(EDGAR Online via COMTEX) -- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 ended September 30, 2019. Some of the information contained in this discussion and analysis constitutes forward-looking statements that involve risks and uncertainties. Actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to these differences include, but are not limited to, those described in the "Forward-Looking Statements" section following this discussion.
D.R. Horton, Inc. is the largest homebuilding company in the United States as measured by number of homes closed. We construct and sell homes through our operating divisions in 88 markets across 29 states, primarily under the names of D.R. Horton, America's Builder; Emerald Homes; Express Homes and Freedom Homes. Our common stock is included in the S&P 500 Index and listed on the New 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 to D.R. Horton, Inc., a Delaware corporation, and its predecessors and subsidiaries.
Our business operations consist of homebuilding, a majority-owned residential lot development company, financial services and other activities. Our homebuilding operations are our core business and primarily include the construction and sale of single-family homes with sales prices generally ranging from $100,000 to more than $1,000,000, with an average closing price of $297,600 during the nine months ended June 30, 2020. Approximately 91% of our home sales revenue in the nine months ended June 30, 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.
During fiscal 2018, we acquired 75% of the outstanding shares of Forestar Group Inc. (Forestar), a publicly traded residential lot development company listed on the New York Stock Exchange under the ticker symbol "FOR." Forestar is a component 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. At June 30, 2020, we owned 65% of Forestar's outstanding common stock.
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 and closing services, primarily to our homebuyers.
In addition to our homebuilding, Forestar and financial services operations, we have subsidiaries that engage in other business activities. These subsidiaries conduct insurance-related operations, construct and own income-producing multi-family rental properties, own non-residential real estate including ranch land and improvements and own and operate oil and gas related assets. The operating results of these subsidiaries are immaterial for separate reporting and therefore are grouped together and presented as other. One of these subsidiaries, DHI Communities, develops, constructs and owns multi-family residential properties that produce rental income. DHI Communities is primarily focused on constructing garden style multi-family products, which typically accommodate 200 to 400 dwelling units, in high growth suburban markets. After DHI Communities has completed construction and achieved a stabilized occupancy rate, the property is typically marketed for sale. At June 30, 2020 and September 30, 2019, our consolidated balance sheets included $224.8 million and $204.0 million, respectively, of assets owned by DHI Communities. The combined assets of all of our subsidiaries engaged in other business activities totaled $361.3 million and $317.9 million at June 30, 2020 and September 30, 2019, respectively.
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Fiscal Year-to-Date Operating Results
During the nine months ended June 30, 2020, our number of homes closed and home sales revenues increased 10% and 11%, respectively, compared to the prior year period, and our consolidated revenues increased 11% to $13.9 billion compared to $12.6 billion in the prior year period. Our pre-tax income was $1.9 billion in the nine months ended June 30, 2020 compared to $1.5 billion in the prior year period, and our pre-tax operating margin was 13.9% compared to 11.7%. Net income was $1.5 billion in the nine months ended June 30, 2020 compared to $1.1 billion in the prior year period. The current nine month period results include a tax benefit of $77.6 million related to the retroactive reinstatement of the federal energy efficient homes tax credit.
Cash provided by our homebuilding operations was $1.2 billion in the nine months ended June 30, 2020 compared to $605.7 million in the prior year period. In the trailing twelve months ended June 30, 2020, our return on equity (ROE) was 19.9% compared to 17.3% in the prior year period, and our homebuilding return on inventory (ROI) was 21.6% compared to 18.1%. ROE is calculated as net income attributable to D.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 66% of the lots owned and controlled at June 30, 2020 compared to 60% at September 30, 2019 and 61% at June 30, 2019. Our focus on increasing the controlled portion of our finished lot pipeline has benefited from our relationship with Forestar, our majority-owned lot development company.
During the latter part of March 2020, the impacts of the COVID-19 pandemic
During April 2020 when restrictive stay-at-home orders were in place for many markets across the United States, we experienced increases in sales cancellations and decreases in sales orders, and net sales orders for April were 1% lower than the same month in the prior year. However, as economic activity began to resume and restrictive orders began to be lifted, our weekly sales pace during May and June increased significantly, and our cancellation rate returned to normal levels. In both May and June, our net sales orders increased over 50% compared to the prior year periods. For the third quarter of fiscal 2020, our net sales orders increased by 38% compared to the prior year quarter.
