M.D.C. HOLDINGS, INC. [MDC] Filings

10-Q 1 mdc-20210930.htm 10-Q mdc-20210930

City

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_____________________________________________

FORM 10-Q

(Mark One)


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2021


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File No. 1-8951

M.D.C. HOLDINGS, INC.

(Exact name of Registrant as specified in its charter)


Delaware			84-0622967
(State or other jurisdiction of incorporation or organization)			(I.R.S. employer identification no.)


4350 South Monaco Street, Suite 500									80237
Denver, Colorado									(Zip code)
(Address of principal executive offices)

(303) 773-1100

(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, $.01 par value

552676108

New York Stock Exchange

6% Senior Notes due January 2043

552676AQ1

New York Stock Exchange

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer

☒

Accelerated Filer

☐

Non-Accelerated Filer

☐

Smaller Reporting Company

☐

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of October 26, 2021, 70,679,388 shares of M.D.C. Holdings, Inc. common stock were outstanding.

Table of Contents

M.D.C. HOLDINGS, INC.

FORM 10-Q

FOR THE QUARTER ENDED September 30, 2021

INDEX


		Page No.
Part I. Financial Information:

Item 1.	Unaudited Consolidated Financial Statements:

	Consolidated Balance Sheets at September 30, 2021 and December 31, 2020	1

	Consolidated Statements of Operations and Comprehensive Income for the three and nine months ended September 30, 2021 and 2020	2

	Consolidated Statements of Changes in Stockholders’ Equity for the nine months ended September 30, 2021 and 2020	3

	Consolidated Statements of Cash Flows for the nine months ended September 30, 2021 and 2020	5

	Notes to Unaudited Consolidated Financial Statements	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	38

Item 4.	Controls and Procedures	38

Part II. Other Information:

Item 1.	Legal Proceedings	39

Item 1A.	Risk Factors	39

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	39

Item 6.	Exhibits	40

Signature		41

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PART I

Item 1. Unaudited Consolidated Financial Statements

M.D.C. HOLDINGS, INC.

Consolidated Balance Sheets


	September 30, 2021		December 31, 2020

	(Dollars in thousands, except per share amounts)
ASSETS
Homebuilding:
Cash and cash equivalents	$	761,715	$	411,362
Restricted cash	12,047		15,343
Trade and other receivables	125,556		72,466
Inventories:
Housing completed or under construction	1,948,211		1,486,587
Land and land under development	1,464,603		1,345,643
Total inventories	3,412,814		2,832,230
Property and equipment, net	61,590		61,880
Deferred tax asset, net	16,301		11,454
Prepaids and other assets	105,860		101,685
Total homebuilding assets	4,495,883		3,506,420
Financial Services:
Cash and cash equivalents	93,884		77,267

Mortgage loans held-for-sale, net	248,921		232,556
Other assets	35,716		48,677
Total financial services assets	378,521		358,500
Total Assets	$	4,874,404	$	3,864,920
LIABILITIES AND EQUITY
Homebuilding:
Accounts payable	$	154,376	$	98,862
Accrued and other liabilities	334,712		300,735
Revolving credit facility	10,000		10,000
Senior notes, net	1,607,658		1,037,391
Total homebuilding liabilities	2,106,746		1,446,988
Financial Services:
Accounts payable and accrued liabilities	93,880		95,630
Mortgage repurchase facility	215,794		202,390
Total financial services liabilities	309,674		298,020
Total Liabilities	2,416,420		1,745,008
Stockholders' Equity
Preferred stock, $0.01 par value; 25,000,000 shares authorized; none issued or outstanding	—		—
Common stock, $0.01 par value; 250,000,000 shares authorized; 70,679,612 and 64,851,126 issued and outstanding at September 30, 2021 and December 31, 2020, respectively	707		649
Additional paid-in-capital	1,697,435		1,407,597
Retained earnings	759,842		711,666
Total Stockholders' Equity	2,457,984		2,119,912
Total Liabilities and Stockholders' Equity	$	4,874,404	$	3,864,920

The accompanying Notes are an integral part of these Unaudited Consolidated Financial Statements.

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M.D.C. HOLDINGS, INC.

