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, 2020 . 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$150,000 to more than$1,000,000 , with an average closing price of$304,100 during the three months endedDecember 31, 2020 . Approximately 92% of our home sales revenue in the three months endedDecember 31, 2020 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 inthe 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 across our markets. Our entry-level homes at affordable price points have experienced very strong demand from homebuyers, as the entry-level segment of the new home market remains under-served, with low inventory levels relative to demand. During fiscal 2020, we began constructing and leasing homes as income-producing single-family rental communities. After a rental community is constructed and achieves a stabilized level of leased occupancy, we generally expect to market the community for a bulk sale of homes. These operations are reported in our homebuilding segment. During the three months endedDecember 31, 2020 , we completed our first sale of a single-family rental community representing 124 homes for$31.8 million , resulting in a gain on sale of$14.0 million . AtDecember 31, 2020 , our homebuilding fixed assets included$106.6 million of assets related to our single-family rental platform, representing 13 communities totaling 890 single-family rental homes and finished lots, which included 440 completed homes. AtDecember 31, 2020 , we owned 65% of the outstanding shares ofForestar Group Inc. (Forestar), a publicly traded residential lot development company listed on theNew 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 under land purchase contracts. During fiscal 2019 and 2020, Forestar raised capital by issuing senior notes and common stock in the public markets and has invested this capital in land acquisition and development to expand its business acrossthe United States . Our financial services operations provide mortgage financing and title agency services to homebuyers in many of our homebuilding markets.DHI Mortgage , our 100% owned subsidiary, provides mortgage financing services primarily to our homebuyers and sells substantially all of the mortgages it originates and the majority of 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, underwriting and closing services, primarily related to our homebuilding transactions. 27
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In addition to our homebuilding, Forestar and financial services operations, we engage in other business activities through our subsidiaries. We 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 results of these operations are immaterial for separate reporting and therefore are grouped together and presented as other. Our multi-family rental operations develop, construct, lease and own multi-family residential properties that produce rental income. We primarily focus on constructing garden style multi-family communities, which typically accommodate 200 to 400 dwelling units, in high growth suburban markets. After we complete construction and achieve a stabilized level of leased occupancy, the property is typically marketed for sale. AtDecember 31, 2020 andSeptember 30, 2020 , our consolidated balance sheets included$294.3 million and$246.2 million , respectively, of multi-family rental assets. Total assets related to other business activities were$438.7 million and$379.4 million atDecember 31, 2020 andSeptember 30, 2020 , respectively. 28
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OVERVIEW
First Quarter Operating Results
During the three months endedDecember 31, 2020 , the number and value of our net sales orders increased 56% and 62%, respectively, compared to the prior year period. During the three months endedDecember 31, 2020 , our number of homes closed and home sales revenues increased 45% and 48%, respectively, compared to the prior year period, and our consolidated revenues increased 48% to$5.9 billion compared to$4.0 billion in the prior year period. Our pre-tax income was$1.0 billion in the three months endedDecember 31, 2020 compared to$523.3 million in the prior year period, and our pre-tax operating margin was 17.4% compared to 13.0%. Net income was$795.2 million in the three months endedDecember 31, 2020 compared to$432.5 million in the prior year period. In the trailing twelve months endedDecember 31, 2020 , our return on equity (ROE) was 24.4% compared to 18.2% in the prior year period, and our homebuilding return on inventory (ROI) was 28.0% compared to 18.7%. ROE is calculated as net income attributable toD.R. Horton for the trailing twelve months divided by average stockholders' equity, where average stockholders' equity is the sum of ending stockholders' equity balances of the trailing five quarters divided by five. 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. Within our homebuilding land and lot portfolio, our lots controlled under purchase contracts represent 72% of the lots owned and controlled atDecember 31, 2020 compared to 70% atSeptember 30, 2020 and 61% atDecember 31, 2019 . Our relationship with Forestar and expanded relationships with other land developers across the country have allowed us to increase the controlled portion of our lot pipeline. COVID-19 DuringMarch 2020 , the impacts of the COVID-19 pandemic (C-19) and the related widespread reductions in economic activity acrossthe United States began to adversely affect our business. However, residential construction and financial services are designated as essential businesses as part of critical infrastructure in almost all of the municipalities across theU.S. where we operate. We implemented operational protocols to comply with social distancing and other health and safety standards as required by federal, state and local government agencies, taking into consideration guidelines of theCenters for Disease Control and Prevention and other public health authorities. DuringApril 2020 when restrictive stay-at-home orders were in place for many markets acrossthe United States , we experienced increases in sales cancellations and decreased sales orders compared to the prior year. However, as economic activity began to resume and restrictive orders were eased, demand for our homes improved significantly during the remainder of fiscal 2020 and the first quarter of fiscal 2021. We believe the increase in demand has been primarily fueled by increased buyer urgency due to lower interest rates on mortgage loans and the limited supply of homes at affordable price points across most of our markets. We were and remain well-positioned for increased demand with our affordable product offerings, lot supply and housing inventory. However, even with the resurgence of demand, we remain cautious as to the ongoing impact of C-19 on our operations and on the overall economy. There is significant uncertainty regarding the extent to which and how long C-19 and its related effects will impact theU.S. economy and level of employment, capital markets, secondary mortgage markets, consumer confidence, demand for our homes and availability and cost of mortgage loans to homebuyers. The extent to which this impacts our operational and financial performance will depend on future developments, including the duration and severity of C-19 and the impact on our customers, trade partners and employees, all of which are highly uncertain and cannot be predicted. We believe our strong balance sheet and liquidity position provide us with the flexibility to operate effectively through changing economic conditions. We plan to continue to generate strong cash flows from our homebuilding operations and manage our product offerings, incentives, home pricing, sales pace and inventory levels to optimize the return on our inventory investments in each of our communities based on local housing market conditions. 29
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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 maximize the returns on our inventory investments and generate
strong profitability and cash flows, while managing risk and maintaining
financial flexibility to navigate changing economic conditions and make
opportunistic strategic investments. We have made operational adjustments as a
result of C-19; however, our strategy remains consistent and 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, 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 across the country.
•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.
•Opportunistically evaluating potential acquisitions to enhance our operations
and improve returns.
•Ensuring that our financial services business provides high quality mortgage
and title services to homebuyers efficiently and effectively.
•Investing in the construction and leasing of single-family and multi-family
rental properties to meet rental demand in high growth suburban markets and
selling these properties profitably.
We believe our operating strategy, which has produced positive results in recent
years, will allow us to successfully operate through changing economic
conditions to maintain and improve our financial and competitive position.
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.
