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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 June 30, 2022
OR | | | | | |
☐ | 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 | | MDC | | New York Stock Exchange |
| 6% Senior Notes due January 2043 | | MDC 43 | | 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 July 26, 2022, 71,156,158 shares of M.D.C. Holdings, Inc. common stock were outstanding.
M.D.C. HOLDINGS, INC.
FORM 10-Q
FOR THE QUARTER ENDED June 30, 2022
PART I. FINANCIAL INFORMATION
Item 1. Unaudited Consolidated Financial Statements
M.D.C. HOLDINGS, INC.
Consolidated Balance Sheets | | | | | | | | | | | |
| June 30, 2022 | | December 31, 2021 |
| (unaudited) | | |
| (Dollars in thousands, except per share amounts) |
ASSETS | | | |
Homebuilding: | | | |
Cash and cash equivalents | $ | 475,254 | | | $ | 485,839 | |
Restricted cash | 5,994 | | | 12,799 | |
Trade and other receivables | 121,202 | | | 98,580 | |
Inventories: | | | |
Housing completed or under construction | 2,385,563 | | | 1,917,616 | |
Land and land under development | 1,717,022 | | | 1,843,235 | |
Total inventories | 4,102,585 | | | 3,760,851 | |
Property and equipment, net | 61,574 | | | 60,561 | |
Deferred tax asset, net | 16,735 | | | 17,942 | |
Prepaids and other assets | 95,956 | | | 106,562 | |
Total homebuilding assets | 4,879,300 | | | 4,543,134 | |
Financial Services: | | | |
Cash and cash equivalents | 114,989 | | | 104,821 | |
| | | |
Mortgage loans held-for-sale, net | 190,070 | | | 282,529 | |
Other assets | 48,468 | | | 33,044 | |
Total financial services assets | 353,527 | | | 420,394 | |
Total Assets | $ | 5,232,827 | | | $ | 4,963,528 | |
LIABILITIES AND EQUITY | | | |
Homebuilding: | | | |
Accounts payable | $ | 186,252 | | | $ | 149,488 | |
Accrued and other liabilities | 397,349 | | | 370,910 | |
Revolving credit facility | 10,000 | | | 10,000 | |
Senior notes, net | 1,482,174 | | | 1,481,781 | |
Total homebuilding liabilities | 2,075,775 | | | 2,012,179 | |
Financial Services: | | | |
Accounts payable and accrued liabilities | 107,170 | | | 97,903 | |
Mortgage repurchase facility | 175,565 | | | 256,300 | |
Total financial services liabilities | 282,735 | | | 354,203 | |
Total Liabilities | 2,358,510 | | | 2,366,382 | |
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; 71,157,875 and 70,668,093 issued and outstanding at June 30, 2022 and December 31, 2021, respectively | 712 | | | 707 | |
Additional paid-in-capital | 1,719,642 | | | 1,709,276 | |
Retained earnings | 1,153,963 | | | 887,163 | |
Total Stockholders' Equity | 2,874,317 | | | 2,597,146 | |
Total Liabilities and Stockholders' Equity | $ | 5,232,827 | | | $ | 4,963,528 | |
The accompanying Notes are an integral part of these Unaudited Consolidated Financial Statements.
M.D.C. HOLDINGS, INC.
