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, 2021 . 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 102 markets across 32 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, rental and other activities. Our homebuilding operations are our core business and primarily include the construction and sale of single-family homes with sales prices generally ranging from$150,000 to more than$1,000,000 , with an average closing price of$361,800 during the three months endedDecember 31, 2021 . Approximately 91% of our home sales revenue in the three months endedDecember 31, 2021 was generated from the sale of single-family detached homes, with the remainder from the sale of attached homes, such as townhomes, duplexes and triplexes. 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. Our entry-level homes at affordable price points have experienced very strong demand from homebuyers, as this segment of the new home market remains under-served, with low inventory levels relative to demand. AtDecember 31, 2021 , we owned 63% 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 through land purchase contracts. Forestar has made significant investments in land acquisition and development over the last few years to expand its business across our homebuilding operating footprint. Our financial services operations provide mortgage financing and title agency services to homebuyers in many of our homebuilding markets.DHI Mortgage , our 100% owned subsidiary, provides mortgage financing services primarily to our homebuyers and sells substantially all of the mortgages it originates and the related servicing rights to third-party purchasers.DHI Mortgage originates loans in accordance with purchaser guidelines and sells substantially all of its mortgage production after origination. Our 100% owned subsidiary title companies serve as title insurance agents by providing title insurance policies, examination, underwriting and closing services, primarily related to our homebuilding transactions. Our rental segment consists of multi-family and single-family rental operations. The multi-family rental operations develop, construct, lease and sell residential rental properties. The single-family rental operations primarily construct and lease single-family homes and then market the community for a bulk sale of rental homes. In addition to our homebuilding, Forestar, financial services and rental operations, we engage in other business activities through our subsidiaries. We conduct insurance-related operations, own non-residential real estate including ranch land and improvements and own and operate energy-related assets. The results of these operations are immaterial for separate reporting and therefore are grouped together and presented as other. 27
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OVERVIEW
During the three months endedDecember 31, 2021 , the number and value of our net sales orders increased 5% and 29%, respectively, compared to the prior year period. During the three months endedDecember 31, 2021 , our number of homes closed decreased 2%, while our home sales revenues increased 17% compared to the prior year. Our consolidated revenues increased 19% to$7.1 billion compared to$5.9 billion in the prior year period. Our pre-tax income was$1.5 billion in the three months endedDecember 31, 2021 compared to$1.0 billion in the prior year period, and our pre-tax operating margin was 21.2% compared to 17.4%. Net income was$1.1 billion in the three months endedDecember 31, 2021 compared to$795.2 million in the prior year period, and our diluted earnings per share was$3.17 compared to$2.14 . In the trailing twelve months endedDecember 31, 2021 , our return on equity (ROE) was 32.4% compared to 24.4% in the prior year period, and our homebuilding return on inventory (ROI) was 38.5% compared to 27.9%. 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. During 2020, the impacts of the COVID-19 pandemic significantly disrupted economic activity acrossthe United States . As economic activity resumed, demand for our homes improved significantly and has remained strong throughout fiscal 2021 and into fiscal 2022. We believe the increase in demand has been fueled by historically low interest rates on mortgage loans and the limited supply of homes at affordable price points across most of our markets. We are well-positioned for increased demand with our affordable product offerings, lot supply and housing inventory. However, multiple disruptions in the supply chain, combined with the strong demand for new homes, have resulted in shortages in certain building materials, which, together with tightness in the labor market, has caused our construction cycle to lengthen. We have slowed our home sales pace to more closely align with our production levels, and we are selling homes later in the construction cycle when we have more certainty regarding the home close date for our homebuyers. Based on the current availability of labor and materials, the stage of completion of our current homes in inventory, production schedules and capacity, we expect to continue restricting the pace of our sales orders as necessary in our communities in the near term to match our production levels.
Within our homebuilding land and lot portfolio, our lots controlled through
purchase contracts represent 76% of the lots owned and controlled at both
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.
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STRATEGY
Our operating strategy focuses on enhancing long-term value to our shareholders
by leveraging our financial and competitive position 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. 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 significant cash balance and strong overall liquidity position
while 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.
•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.
•Increasing our investments in the construction and leasing of single-family and
multi-family rental properties to meet rental demand in high growth suburban
markets and selling these properties profitably.
•Opportunistically evaluating potential acquisitions to enhance our operating
platform.
We believe our operating strategy, which has produced positive results in recent
years, will allow us to successfully operate through changing economic
conditions to maintain and improve our financial and competitive position.