Consolidated Statements of Operations and Comprehensive Income


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020

	(Dollars in thousands, except per share amounts)
Homebuilding:
Home sale revenues	$	1,257,701	$	1,000,549	$	3,667,332	$	2,584,392
Home cost of sales	(962,078)		(795,172)		(2,827,147)		(2,061,608)


Gross profit	295,623		205,377		840,185		522,784
Selling, general and administrative expenses	(120,116)		(103,632)		(363,970)		(285,269)
Loss on debt retirement	(12,150)		—		(12,150)		—
Interest and other income	3,149		756		4,984		3,365
Other expense	(1,354)		(851)		(2,881)		(4,640)
Homebuilding pretax income	165,152		101,650		466,168		236,240

Financial Services:
Revenues	43,104		36,803		121,445		91,653
Expenses	(16,377)		(13,294)		(47,922)		(36,401)
Other income (expense), net	813		859		2,855		(5,274)
Financial services pretax income	27,540		24,368		76,378		49,978

Income before income taxes	192,692		126,018		542,546		286,218
Provision for income taxes	(46,738)		(27,080)		(131,550)		(66,124)
Net income	$	145,954	$	98,938	$	410,996	$	220,094

Comprehensive income	$	145,954	$	98,938	$	410,996	$	220,094

Earnings per share:
Basic	$	2.07	$	1.42	$	5.83	$	3.21
Diluted	$	1.99	$	1.38	$	5.62	$	3.12

Weighted average common shares outstanding:
Basic	70,301,085		68,977,965		70,130,853		68,179,403
Diluted	72,800,011		71,090,903		72,770,432		70,167,443

Dividends declared per share	$	0.40	$	0.31	$	1.17	$	0.92

The accompanying Notes are an integral part of these Unaudited Consolidated Financial Statements.

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M.D.C. HOLDINGS, INC.

Consolidated Statements of Changes in Stockholders’ Equity

(Dollars in thousands, except share amounts)


	Nine Months Ended September 30, 2021
	Common Stock			Additional Paid-in Capital		Retained Earnings		Total
	Shares	Amount
Balance at December 31, 2020	64,851,126	$	649	$	1,407,597	$	711,666	$	2,119,912
Net Income	—	—		—		110,690		110,690
Shares issued under stock-based compensation programs, net	221,303	2		1,007		—		1,009
Cash dividends declared	—	—		—		(25,978)		(25,978)
Stock dividend declared	5,192,776	52		279,579		(280,318)		(687)
Stock-based compensation expense	—	—		9,926		—		9,926

Balance at March 31, 2021	70,265,205	$	703	$	1,698,109	$	516,060	$	2,214,872
Net Income	—	—		—		154,352		154,352
Shares issued under stock-based compensation programs, net	358,993	3		(16,546)		—		(16,543)
Cash dividends declared	—	—		—		(28,248)		(28,248)
Stock-based compensation expense	—	—		8,126		—		8,126
Forfeiture of restricted stock	(4,560)	—		—		—		—
Balance at June 30, 2021	70,619,638	$	706	$	1,689,689	$	642,164	$	2,332,559
Net Income	—	—		—		145,954		145,954
Shares issued under stock-based compensation programs, net	69,512	1		(20)		—		(19)
Cash dividends declared	—	—		—		(28,276)		(28,276)
Stock-based compensation expense	—	—		7,766		—		7,766
Forfeiture of restricted stock	(9,538)	—		—		—		—
Balance at September 30, 2021	70,679,612	$	707	$	1,697,435	$	759,842	$	2,457,984

The accompanying Notes are an integral part of these Unaudited Consolidated Financial Statements.

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M.D.C. HOLDINGS, INC.

Consolidated Statements of Changes in Stockholders’ Equity (Continued)

(Dollars in thousands, except share amounts)