Consolidated Statements of Operations and Comprehensive Income | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| | | | | | | |
| (Dollars in thousands, except per share amounts) |
Homebuilding: | | | | | | | |
Home sale revenues | $ | 1,450,823 | | | $ | 1,367,773 | | | $ | 2,691,343 | | | $ | 2,409,631 | |
Home cost of sales | (1,062,016) | | | (1,051,181) | | | (1,983,394) | | | (1,865,069) | |
Inventory impairments | — | | | — | | | (660) | | | — | |
Total cost of sales | (1,062,016) | | | (1,051,181) | | | (1,984,054) | | | (1,865,069) | |
Gross profit | 388,807 | | | 316,592 | | | 707,289 | | | 544,562 | |
Selling, general and administrative expenses | (133,849) | | | (128,861) | | | (263,163) | | | (243,854) | |
Interest and other income | 822 | | | 868 | | | 1,577 | | | 1,835 | |
Other expense | (15,509) | | | (1,090) | | | (16,933) | | | (1,527) | |
Homebuilding pretax income | 240,271 | | | 187,509 | | | 428,770 | | | 301,016 | |
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Financial Services: | | | | | | | |
Revenues | 36,229 | | | 33,318 | | | 65,360 | | | 78,341 | |
Expenses | (18,801) | | | (16,440) | | | (35,736) | | | (31,545) | |
Other income, net | 1,264 | | | 1,155 | | | 2,451 | | | 2,042 | |
Financial services pretax income | 18,692 | | | 18,033 | | | 32,075 | | | 48,838 | |
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Income before income taxes | 258,963 | | | 205,542 | | | 460,845 | | | 349,854 | |
Provision for income taxes | (69,421) | | | (51,190) | | | (122,882) | | | (84,812) | |
Net income | $ | 189,542 | | | $ | 154,352 | | | $ | 337,963 | | | $ | 265,042 | |
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Comprehensive income | $ | 189,542 | | | $ | 154,352 | | | $ | 337,963 | | | $ | 265,042 | |
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Earnings per share: | | | | | | | |
Basic | $ | 2.66 | | | $ | 2.19 | | | $ | 4.75 | | | $ | 3.76 | |
Diluted | $ | 2.59 | | | $ | 2.11 | | | $ | 4.61 | | | $ | 3.62 | |
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Weighted average common shares outstanding: | | | | | | | |
Basic | 70,841,476 | | | 70,291,057 | | | 70,804,019 | | | 70,044,326 | |
Diluted | 72,881,012 | | | 72,715,273 | | | 72,945,748 | | | 72,754,141 | |
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Dividends declared per share | $ | 0.50 | | | $ | 0.40 | | | $ | 1.00 | | | $ | 0.77 | |
The accompanying Notes are an integral part of these Unaudited Consolidated Financial Statements.
M.D.C. HOLDINGS, INC.
Consolidated Statements of Changes in Stockholders’ Equity
(Dollars in thousands, except share amounts) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2022 |
| Common Stock | | Additional Paid-in Capital | | Retained Earnings | | Total |
| Shares | | Amount | | | |
Balance at December 31, 2021 | 70,668,093 | | | $ | 707 | | | $ | 1,709,276 | | | $ | 887,163 | | | $ | 2,597,146 | |
Net income | — | | | — | | | — | | | 148,421 | | | 148,421 | |
Shares issued under stock-based compensation programs, net | 498,921 | | | 5 | | | (12,633) | | | — | | | (12,628) | |
Cash dividends declared | — | | | — | | | — | | | (35,583) | | | (35,583) | |
Stock-based compensation expense | — | | | — | | | 13,726 | | | — | | | 13,726 | |
Forfeiture of restricted stock | (4,769) | | | — | | | — | | | — | | | — | |
Balance at March 31, 2022 | 71,162,245 | | | $ | 712 | | | $ | 1,710,369 | | | $ | 1,000,001 | | | $ | 2,711,082 | |
Net Income | — | | | — | | | — | | | 189,542 | | | 189,542 | |
Shares issued under stock-based compensation programs, net | (1,573) | | | — | | | (58) | | | — | | | (58) | |
Cash dividends declared | — | | | — | | | — | | | (35,580) | | | (35,580) | |
Stock-based compensation expense | — | | | — | | | 9,331 | | | — | | | 9,331 | |
Forfeiture of restricted stock | (2,797) | | | — | | | — | | | — | | | — | |
Balance at June 30, 2022 | 71,157,875 | | | $ | 712 | | | $ | 1,719,642 | | | $ | 1,153,963 | | | $ | 2,874,317 | |
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| Six Months Ended June 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 dividends 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 | |
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The accompanying Notes are an integral part of these Unaudited Consolidated Financial Statements.