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 17% to$6.7 billion compared to$5.7 billion . •Homes closed decreased 2% to 18,396 homes, while the average closing price of those homes increased 19% to$361,800 . •Net sales orders increased 5% to 21,522 homes, and the value of net sales orders increased 29% to$8.3 billion . •Sales order backlog increased 3% to 29,347 homes, and the value of sales order backlog increased 24% to$11.1 billion . •Home sales gross margin was 27.4% compared to 24.1%. •Homebuilding SG&A expense was 7.5% of homebuilding revenues compared to 7.9%. •Homebuilding pre-tax income was$1.3 billion compared to$922.6 million . •Homebuilding pre-tax income was 20.0% of homebuilding revenues compared to 16.1%. •Homebuilding cash and cash equivalents totaled$2.1 billion compared to$3.0 billion and$2.1 billion atSeptember 30, 2021 andDecember 31, 2020 , respectively. •Homebuilding inventories totaled$15.3 billion compared to$13.9 billion and$12.1 billion atSeptember 30, 2021 andDecember 31, 2020 , respectively. •Homes in inventory totaled 54,800 compared to 47,800 and 42,100 atSeptember 30, 2021 andDecember 31, 2020 , respectively. •Owned lots totaled 131,900 compared to 127,800 and 122,000 atSeptember 30, 2021 andDecember 31, 2020 , respectively. Lots controlled through purchase contracts increased to 419,500 from 402,500 and 318,700 atSeptember 30, 2021 andDecember 31, 2020 , respectively. •Homebuilding debt was$3.3 billion compared to$3.2 billion and$2.6 billion atSeptember 30, 2021 andDecember 31, 2020 , respectively. •Homebuilding debt to total capital was 17.3% compared to 17.8% and 17.3% atSeptember 30, 2021 andDecember 31, 2020 , respectively. Net homebuilding debt to total capital was 6.9% compared to 1.7% and 3.9% atSeptember 30, 2021 andDecember 31, 2020 , respectively. 30 -------------------------------------------------------------------------------- Table of Contents Forestar: •Forestar's revenues increased 33% to$407.6 million compared to$307.1 million . Revenues in the current and prior year quarters included$330.1 million and$294.2 million , respectively, of revenue from land and lot sales to our homebuilding segment. •Forestar's lots sold increased 27% to 4,516 compared to 3,567. Lots sold toD.R. Horton totaled 4,014 compared to 3,389. •Forestar's pre-tax income was$53.5 million compared to$29.2 million . •Forestar's pre-tax income was 13.1% of revenues compared to 9.5%. •Forestar's cash and cash equivalents totaled$162.5 million compared to$153.6 million and$237.4 million atSeptember 30, 2021 andDecember 31, 2020 , respectively. •Forestar's inventories totaled$2.0 billion compared to$1.9 billion and$1.5 billion atSeptember 30, 2021 andDecember 31, 2020 , respectively. •Forestar's owned and controlled lots totaled 103,300 compared to 97,000 and 77,500 atSeptember 30, 2021 andDecember 31, 2020 , respectively. Of these lots, 38,300 were under contract to sell to or subject to a right of first offer withD.R. Horton compared to 39,200 and 34,900 atSeptember 30, 2021 andDecember 31, 2020 , respectively. •Forestar's debt was$704.9 million compared to$704.5 million and$654.1 million atSeptember 30, 2021 andDecember 31, 2020 , respectively. •Forestar's debt to total capital was 40.0% compared to 41.0% and 42.3% atSeptember 30, 2021 andDecember 31, 2020 , respectively. Forestar's net debt to total capital was 33.9% compared to 35.2% and 31.8% atSeptember 30, 2021 andDecember 31, 2020 , respectively. Financial Services: •Financial services revenues decreased 2% to$184.3 million compared to$187.2 million . •Financial services pre-tax income decreased 20% to$67.1 million compared to$84.1 million . •Financial services pre-tax income was 36.4% of financial services revenues compared to 44.9%. Consolidated Results: •Consolidated revenues increased 19% to$7.1 billion compared to$5.9 billion . •Consolidated pre-tax income increased 45% to$1.5 billion compared to$1.0 billion . •Consolidated pre-tax income was 21.2% of consolidated revenues compared to 17.4%. •Income tax expense was$351.5 million compared to$239.1 million , and our effective tax rate was 23.5% compared to 23.1%. •Net income attributable toD.R. Horton increased 44% to$1.1 billion compared to$791.8 million . •Diluted net income per common share attributable toD.R. Horton increased 48% to$3.17 compared to$2.14 . •Stockholders' equity was$15.7 billion compared to$14.9 billion and$12.5 billion atSeptember 30, 2021 andDecember 31, 2020 , respectively. •Book value per common share increased to$44.25 compared to$41.81 and$34.33 atSeptember 30, 2021 andDecember 31, 2020 , respectively. •Debt to total capital was 25.1% compared to 26.7% and 25.3% atSeptember 30, 2021 andDecember 31, 2020 , respectively. Net debt to total capital was 15.2% compared to 12.9% and 12.4% atSeptember 30, 2021 andDecember 31, 2020 , respectively. 31
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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 most
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.
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State Reporting Region/Market State Reporting Region/Market
Northwest Region South Central Region
Colorado Colorado Springs Oklahoma Oklahoma City
Denver Tulsa
Fort Collins Texas Austin
Oregon Bend Beaumont
Eugene/Springfield Bryan/College Station
Portland/Salem Corpus Christi
Utah Salt Lake City Dallas
St. George Fort Worth
Washington Seattle/Tacoma/Everett/Olympia Houston
Spokane Killeen/Temple/Waco
Vancouver Lubbock
Midland/Odessa
Southwest Region New Braunfels/San Marcos
Arizona Phoenix San Antonio
Tucson
California Bakersfield East Region
Bay Area Georgia Atlanta
Fresno/Tulare Augusta
Los Angeles County Savannah
Modesto/Merced/Stockton North Carolina Asheville
Riverside County Charlotte
Sacramento Greensboro/Winston-Salem
San Bernardino County Raleigh/Durham
San Diego County Wilmington
Hawaii Oahu South Carolina Charleston
Nevada Las Vegas Columbia
Reno Greenville/Spartanburg
New Mexico Albuquerque Hilton Head
Myrtle Beach
Southeast Region Tennessee Chattanooga
Alabama Birmingham Knoxville
Huntsville Memphis
Mobile/Baldwin County Nashville
Montgomery
Tuscaloosa North Region
Florida Fort Myers/Naples Delaware Central Delaware
Gainesville Northern Delaware
Jacksonville Illinois Chicago
Lakeland Indiana Fort Wayne
Melbourne/Vero Beach Indianapolis
Miami/Fort Lauderdale Northwest Indiana
Ocala Iowa Des Moines
Orlando Iowa City/Cedar Rapids
Pensacola/Panama City Kentucky Louisville
Port St. Lucie Maryland Baltimore
Tallahassee Suburban Washington, D.C.
Tampa/Sarasota Western Maryland
Volusia County Minnesota Minneapolis/St. Paul
West Palm Beach Nebraska Omaha
Louisiana Baton Rouge New Jersey Northern New Jersey
Lake Charles/Lafayette Southern New Jersey
Mississippi Gulf Coast Ohio Cincinnati
Columbus
Pennsylvania Central Pennsylvania
Philadelphia
Virginia Northern Virginia
Southern Virginia
West Virginia Eastern West Virginia
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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 endedDecember 31, 2021 and 2020. During the fourth quarter of fiscal 2021, we reassessed our operating segments and reportable segments and realigned the aggregation of our homebuilding operating segments into six new reportable segments to better allocate our homebuilding operating segments across geographic reporting regions. Segment information for the three months endedDecember 31, 2020 has been reclassified to conform to the current presentation. Net Sales Orders (1) Three Months Ended December 31, Net Homes Sold Value (In millions) Average Selling Price % % % 2021 2020 Change 2021 2020 Change 2021 2020 Change Northwest 1,228 997 23 %$ 657.1 $ 470.8 40 %$ 535,100 $ 472,200 13 % Southwest 2,301 2,228 3 % 1,183.8 906.7 31 % 514,500 407,000 26 % South Central 5,862 6,172 (5) % 1,946.2 1,675.8 16 % 332,000 271,500 22 % Southeast 6,394 5,930 8 % 2,284.8 1,727.4 32 % 357,300 291,300 23 % East 3,980 3,678 8 % 1,454.9 1,118.8 30 % 365,600 304,200 20 % North 1,757 1,413 24 % 729.6 516.5 41 % 415,300 365,500 14 % 21,522 20,418 5 %$ 8,256.4 $ 6,416.0 29 %$ 383,600 $ 314,200 22 % Sales Order Cancellations Three Months Ended December 31, Cancelled Sales Orders Value (In millions) Cancellation Rate (2) 2021 2020 2021 2020 2021 2020 Northwest 148 167$ 77.2 $ 77.3 11 % 14 % Southwest 443 399 205.3 