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KEY RESULTS
Key financial results as of and for the three months ended
Homebuilding:
•Homebuilding revenues increased 47% to$5.7 billion compared to$3.9 billion . •Homes closed increased 45% to 18,739 homes, and the average closing price of those homes was$304,100 . •Net sales orders increased 56% to 20,418 homes, and the value of net sales orders increased 62% to$6.4 billion . •Sales order backlog increased 107% to 28,487 homes, and the value of sales order backlog increased 111% to$8.9 billion . •Home sales gross margin was 24.1% compared to 21.0%. •Homebuilding SG&A expense was 7.9% of homebuilding revenues compared to 9.2%. •Homebuilding pre-tax income was$935.2 million compared to$461.6 million . •Homebuilding pre-tax income was 16.4% of homebuilding revenues compared to 11.9%. •Homebuilding cash and cash equivalents totaled$2.1 billion compared to$2.6 billion and$1.2 billion atSeptember 30, 2020 andDecember 31, 2019 , respectively. •Homebuilding inventories totaled$12.1 billion compared to$11.0 billion and$10.9 billion atSeptember 30, 2020 andDecember 31, 2019 , respectively. •Homes in inventory totaled 42,100 compared to 38,000 and 30,200 atSeptember 30, 2020 andDecember 31, 2019 , respectively. •Owned lots totaled 122,000 compared to 112,600 and 123,400 atSeptember 30, 2020 andDecember 31, 2019 , respectively. Lots controlled through purchase contracts increased to 318,700 from 264,300 and 195,600 atSeptember 30, 2020 andDecember 31, 2019 , respectively. •Homebuilding debt was$2.6 billion compared to$2.5 billion at bothSeptember 30, 2020 andDecember 31, 2019 . •Homebuilding debt to total capital was 17.3% compared to 17.5% and 19.5% atSeptember 30, 2020 andDecember 31, 2019 , respectively. 31
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Forestar:
•Forestar's revenues increased 24% to$307.1 million compared to$247.2 million . Revenues in the current and prior year quarters included$294.2 million and$221.2 million , respectively, of revenue from land and lot sales to our homebuilding segment. •Forestar's lots sold increased 47% to 3,567 compared to 2,422. Lots sold toD.R. Horton totaled 3,389 compared to 2,390. •Forestar's pre-tax income was$29.2 million compared to$22.2 million . •Forestar's pre-tax income was 9.5% of revenues compared to 9.0%. •Forestar's cash and cash equivalents totaled$237.4 million compared to$394.3 million and$373.3 million atSeptember 30, 2020 andDecember 31, 2019 , respectively. •Forestar's inventories totaled$1.5 billion compared to$1.3 billion and$1.1 billion atSeptember 30, 2020 andDecember 31, 2019 , respectively. •Forestar's owned and controlled lots totaled 77,500 compared to 60,500 and 44,500 atSeptember 30, 2020 andDecember 31, 2019 , respectively. Of these lots, 34,900 were under contract to sell to or subject to a right of first offer withD.R. Horton compared to 30,400 and 25,600 atSeptember 30, 2020 andDecember 31, 2019 , respectively. •Forestar's debt was$654.1 million compared to$641.1 million and$462.1 million atSeptember 30, 2020 andDecember 31, 2019 , respectively. •Forestar's debt to total capital was 42.3% compared to 42.4% and 35.9% atSeptember 30, 2020 andDecember 31, 2019 , respectively. Financial Services: •Financial services revenues increased 82% to$187.2 million compared to$102.9 million . •Financial services pre-tax income increased 176% to$84.1 million compared to$30.5 million . •Financial services pre-tax income was 44.9% of financial services revenues compared to 29.6%. Consolidated Results: •Consolidated pre-tax income increased 98% to$1.0 billion compared to$523.3 million . •Consolidated pre-tax income was 17.4% of consolidated revenues compared to 13.0%. •Income tax expense was$239.1 million compared to$90.8 million , and our effective tax rate was 23.1% compared to 17.4%. •Net income attributable toD.R. Horton increased 84% to$791.8 million compared to$431.3 million . •Diluted net income per common share attributable toD.R. Horton increased 84% to$2.14 compared to$1.16 . •Stockholders' equity was$12.5 billion compared to$11.8 billion and$10.2 billion atSeptember 30, 2020 andDecember 31, 2019 , respectively. •Book value per common share increased to$34.33 compared to$32.53 and$27.92 atSeptember 30, 2020 andDecember 31, 2019 , respectively. •Debt to total capital was 25.3% compared to 26.6% atSeptember 30, 2020 and 27.0% atDecember 31, 2019 . 32
-------------------------------------------------------------------------------- Table of Contents 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 Midwest Region
Delaware Central Delaware Colorado Colorado Springs
Northern Delaware Denver
Georgia Savannah Fort Collins
Maryland Baltimore Illinois Chicago
Suburban Washington, D.C. Indiana Fort Wayne
New Jersey Northern New Jersey Indianapolis
Southern New Jersey Iowa Des Moines
North Carolina Asheville Minnesota Minneapolis/St. Paul
Charlotte Ohio Cincinnati
Greensboro/Winston-Salem Columbus
Raleigh/Durham
Wilmington South Central Region
Pennsylvania Central Pennsylvania Louisiana Baton Rouge
Philadelphia Lake Charles/Lafayette
South Carolina Charleston Oklahoma Oklahoma City
Columbia Texas Austin
Greenville/Spartanburg
Hilton Head Corpus Christi
Myrtle Beach Dallas
Virginia Northern Virginia Fort Worth
Southern Virginia Houston
Southeast Region
Alabama Birmingham New
Braunfels/
Huntsville San Antonio
Mobile/Baldwin County
Montgomery Southwest Region
Tuscaloosa Arizona Phoenix
Florida Fort Myers/Naples Tucson
Gainesville New Mexico Albuquerque
Jacksonville
Lakeland West Region
Melbourne/Vero Beach California Bakersfield
Miami/Fort Lauderdale Bay Area
Ocala Fresno
Orlando Los Angeles County
Pensacola/Panama City Modesto/Merced
Port St. Lucie Riverside County
Tampa/Sarasota Sacramento
Volusia County San Bernardino County
West Palm Beach San Diego County
Georgia Atlanta Hawaii Oahu
Augusta Nevada Las Vegas
Mississippi Gulf Coast Reno
Tennessee Chattanooga Oregon Bend
Knoxville Portland/Salem
Memphis Utah Salt Lake City
Nashville Washington Spokane Vancouver 33
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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 December 31,
Net Homes Sold Value (In millions) Average Selling Price
% % %
2020 2019 Change 2020 2019 Change 2020 2019 Change
East 2,634 1,841 43 % $ 861.6 $ 546.8 58 % $ 327,100 $ 297,000 10 %
Midwest 1,255 714 76 % 475.9 255.4 86 % 379,200 357,700 6 %
Southeast 7,007 4,374 60 % 2,082.2 1,191.8 75 % 297,200 272,500 9 %
South Central 6,690 3,775 77 % 1,806.5 964.2 87 % 270,000 255,400 6 %
Southwest 902 667 35 % 284.6 199.7 43 % 315,500 299,400 5 %
West 1,930 1,755 10 % 905.2 791.9 14 % 469,000 451,200 4 %
20,418 13,126 56 % $ 6,416.0 $ 3,949.8 62 % $ 314,200 $ 300,900 4 %
Sales Order Cancellations
Three Months Ended December 31,
Cancelled Sales Orders Value (In millions) Cancellation Rate (2)
2020 2019 2020 2019 2020 2019
East 570 430 $ 171.0 $ 123.1 18 % 19 %
Midwest 248 161 92.7 51.2 17 % 18 %
Southeast 1,676 1,171 476.9 320.7 19 % 21 %
South Central 1,433 994 373.4 254.4 18 % 21 %
Southwest 206 160 59.7 44.6 19 % 19 %
West 275 291 123.9 129.9 12 % 14 %
4,408 3,207 $ 1,297.6 $ 923.9 18 % 20 %
________
(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.Net Sales Orders The number of net sales orders increased 56% in the three months endedDecember 31, 2020 compared to the prior year period, with increases in all of our regions. The value of net sales orders increased 62% to$6.4 billion (20,418 homes) for the three months endedDecember 31, 2020 compared to$3.9 billion (13,126 homes) in the prior year period. The average selling price of net sales orders during the three months endedDecember 31, 2020 was$314,200 , up 4% from the prior year period. The markets contributing most to the increases in sales volumes in our regions were as follows: the Carolina markets in the East; theDenver andIndianapolis markets in the Midwest; theFlorida markets (particularlyTampa ) in the Southeast; theDallas ,Houston ,Austin andSan Antonio markets in theSouth Central ; thePhoenix market in the Southwest; and theCalifornia markets in the West.