	Nine Months Ended September 30, 2020
	Common Stock			Additional Paid-in Capital		Retained Earnings		Total
	Shares	Amount
Balance at December 31, 2019	62,574,961	$	626	$	1,348,733	$	433,126	$	1,782,485
Cumulative effect of newly adopted accounting standards	—	—		—		(34)		(34)
Balance at January 1, 2020	62,574,961	626		1,348,733		433,092		1,782,451
Net Income	—	—		—		36,760		36,760
Shares issued under stock-based compensation programs, net	477,582	5		8,189		—		8,194
Cash dividends declared	—	—		—		(20,768)		(20,768)
Stock-based compensation expense	—	—		4,440		—		4,440
Forfeiture of restricted stock	(48)	—		—		—		—
Balance at March 31, 2020	63,052,495	$	631	$	1,361,362	$	449,084	$	1,811,077
Net Income	—	—		—		84,396		84,396
Shares issued under stock-based compensation programs, net	334,178	3		(6,865)		—		(6,862)
Cash dividends declared	—	—		—		(20,914)		(20,914)
Stock-based compensation expense	—	—		5,488		—		5,488
Forfeiture of restricted stock	(1,807)	—		—		—		—
Balance at June 30, 2020	63,384,866	$	634	$	1,359,985	$	512,566	$	1,873,185
Net Income	—	—		—		98,938		98,938
Shares issued under stock-based compensation programs, net	1,480,711	15		28,627		—		28,642
Cash dividends declared	—	—		—		(21,374)		(21,374)
Stock-based compensation expense	—	—		8,608		—		8,608
Balance at September 30, 2020	64,865,577	$	649	$	1,397,220	$	590,130	$	1,987,999

The accompanying Notes are an integral part of these Unaudited Consolidated Financial Statements.

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M.D.C. HOLDINGS, INC.

Consolidated Statements of Cash Flows


	Nine Months Ended September 30,
	2021		2020

	(Dollars in thousands)
Operating Activities:
Net income	$	410,996	$	220,094
Adjustments to reconcile net income to net cash provided by operating activities:
Stock-based compensation expense	26,832		18,536
Depreciation and amortization	23,930		18,881

Net loss on marketable equity securities	—		8,285
Gain on sale of other assets	(2,014)		—
Loss on debt retirement	12,150		—
Deferred income tax expense	(4,847)		8,493
Net changes in assets and liabilities:
Trade and other receivables	(55,529)		(17,512)
Mortgage loans held-for-sale, net	(16,365)		36,515
Housing completed or under construction	(461,105)		(387,269)
Land and land under development	(118,762)		108,710
Prepaids and other assets	9,919		(20,314)
Accounts payable and accrued and other liabilities	88,273		35,023
Net cash provided by (used in) operating activities	(86,522)		29,442

Investing Activities:
Purchases of marketable securities	—		(10,804)
Sales of marketable securities	—		59,266
Proceeds from sale of other assets	2,014		—
Purchases of property and equipment	(23,028)		(20,885)
Net cash provided by (used in) investing activities	(21,014)		27,577

Financing Activities:
Payments on mortgage repurchase facility, net	13,404		(18,755)
Payments on homebuilding line of credit, net	—		(5,000)
Repayment of senior notes	(136,394)		(250,000)
Proceeds from issuance of senior notes	694,662		298,050
Dividend payments	(83,189)		(63,056)
Payments of deferred financing costs	(1,720)		—
Issuance of shares under stock-based compensation programs, net	(15,553)		29,974
Net cash provided by (used in) financing activities	471,210		(8,787)

Net increase in cash, cash equivalents and restricted cash	363,674		48,232
Cash, cash equivalents and restricted cash:
Beginning of period	503,972		474,212
End of period	$	867,646	$	522,444

Reconciliation of cash, cash equivalents and restricted cash:
Homebuilding:
Cash and cash equivalents	$	761,715	$	432,277
Restricted cash	12,047		19,732
Financial Services:
Cash and cash equivalents	93,884		70,435
Total cash, cash equivalents and restricted cash	$	867,646	$	522,444

The accompanying Notes are an integral part of these Unaudited Consolidated Financial Statements.

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1. Basis of Presentation

The Unaudited Consolidated Financial Statements of M.D.C. Holdings, Inc. ("MDC," “the Company," “we,” “us,” or “our,” which refers to M.D.C. Holdings, Inc. and its subsidiaries) have been prepared, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC"). Accordingly, they do not include all information and footnotes required by U.S. generally accepted accounting principles (“GAAP”) for complete financial statements. These statements reflect all normal and recurring adjustments which, in the opinion of management, are necessary to present fairly the financial position, results of operations and cash flows of MDC at September 30, 2021 and for all periods presented. These statements should be read in conjunction with MDC’s Consolidated Financial Statements and Notes thereto included in MDC’s Annual Report on Form 10-K for the year ended December 31, 2020.

On January 25, 2021, MDC's board of directors declared an 8% stock dividend that was distributed on March 17, 2021 to shareholders of record on March 3, 2021. In accordance with Accounting Standards Codification ("ASC") Topic 260, Earnings Per Share ("ASC 260"), basic and diluted earnings per share amounts, share amounts and dividends declared per share have been restated for any period or dates prior to the stock dividend record date.