146.8 16 % 15 % South Central 1,339 1,305 433.7 342.6 19 % 17 % Southeast 1,083 1,431 361.0 401.5 14 % 19 % East 661 863 225.2 246.7 14 % 19 % North 246 243 97.7 82.7 12 % 15 % 3,920 4,408$ 1,400.1 $ 1,297.6 15 % 18 % ________ (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 5% in the three months endedDecember 31, 2021 compared to the prior year period. The value of net sales orders increased 29% to$8.3 billion (21,522 homes) compared to$6.4 billion (20,418 homes) in the prior year period, primarily due to the increase in our average selling price. The average selling price of net sales orders during the three months endedDecember 31, 2021 was$383,600 , up 22% from the prior year period. During fiscal 2021 and in the first quarter of fiscal 2022, demand for homes remained strong. However, multiple disruptions in the supply chain, combined with the strong demand for new homes, have resulted in shortages in certain building materials, which, together with tightness in the labor market, has caused our construction cycle to lengthen. As a result, we have slowed our home sales pace to more closely align with our production levels, and we are selling homes later in the construction cycle when we have more certainty regarding the home close date for our homebuyers. Based on the stage of completion of our current homes in inventory, production schedules and capacity, we expect to continue restricting the pace of our sales orders as necessary in our communities in the near term to match our production levels. Although these challenges may persist to some degree for some time, we currently expect to close more homes in fiscal 2022 than we closed in fiscal 2021. The markets contributing most to the increase in sales volume in the Northwest wereSalt Lake City andPortland , and those contributing most to the increase in the North wereIndianapolis and SuburbanWashington, D.C. 34
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Our sales order cancellation rate (cancelled sales orders divided by gross sales
orders for the period) was 15% in the three months ended
Sales Order Backlog
As of December 31,
Homes in Backlog Value (In millions) Average Selling Price
% % %
2021 2020 Change 2021 2020 Change 2021 2020 Change
Northwest 1,157 1,334 (13) % $ 605.9 $ 616.7 (2) % $ 523,700 $ 462,300 13 %
Southwest 3,795 3,828 (1) % 1,768.2 1,419.0 25 % 465,900 370,700 26 %
South Central 9,158 8,289 10 % 3,079.2 2,250.0 37 % 336,200 271,400 24 %
Southeast 8,389 7,594 10 % 3,009.2 2,231.8 35 % 358,700 293,900 22 %
East 5,069 5,038 1 % 1,849.6 1,542.2 20 % 364,900 306,100 19 %
North 1,779 2,404 (26) % 751.0 875.1 (14) % 422,100 364,000 16 %
29,347 28,487 3 % $ 11,063.1 $ 8,934.8 24 % $ 377,000 $ 313,600 20 %
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
% % %
2021 2020 Change 2021 2020 Change 2021 2020 Change
Northwest 1,025 1,207 (15) % $ 548.9 $ 547.1 - % $ 535,500 $ 453,300 18 %
Southwest 1,944 2,142 (9) % 911.5 829.0 10 % 468,900 387,000 21 %
South Central 5,437 5,221 4 % 1,692.3 1,362.5 24 % 311,300 261,000 19 %
Southeast 5,324 5,258 1 % 1,810.3 1,464.3 24 % 340,000 278,500 22 %
East 3,128 3,497 (11) % 1,074.7 1,003.1 7 % 343,600 286,800 20 %
North 1,538 1,414 9 % 618.7 492.7 26 % 402,300 348,400 15 %
18,396 18,739 (2) % $ 6,656.4 $ 5,698.7 17 % $ 361,800 $ 304,100 19 %
Home Sales Revenue
Revenues from home sales increased 17% to $6.7 billion (18,396 homes closed) for
the three months ended December 31, 2021 from $5.7 billion (18,739 homes closed)
in the prior year period. Home sales revenues increased in all of our regions,
primarily due to an increase in average selling price.
The number of homes closed decreased 2% in the three months ended December 31,
2021 compared to the prior year period, reflecting the effect of supply chain
disruptions in recent quarters. In regions with a decrease in closings volume,
the markets contributing most to the decreases were as follows: the Seattle and
Portland markets in the Northwest; the Las Vegas market in the Southwest; and
the Atlanta market in the East.
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Homebuilding Operating Margin Analysis
Percentages of Related Revenues
Three Months Ended
December 31,
2021 2020
Gross profit - home sales 27.4 % 24.1 %
Gross profit - land/lot sales and other 25.7 % 23.5 %
Inventory and land option charges (0.1) % (0.1) %
Gross profit - total homebuilding 27.3 % 24.0 %
Selling, general and administrative expense 7.5 % 7.9 %
Other (income) expense (0.1) % - %
Homebuilding pre-tax income 20.0 % 16.1 %
Home Sales Gross Profit
Gross profit from home sales increased to $1.8 billion in the three months ended
December 31, 2021 from $1.4 billion in the prior year period and increased 330
basis points to 27.4% as a percentage of home sales revenues. The percentage
increase resulted from improvements of 310 basis points due to the average
selling price of our homes closed increasing by more than the average cost of
those homes, 10 basis points due to a decrease in the amortization of
capitalized interest and 10 basis points due to a decrease in warranty and
construction defect costs.
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, we would expect our gross profit margins to also decline.
Land/Lot Sales and Other Revenues
Land/lot sales and other revenues from our homebuilding operations were$23.0 million and$17.9 million in the three months endedDecember 31, 2021 and 2020, 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, 2021 , our homebuilding operations had$24.8 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, 2021 , we determined that no communities were impaired, and no impairment charges were recorded during the three months endedDecember 31, 2021 compared to$5.6 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. If the housing market or economic conditions are adversely affected for a prolonged period, we may be required to evaluate additional communities for potential impairment. These evaluations could result in additional impairment charges which could be significant. 36
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During the three months endedDecember 31, 2021 , earnest money and pre-acquisition cost write-offs related to land purchase contracts that we have terminated or expect to terminate were$3.9 million compared to$2.3 million in the same period of fiscal 2020.
Selling, General and Administrative (SG&A) Expense
SG&A expense from homebuilding activities increased 11% to$497.7 million in the three months endedDecember 31, 2021 from$449.4 million in the prior year period. SG&A expense as a percentage of homebuilding revenues was 7.5% and 7.9% in the three months endedDecember 31, 2021 and 2020, respectively. Employee compensation and related costs were$409.6 million and$356.0 million in the three months endedDecember 31, 2021 and 2020, respectively, representing 82% and 79% of SG&A costs in those periods. These costs increased 15% in the three months endedDecember 31, 2021 from the prior year period. Our homebuilding operations employed 8,699 and 7,583 people atDecember 31, 2021 and 2020, 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$24.8 million and$24.4 million in the three months endedDecember 31, 2021 and 2020, respectively. Interest charged to cost of sales was 0.7% and 0.8% of total cost of sales (excluding inventory and land option charges), respectively, in those periods.
