NOTES PAYABLE

The Company’s notes payable at their principal amounts, net of unamortized discounts and debt issuance costs, consist of the following:



	September 30,
	2018		2017
	(In millions)
Homebuilding:
Unsecured:
Revolving credit facility, maturing 2023	$	—	$	—
3.625% senior notes due 2018	—		399.7
3.75% senior notes due 2019	499.6		498.8
4.0% senior notes due 2020	498.8		497.9
2.55% senior notes due 2020	397.9		—
4.375% senior notes due 2022	348.4		348.1
4.75% senior notes due 2023	298.7		298.4
5.75% senior notes due 2023	398.0		397.6
Other secured notes	4.5		11.1
	2,445.9		2,451.6
Forestar:
Unsecured:
Revolving credit facility, maturing 2021	—
3.75% convertible senior notes due 2020	119.9
	119.9
Financial Services:
Mortgage repurchase facility, maturing 2019	637.7		420.0
	$	3,203.5	$	2,871.6

Debt issuance costs that were deducted from the carrying amounts of the homebuilding senior notes totaled $8.5 million and $9.5 million at September 30, 2018 and 2017, respectively. These costs are capitalized into inventory as they are amortized. Forestar’s 3.75% convertible senior notes due 2020 include an unamortized fair value adjustment of $8.2 million at September 30, 2018.

As of September 30, 2018, maturities of consolidated notes payable, assuming the mortgage repurchase facility is not extended or renewed, are $1.1 billion in fiscal 2019, $618.9 million in fiscal 2020, $400.0 million in fiscal 2021, $350.0 million in fiscal 2022 and $700.0 million in fiscal 2023.

Homebuilding:

The Company has a senior unsecured homebuilding revolving credit facility which was amended in September 2018 to increase its capacity from $1.275 billion to $1.325 billion and to extend its maturity date to September 25, 2023. The facility has an uncommitted accordion feature that could increase the size of the facility to $1.9 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 approximately 50% 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 or London Interbank Offered Rate (LIBOR) plus an applicable margin, as defined in the credit agreement governing the facility. Borrowings and repayments under the facility totaled $1.8 billion each during fiscal 2018. At September 30, 2018, there were no borrowings outstanding and $107.2 million of letters of credit issued under the revolving credit facility.

The Company’s homebuilding revolving credit facility imposes restrictions on its operations and activities, including requiring the maintenance of a maximum allowable ratio of debt to tangible net worth and a borrowing base restriction if the Company’s ratio of debt to tangible net worth 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 and the indenture governing the senior notes also impose restrictions on the creation of secured debt and liens. At September 30, 2018, the Company was in compliance with all of the covenants, limitations and restrictions of its homebuilding revolving credit facility and public debt obligations.

The Company has an automatically effective universal shelf registration statement filed with the Securities and Exchange Commission (SEC) in August 2018, registering debt and equity securities that the Company may issue from time to time in amounts to be determined.

In December 2017, the Company issued $400 million principal amount of 2.55% senior notes due December 1, 2020, with interest payable semi-annually. The notes represent unsecured obligations of the Company. In December 2017, the Company redeemed $400 million principal amount of its 3.625% senior notes due February 2018. The senior notes were redeemed at a price equal to 100% of the principal amount of the notes, together with accrued and unpaid interest.

The key terms of the Company’s homebuilding senior notes outstanding as of September 30, 2018 are summarized below.



Notes Payable	Principal Amount	Date Issued	Date Due	Redeemable Prior to Maturity (1)	Effective Interest Rate (2)
	(In millions)
3.75% senior notes	$500.0	February 2014	March 1, 2019	Yes	3.9%
4.0% senior notes	$500.0	February 2015	February 15, 2020	Yes	4.2%
2.55% senior notes	$400.0	December 2017	December 1, 2020	Yes	2.8%
4.375% senior notes	$350.0	September 2012	September 15, 2022	Yes	4.5%
4.75% senior notes	$300.0	February 2013	February 15, 2023	Yes	4.9%
5.75% senior notes	$400.0	August 2013	August 15, 2023	Yes	5.9%

_____________


(1)	The Company may redeem the notes in whole at any time or in part from time to time, at a redemption price equal to the greater of 100% of their principal amount or the present value of the remaining scheduled payments on the redemption date, plus accrued and unpaid interest.


(2)	Interest is payable semi-annually on each of the series of senior notes. The annual effective interest rate is calculated after giving effect to the amortization of debt issuance costs.

All series of homebuilding senior notes and borrowings under the revolving credit facility are senior obligations and rank pari passu in right of payment to all existing and future unsecured indebtedness and senior to all existing and future indebtedness expressly subordinated to them. The homebuilding senior notes and borrowings under the revolving credit facility are guaranteed by entities that hold approximately 85% of the Company’s assets. Upon the occurrence of both a change of control of the Company and a ratings downgrade event, as defined in the indenture governing its senior notes, the Company would be required in certain circumstances to offer to repurchase these notes at 101% of their principal amount, along with accrued and unpaid interest. Also, a change of control as defined in the revolving credit facility would constitute an event of default under the revolving credit facility, which could result in the acceleration of any borrowings outstanding under the facility and the termination of the commitments thereunder.