We believe the increase in demand in May and June was fueled by increased buyer urgency due to lower interest rates on mortgage loans, the limited supply of homes at affordable price points across most of our markets and to some extent the lower levels of home sales from mid-March through early April, which caused some pent-up demand. We were and remain well-positioned for this increased demand with our affordable product offerings, lot supply and housing inventory, particularly completed homes and those close to completion.
However, even with the resurgence of demand in May and June, we remain cautious as to the impact C-19 may have on our operations and on the overall economy in the future. There is significant uncertainty regarding the extent to which and how long C-19 and its related effects will impact the U.S. economy and level of employment, capital markets, secondary mortgage markets, consumer confidence, demand for our homes and availability 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 spread 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 these 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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Our operating strategy focuses on enhancing long-term value to our shareholders by leveraging our financial and competitive position in our core homebuilding business to increase the returns on our inventory investments and generate strong profitability and cash flows, while managing risk and maintaining financial flexibility to navigate uncertain economic conditions and make opportunistic strategic investments. We have made operational adjustments as a result of the COVID-19 pandemic; however, our strategy remains consistent and includes the following initiatives:
We believe our operating strategy, which has produced positive results in recent years, will allow us to successfully operate through an uncertain economic environment to maintain and improve our financial and competitive position and balance sheet strength. However, we cannot provide any assurances that the initiatives listed above will continue to be successful, and we may need to adjust components of our strategy to meet future market conditions.
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Key financial results as of and for the three months ended June 30, 2020, as compared to the same period of 2019, were as follows:
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RESULTS OF OPERATIONS - HOMEBUILDING We conduct our homebuilding operations in the geographic regions, states and markets listed below, and we conduct our financial services operations in many of these markets. Our homebuilding operating divisions are aggregated into six reporting segments, also referred to as reporting regions, which comprise the markets below. Our financial statements and the notes thereto contain additional information regarding segment performance. State Reporting Region/Market State Reporting Region/Market East Region Southeast Region Delaware Central Delaware Alabama Birmingham Northern Delaware Huntsville Georgia Savannah Mobile/Baldwin County Maryland Baltimore Montgomery Suburban Washington, D.C. Tuscaloosa New Jersey Northern New Jersey Florida Fort Myers/Naples Southern New Jersey Gainesville North Carolina Asheville Jacksonville Charlotte Lakeland Greensboro/Winston-Salem Melbourne/Vero Beach Raleigh/Durham Miami/Fort Lauderdale Wilmington Ocala Pennsylvania Philadelphia Orlando South Carolina Charleston Pensacola/Panama City Columbia Port St. Lucie Greenville/Spartanburg Tampa/Sarasota Hilton Head Volusia County Myrtle Beach West Palm Beach Virginia Northern Virginia Georgia Atlanta Southern Virginia Augusta Mississippi Gulf Coast Midwest Region Tennessee Chattanooga Colorado Denver Knoxville Fort Collins Memphis Illinois Chicago Nashville Indiana Fort Wayne Indianapolis West Region Iowa Des Moines California Bakersfield Minnesota Minneapolis/St. Paul Bay Area Ohio Cincinnati Fresno Columbus Los Angeles County Modesto/Merced South Central Region Riverside County Louisiana Baton Rouge Sacramento Lake Charles/Lafayette San Bernardino County Oklahoma Oklahoma City San Diego County Texas Austin Hawaii Maui Bryan/College Station Oahu Dallas Nevada Las Vegas Fort Worth Reno Houston Oregon Bend Killeen/Temple/Waco Portland/Salem Midland/Odessa Utah Salt Lake City New Braunfels/San Marcos Washington Seattle/Tacoma/Everett/Olympia San Antonio Spokane Vancouver Southwest Region Arizona Phoenix Tucson New Mexico Albuquerque
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The following tables and related discussion set forth key operating and financial data for our homebuilding operations by reporting segment as of and for the three and nine months ended June 30, 2020 and 2019.
Net Sales Orders (1) Three Months Ended June 30, Net Homes Sold Value (In millions) Average Selling Price % % % . . .
Jul 30, 2020
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