Our sales order cancellation rate (cancelled sales orders divided by gross sales
orders for the period) was 18% in the three months ended
The increase in our sales orders that occurred in the second half of fiscal 2020
has continued into fiscal 2021 and reflects buyer urgency due to low interest
rates on mortgage loans and the limited supply of homes at affordable price
points across most of our markets.
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Sales Order Backlog
As of December 31,
Homes in Backlog Value (In millions) Average Selling Price
% % %
2020 2019 Change 2020 2019 Change 2020 2019 Change
East 3,625 1,959 85 % $ 1,194.4 $ 602.5 98 % $ 329,500 $ 307,600 7 %
Midwest 2,135 964 121 % 795.5 337.8 135 % 372,600 350,400 6 %
Southeast 8,967 4,420 103 % 2,684.4 1,262.0 113 % 299,400 285,500 5 %
South Central 9,059 4,161 118 % 2,441.8 1,090.2 124 % 269,500 262,000 3 %
Southwest 2,134 819 161 % 648.6 245.4 164 % 303,900 299,600 1 %
West 2,567 1,457 76 % 1,170.1 688.7 70 % 455,800 472,700 (4) %
28,487 13,780 107 % $ 8,934.8 $ 4,226.6 111 % $ 313,600 $ 306,700 2 %
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
% % %
2020 2019 Change 2020 2019 Change 2020 2019 Change
East 2,592 1,798 44 % $ 804.6 $ 520.4 55 % $ 310,400 $ 289,400 7 %
Midwest 1,136 813 40 % 411.9 282.2 46 % 362,600 347,100 4 %
Southeast 6,296 4,231 49 % 1,776.3 1,149.3 55 % 282,100 271,600 4 %
South Central 5,669 3,780 50 % 1,473.4 958.0 54 % 259,900 253,400 3 %
Southwest 773 663 17 % 232.2 196.0 18 % 300,400 295,600 2 %
West 2,273 1,674 36 % 1,000.3 757.4 32 % 440,100 452,400 (3) %
18,739 12,959 45 % $ 5,698.7 $ 3,863.3 48 % $ 304,100 $ 298,100 2 %
Home Sales Revenue
Revenues from home sales increased 48% to $5.7 billion (18,739 homes closed) for
the three months ended December 31, 2020 from $3.9 billion (12,959 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.
The number of homes closed increased 45% in the three months ended December 31,
2020 compared to the prior year period. The markets contributing most to the
increases in closing volumes in our regions were as follows: the Carolina
markets (particularly Myrtle Beach ) in the East; the Denver and Chicago markets
in the Midwest; the Florida markets (particularly Tampa ) in the Southeast; the
Houston , Dallas and San Antonio markets in the South Central ; the Phoenix and
Tucson markets in the Southwest; and the Las Vegas , Southern California and
Seattle markets in the West.
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Homebuilding Operating Margin Analysis
Percentages of Related Revenues
Three Months Ended
December 31,
2020 2019
Gross profit - home sales 24.1 % 21.0 %
Gross profit - land/lot sales and other 30.7 % 32.5 %
Inventory and land option charges (0.1) % (0.1) %
Gross profit - total homebuilding 24.0 % 21.0 %
Selling, general and administrative expense 7.9 % 9.2 %
Gain on sale of assets (0.2) % - %
Other (income) expense - % (0.1) %
Homebuilding pre-tax income 16.4 % 11.9 %
Home Sales Gross Profit
Gross profit from home sales increased to $1.4 billion in the three months ended
December 31, 2020 from $811.7 million in the prior year period and increased 310
basis points to 24.1% as a percentage of home sales revenues. The percentage
increase resulted from improvements of 280 basis points due to a decrease in the
average cost of our homes closed while the average selling price increased
slightly, 10 basis points from a decrease in the amount of purchase accounting
adjustments related to prior year acquisitions, 10 basis points due to a
decrease in the amortization of capitalized interest and 10 basis points due to
a decrease in warranty and construction defect costs.
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. If new home demand declines
from current levels due to an economic recession, an increase in mortgage
interest rates, the impact of C-19 or otherwise, we would expect our gross
profit margins to decline from current levels.
Land/Lot Sales and Other Revenues
Land/lot sales and other revenues from our homebuilding operations were$19.9 million and$19.7 million in the three months endedDecember 31, 2020 and 2019, 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, 2020 , our homebuilding operations had$23.8 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 ofDecember 31, 2020 , we performed detailed impairment evaluations of communities and land inventories with a combined carrying value of$33.5 million and recorded impairment charges of$5.6 million during the three months endedDecember 31, 2020 to reduce the carrying value of impaired land to fair value. There were no impairment charges recorded in the prior year period. 36
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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. If the housing market or economic conditions are adversely affected for a prolonged period due to C-19 or otherwise, we may be required to evaluate additional communities for potential impairment. These evaluations could result in additional impairment charges which could be significant.