Other Income
Other income, net of other expenses, included in our homebuilding operations was$6.2 million and$2.1 million in the three months endedDecember 31, 2021 and 2020, respectively. 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. 37
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Homebuilding Results by
Three Months Ended December 31,
2021 2020
Homebuilding Pre-tax Income as a Homebuilding Pre-tax Income as a
Homebuilding Pre-tax Percentage of Homebuilding Pre-tax Percentage of
Revenues Income (1) Homebuilding Revenues Revenues Income (1) Homebuilding Revenues
(In millions)
Northwest $ 569.0 $ 111.8 19.6 % $ 548.0 $ 86.8 15.8 %
Southwest 911.6 159.3 17.5 % 838.6 115.2 13.7 %
South Central 1,694.3 354.3 20.9 % 1,363.5 240.0 17.6 %
Southeast 1,810.9 415.4 22.9 % 1,465.0 247.2 16.9 %
East 1,074.9 202.3 18.8 % 1,007.7 170.7 16.9 %
North 618.7 89.9 14.5 % 493.8 62.7 12.7 %
$ 6,679.4 $ 1,333.0 20.0 % $ 5,716.6 $ 922.6 16.1 %
______________
(1)Expenses maintained at the corporate level consist primarily of interest and
property taxes, which are capitalized and amortized to cost of sales or expensed
directly, and the expenses related to operating our corporate office. The
amortization of capitalized interest and property taxes is allocated to each
segment based on the segment's cost of sales, while expenses associated with the
corporate office are allocated to each segment based on the segment's inventory
balances.
Northwest Region - Homebuilding revenues increased 4% in the three months ended
December 31, 2021 compared to the prior year period, due to increases in the
average selling price of homes closed in all markets, while the number of homes
closed decreased, particularly in the Seattle and Portland markets. The region
generated pre-tax income of $111.8 million in the three months ended
December 31, 2021 compared to $86.8 million in the prior year period. Gross
profit from home sales as a percentage of home sales revenue (home sales gross
profit percentage) increased by 480 basis points in the three months ended
December 31, 2021 compared to the prior year period, primarily due to the
average selling price of homes closed increasing by more than the average cost
of those homes. As a percentage of homebuilding revenues, SG&A expenses
increased by 40 basis points in the three months ended December 31, 2021
compared to the prior year period due to increases in employee compensation and
related costs.
Southwest Region - Homebuilding revenues increased 9% in the three months ended
December 31, 2021 compared to the prior year period, primarily due to increases
in the average selling price of homes closed in most markets, while the number
of homes closed decreased, particularly in the Las Vegas market. The region
generated pre-tax income of $159.3 million in the three months ended
December 31, 2021 compared to $115.2 million in the prior year period. Home
sales gross profit percentage increased by 350 basis points in the three months
ended December 31, 2021 compared to the prior year period, primarily due to the
average selling price of homes closed increasing by more than the average cost
of those homes. As a percentage of homebuilding revenues, SG&A expenses
decreased by 20 basis points in the three months ended December 31, 2021
compared to the prior year period.
South Central Region - Homebuilding revenues increased 24% in the three months
ended December 31, 2021 compared to the prior year period, primarily due to
increases in the average selling price of homes closed in all markets, as well
as a slight increase in the number of homes closed. The region generated pre-tax
income of $354.3 million in the three months ended December 31, 2021 compared to
$240.0 million in the prior year period. Home sales gross profit percentage
increased by 250 basis points in the three months ended December 31, 2021
compared to the prior year period, primarily due to the average selling price of
homes closed increasing by more than the average cost of those homes. As a
percentage of homebuilding revenues, SG&A expenses decreased by 80 basis points
in the three months ended December 31, 2021 compared to the prior year period,
primarily due to the increase in homebuilding revenues.
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Southeast Region - Homebuilding revenues increased 24% in the three months endedDecember 31, 2021 compared to the prior year period, primarily due to increases in the average selling price of homes closed in all markets, as well as a slight increase in the number of homes closed. The region generated pre-tax income of$415.4 million in the three months endedDecember 31, 2021 compared to$247.2 million in the prior year period. Home sales gross profit percentage increased by 460 basis points in the three months endedDecember 31, 2021 compared to the prior year period, primarily due to the average selling price of homes closed increasing by more than the average cost of those homes. As a percentage of homebuilding revenues, SG&A expenses decreased by 90 basis points in the three months endedDecember 31, 2021 compared to the prior year period, primarily due to the increase in homebuilding revenues.East Region - Homebuilding revenues increased 7% in the three months endedDecember 31, 2021 compared to the prior year period, due to increases in the average selling price of homes closed in all markets, while the number of homes closed decreased, particularly in theAtlanta market. The region generated pre-tax income of$202.3 million in the three months endedDecember 31, 2021 compared to$170.7 million in the prior year period. Home sales gross profit percentage increased by 170 basis points in the three months endedDecember 31, 2021 compared to the prior year period, primarily due to the average selling price of homes closed increasing by more than the average cost of those homes. As a percentage of homebuilding revenues, SG&A expenses increased by 10 basis points in the three months endedDecember 31, 2021 compared to the prior year period.North Region - Homebuilding revenues increased 25% in the three months endedDecember 31, 2021 compared to the prior year period, primarily due to increases in the average selling price of homes closed in all markets, as well as increases in the number of homes closed in several markets. The region generated pre-tax income of$89.9 million in the three months endedDecember 31, 2021 compared to$62.7 million in the prior year period. Home sales gross profit percentage increased by 200 basis points in the three months endedDecember 31, 2021 compared to the prior year period, primarily due to the average selling price of homes closed increasing by more than the average cost of those homes. As a percentage of homebuilding revenues, SG&A expenses were unchanged in the three months endedDecember 31, 2021 compared to the prior year period as employee compensation and related costs increased at a similar rate as 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, 2021
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)
Northwest $ 667.3 $ 781.5 $ - $ 2.0 $ 1,450.8
Southwest 1,330.1 1,387.0 7.0 19.2 2,743.3
South Central 2,208.1 1,563.7 0.3 0.1 3,772.2
Southeast 2,222.0 1,209.9 13.0 - 3,444.9
East 1,296.4 820.5 - 1.4 2,118.3
North 1,032.1 519.2 5.3 1.8 1,558.4
Corporate and unallocated (1) 123.5 84.9 0.3 0.3 209.0
$ 8,879.5 $ 6,366.7 $ 25.9 $ 24.8 $ 15,296.9
As of September 30, 2021
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)
Northwest $ 609.6 $ 685.4 $ - $ 12.5 $ 1,307.5
Southwest 1,113.5 1,315.8 6.9 9.4 2,445.6
South Central 1,977.4 1,501.5 0.4 - 3,479.3
Southeast 2,002.4 1,160.1 16.1 - 3,178.6
East 1,124.6 792.3 1.3 1.4 1,919.6
North 901.4 460.4 5.3 1.8 1,368.9
Corporate and unallocated (1) 119.1 88.5 0.4 0.3 208.3
$ 7,848.0 $ 6,004.0 $ 30.4 $ 25.4 $ 13,907.8
__________
(1)Corporate and unallocated inventory consists primarily of capitalized interest and property taxes.
