senior notes outstanding as ofDecember 31, 2019 that mature fromFebruary 2020 throughOctober 2024 . InOctober 2019 , we issued$500 million principal amount of 2.5% senior notes dueOctober 15, 2024 , with interest payable semi-annually. The annual effective interest rate of these notes after giving effect to the amortization of the discount and financing costs is 2.7%. The indenture governing our senior notes imposes restrictions on the creation of secured debt and liens. AtDecember 31, 2019 , we were in compliance with all of the limitations and restrictions associated with our public debt obligations.
Repurchases of Common Stock - During the three months ended
Debt and Equity Repurchase Authorizations - EffectiveJuly 30, 2019 , our Board of Directors authorized the repurchase of up to$500 million of debt securities and$1.0 billion of our common stock. AtDecember 31, 2019 , the full amount of the debt repurchase authorization was remaining and$732.6 million of the equity repurchase authorization was remaining. These authorizations have no expiration date.
Capital Resources - Forestar
Forestar's ability to achieve its long-term growth objectives will depend on its ability to obtain financing in sufficient capacities. 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.
Cash and Cash Equivalents - At
Bank Credit Facility - Forestar has a$380 million senior unsecured revolving credit facility with an uncommitted accordion feature that could increase the size of the facility to$570 million , subject to certain conditions and availability of additional bank commitments. The facility also provides for the issuance of letters of credit with a sublimit equal to the greater of$100 million and 50% of the revolving credit commitment. Borrowings under the revolving credit facility are subject to a borrowing base based on Forestar's book value of its real estate assets and unrestricted cash. Letters of credit issued under the facility reduce the available borrowing capacity. AtDecember 31, 2019 , there were no borrowings outstanding and$28.7 million of letters of credit issued under the revolving credit facility, resulting in available capacity of$351.3 million . The maturity date of the facility isOctober 2, 2022 , which can be extended by up to one year on up to two additional occasions, subject to the approval of lenders holding a majority of the commitments. The revolving credit facility includes customary affirmative and negative covenants, events of default and financial covenants. The financial covenants require Forestar to maintain a minimum level of tangible net worth, a minimum level of liquidity and a maximum allowable leverage ratio. These covenants are measured as defined in the credit agreement governing the facility and are reported to the lenders quarterly. 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. AtDecember 31, 2019 , Forestar was in compliance with all of the covenants, limitations and restrictions of its revolving credit facility. Unsecured Debt - Forestar has$118.9 million principal amount of 3.75% convertible senior notes that are expected to be settled in cash upon their maturity onMarch 1, 2020 . Forestar also has$350 million principal amount of 8.0% senior notes that matureApril 15, 2024 . AtDecember 31, 2019 , Forestar was in compliance with all of the limitations and restrictions associated with its senior note obligations.
Forestar's revolving credit facility, its senior notes and its convertible
senior notes are not guaranteed by
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Capital Resources - Financial Services
Cash and Cash Equivalents - At
Mortgage Repurchase Facility - Our mortgage subsidiary,DHI Mortgage , has a mortgage repurchase facility that provides financing and liquidity toDHI Mortgage by facilitating purchase transactions in whichDHI 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$900 million , which can be increased to$1.2 billion subject to the availability of additional commitments. InDecember 2019 , we received an additional commitment of$50 million increasing the total capacity of the facility to$950 million . The additional commitment expired onJanuary 26, 2020 . We are currently in discussions with our lenders and expect to renew and extend the facility on similar terms prior to itsFebruary 21, 2020 maturity date. As ofDecember 31, 2019 ,$953.7 million of mortgage loans held for sale with a collateral value of$915.1 million were pledged under the mortgage repurchase facility.DHI Mortgage had an obligation of$850.2 million outstanding under the mortgage repurchase facility atDecember 31, 2019 at a 3.5% annual interest rate. The mortgage repurchase facility is not guaranteed byD.R. Horton, Inc. or any of the subsidiaries that guarantee our homebuilding debt. The facility contains financial covenants as to the mortgage subsidiary's minimum required tangible net worth, its maximum allowable leverage ratio and its minimum required liquidity. These covenants are measured and reported to the lenders monthly. AtDecember 31, 2019 ,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.