During the three months ended
Selling, General and Administrative (SG&A) Expense
SG&A expense from homebuilding activities increased 26% to$451.2 million in the three months endedDecember 31, 2020 from$358.4 million in the prior year period. SG&A expense as a percentage of homebuilding revenues was 7.9% in the three months endedDecember 31, 2020 compared to 9.2% in the prior year period. Employee compensation and related costs represented 79% and 73% of SG&A costs in the three months endedDecember 31, 2020 and 2019, respectively. These costs increased 36% to$356.0 million in the three months endedDecember 31, 2020 from$262.0 million in the prior year period. Our homebuilding operations employed 7,583 and 6,811 employees atDecember 31, 2020 and 2019, 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 was$24.4 million in the three months endedDecember 31, 2020 , up slightly from$24.3 million in the prior year period. Interest charged to cost of sales was 0.8% of total cost of sales (excluding inventory and land option charges) in both the three months endedDecember 31, 2020 and 2019. Gain on Sale of Assets During the three months endedDecember 31, 2020 , we sold one single-family rental community representing 124 homes for$31.8 million , resulting in a gain on sale of$13.1 million in our homebuilding segment and$0.9 million in our other businesses. Other Income Other income, net of other expenses, included in our homebuilding operations was$1.5 million in the three months endedDecember 31, 2020 compared to$5.4 million in the prior year period. Other income consists of interest income and various other types of ancillary income, gains, expenses and losses not directly associated with sales of homes, land and lots. The activities that result in this ancillary income are not significant, either individually or in the aggregate.
Business Acquisition
InOctober 2020 , we acquired the homebuilding operations ofBraselton Homes for approximately$23.0 million in cash.Braselton Homes operates inCorpus Christi, Texas . The assets acquired included approximately 90 homes in inventory, 95 lots and control of approximately 840 additional lots through purchase contracts. We also acquired a sales order backlog of approximately 125 homes. 37
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Homebuilding Results by
Three Months Ended December 31,
2020 2019
Homebuilding Homebuilding
Homebuilding Pre-tax % of Homebuilding Pre-tax % of
Revenues Income (1) Revenues Revenues Income (1) Revenues
(In millions)
East $ 809.2 $ 132.5 16.4 % $ 520.5 $ 59.9 11.5 %
Midwest 413.1 49.2 11.9 % 282.6 18.6 6.6 %
Southeast 1,778.4 305.8 17.2 % 1,150.6 146.3 12.7 %
South Central 1,474.9 264.7 17.9 % 958.7 132.6 13.8 %
Southwest 232.6 38.6 16.6 % 211.0 34.5 16.4 %
West 1,010.4 144.4 14.3 % 759.6 69.7 9.2 %
$ 5,718.6 $ 935.2 16.4 % $ 3,883.0 $ 461.6 11.9 %
______________
(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 55% in the three months endedDecember 31, 2020 compared to the prior year period, primarily due to an increase in the number of homes closed in ourNew Jersey ,Myrtle Beach , suburbanWashington D.C. andCharlotte markets. The region generated pre-tax income of$132.5 million in the three months endedDecember 31, 2020 compared to$59.9 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 360 basis points in the three months endedDecember 31, 2020 compared to the prior year period, primarily due to the average selling price of homes closed increasing by more than the average cost of those homes. As a percentage of homebuilding revenues, SG&A expenses decreased by 170 basis points in the three months endedDecember 31, 2020 compared to the prior year period, primarily due to the increase in homebuilding revenues.Midwest Region - Homebuilding revenues increased 46% in the three months endedDecember 31, 2020 compared to the prior year period, primarily due to increases in the number of homes closed in ourDenver ,Chicago andIndianapolis markets. The region generated pre-tax income of$49.2 million in the three months endedDecember 31, 2020 compared to$18.6 million in the prior year period. Home sales gross profit percentage increased by 360 basis points in the three months endedDecember 31, 2020 compared to the prior year period, primarily due to the average selling price of homes closed increasing by more than the average cost of those homes. As a percentage of homebuilding revenues, SG&A expenses decreased by 210 basis points in the three months endedDecember 31, 2020 compared to the prior year period, primarily due to the increase in homebuilding revenues.Southeast Region - Homebuilding revenues increased 55% in the three months endedDecember 31, 2020 compared to the prior year period, primarily due to increases in the number of homes closed in all of our markets. The region generated pre-tax income of$305.8 million in the three months endedDecember 31, 2020 compared to$146.3 million in the prior year period. Home sales gross profit percentage increased by 340 basis points in the three months endedDecember 31, 2020 compared to the prior year period, primarily due to the average selling price of homes closed increasing while the average cost of those homes decreased slightly. As a percentage of homebuilding revenues, SG&A expenses decreased by 140 basis points in the three months endedDecember 31, 2020 compared to the prior year period, primarily due to the increase in homebuilding revenues. 38
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South Central Region - Homebuilding revenues increased 54% in the three months endedDecember 31, 2020 compared to the prior year period, primarily due to increases in the number of homes closed in ourHouston ,Dallas andSan Antonio markets. The region generated pre-tax income of$264.7 million in the three months endedDecember 31, 2020 compared to$132.6 million in the prior year period. Home sales gross profit percentage increased by 200 basis points in the three months endedDecember 31, 2020 compared to the prior year period, primarily due to the average selling price of homes closed increasing by more than the average cost of those homes. As a percentage of homebuilding revenues, SG&A expenses decreased by 120 basis points in the three months endedDecember 31, 2020 compared to the prior year period, primarily due to the increase in homebuilding revenues.Southwest Region - Homebuilding revenues increased 10% in the three months endedDecember 31, 2020 compared to the prior year period, primarily due to increases in the number of homes closed in all of our markets. The region generated pre-tax income of$38.6 million in the three months endedDecember 31, 2020 compared to$34.5 million in the prior year period. Home sales gross profit percentage increased by 170 basis points in the three months endedDecember 31, 2020 compared to the prior year period, primarily due to the average selling price of homes closed increasing, while the average cost of those homes decreased. As a percentage of homebuilding revenues, SG&A expenses increased by 130 basis points in the three months endedDecember 31, 2020 compared to the prior year period, due to an increase in employee compensation and related costs.West Region - Homebuilding revenues increased 33% in the three months endedDecember 31, 2020 compared to the prior year period, primarily due to increases in the number of homes closed in ourLas Vegas ,Southern California andSeattle markets, partially offset by decreases in the average selling price of homes closed in many markets. The region generated pre-tax income of$144.4 million in the three months endedDecember 31, 2020 compared to$69.7 million in the prior year period. Home sales gross profit percentage increased by 350 basis points in the three months endedDecember 31, 2020 compared to the prior year period, primarily due to the average selling price of homes closed decreasing by less than the average cost of those homes. As a percentage of homebuilding revenues, SG&A expenses decreased by 170 basis points in the three months endedDecember 31, 2020 compared to the prior year period, primarily due to the increase in homebuilding revenues. 39
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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, 2020
Residential
Land/Lots
Construction in Developed and
Progress and Under Land Held Land Held
Finished Homes Development for Development for Sale Total Inventory
(In millions)
East $ 865.2 $ 572.2 $ 5.5 $ 1.4 $ 1,444.3
Midwest 560.9 516.5 1.8 0.5 1,079.7
Southeast 1,887.2 1,227.9 26.9 0.8 3,142.8
South Central 1,756.5 1,498.5 0.3 0.5 3,255.8
Southwest 304.9 542.7 1.6 - 849.2
West 1,166.4 951.2 5.7 20.3 2,143.6
Corporate and unallocated (1) 124.0 98.3 0.5 0.3 223.1
$ 6,665.1 $ 5,407.3 $ 42.3 $ 23.8 $ 12,138.5
As of September 30, 2020
Residential
Land/Lots
Construction in Developed and
Progress and Under Land Held Land Held
Finished Homes Development for Development for Sale Total Inventory
(In millions)
East $ 785.3 $ 531.2 $ 5.5 $ 6.3 $ 1,328.3
Midwest 497.0 459.0 1.8 0.7 958.5
Southeast 1,655.5 1,231.5 32.3 0.6 2,919.9
South Central 1,596.3 1,282.3 0.3 1.0 2,879.9
Southwest 244.2 449.7 1.6 0.3 695.8
West 1,137.3 847.1 5.7 19.0 2,009.1
Corporate and unallocated (1) 121.9 100.6 0.6 0.4 223.5
$ 6,037.5 $ 4,901.4 $ 47.8 $ 28.3 $ 11,015.0
__________
(1)Corporate and unallocated inventory consists primarily of capitalized interest and property taxes.