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Our land and lot position and homes in inventory at
As of December 31, 2021
Lots Controlled
Through Total
Land and Lot Land/Lots Homes
Land/Lots Purchase Owned and in
Owned (1) Contracts (2)(3) Controlled Inventory (4)
Northwest 10,500 32,300 42,800 3,000
Southwest 23,500 35,200 58,700 6,500
South Central 44,000 67,600 111,600 15,900
Southeast 26,400 129,900 156,300 15,500
East 18,100 98,200 116,300 8,400
North 9,400 56,300 65,700 5,500
131,900 419,500 551,400 54,800
24 % 76 % 100 %
As of September 30, 2021
Lots Controlled
Through Total
Land and Lot Land/Lots Homes
Land/Lots Purchase Owned and in
Owned (1) Contracts (2)(3) Controlled Inventory (4)
Northwest 9,000 31,400 40,400 2,600
Southwest 22,800 34,300 57,100 5,500
South Central 42,800 79,000 121,800 14,000
Southeast 26,700 125,500 152,200 13,600
East 17,300 83,100 100,400 7,300
North 9,200 49,200 58,400 4,800
127,800 402,500 530,300 47,800
24 % 76 % 100 %
___________________
(1)Land/lots owned included approximately 30,100 and 30,800 owned lots that are
fully developed and ready for home construction at December 31, 2021 and
September 30, 2021 , respectively. Land/lots owned also included land held for
development representing 600 and 1,300 lots at December 31, 2021 and
September 30, 2021 , respectively.
(2)The total remaining purchase price of lots controlled through land and lot
purchase contracts at December 31, 2021 and September 30, 2021 was $17.1 billion
and $15.5 billion , respectively, secured by earnest money deposits of $1.3
billion and $1.1 billion , respectively. The total remaining purchase price of
lots controlled through land and lot purchase contracts at December 31, 2021 and
September 30, 2021 included $1.5 billion and $1.6 billion , respectively, related
to lot purchase contracts with Forestar, secured by $141.5 million and $151.0
million , respectively, of earnest money.
(3)Lots controlled at December 31, 2021 included approximately 38,300 lots owned
or controlled by Forestar, 20,000 of which our homebuilding divisions have under
contract to purchase and 18,300 of which our homebuilding divisions have a right
of first offer to purchase. Of these, approximately 16,700 lots were in our
Southeast region, 6,900 lots were in our East region, 5,700 lots were in our
Southwest, 4,300 lots were in our South Central region, 3,400 lots were in our
North region and 1,300 lots were in our Northwest region. Lots controlled at
September 30, 2021 included approximately 39,200 lots owned or controlled by
Forestar, 21,000 of which our homebuilding divisions had under contract to
purchase and 18,200 of which our homebuilding divisions had a right of first
offer to purchase.
(4)Approximately 25,600 and 21,700 of our homes in inventory were unsold at
December 31, 2021 and September 30, 2021 , respectively. At December 31, 2021 ,
approximately 1,000 of our unsold homes were completed, of which approximately
100 homes had been completed for more than six months. At September 30, 2021 ,
approximately 900 of our unsold homes were completed, of which approximately 100
homes had been completed for more than six months. Homes in inventory exclude
approximately 1,800 model homes at both December 31, 2021 and September 30,
2021 .
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RESULTS OF OPERATIONS - FORESTAR
In fiscal 2018, we acquired 75% of the outstanding shares of Forestar and at
December 31, 2021 , we owned 63% of its outstanding shares. Forestar is a
publicly traded residential lot development company with operations in 55
markets across 23 states as of December 31, 2021 . Forestar's segment results are
presented on their historical cost basis, consistent with the manner in which
management evaluates segment performance. (See Note B to the accompanying
financial statements for additional Forestar segment information.)
Results of operations for the Forestar segment for the three months ended
Three Months Ended
December 31,
2021 2020
(In millions)
Residential lot sales $ 404.1 $ 307.0
Tract sales and other 3.5 0.1
Total revenues $ 407.6 $ 307.1
Cost of sales 334.2 262.9
Selling, general and administrative expense 21.5 15.5
Other (income) expense (1.6) (0.5)
Income before income taxes $ 53.5 $ 29.2
Residential land and lot sales primarily consist of the sale of single-family
lots to local, regional and national homebuilders. During the three months ended
December 31, 2021 and 2020, Forestar's lot sales, including the portion sold to
D.R. Horton and the revenues generated from those sales, were as follows:
Three Months Ended
December 31,
2021 2020
($ in millions)
Total residential single-family lots sold 4,516 3,567
Residential single-family lots sold toD.R. Horton 4,014
3,389
Residential lot sales revenues from sales to
SG&A expense for the three months endedDecember 31, 2021 and 2020 included charges of$1.0 million and$1.1 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. AtDecember 31, 2021 , Forestar owned directly or controlled through land and lot purchase contracts approximately 103,300 residential lots, of which 4,900 are fully developed. Approximately 38,300 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 , and 1,000 of these lots are under contract to sell to other builders. 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, 2021 and 2020.
Three Months Ended
2021 2020 % Change
Number of first-lien loans originated or brokered by
12,089 12,722 (5) %
Number of homes closed by D.R. Horton 18,396 18,739 (2) %
Percentage of D.R. Horton homes financed by DHI Mortgage 66 % 68 %
Number of total loans originated or brokered by
12,111 12,738 (5) %
Total number of loans originated or brokered by
12,414 13,073 (5) %
Captive business percentage 98 % 97 %
Loans sold by DHI Mortgage to third parties 13,071 13,458 (3) %
Three Months Ended December 31,
2021 2020 % Change
(In millions)
Loan origination and other fees $ 9.5 $ 11.1 (14) %
Gains on sale of mortgage loans and mortgage servicing rights 134.1 138.9 (3) %
Servicing income 0.5 2.4 (79) %
Total mortgage operations revenues 144.1 152.4 (5) %
Title policy premiums 40.2 34.8 16 %
Total revenues 184.3 187.2 (2) %
General and administrative expense 125.3 109.5 14 %
Other (income) expense (8.1) (6.4) 27 %
Financial services pre-tax income $ 67.1 $ 84.1 (20) %
Financial Services Operating Margin Analysis
Percentages of
Financial Services Revenues
Three Months Ended
December 31,
2021 2020
General and administrative expense 68.0 % 58.5 %
Other (income) expense (4.4) % (3.4) %
Financial services pre-tax income 36.4 % 44.9 %
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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, 2021 , the volume of first-lien loans originated or brokered byDHI Mortgage for our homebuyers decreased 5% from the prior year period due to a decrease in the number of homes closed by our homebuilding operations and in the percentage of homes closed for whichDHI Mortgage handled our homebuyers' financing. Homes closed by our homebuilding operations constituted 98% and 97% ofDHI Mortgage loan originations in the three months endedDecember 31, 2021 and 2020, respectively. These percentages reflectDHI Mortgage's consistent focus on the captive business provided by our homebuilding operations. The number of loans sold decreased 3% in the three months endedDecember 31, 2021 compared to the prior year period. Virtually all of the mortgage loans held for sale onDecember 31, 2021 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, 2021 , approximately 61% of our mortgage loans were sold directly to Fannie Mae, Freddie Mac or into securities backed byGinnie Mae , and 30% were sold to one other major financial entity. Changes in market conditions could result in a greater concentration of our mortgage sales in future periods to fewer financial entities and directly to Fannie Mae, Freddie Mac orGinnie Mae , and we may need to make other adjustments to our mortgage operations.