Effective August 1, 2018, the Board of Directors authorized the repurchase of up to $500 million of the Company’s debt securities effective through September 30, 2019. All of the $500 million authorization was remaining at September 30, 2018.

Forestar:

In August 2018, Forestar entered into a $380 million senior unsecured revolving credit facility with an uncommitted accordion feature that could increase the size of the facility to $570 million, subject to certain conditions and availability of additional bank commitments. The facility also provides for the issuance of letters of credit with a sublimit equal to the greater of $100 million and 50% of the revolving credit commitment. Borrowings under the revolving credit facility are subject to a borrowing base based on Forestar’s book value of its real estate assets and unrestricted cash. The maturity date of the facility is August 16, 2021. The maturity date of the revolving credit facility may be extended by up to one year on up to three occasions, subject to the approval of lenders holding a majority of the commitments. At September 30, 2018, there were no borrowings outstanding and $4.5 million of letters of credit issued under the revolving credit facility.

The revolving credit facility includes customary affirmative and negative covenants, events of default and financial covenants. The financial covenants require Forestar to maintain a minimum level of tangible net worth, a minimum level of liquidity and a maximum allowable leverage ratio. These covenants are measured as defined in the credit agreement governing the facility and are reported to the lenders quarterly. A failure to comply with these financial covenants could allow the lending banks to terminate the availability of funds under the revolving credit facility or cause any outstanding borrowings to become due and payable prior to maturity. At September 30, 2018, Forestar was in compliance with all of the covenants, limitations and restrictions of its revolving credit facility.

In August 2018, in connection with entering into the revolving credit facility agreement, Forestar amended its letter of credit facility agreement. Under the amendment, outstanding letters of credit issued by one bank were transferred into Forestar’s new revolving credit facility. The amendment reduced the capacity of the letter of credit facility from $30.0 million to $15.4 million and provided for a corresponding release of cash collateral in the amount of $13.8 million. The amendment also extended the maturity date of the facility to October 5, 2019. At September 30, 2018, letters of credit outstanding under the letter of credit facility totaled $15.4 million, secured by $16.2 million in cash, which is included in restricted cash in the consolidated balance sheet.

On October 5, 2017, Forestar had $120 million principal amount outstanding of 3.75% convertible senior notes due 2020. The completion of the acquisition resulted in a fundamental change in the notes as described in the related note indentures and therefore, Forestar offered to purchase all or any part of every holder’s convertible senior notes for a price in cash equal to 100% of the aggregate principal amount of the notes, plus accrued and unpaid interest, if any, to the date of repurchase. As a result, Forestar purchased $1.1 million of the aggregate principal amount of the notes. Also, prior to the acquisition, upon conversion of the notes each holder was entitled to receive 40.8351 shares of former Forestar common stock per $1,000 principal amount of notes surrendered for conversion. In connection with the acquisition, the conversion ratio was adjusted in accordance with the indenture governing the convertible notes such that each holder is now entitled to receive $579.77062 in cash and 8.17192 shares of new Forestar common stock per $1,000 principal amount of notes surrendered for conversion.

Forestar’s revolving credit facility and its convertible senior notes are not guaranteed by D.R. Horton, Inc. or any of the subsidiaries that guarantee the Company’s homebuilding debt.

Financial Services:

The Company’s mortgage subsidiary, DHI Mortgage, has a mortgage repurchase facility that is accounted for as a secured financing. The mortgage repurchase facility provides financing and liquidity to DHI Mortgage by facilitating purchase transactions in which DHI Mortgage transfers eligible loans to the counterparties against the transfer of funds by the counterparties, thereby becoming purchased loans. 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 $600 million; however, the capacity increases, without requiring additional commitments, to $725 million for approximately 30 days at each quarter end and to $800 million for approximately 45 days at fiscal year end. The capacity can also be increased to $1.0 billion subject to the availability of additional commitments. The maturity date of the facility is February 22, 2019.

As of September 30, 2018, $758.6 million of mortgage loans held for sale with a collateral value of $735.6 million were pledged under the mortgage repurchase facility. As a result of advance paydowns totaling $97.9 million, DHI Mortgage had an obligation of $637.7 million outstanding under the mortgage repurchase facility at September 30, 2018 at a 4.1% annual interest rate.

The mortgage repurchase facility is not guaranteed by D.R. Horton, Inc. or any of the subsidiaries that guarantee the Company’s homebuilding debt. The facility contains financial covenants as to the mortgage subsidiary’s minimum required tangible net worth, its maximum allowable ratio of debt to tangible net worth and its minimum required liquidity. These covenants are measured and reported to the lenders monthly. At September 30, 2018, 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 the Company’s 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.