40
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Our homebuilding segment's land and lot position and homes in inventory at
As of December 31, 2020
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 11,400 57,800 69,200 5,400
Midwest 8,700 22,800 31,500 3,000
Southeast 29,100 110,300 139,400 13,200
South Central 45,400 81,500 126,900 13,500
Southwest 8,100 15,600 23,700 2,500
West 19,300 30,700 50,000 4,500
122,000 318,700 440,700 42,100
28 % 72 % 100 %
As of September 30, 2020
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 11,300 50,500 61,800 4,900
Midwest 8,000 17,800 25,800 2,600
Southeast 28,700 95,700 124,400 11,500
South Central 40,100 65,200 105,300 12,600
Southwest 7,200 7,600 14,800 1,800
West 17,300 27,500 44,800 4,600
112,600 264,300 376,900 38,000
30 % 70 % 100 %
___________________
(1)Land/lots owned include approximately 35,600 and 33,800 owned lots that are
fully developed and ready for home construction at December 31, 2020 and
September 30, 2020 , respectively. Land/lots owned also include land held for
development representing 1,600 lots at both December 31, 2020 and September 30,
2020 .
(2)The total remaining purchase price of lots controlled through land and lot
purchase contracts at December 31, 2020 and September 30, 2020 was $11.9 billion
and $9.9 billion , respectively, secured by earnest money deposits of $776.0
million and $653.4 million , respectively. The total remaining purchase price of
lots controlled through land and lot purchase contracts at December 31, 2020 and
September 30, 2020 included $1.3 billion and $1.0 billion , respectively, related
to lot purchase contracts with Forestar, secured by $122.9 million and $98.2
million , respectively, of earnest money.
(3)Lots controlled at December 31, 2020 include approximately 34,900 lots owned
or controlled by Forestar, 18,300 of which our homebuilding divisions have under
contract to purchase and 16,600 of which our homebuilding divisions have a right
of first offer to purchase. Of these, approximately 15,700 lots were in our
Southeast region, 6,000 lots were in our South Central region, 5,600 lots were
in our West region, 3,100 lots were in our East region, 2,600 lots were in our
Southwest region, and 1,900 lots were in our Midwest region. Lots controlled at
September 30, 2020 included approximately 30,400 lots owned or controlled by
Forestar, 14,000 of which our homebuilding divisions had under contract to
purchase and 16,400 of which our homebuilding divisions had a right of first
offer to purchase.
(4)Approximately 16,300 and 14,900 of our homes in inventory were unsold at
December 31, 2020 and September 30, 2020 , respectively. At December 31, 2020 ,
approximately 1,600 of our unsold homes were completed, of which approximately
200 homes had been completed for more than six months. At September 30, 2020 ,
approximately 1,900 of our unsold homes were completed, of which approximately
300 homes had been completed for more than six months. Homes in inventory
exclude approximately 1,900 and 1,800 model homes at December 31, 2020 and
September 30, 2020 , respectively.
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RESULTS OF OPERATIONS - FORESTAR
In fiscal 2018, we acquired 75% of the outstanding shares of Forestar and at
December 31, 2020 , we owned 65% of its outstanding shares. Forestar is a
publicly traded residential lot development company with operations in 51
markets across 21 states as of December 31, 2020 . 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.)
Results of operations for the Forestar segment for the three months ended
Three Months Ended
December 31,
2020 2019
(In millions)
Residential land and lot sales $ 307.0 $ 247.1
Other 0.1 0.1
Total revenues $ 307.1 $ 247.2
Cost of sales 262.9 216.6
Selling, general and administrative expense 15.5 10.5
Loss on sale of assets - 0.1
Other (income) expense (0.5) (2.2)
Income before income taxes$ 29.2 $ 22.2 AtDecember 31, 2020 , Forestar owned directly or controlled through land and lot purchase contracts approximately 77,500 residential lots, of which approximately 4,900 are fully developed. Approximately 34,900 of these lots are under contract to sell toD.R. Horton or subject to a right of first offer under the master supply agreement withD.R. Horton . Approximately 600 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 endedDecember 31, 2020 and 2019, Forestar's land and lot sales, including the portion sold toD.R. Horton and the revenues generated from those sales, were as follows. Three Months Ended December 31, 2020 2019 ($ in millions) Total residential single-family lots sold 3,567
2,422
Residential single-family lots sold toD.R. Horton 3,389
2,390
Residential lot sales revenues from sales to
$ 214.0 Residential tract acres sold toD.R. Horton -
36
Residential land sales revenues from sales to
SG&A expense for the three months endedDecember 31, 2020 and 2019 includes charges of$1.1 million and$1.3 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. 42
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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, 2020 and 2019.