Financial Services Revenues and Expenses
Revenues from our mortgage operations decreased 5% to$144.1 million in the three months endedDecember 31, 2021 from$152.4 million in the prior year period, primarily due to the decrease in mortgage loan originations. Revenues from our title operations increased 16% to$40.2 million in the three months endedDecember 31, 2021 from$34.8 million in the prior year period, primarily due to an increase in the average premium collected on closing transactions. General and administrative (G&A) expense related to our financial services operations increased 14% to$125.3 million in the three months endedDecember 31, 2021 from$109.5 million in the prior year period. As a percentage of financial services revenues, G&A expense was 68.0% in the three months endedDecember 31, 2021 compared to 58.5% in the prior year period. The increase was primarily due to an increase in the number of employees to support increased volume in the fourth quarter of fiscal 2021 and expected increased volume for the remainder of fiscal 2022. Additionally, fluctuations in financial services G&A expense as a percentage of revenues can occur because some components of revenue fluctuate differently than loan volumes, and some expenses are not directly related to mortgage loan volume or to changes in the amount of revenue earned. Our financial services operations employed 2,942 and 2,403 people atDecember 31, 2021 and 2020, respectively.
Other income, net of other expense, included in our financial services operations consists primarily of the interest income of our mortgage subsidiary.
As a result of the revenue decrease from a lower volume of mortgage originations and an increase in employee related G&A expenses, pre-tax income from our financial services operations decreased 20% to$67.1 million in the three months endedDecember 31, 2021 from$84.1 million in the prior year period. 44
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RESULTS OF OPERATIONS - RENTAL
Our rental segment consists of multi-family and single-family rental operations. The multi-family rental operations develop, construct, lease and sell residential rental properties. We primarily focus on constructing garden style multi-family rental communities, which typically accommodate 200 to 400 dwelling units, in high growth suburban markets. The single-family rental operations primarily construct and lease single-family homes and then market the community for a bulk sale of rental homes. Multi-family and single-family rental property sales are recognized as revenues, and rental income is recognized as other income. Results of operations for the rental segment for the three months endedDecember 31, 2021 and 2020 were as follows: Three Months Ended December 31, 2021 2020 (In millions) Revenues Single-family rental$ 80.3 $ 31.8 Multi-family rental 76.2 - Total revenues 156.5 31.8 Cost of sales Single-family rental 36.4 17.8 Multi-family rental 36.4 - Total cost of sales 72.8 17.8 Selling, general and administrative expense 18.5 9.3 Other (income) expense (4.9) (3.9) Income before income taxes$ 70.1 $ 8.6 During the three months endedDecember 31, 2021 , we sold one multi-family rental property for$76.2 million (350 total units). There were no sales of multi-family rental properties during the prior year quarter. During the three months endedDecember 31, 2021 , we sold two single-family rental properties (225 total homes) for$80.3 million compared to one property sold (124 total homes) for$31.8 million in the prior year quarter. AtDecember 31, 2021 , our rental property inventory of$1.2 billion included$519.2 million of inventory related to our multi-family rental operations and$641.9 million of inventory related to our single-family rental operations. AtDecember 31, 2021 , we had 16 multi-family rental properties, consisting of 4,870 units, under active construction and one community, consisting of 130 units, that was substantially complete and in the lease-up phase. AtDecember 31, 2021 , our single-family rental properties (74 total communities) included 4,800 homes and finished lots, of which 1,100 homes were completed, and 3,400 expected lots that were unimproved or under development. AtSeptember 30, 2021 , our rental property inventory of$840.9 million included$425.1 million of assets related to our multi-family rental operations and$415.8 million of assets related to our single-family rental operations. AtSeptember 30, 2021 , we had 15 multi-family rental properties, consisting of 4,340 units, under active construction and one community, consisting of 350 units, that was substantially complete and in the lease-up phase. AtSeptember 30, 2021 , our single-family rental properties (55 total communities) included 2,650 homes and finished lots, of which 865 homes were completed, and 3,200 expected lots that were unimproved or under development. 45 -------------------------------------------------------------------------------- Table of Contents RESULTS OF OPERATIONS - OTHER BUSINESSES In addition to our homebuilding, Forestar, financial services and rental operations, we engage in other business activities through our subsidiaries. We conduct insurance-related operations, own non-residential real estate including ranch land and improvements and own and operate energy-related assets. The pre-tax income of all of our subsidiaries engaged in other business activities was$10.7 million in the three months endedDecember 31, 2021 compared to$6.2 million in the prior year period.
RESULTS OF OPERATIONS - CONSOLIDATED
Income before Income Taxes
Pre-tax income for the three months endedDecember 31, 2021 was$1.5 billion compared to$1.0 billion 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 average selling prices and an increase in home sales gross margin.