Included in these footnotes are certain statements that constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include statements regarding our business, financial condition, results of operations, cash flows, strategies and prospects. These forward-looking statements may be identified by terminology such as “likely,” “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential” or “continue,” or the negative of such terms and other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements contained in this section are reasonable, we cannot guarantee future results. These statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company to be materially different from those expressed or implied by the forward-looking statements. We undertake no obligation to publicly update 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 considered.

Where necessary, reclassifications have been made to our prior period financial information to conform to the current year presentation.

2. Recently Issued Accounting Standards

Adoption of New Accounting Standards

In June 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which requires measurement and recognition of expected credit losses for financial assets held. The amendments in ASU 2016-13 eliminate the probable threshold for initial recognition of a credit loss in current GAAP and reflect an entity’s current estimate of all expected credit losses. On January 1, 2020, we adopted ASU 2016-13 using the modified retrospective transition method, resulting in a cumulative effect adjustment that decreased the opening balance of retained earnings by less than $0.1 million. The standard did not materially impact our consolidated statements of operations and comprehensive income or consolidated cash flows.

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3. Segment Reporting

An operating segment is defined as a component of an enterprise for which discrete financial information is available and is reviewed regularly by the Chief Operating Decision Maker (“CODM”), or decision-making group, to evaluate performance and make operating decisions. We have identified our CODM as two key executives—the Executive Chairman and the Chief Executive Officer (“CEO”).

We have identified each homebuilding division as an operating segment. Our homebuilding operating segments have been aggregated into the reportable segments noted below because they are similar in the following regards: (1) economic characteristics; (2) housing products; (3) class of homebuyer; (4) regulatory environments; and (5) methods used to construct and sell homes. Our homebuilding reportable segments are as follows:

•West (Arizona, California, Nevada, New Mexico, Oregon, Texas and Washington)

•Mountain (Colorado, Idaho and Utah)

•East (mid-Atlantic, which includes Maryland and Virginia, Florida and Tennessee)

Our financial services business consists of the operations of the following operating segments: (1) HomeAmerican Mortgage Corporation (“HomeAmerican”); (2) Allegiant Insurance Company, Inc., A Risk Retention Group (“Allegiant”); (3) StarAmerican Insurance Ltd. (“StarAmerican”); (4) American Home Insurance Agency, Inc.; and (5) American Home Title and Escrow Company. Due to its contributions to consolidated pretax income, we consider HomeAmerican to be a reportable segment (“mortgage operations”). The remaining operating segments have been aggregated into one reportable segment (“other”) because they do not individually exceed 10 percent of: (1) consolidated revenue; (2) the greater of (a) the combined reported profit of all operating segments that did not report a loss or (b) the positive value of the combined reported loss of all operating segments that reported losses; or (3) consolidated assets.

Corporate is a non-operating segment that develops and implements strategic initiatives and supports our operating divisions by centralizing key administrative functions such as finance, treasury, information technology, insurance, risk management, litigation and human resources. Corporate also provides the necessary administrative functions to support MDC as a publicly traded company. A portion of the expenses incurred by Corporate are allocated to the homebuilding operating segments based on their respective percentages of assets, and to a lesser degree, a portion of Corporate expenses are allocated to the financial services segments. A majority of Corporate’s personnel and resources are primarily dedicated to activities relating to the homebuilding segments, and, therefore, the balance of any unallocated Corporate expenses is included in the homebuilding operations section of our consolidated statements of operations and comprehensive income.

The following table summarizes revenues for our homebuilding and financial services operations:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020

	(Dollars in thousands)
Homebuilding
West	$	729,777	$	552,319	$	2,194,071	$	1,447,934
Mountain	379,041		347,095		1,104,391		886,619
East	148,883		101,135		368,870		249,839

Total homebuilding revenues	$	1,257,701	$	1,000,549	$	3,667,332	$	2,584,392

Financial Services
Mortgage operations	$	31,122	$	28,548	$	89,608	$	67,536
Other	11,982		8,255		31,837		24,117
Total financial services revenues	$	43,104	$	36,803	$	121,445	$	91,653

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The following table summarizes pretax income (loss) for our homebuilding and financial services operations:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020