Three Months Ended
2020 2019 % Change
Number of first-lien loans originated or brokered by
12,722 8,401 51 %
Number of homes closed by D.R. Horton 18,739 12,959 45 %
Percentage of D.R. Horton homes financed by DHI Mortgage 68 % 65 %
Number of total loans originated or brokered by
12,738 8,442 51 %
Total number of loans originated or brokered by
13,073 8,723 50 %
Captive business percentage 97 % 97 %
Loans sold by DHI Mortgage to third parties 13,458 8,745 54 %
Three Months Ended December 31,
2020 2019 % Change
(In millions)
Loan origination and other fees $ 11.1 $ 7.5 48 %
Gains on sale of mortgage loans and mortgage servicing rights 138.9 73.6 89 %
Servicing income 2.4 - - %
Total mortgage operations revenues 152.4 81.1 88 %
Title policy premiums 34.8 21.8 60 %
Total revenues 187.2 102.9 82 %
General and administrative expense 109.5 77.9 41 %
Other (income) expense (6.4) (5.5) 16 %
Financial services pre-tax income $ 84.1 $ 30.5 176 %
Financial Services Operating Margin Analysis
Percentages of
Financial Services Revenues
Three Months Ended
December 31,
2020 2019
General and administrative expense 58.5 % 75.7 %
Other (income) expense (3.4) % (5.3) %
Financial services pre-tax income 44.9 % 29.6 %
43-------------------------------------------------------------------------------- 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, 2020 , the volume of first-lien loans originated or brokered byDHI Mortgage for our homebuyers increased 51% from the prior year period, due to the 45% increase in the number of homes closed by our homebuilding operations, as well as a 3% increase in the percentage of homes closed for whichDHI Mortgage handled our homebuyers' financing.
Homes closed by our homebuilding operations constituted 97% of
The number of loans sold increased 54% in the three months endedDecember 31, 2020 compared to the prior year period. Virtually all of the mortgage loans held for sale onDecember 31, 2020 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 ). During the three months endedDecember 31, 2020 , approximately 66% of our mortgage loans were sold directly to Fannie Mae or into securities backed byGinnie Mae and 27% were sold to two other major financial entities. 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 orGinnie Mae , and we may need to make other adjustments to our mortgage operations. Due to the disruption in the secondary mortgage markets beginning in lateMarch 2020 caused by C-19 and the uncertainty of the impact of the CARES Act, many financial entities began offering lower pricing and limiting their purchases of our mortgages and servicing rights. As a result of the rapid decline in servicing values at the end of March, we began retaining the servicing rights on a portion of our loan originations. Servicing values have since improved, and we sold a portion of our retained mortgage servicing rights in the three months endedDecember 31, 2020 . We expect to continue retaining some servicing rights prior to selling them to third parties, typically within six months of loan origination.
Financial Services Revenues and Expenses
Revenues from our mortgage operations increased 88% to$152.4 million in the three months endedDecember 31, 2020 from$81.1 million in the prior year period, primarily due to a 50% increase in loan originations and a higher net gain achieved on the sale of loan originations in the secondary market. Revenues from our title operations increased 60% to$34.8 million in the three months endedDecember 31, 2020 from$21.8 million in the prior year period, primarily due to a 50% increase in escrow closings. General and administrative (G&A) expense related to our financial services operations increased 41% to$109.5 million in the three months endedDecember 31, 2020 from$77.9 million in the prior year period. The increase was primarily due to an increase in employee related costs to support a higher volume of transactions. Our financial services operations employed 2,403 and 1,882 employees atDecember 31, 2020 and 2019, respectively. As a percentage of financial services revenues, G&A expense was 58.5% in the three months endedDecember 31, 2020 compared to 75.7% in the prior year period. Our significant increase in loan volume resulted in better G&A leverage in the current year period. However, 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.
Other income, net of other expense, included in our financial services operations consists primarily of the interest income of our mortgage subsidiary.
As a result of the revenue increases from higher volumes of mortgage originations and escrow closings and better leverage of our G&A expenses, pre-tax income from our financial services operations increased 176% to$84.1 million in the three months endedDecember 31, 2020 from$30.5 million in the prior year period. 44
-------------------------------------------------------------------------------- Table of Contents RESULTS OF OPERATIONS - OTHER BUSINESSES The combined pre-tax income of all of our subsidiaries engaged in other business activities was$2.2 million in the three months endedDecember 31, 2020 compared to$29.6 million in the prior year period. Income generated by our other businesses can vary significantly based on the timing of multi-family rental property sales. There were no sales of multi-family rental properties during the current year period. In the prior year period, one property was sold for$61.5 million with a gain on sale of$31.2 million . Our multi-family rental operations develop, construct, lease and own multi-family residential properties that produce rental income. We primarily focus on constructing garden style multi-family communities, which typically accommodate 200 to 400 dwelling units, in high growth suburban markets. After we complete construction and achieve a stabilized level of leased occupancy, the property is typically marketed for sale. AtDecember 31, 2020 , we had four multi-family rental projects under active construction and four projects that were substantially complete. These eight projects represent 2,325 multi-family units, including 1,015 units under active construction and 1,310 completed units.
RESULTS OF OPERATIONS - CONSOLIDATED
Income before Income Taxes
Pre-tax income for the three months endedDecember 31, 2020 was$1.0 billion compared to$523.3 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, 2020 and 2019 was$239.1 million and$90.8 million , respectively. Our effective tax rate was 23.1% for the three months endedDecember 31, 2020 compared to 17.4% in the prior year period. The effective tax rates for both periods include an expense for state income taxes and tax benefits related to stock-based compensation and the federal energy efficient homes tax credit. For the three months endedDecember 31, 2019 , the retroactive reinstatement of the federal energy efficient homes tax credit for homes closed fromJanuary 1, 2018 toSeptember 30, 2019 reduced our effective tax rate by 5.6%. Our deferred tax assets, net of deferred tax liabilities, were$149.5 million atDecember 31, 2020 compared to$152.4 million atSeptember 30, 2020 . We have a valuation allowance of$7.5 million atDecember 31, 2020 andSeptember 30, 2020 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. 45 -------------------------------------------------------------------------------- Table of Contents 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 economic and market conditions. We remain cautious as to the ongoing impact of C-19 on theU.S. economy and will adjust our strategy as appropriate should market conditions change due to the pandemic or otherwise. In the current market, we are increasing our investments in homebuilding inventories and single-family and multi-family rental properties to expand our operations and grow our revenues and profitability, as well as considering opportunistic strategic investments as they arise. We are also maintaining higher homebuilding cash balances than in prior years to support the increased scale and level of activity in our business and to provide flexibility to adjust to changing conditions and opportunities. AtDecember 31, 2020 , our ratio of debt to total capital (notes payable divided by stockholders' equity plus notes payable) was 25.3% compared to 26.6% atSeptember 30, 2020 and 27.0% atDecember 31, 2019 . Our ratio of homebuilding debt to total capital (homebuilding notes payable divided by stockholders' equity plus homebuilding notes payable) was 17.3% compared to 17.5% atSeptember 30, 2020 and 19.5% atDecember 31, 2019 . 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 2021. 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 maintain sufficient cash levels to support our other 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. AtDecember 31, 2020 ,$394.3 million remained available under Forestar's shelf registration statement,$100 million of which is reserved for sales under its at-the-market equity offering program. As market conditions permit, we may issue new debt or equity securities through the capital markets or obtain additional bank financing to fund our projected capital requirements or provide additional liquidity. We believe that our existing cash resources, revolving credit facilities, mortgage repurchase facility and ability to access the capital markets or obtain additional bank financing will provide sufficient liquidity to fund our near-term working capital needs and debt obligations.