Income Taxes
Our income tax expense for the three months endedDecember 31, 2021 and 2020 was$351.5 million and$239.1 million , respectively. Our effective tax rate was 23.5% for the three months endedDecember 31, 2021 compared to 23.1% in the prior year period. The effective tax rates for both periods include an expense for state income taxes and tax benefits related to stock-based compensation and the federal energy efficient homes tax credit. The federal energy efficient homes tax credit expires for homes closed afterDecember 31, 2021 . Our deferred tax assets, net of deferred tax liabilities, were$141.7 million atDecember 31, 2021 compared to$159.5 million atSeptember 30, 2021 . We have a valuation allowance of$4.1 million and$4.2 million atDecember 31, 2021 andSeptember 30, 2021 , respectively, related to state deferred tax assets for net operating loss (NOL) carryforwards that are more likely than not to expire before being realized. We will continue to evaluate both the positive and negative evidence in determining the need for a valuation allowance with respect to our remaining state NOL carryforwards. 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. 46
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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 economic and market conditions. We have continued to increase our investments in homebuilding inventories and single-family and multi-family rental properties to expand our operations and grow our revenues and profitability. We are also returning capital to our shareholders through dividend payments and repurchases of our common stock. We are maintaining significant homebuilding cash balances to support the increased scale and level of activity in our business and to provide flexibility to adjust to changing conditions and opportunities. As ofDecember 31, 2021 , we had outstanding notes payable with varying maturities totaling an aggregate principal amount of$5.3 billion , with$1.8 billion payable within 12 months, including$1.3 billion outstanding under the mortgage repurchase facility. AtDecember 31, 2021 , our ratio of debt to total capital (notes payable divided by stockholders' equity plus notes payable) was 25.1% compared to 26.7% atSeptember 30, 2021 and 25.3% atDecember 31, 2020 . Our net debt to total capital (notes payable net of cash divided by stockholders' equity plus notes payable net of cash) was 15.2% atDecember 31, 2021 compared to 12.9% atSeptember 30, 2021 and 12.4% andDecember 31, 2020 . AtDecember 31, 2021 , our ratio of homebuilding debt to total capital (homebuilding notes payable divided by stockholders' equity plus homebuilding notes payable) was 17.3% compared to 17.8% atSeptember 30, 2021 and 17.3% atDecember 31, 2020 . Our net homebuilding debt to total capital (homebuilding notes payable net of cash divided by stockholders' equity plus homebuilding notes payable net of cash) was 6.9% atDecember 31, 2021 compared to 1.7% atSeptember 30, 2021 and 3.9% atDecember 31, 2020 . Over the long term, we intend to maintain our ratio of homebuilding debt to total capital below 30%, and we expect it to remain significantly lower than 30% throughout fiscal 2022. 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. AtDecember 31, 2021 , we had outstanding letters of credit of$253.5 million and surety bonds of$2.4 billion , issued by third parties to secure performance under various contracts. 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. 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) inJuly 2021 , registering debt and equity securities that may be issued from time to time in amounts to be determined. Forestar also has an effective shelf registration statement filed with theSEC inOctober 2021 , registering$750 million of equity securities, of which$300 million was reserved for sales under its at-the-market equity offering program that became effective inNovember 2021 . AtDecember 31, 2021 ,$748.2 million remained available for issuance under Forestar's shelf registration statement, of which$298.2 million was reserved for sales under its at-the-market equity offering program. 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. 47 -------------------------------------------------------------------------------- Table of Contents Capital Resources - Homebuilding
Cash and Cash Equivalents - At
Bank Credit Facility - We have a$2.19 billion senior unsecured homebuilding revolving credit facility with an uncommitted accordion feature that could increase the size of the facility to$3.0 billion , subject to certain conditions and availability of additional bank commitments. The facility also provides for the issuance of letters of credit with a sublimit equal to 100% of the revolving credit commitment. 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 isApril 20, 2026 . AtDecember 31, 2021 , there were no borrowings outstanding and$187.2 million of letters of credit issued under the revolving credit facility, resulting in available capacity of$2.0 billion . 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, 2021 , we were in compliance with all of the covenants, limitations and restrictions of our homebuilding revolving credit facility. Public Unsecured Debt - We have$3.15 billion principal amount of homebuilding senior notes outstanding as ofDecember 31, 2021 that mature fromSeptember 2022 throughOctober 2027 . The indentures governing our senior notes impose restrictions on the creation of secured debt and liens. AtDecember 31, 2021 , we were in compliance with all of the limitations and restrictions associated with our public debt obligations. Debt and Stock Repurchase Authorizations - InJuly 2019 , our Board of Directors authorized the repurchase of up to$500 million of debt securities. InApril 2021 , our Board of Directors authorized the repurchase of up to$1.0 billion of our common stock, replacing the prior authorization. During the three months endedDecember 31, 2021 , we repurchased 2.7 million shares of our common stock for$278.2 million . AtDecember 31, 2021 , the full amount of the debt repurchase authorization was remaining, and$268.0 million of the stock repurchase authorization was remaining. These authorizations have no expiration date.
Capital Resources - Forestar
The achievement of Forestar's long-term growth objectives will depend on its ability to obtain financing 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. AtDecember 31, 2021 , Forestar's ratio of debt to total capital (notes payable divided by stockholders' equity plus notes payable) was 40.0% compared to 41.0% atSeptember 30, 2021 and 42.3% atDecember 31, 2020 . Forestar's ratio of net debt to total capital (notes payable net of cash divided by stockholders' equity plus notes payable net of cash) was 33.9% compared to 35.2% atSeptember 30, 2021 and 31.8% atDecember 31, 2020 .
Cash and Cash Equivalents - At
Bank Credit Facility - Forestar has a$410 million senior unsecured revolving credit facility with an uncommitted accordion feature that could increase the size of the facility to$600 million , subject to certain conditions and availability of additional bank commitments. The facility also provides for the issuance of letters of credit with a sublimit equal to the greater of$100 million and 50% of the revolving credit commitment. Borrowings under the revolving credit facility are subject to a borrowing base calculation based on Forestar's book value of its real estate assets and unrestricted cash. Letters of credit issued under the facility reduce the available borrowing capacity. The maturity date of the facility isApril 16, 2025 . AtDecember 31, 2021 , there were no borrowings outstanding and$66.3 million of letters of credit issued under the revolving credit facility, resulting in available capacity of$343.7 million . 48 -------------------------------------------------------------------------------- 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 - As ofDecember 31, 2021 , Forestar had$700 million principal amount of senior notes issued pursuant to Rule 144A and Regulation S under the Securities Act of 1933, as amended, which represent unsecured obligations of Forestar. These notes include$400 million principal amount of 3.85% senior notes that mature inMay 2026 and$300 million principal amount of 5.0% senior notes that mature inMarch 2028 . 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, 2021 , Forestar was in compliance with all of the covenants, limitations and restrictions of its revolving credit facility and senior note obligations. Debt Repurchase Authorization - InApril 2020 , Forestar's Board of Directors authorized the repurchase of up to$30 million of Forestar's debt securities. All of the$30 million authorization was remaining atDecember 31, 2021 , and the authorization has no expiration date. Issuance of Common Stock - During the three months endedDecember 31, 2021 , Forestar issued 84,547 shares of common stock under its at-the-market equity offering program for proceeds of$1.7 million , net of commissions and other issuance costs totaling$0.1 million . AtDecember 31, 2021 ,$748.2 million remained available for issuance under Forestar's shelf registration statement, of which$298.2 million was reserved for sales under its at-the-market equity offering program.