Operating Cash Flow Activities
In the three months endedDecember 31, 2019 , net cash used in operating activities was$113.8 million compared to$373.1 million in the prior year period. Cash used in operating activities in the current year period primarily consisted of$178.4 million and$11.7 million of cash used in our homebuilding and Forestar segments, respectively, partially offset by$83.5 million of cash provided by our financial services segment. Cash used to increase construction in progress and finished home inventory was$334.8 million in the current year period compared to$500.3 million in the prior year period. In both periods, the expenditures were made to support the current period increase in sales and closing volumes, as well as the expected increase in future periods. Cash used to increase residential land and lots in the current year period was$373.1 million compared to$435.9 million in the prior year period. Of these amounts,$38.9 million and$191.5 million related to Forestar, respectively. The most significant source of cash provided by operating activities in both periods was net income.
Investing Cash Flow Activities
In the three months endedDecember 31, 2019 , net cash used in investing activities was$17.8 million compared to$310.4 million in the prior year period. In the current year period, uses of cash included expenditures related to our rental properties totaling$59.6 million and purchases of property and equipment totaling$21.6 million , partially offset by proceeds from the sale of assets primarily consisting of$61.5 million related to the sale of a multi-family rental property. In the prior year period, the most significant uses of cash were the purchases of the homebuilding operations ofWestport Homes ,Classic Builders andTerramor Homes , whereby$293.0 million of the aggregate purchase price was paid during the period. 55
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Financing Cash Flow Activities
We expect the short-term financing needs of our operations will be funded with existing cash, cash generated from operations and borrowings under our credit facilities. Long-term financing needs for the growth of our homebuilding and Forestar operations may be funded with the issuance of senior unsecured debt securities or equity securities through the capital markets. During the three months endedDecember 31, 2019 , net cash provided by financing activities was$213.5 million , consisting primarily of note proceeds from our issuance of$500 million principal amount of 2.5% senior notes, partially offset by cash used for the repurchase of 3.0 million shares of our common stock for$163.1 million , payment of cash dividends totaling$64.6 million and net payments on our mortgage repurchase facility of$38.6 million . During the three months endedDecember 31, 2018 , net cash used in financing activities was$54.2 million , consisting primarily of the repayment of amounts drawn on our homebuilding revolving credit facility totaling$275 million , net payments on our mortgage repurchase facility of$163.8 million , the repurchase of 4.1 million shares of our common stock for$140.6 million and the payment of cash dividends totaling$56.0 million . These uses of cash were largely offset by note proceeds from amounts drawn on our homebuilding revolving credit facility totaling$575 million . During the three months endedDecember 31, 2019 , our Board of Directors approved a quarterly cash dividend of$0.175 per common share, which was paid onDecember 11, 2019 to stockholders of record onNovember 27, 2019 . InJanuary 2020 , our Board of Directors approved a quarterly cash dividend of$0.175 per common share, payable onFebruary 24, 2020 to stockholders of record onFebruary 10, 2020 . Cash dividends of$0.15 per common share were approved and paid in each quarter of fiscal 2019. The declaration of future cash dividends is at the discretion of our Board of Directors and will depend upon, among other things, our future earnings, cash flows, capital requirements, financial condition and general business conditions. 56
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CONTRACTUAL CASH OBLIGATIONS, COMMERCIAL COMMITMENTS AND OFF-BALANCE SHEET ARRANGEMENTS
Our primary contractual cash obligations are payments under our debt agreements and lease payments under operating leases. We expect to fund our contractual obligations in the ordinary course of business through a combination of our existing cash resources, cash flows generated from profits, our credit facilities or other bank financing, and the issuance of new debt or equity securities through the public capital markets as market conditions may permit. AtDecember 31, 2019 , we had outstanding letters of credit of$170.4 million and surety bonds of$1.7 billion , issued by third parties to secure performance under various contracts. We expect that our performance obligations secured by these letters of credit and bonds will generally be completed in the ordinary course of business and in accordance with the applicable contractual terms. When we complete our performance obligations, the related letters of credit and bonds are generally released shortly thereafter, leaving us with no continuing obligations. We have no material third-party guarantees. Our mortgage subsidiary enters into various commitments related to the lending activities of our mortgage operations. Further discussion of these commitments is provided in Item 3 "Quantitative and Qualitative Disclosures about Market Risk" under Part I of this quarterly report on Form 10-Q. We enter into land and lot purchase contracts to acquire land or lots for the construction of homes. Lot purchase contracts enable us to control significant lot positions with limited capital investment. Among our homebuilding land and lot purchase contracts atDecember 31, 2019 , there were a limited number of contracts, representing$57.3 million of remaining purchase price, subject to specific performance provisions that may require us to purchase the land