	(Dollars in thousands)
Homebuilding
West	$	120,284	$	59,120	$	330,390	$	144,441
Mountain	55,386		48,053		165,296		111,372
East	15,410		6,020		34,091		9,993

Corporate	(25,928)		(11,543)		(63,609)		(29,566)
Total homebuilding pretax income	$	165,152	$	101,650	$	466,168	$	236,240
Financial Services
Mortgage operations	$	21,214	$	20,809	$	61,341	$	46,558
Other	6,326		3,559		15,037		3,420
Total financial services pretax income	$	27,540	$	24,368	$	76,378	$	49,978

Total pretax income	$	192,692	$	126,018	$	542,546	$	286,218

The following table summarizes total assets for our homebuilding and financial services operations. The assets in our West, Mountain and East segments consist primarily of inventory while the assets in our Corporate segment primarily include our cash and cash equivalents and deferred tax assets. The assets in our financial services segment consist mostly of cash and cash equivalents and mortgage loans held-for-sale.


	September 30, 2021		December 31, 2020

	(Dollars in thousands)
Homebuilding assets
West	$	2,229,687	$	1,855,567
Mountain	1,030,407		905,007
East	419,212		274,937

Corporate	816,577		470,909
Total homebuilding assets	$	4,495,883	$	3,506,420
Financial services assets
Mortgage operations	$	279,938	$	279,649
Other	98,583		78,851
Total financial services assets	$	378,521	$	358,500

Total assets	$	4,874,404	$	3,864,920

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4. Earnings Per Share

Accounting Standards Codification ("ASC") Topic 260, Earnings per Share ("ASC 260") requires a company that has participating security holders (for example, holders of unvested restricted stock that have non-forfeitable dividend rights) to utilize the two-class method for calculating earnings per share (“EPS”) unless the treasury stock method results in lower EPS. The two-class method is an allocation of earnings/(loss) between the holders of common stock and a company’s participating security holders. Under the two-class method, earnings/(loss) for the reporting period are allocated between common shareholders and other security holders based on their respective rights to receive distributed earnings (i.e., dividends) and undistributed earnings (i.e., net income/(loss)). Our common shares outstanding are comprised of shareholder owned common stock and shares of unvested restricted stock held by participating security holders. Basic EPS is calculated by dividing income or loss attributable to common stockholders by the weighted average number of shares of common stock outstanding, excluding participating shares in accordance with ASC 260. To calculate diluted EPS, basic EPS is adjusted to include the effect of potentially dilutive stock options outstanding and contingently issuable equity awards. The table below shows our basic and diluted EPS calculations.


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020

	(Dollars in thousands, except per share amounts)
Numerator
Net income	$	145,954	$	98,938	$	410,996	$	220,094
Less: distributed earnings allocated to participating securities	(155)		(148)		(446)		(404)
Less: undistributed earnings allocated to participating securities	(602)		(502)		(1,668)		(952)
Net income attributable to common stockholders (numerator for basic earnings per share)	145,197		98,288		408,882		218,738
Add back: undistributed earnings allocated to participating securities	602		502		1,668		952
Less: undistributed earnings reallocated to participating securities	(584)		(488)		(1,615)		(929)
Numerator for diluted earnings per share under two class method	$	145,215	$	98,302	$	408,935	$	218,761

Denominator
Weighted-average common shares outstanding	70,301,085		68,977,965		70,130,853		68,179,403
Add: dilutive effect of stock options	2,202,045		1,955,474		2,330,667		1,727,700
Add: dilutive effect of contingently issuable equity awards	296,881		157,464		308,912		260,340
Denominator for diluted earnings per share under two class method	72,800,011		71,090,903		72,770,432		70,167,443

Basic Earnings Per Common Share	$	2.07	$	1.42	$	5.83	$	3.21
Diluted Earnings Per Common Share	$	1.99	$	1.38	$	5.62	$	3.12

Diluted EPS for both the three and nine months ended September 30, 2021 excluded options to purchase 15,000 shares, respectively, because the effect of their inclusion would be anti-dilutive. Their were zero and 800,000 anti-dilutive options for the three and nine months ended September 30, 2020, respectively.

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5. Fair Value Measurements

ASC Topic 820, Fair Value Measurements (“ASC 820”), defines fair value, establishes guidelines for measuring fair value and expands disclosures regarding fair value measurements. ASC 820 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs, other than quoted prices in active markets, that are either directly or indirectly observable; and Level 3, defined as unobservable inputs for which little or no market data exists, therefore requiring an entity to develop its own assumptions.