Capital Resources - Homebuilding
Cash and Cash Equivalents - At
Bank Credit Facilities - 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, 2020 , there were no borrowings outstanding and$151.6 million of letters of credit issued under the revolving credit facility, resulting in available capacity of approximately$1.44 billion . 46 -------------------------------------------------------------------------------- Table of Contents InMay 2020 , we entered into a credit agreement providing for a$375 million 364-day senior unsecured homebuilding revolving credit facility with an uncommitted accordion feature that could increase the size of the facility to$550 million , subject to certain conditions and availability of additional bank commitments. The interest rate on borrowings under the 364-day revolving credit facility may be based on either the Prime Rate or LIBOR plus an applicable margin, as defined in the credit agreement governing the facility. The maturity date of the facility isMay 27, 2021 . There were no borrowings outstanding under the facility atDecember 31, 2020 . Our homebuilding revolving credit facilities impose 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. Both facilities include substantially the same affirmative and negative covenants, events of default and financial covenants. These covenants are measured as defined in the credit agreements governing the facilities and are reported to the lenders quarterly. A failure to comply with these financial covenants could allow the lending banks to terminate the availability of funds under the revolving credit facilities or cause any outstanding borrowings to become due and payable prior to maturity. The credit agreements governing the facilities impose restrictions on the creation of secured debt and liens. AtDecember 31, 2020 , we were in compliance with all of the covenants, limitations and restrictions of our homebuilding revolving credit facilities. Public Unsecured Debt - We have$2.55 billion principal amount of homebuilding senior notes outstanding as ofDecember 31, 2020 that mature fromSeptember 2022 throughOctober 2027 . InOctober 2020 , we issued$500 million principal amount of 1.4% senior notes dueOctober 15, 2027 , with interest payable semi-annually. The annual effective interest rate of these notes after giving effect to the amortization of the discount and financing costs is 1.6%. InDecember 2020 , we repaid$400 million principal amount of our 2.55% senior notes at maturity. The indentures governing our senior notes impose restrictions on the creation of secured debt and liens. AtDecember 31, 2020 , we were in compliance with all of the limitations and restrictions associated with our public debt obligations.
Repurchases of Common Stock - We repurchased 1.0 million shares of our common
stock for
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, 2020 , the full amount of the debt repurchase authorization was remaining, and$465.5 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 calculation 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, 2020 , there were no borrowings outstanding and$40.5 million of letters of credit issued under the revolving credit facility, resulting in available capacity of$339.5 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. 47
-------------------------------------------------------------------------------- Table of Contents The Forestar 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. Unsecured Debt - Forestar has$650 million principal amount of senior notes issued pursuant to Rule 144A and Regulation S under the Securities Act of 1933, as amended. The notes mature fromApril 2024 throughMarch 2028 , with interest payable semi-annually, and represent unsecured obligations of Forestar. Forestar's revolving credit facility and its senior notes are not guaranteed byD.R. Horton, Inc. or any of the subsidiaries that guarantee our homebuilding debt. AtDecember 31, 2020 , Forestar was in compliance with all of the covenants, limitations and restrictions of its revolving credit facility and senior note obligations. Debt Repurchase Authorization - EffectiveApril 30, 2020 , Forestar's Board of Directors authorized the repurchase of up to$30 million of Forestar's debt securities. The authorization has no expiration date. All of the$30 million authorization was remaining atDecember 31, 2020 .
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$1.35 billion ; however, the capacity increased, without requiring additional commitments, to$1.575 billion for approximately 45 days aroundSeptember 30, 2020 and increased again for approximately 30 days aroundDecember 31, 2020 . The capacity of the facility can also be increased to$1.8 billion , subject to the availability of additional commitments. The maturity date of the facility isFebruary 19, 2021 . We are currently in discussions with our lenders and expect to renew and extend the facility on similar terms prior to its maturity date. As ofDecember 31, 2020 ,$1.31 billion of mortgage loans held for sale with a collateral value of$1.29 billion were pledged under the mortgage repurchase facility. As a result of advance paydowns totaling$319.4 million ,DHI Mortgage had an obligation of$969.1 million outstanding under the mortgage repurchase facility atDecember 31, 2020 at a 2.4% 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, 2020 ,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. 48 -------------------------------------------------------------------------------- Table of Contents Operating Cash Flow Activities In the three months endedDecember 31, 2020 , net cash used in operating activities was$252.1 million compared to$113.8 million in the prior year period. Cash used in operating activities in the current year period primarily consisted of$269.2 million and$158.7 million of cash used in our homebuilding and Forestar segments, respectively, partially offset by$173.1 million of cash provided by our financial services segment. Cash used to increase construction in progress and finished home inventory was$591.2 million in the current year period compared to$334.8 million in the prior year period. In both periods, the expenditures were made to support increased sales and closing volumes. Cash used to increase residential land and lots in the current year period was$716.8 million compared to$373.1 million in the prior year period. Of these amounts,$218.5 million and$38.9 million , respectively, related to Forestar. 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, 2020 , net cash used in investing activities was$91.4 million compared to$17.8 million in the prior year period. In the current year period, uses of cash included expenditures related to our rental operations totaling$86.2 million , an acquisition of the homebuilding operations ofBraselton Homes for$23.0 million and purchases of property and equipment totaling$16.3 million , partially offset by proceeds from the sale of a single-family rental community for$31.8 million . In the prior year period, uses of cash included expenditures related to our rental operations 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.