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$1.4 billion ; however, the capacity automatically increases during certain higher volume periods and can be further increased through additional commitments. The total capacity of the facility atDecember 31, 2021 was$1.633 billion , and its maturity date isFebruary 18, 2022 .DHI Mortgage expects to renew and extend the maturity date of the facility. As ofDecember 31, 2021 ,$1.7 billion of mortgage loans held for sale with a collateral value of$1.7 billion were pledged under the mortgage repurchase facility. As a result of advance paydowns totaling$436.5 million ,DHI Mortgage had an obligation of$1.3 billion outstanding under the mortgage repurchase facility atDecember 31, 2021 at a 2.1% 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, 2021 ,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. 49
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Capital Resources - Rental
Cash and Cash Equivalents - AtDecember 31, 2021 , cash and cash equivalents of our rental operations segment totaled$44.2 million . During fiscal 2021 and through the first quarter of fiscal 2022, we substantially increased the investment in our rental operations. The inventory in our rental segment totaled$1.2 billion atDecember 31, 2021 compared to$840.9 million atSeptember 30, 2021 and$385.6 million atDecember 31, 2020 . To date, we have funded our rental operations with capital from our homebuilding operations. Our rental operations had no debt outstanding atDecember 31, 2021 ; however, we are currently exploring bank debt financing to fund a portion of the expected future growth. Over the longer term, as our rental operations continue to grow, we plan to evaluate additional capital sources to fund future growth opportunities.
Operating Cash Flow Activities
In the three months endedDecember 31, 2021 , net cash used in operating activities was$174.1 million compared to$252.1 million in the prior year period. Cash used in operating activities in the current year period primarily consisted of$255.9 million and$114.7 million of cash used in our rental and homebuilding segments, respectively, partially offset by$247.5 million and$5.8 million of cash provided by our financial services and Forestar segments. The most significant source of cash provided by operating activities in both periods was net income. Cash used to increase construction in progress and finished home inventory was$1.0 billion in the current year period compared to$591.2 million in the prior year period. In both periods, the expenditures were made to increase our homes in inventory in response to the strength of homebuyer demand. Cash used to increase residential land and lots was$340.7 million in the current year period compared to$716.8 million in the prior year period. Of these amounts,$55.5 million and$218.5 million , respectively, related to Forestar. During the three months endedDecember 31, 2021 , we increased our single-family and multi-family rental properties by$319.5 million , which is reflected as cash used in operating activities. Prior to the change in presentation of rental operations, as discussed in Note A to the accompanying financial statements, cash activities related to rental properties were presented as investing activities. During the three month period endedDecember 31, 2020 , expenditures related to rental properties were$86.2 million and are reflected as cash used in investing activities.
Investing Cash Flow Activities
In the three months endedDecember 31, 2021 , net cash used in investing activities was$26.5 million compared to$91.4 million in the prior year period. In the current year period, uses of cash included purchases of property and equipment totaling$30.9 million . In the prior year period, uses of cash included expenditures related to our rental operations totaling$86.2 million , the 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 .
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 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, 2021 , net cash used in financing activities was$572.0 million , consisting primarily of cash used to repurchase shares of our common stock of$303.8 million , net payments of$234.6 million on our mortgage repurchase facility and payment of cash dividends totaling$80.1 million . During the three months 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. 50
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During the three months endedDecember 31, 2021 , our Board of Directors approved a quarterly cash dividend of$0.225 per common share, which was paid onDecember 15, 2021 to stockholders of record onDecember 6, 2021 . InJanuary 2022 , our Board of Directors approved a quarterly cash dividend of$0.225 per common share, payable onFebruary 25, 2022 to stockholders of record onFebruary 17, 2022 . Cash dividends of$0.20 per common share were approved and paid in each quarter of fiscal 2021. 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.
SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION
As ofDecember 31, 2021 ,D.R. Horton, Inc. had$3.15 billion principal amount of homebuilding senior notes outstanding due throughOctober 2027 and no amounts outstanding on its homebuilding revolving credit facility. All of the homebuilding senior notes and the homebuilding revolving credit facility are fully and unconditionally guaranteed, on a joint and several basis, by certain subsidiaries 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 operations, financial services operations, multi-family residential construction and certain other subsidiaries do not guarantee the homebuilding senior notes or the homebuilding revolving credit facility (collectively, Non-Guarantor Subsidiaries). 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 enforceability of the obligations of the Guarantor Subsidiaries under their guarantees may be subject to review under applicable federal or state laws relating to fraudulent conveyance or transfer, voidable preference and similar laws affecting the rights of creditors generally. In certain circumstances, a court could void the guarantees, subordinate amounts owing under the guarantees or order other relief detrimental to the holders of our guaranteed obligations. 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. 51 -------------------------------------------------------------------------------- Table of Contents 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 2021 2021 (In millions) Assets Cash$ 2,073.2 $ 2,893.3 Inventories 15,683.3 14,203.2 Amount due from Non-Guarantor Subsidiaries 704.4 592.4 Total assets 20,710.2 19,724.9 Liabilities & Stockholders' Equity Notes payable$ 3,226.7 $ 3,214.0 Total liabilities 6,493.5 6,157.4 Stockholders' equity 14,216.7 13,567.5 Three Months Ended Year Ended December 31, September 30, Summarized Statement of Operations Data 2021 2021 (In millions) Revenues$ 6,676.1 $ 26,566.8 Cost of sales 4,853.3 19,824.1 Selling, general and administrative expense 483.5 1,889.4 Income before income taxes 1,337.1 4,825.6 Net income 1,023.8 3,786.5 52
-------------------------------------------------------------------------------- Table of Contents CRITICAL ACCOUNTING POLICIES
As disclosed in our annual report on Form 10-K for the fiscal year ended
As disclosed in our critical accounting policies in our Form 10-K for the fiscal year endedSeptember 30, 2021 , our reserves for construction defect claims include the estimated costs of both known claims and anticipated future claims. AtDecember 31, 2021 andSeptember 30, 2021 , we had reserves for approximately 410 and 380 pending construction defect claims, respectively, and no individual existing claim was material to our financial statements. During the three months endedDecember 31, 2021 , we established reserves for approximately 70 new construction defect claims and resolved 40 construction defect claims for a total cost of$4.3 million . 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 .
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 pre-tax income in the third and
fourth quarters of our fiscal year. The seasonal nature of our business can also
cause significant variations in the working capital requirements for our
homebuilding, lot development, financial services and rental 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.
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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 the Securities and Exchange Commission ,
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, lot development and rental housing
industries and changes in economic, real estate or 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, lot and rental inventory;
•our ability to effect our growth strategies, acquisitions or investments
successfully;
•the impact of an inflationary, deflationary or higher interest rate
environment;
•supply shortages and other risks of acquiring land, building materials and
skilled labor;
•the effects of public health issues such as a major epidemic or pandemic,
including the impact of COVID-19 on the economy and our businesses;
•the effects of weather conditions and natural disasters on our business and
financial results;
•home warranty and construction defect claims;
•the effects of health and safety incidents;
•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 industries in which we operate;
•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;
•actions by activist stockholders; 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 ended September 30, 2021 , including the section entitled
"Risk Factors," which is filed with the SEC .
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