The following table sets forth the fair values and methods used for measuring the fair values of financial instruments on a recurring basis:

Fair Value

Financial Instrument

Hierarchy

September 30,
2021

December 31,
2020

(Dollars in thousands)

Mortgage loans held-for-sale, net

Level 2

248,921

232,556

The following methods and assumptions were used to estimate the fair value of each class of financial instruments as of September 30, 2021 and December 31, 2020.

Cash and cash equivalents (excluding debt securities with an original maturity of three months or less), restricted cash, trade and other receivables, prepaids and other assets, accounts payable, accrued and other liabilities and borrowings on our revolving credit facility. Fair value approximates carrying value.

Equity securities. Our equity securities consisted of holdings in common stock and exchange traded funds and were recorded at fair value with all changes in fair value recorded to other income (expense), net in the financial services section of our consolidated statements of operations and comprehensive income.

The following table reconciles the net gain (loss) recognized during the three and nine months ended September 30, 2021 and 2020 on equity securities to the unrealized gain recognized during the periods on equity securities still held at the reporting date.


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020

	(Dollars in thousands)
Net gain (loss) recognized during the period on equity securities	$	—	$	—	$	—	$	(8,285)
Less: Net gain (loss) recognized during the period on equity securities sold during the period	—		—		—		(8,285)
Unrealized gain (loss) loss recognized during the reporting period on equity securities still held at the reporting date	$	—	$	—	$	—	$	—

Mortgage loans held-for-sale, net. Our mortgage loans held-for-sale, which are measured at fair value on a recurring basis, include (1) mortgage loans held-for-sale that are under commitments to sell and (2) mortgage loans held-for-sale that are not under commitments to sell. At September 30, 2021 and December 31, 2020, we had $142.2 million and $137.3 million, respectively, of mortgage loans held-for-sale under commitments to sell. The fair value for those loans was based on quoted market prices for those mortgage loans, which are Level 2 fair value inputs. At September 30, 2021 and December 31, 2020, we had $106.7 million and $95.3 million, respectively, of mortgage loans held-for-sale that were not under commitments to sell. The fair value for those loans was primarily based upon the estimated market price received from an outside party, which is a Level 2 fair value input.

Gains on sales of mortgage loans, net, are included as a component of revenues in the financial services section of our consolidated statements of operations and comprehensive income. For the three and nine months ended September 30, 2021, we recorded net gains on the sales of mortgage loans of $23.6 million and $73.5 million, respectively, compared to $26.8 million and $64.3 million for the same periods in the prior year, respectively.

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Mortgage Repurchase Facility. The debt associated with our mortgage repurchase facility (see Note 18 for further discussion) is at floating rates that approximate current market rates and have relatively short-term maturities, generally within 30 days. The fair value approximates carrying value and is based on Level 2 inputs.

Senior Notes. The estimated values of the senior notes in the following table are based on Level 2 inputs, which primarily reflect estimated prices for our senior notes that were provided by multiple sources.


	September 30, 2021				December 31, 2020
	Carrying Amount		Fair Value		Carrying Amount		Fair Value

	(Dollars in thousands)
$250 million 5.500% Senior Notes due January 2024, net	$	126,071	$	137,109	$	249,233	$	275,463
$300 million 3.850% Senior Notes due January 2030, net	297,638		322,680		297,458		331,384
$350 million 2.500% Senior Notes due January 2031, net	347,055		341,457		—		—
$500 million 6.000% Senior Notes due January 2043, net	490,851		625,275		490,700		667,288
$350 million 3.966% Senior Notes due August 2061, net	346,043		334,664		—		—
Total	$	1,607,658	$	1,761,185	$	1,037,391	$	1,274,135

During the three months ended September 30, 2021, we accelerated the retirement of $123.6 million of our 5.500% senior notes scheduled to mature in January 2024 through a cash tender offer.