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 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, 2020 , net cash used in financing activities was$221.7 million , consisting primarily of repayment of$400 million principal amount of our 2.55% homebuilding senior notes at maturity, net payments of$163.5 million on our mortgage repurchase facility, payment of cash dividends totaling$72.9 million and cash used to repurchase shares of our common stock of$53.8 million . These uses of cash were partially offset by note proceeds from our issuance of$500 million principal amount of 1.4% homebuilding senior notes. During the three months 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% homebuilding senior notes, partially offset by cash used to repurchase shares of our common stock of$163.1 million , payment of cash dividends totaling$64.6 million and net payments of$38.6 million on our mortgage repurchase facility. During the three months endedDecember 31, 2020 , our Board of Directors approved a quarterly cash dividend of$0.20 per common share, which was paid onDecember 14, 2020 to stockholders of record onDecember 4, 2020 . InJanuary 2021 , our Board of Directors approved a quarterly cash dividend of$0.20 per common share, payable onFebruary 25, 2021 to stockholders of record onFebruary 17, 2021 . Cash dividends of$0.175 per common share were approved and paid in each quarter of fiscal 2020. 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. 49
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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, 2020 , we had outstanding letters of credit of$192.1 million and surety bonds of$1.9 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. 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, 2020 , there were a limited number of contracts with$73.5 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,$41.5 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. 50
-------------------------------------------------------------------------------- Table of Contents SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION
As of
All of the homebuilding senior notes and the homebuilding revolving credit facilities are fully and unconditionally guaranteed, on a joint and several basis, by certain subsidiaries ofD.R. Horton, Inc. (Guarantors or Guarantor Subsidiaries). Each of the Guarantor Subsidiaries is 100% owned, directly or indirectly, byD.R. Horton, Inc. Our subsidiaries associated with the Forestar lot development operation, financial services operations, multi-family residential construction and certain other subsidiaries do not guarantee the homebuilding senior notes or the homebuilding revolving credit facilities (collectively, Non-Guarantor Subsidiaries). The guarantees are senior unsecured obligations of each Guarantor and rank equal with all existing and future senior debt of such Guarantor and senior to all subordinated debt of such Guarantor. The guarantees are effectively subordinated to any secured debt of such Guarantor to the extent of the value of the assets securing such debt. The guarantees will be structurally subordinated to indebtedness and other liabilities of Non-Guarantor Subsidiaries of the Guarantors. The guarantees by a Guarantor Subsidiary will be automatically and unconditionally released and discharged upon: (1) the sale or other disposition of its common stock whereby it is no longer a subsidiary of ours; (2) the sale or other disposition of all or substantially all of its assets (other than to us or another Guarantor); (3) its merger or consolidation with an entity other than us or another Guarantor; or (4) its ceasing to guarantee any of our publicly traded debt securities and ceasing to guarantee any of our obligations under our homebuilding revolving credit facility. The following tables present summarized financial information forD.R. Horton, Inc. and the Guarantor Subsidiaries on a combined basis after intercompany transactions and balances have been eliminated amongD.R. Horton, Inc. and the Guarantor Subsidiaries, as well as their investment in, and equity in earnings from the Non-Guarantor Subsidiaries. D.R. Horton, Inc. and Guarantor Subsidiaries December 31, September 30, Summarized Balance Sheet Data 2020 2020 (In millions) Assets Cash$ 2,044.8 $ 2,498.5 Inventories 12,044.0 10,921.8 Amount due from Non-Guarantor Subsidiaries 572.7 524.6 Total assets 16,374.6 15,503.9 Liabilities & Stockholders' Equity Notes payable$ 2,606.2 $ 2,514.4 Total liabilities 5,053.6 4,746.9 Stockholders' equity 11,321.0 10,757.0 Three Months Ended December 31, Fiscal Year Ended Summarized Statement of Operations Data 2020 September 30, 2020 (In millions) Revenues$ 5,714.2 $ 19,630.0 Cost of sales 4,343.9 15,379.2 Selling, general and administrative expense 435.9 1,584.4 Income before income taxes 926.7 2,666.4 Net income 713.0 2,134.7 51
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A court could void or subordinate any Guarantor's guarantee under the fraudulent conveyance laws if existing or future creditors of any such Guarantor were successful in establishing that: (i) such guarantee was incurred with fraudulent intent; or (ii) such Guarantor did not receive fair consideration or reasonably equivalent value for issuing its guarantee and was insolvent at the time of the guarantee, was rendered insolvent by reason of the guarantee, was engaged in a business or transaction for which its assets constituted unreasonably small capital to carry on its business, or intended to incur, or believed that it would incur, debt beyond its ability to pay such debt as it matured. The measures of insolvency for purposes of determining whether a fraudulent conveyance occurred would vary depending upon the laws of the relevant jurisdiction and upon the valuation assumptions and methodology applied by the court. Generally, however, a company would be considered insolvent for purposes of the foregoing if the sum of the company's debts, including contingent, unliquidated and unmatured liabilities, is greater than all of such company's property at a fair valuation, or if the present fair saleable value of the company's assets is less than the amount that will be required to pay the probable liability on its existing debts as they become absolute and matured. The indentures governing our homebuilding senior notes contain a "savings clause," which limits the liability of each Guarantor on its guarantee to the maximum amount that such Guarantor can incur without risk that its guarantee will be subject to avoidance as a fraudulent transfer. This provision may not be effective to protect such guarantees from fraudulent transfer challenges or, if it does, it may reduce such Guarantor's obligation such that the remaining amount due and collectible under the guarantees would not suffice, if necessary, to pay the notes in full when due. On the basis of historical financial information, operating history and other factors, we believe that each of the Guarantors, after giving effect to the issuance of the guarantees when such guarantees were issued, was not insolvent, did not have unreasonably small capital for the business in which it engaged and did not and has not incurred debts beyond its ability to pay such debts as they mature. We cannot assure you, however, as to what standard a court would apply in making these determinations or that a court would agree with our conclusions in this regard. CRITICAL ACCOUNTING POLICIES As disclosed in our annual report on Form 10-K for the fiscal year endedSeptember 30, 2020 , our most critical accounting policies relate to revenue recognition, inventories and cost of sales, warranty claims and legal claims and insurance. SinceSeptember 30, 2020 , 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, 2020 , our reserves for construction defect claims include the estimated costs of both known claims and anticipated future claims. AtDecember 31, 2020 andSeptember 30, 2020 , we had reserves for approximately 270 and 260 pending construction defect claims, respectively, and no individual existing claim was material to our financial statements. During the three months endedDecember 31, 2020 , we established reserves for approximately 30 new construction defect claims and resolved 20 construction defect claims for a total cost of$2.3 million . 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 .
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, lot 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.
52-------------------------------------------------------------------------------- Table of Contents 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 effects of public health issues such as a major epidemic or pandemic, including the impact of C-19 on the economy and our businesses; •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 by government 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; •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; •competitive conditions within the homebuilding, lot development and financial services industries; •our ability to manage and service our debt and comply with related debt covenants, restrictions and limitations; •the effects of negative publicity; •the effects of the loss of key personnel; and •information technology failures, data security breaches and our ability to satisfy privacy and data protection laws and regulations. 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, 2020 , including the section entitled "Risk Factors," which is filed with theSEC . 53
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