or lots upon the land sellers meeting their respective contractual obligations. Of this amount,$12.3 million related to contracts between our homebuilding segment and Forestar. Further information about our land purchase contracts is provided in the "Homebuilding Inventories, Land and Lot Position and Homes in Inventory" section included herein. CRITICAL ACCOUNTING POLICIES As disclosed in our annual report on Form 10-K for the fiscal year endedSeptember 30, 2019 , our most critical accounting policies relate to revenue recognition, inventories and cost of sales, warranty claims and legal claims and insurance. SinceSeptember 30, 2019 , there have been no significant changes to those critical accounting policies. As disclosed in our critical accounting policies in our Form 10-K for the fiscal year endedSeptember 30, 2019 , our reserves for construction defect claims include the estimated costs of both known claims and anticipated future claims. AtDecember 31, 2019 andSeptember 30, 2019 , we had reserves for approximately 195 and 180 pending construction defect claims, respectively, and no individual existing claim was material to our financial statements. During the three months endedDecember 31, 2019 , we established reserves for approximately 35 new construction defect claims and resolved 20 construction defect claims for a total cost of$14.9 million . At bothDecember 31, 2018 andSeptember 30, 2018 , we had reserves for approximately 155 pending construction defect claims, and no individual existing claim was material to our financial statements. During the three months endedDecember 31, 2018 , we established reserves for approximately 30 new construction defect claims and resolved 30 construction defect claims for a total cost of$3.4 million . SEASONALITY Although significant changes in market conditions have impacted our seasonal patterns in the past and could do so again in the future, we generally close more homes and generate greater revenues and operating income in the third and fourth quarters of our fiscal year. The seasonal nature of our business can also cause significant variations in our working capital requirements in our homebuilding, land development and financial services operations. As a result of seasonal activity, our quarterly results of operations and financial position at the end of a particular fiscal quarter are not necessarily representative of the balance of our fiscal year. 57
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Forward-Looking Statements
Some of the statements contained in this report, as well as in other materials we have filed or will file with theSEC , statements made by us in periodic press releases and oral statements we make to analysts, stockholders and the press in the course of presentations about us, may be construed as "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, Section 21E of the Securities Exchange Act of 1934 and the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based on management's beliefs as well as assumptions made by, and information currently available to, management. These forward-looking statements typically include the words "anticipate," "believe," "consider," "continue," "could," "estimate," "expect," "forecast," "goal," "intend," "likely," "may," "outlook," "plan," "possible," "potential," "predict," "projection," "seek," "should," "strategy," "target," "will," "would" or other words of similar meaning. Any or all of the forward-looking statements included in this report and in any other of our reports or public statements may not approximate actual experience, and the expectations derived from them may not be realized, due to risks, uncertainties and other factors. As a result, actual results may differ materially from the expectations or results we discuss in the forward-looking statements. These risks, uncertainties and other factors include, but are not limited to: • the cyclical nature of the homebuilding and lot development industries
and changes in economic, real estate and other conditions;
• constriction of the credit and public capital markets, which could limit
our ability to access capital and increase our costs of capital;
• reductions in the availability of mortgage financing provided bygovernment agencies, changes in government financing programs, a decrease
in our ability to sell mortgage loans on attractive terms or an increase
in mortgage interest rates;
• the risks associated with our land and lot inventory;
• our ability to effect our growth strategies, acquisitions or investments
successfully;
• the impact of an inflationary, deflationary or higher interest rate
environment;
• home warranty and construction defect claims;
• the effects of health and safety incidents;
• the effects of negative publicity;
• supply shortages and other risks of acquiring land, building materials
and skilled labor;
• reductions in the availability of performance bonds;
• increases in the costs of owning a home;
• the effects of governmental regulations and environmental matters on our
homebuilding and land development operations;
• the effects of governmental regulations on our financial services operations;
• our ability to manage and service our debt and comply with related debt
covenants, restrictions and limitations;
• competitive conditions within the homebuilding and financial services
industries;
• the effects of the loss of key personnel; and
• information technology failures and data security breaches.
We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. However, any further disclosures made on related subjects in subsequent reports on Forms 10-K, 10-Q and 8-K should be consulted. Additional information about issues that could lead to material changes in performance and risk factors that have the potential to affect us is contained in our annual report on Form 10-K for the fiscal year endedSeptember 30, 2019 , including the section entitled "Risk Factors," which is filed with theSEC . 58
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