6. Inventories

The following table sets forth, by reportable segment, information relating to our homebuilding inventories:


	September 30, 2021		December 31, 2020

	(Dollars in thousands)
Housing completed or under construction:
West	$	1,077,320	$	902,842
Mountain	636,090		464,501
East	234,801		119,244

Subtotal	1,948,211		1,486,587
Land and land under development:
West	974,380		822,504
Mountain	340,702		391,054
East	149,521		132,085

Subtotal	1,464,603		1,345,643
Total inventories	$	3,412,814	$	2,832,230

Our inventories are primarily associated with communities where we intend to construct and sell homes, including models. Costs capitalized to land and land under development primarily include: (1) land costs; (2) land development costs; (3) entitlement costs; (4) capitalized interest; (5) engineering fees; and (6) title insurance, real property taxes and closing costs directly related to the purchase of the land parcel. Components of housing completed or under construction primarily include: (1) land costs transferred from land and land under development; (2) direct construction costs associated with a house; (3) real property taxes, engineering fees, permits and other fees; (4) capitalized interest; and (5) indirect construction costs, which include field construction management salaries and benefits, utilities and other construction related costs. Land costs are transferred from land and land under development to housing completed or under construction at the point in time that construction of a home on an owned lot begins.

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In accordance with ASC Topic 360, Property, Plant, and Equipment (“ASC 360”), homebuilding inventories, excluding those classified as held for sale, are carried at cost unless events and circumstances indicate that the carrying value of the underlying subdivision may not be recoverable. We evaluate inventories for impairment at each quarter end on a subdivision level basis as each such subdivision represents the lowest level of identifiable cash flows. In making this determination, we review, among other things, the following for each subdivision:

•actual and trending “Homebuilding Margin” (which is defined as home sale revenues less home cost of sales and all incremental costs associated directly with the subdivision, including sales commissions and marketing costs);

•forecasted Homebuilding Margin for homes in backlog;

•actual and trending net home orders;

•homes available for sale;

•market information for each sub-market, including competition levels, home foreclosure levels, the size and style of homes currently being offered for sale and lot size; and

•known or probable events indicating that the carrying value may not be recoverable.

If events or circumstances indicate that the carrying value of our inventory may not be recoverable, assets are reviewed for impairment by comparing the undiscounted estimated future cash flows from an individual subdivision (including capitalized interest) to its carrying value. If the undiscounted future cash flows are less than the subdivision’s carrying value, the carrying value of the subdivision is written down to its then estimated fair value. We generally determine the estimated fair value of each subdivision by determining the present value of the estimated future cash flows at discount rates, which are Level 3 inputs, that are commensurate with the risk of the subdivision under evaluation. The evaluation for the recoverability of the carrying value of the assets for each individual subdivision can be impacted significantly by our estimates of future home sale revenues, home construction costs, and development costs per home, all of which are Level 3 inputs.

If land is classified as held for sale, we measure it in accordance with ASC 360 at the lower of the carrying value or fair value less estimated costs to sell. In determining fair value, we primarily rely upon the most recent negotiated price, which is a Level 2 input. If a negotiated price is not available, we will consider several factors including, but not limited to, current market conditions, recent comparable sales transactions and market analysis studies, which are considered Level 3 inputs. If the fair value less estimated costs to sell is lower than the current carrying value, the land is impaired down to its estimated fair value less costs to sell.

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7. Capitalization of Interest

We capitalize interest to inventories during the period of development in accordance with ASC Topic 835, Interest (“ASC 835”). Homebuilding interest capitalized as a cost of inventories is included in cost of sales during the period that related units or lots are delivered. To the extent our homebuilding debt exceeds our qualified assets as defined in ASC 835, we expense a portion of the interest incurred. Qualified homebuilding assets consist of all lots and homes, excluding finished unsold homes or finished models, within projects that are actively selling or under development. The table set forth below summarizes homebuilding interest activity. For all periods presented below, our qualified assets exceeded our homebuilding debt and as such, all interest incurred has been capitalized.


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020

	(Dollars in thousands)
Homebuilding interest incurred	$	19,108	$	14,799	$	53,849	$	46,427
Less: Interest capitalized	(19,108)		(14,799)		(53,849)		(46,427)
Homebuilding interest expensed	$	—	$	—	$	—	$	—

Interest capitalized, beginning of period	$	54,351	$	56,929	$	52,777	$	55,310
Plus: Interest capitalized during period	19,108		14,799		53,849		46,427
Less: Previously capitalized interest included in home cost of sales	(16,024)		(16,511)		(49,191)		(46,520)
Interest capitalized, end of period	$	57,435	$	55,217	$	57,435	$	55,217