M.D.C. HOLDINGS, INC.
Consolidated Statements of Cash Flows | | | | | | | | | | | |
| Six Months Ended June 30, |
| 2022 | | 2021 |
| | | |
| (Dollars in thousands) |
Operating Activities: | | | |
Net income | $ | 337,963 | | | $ | 265,042 | |
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | | | |
Stock-based compensation expense | 24,793 | | | 18,867 | |
Depreciation and amortization | 13,903 | | | 16,178 | |
Inventory impairments | 660 | | | — | |
Deferred income tax expense (benefit) | 1,207 | | | (3,339) | |
Net changes in assets and liabilities: | | | |
Trade and other receivables | (22,332) | | | (57,105) | |
Mortgage loans held-for-sale, net | 92,459 | | | 46,470 | |
Housing completed or under construction | (468,301) | | | (385,698) | |
Land and land under development | 126,300 | | | 36,379 | |
Prepaids and other assets | (5,775) | | | 4,695 | |
Accounts payable and accrued and other liabilities | 70,183 | | | 70,595 | |
Net cash provided by operating activities | 171,060 | | | 12,084 | |
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Investing Activities: | | | |
Purchases of property and equipment | (13,698) | | | (13,447) | |
Net cash (used in) investing activities | (13,698) | | | (13,447) | |
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Financing Activities: | | | |
Proceeds from (payments on) mortgage repurchase facility, net | (80,735) | | | (37,709) | |
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Proceeds from issuance of senior notes | — | | | 347,725 | |
Dividend payments | (71,163) | | | (54,913) | |
Payments of deferred financing costs | — | | | (819) | |
Issuance of shares under stock-based compensation programs, net | (12,686) | | | (15,534) | |
Net cash provided by (used in) financing activities | (164,584) | | | 238,750 | |
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Net increase (decrease) in cash, cash equivalents and restricted cash | (7,222) | | | 237,387 | |
Cash, cash equivalents and restricted cash: | | | |
Beginning of period | 603,459 | | | 503,972 | |
End of period | $ | 596,237 | | | $ | 741,359 | |
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Reconciliation of cash, cash equivalents and restricted cash: | | | |
Homebuilding: | | | |
Cash and cash equivalents | $ | 475,254 | | | $ | 638,547 | |
Restricted cash | 5,994 | | | 14,158 | |
Financial Services: | | | |
Cash and cash equivalents | 114,989 | | | 88,654 | |
Total cash, cash equivalents and restricted cash | $ | 596,237 | | | $ | 741,359 | |
The accompanying Notes are an integral part of these Unaudited Consolidated Financial Statements.
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 June 30, 2022 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, 2021.
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
There are no recently issued accounting standards applicable to the Company.
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 (Florida, mid-Atlantic, which includes Maryland, Pennsylvania and Virginia, 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:
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| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
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| (Dollars in thousands) |
Homebuilding | | | | | | | |
West | $ | 788,279 | | | $ | 847,683 | | | $ | 1,495,590 | | | $ | 1,464,294 | |
Mountain | 437,001 | | | 400,633 | | | 772,129 | | | 725,350 | |
East | 225,543 | | | 119,457 | | | 423,624 | | | 219,987 | |
Total homebuilding revenues | $ | 1,450,823 | | | $ | 1,367,773 | | | $ | 2,691,343 | | | $ | 2,409,631 | |
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Financial Services | | | | | | | |
Mortgage operations | $ | 22,077 | | | $ | 23,321 | | | $ | 39,678 | | | $ | 58,486 | |
Other | 14,152 | | | 9,997 | | | 25,682 | | | 19,855 | |
Total financial services revenues | $ | 36,229 | | | $ | 33,318 | | | $ | 65,360 | | | $ | 78,341 | |
The following table summarizes pretax income (loss) for our homebuilding and financial services operations:
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| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
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| (Dollars in thousands) |
Homebuilding | | | | | | | |
West | $ | 148,508 | | | $ | 132,919 | | | $ | 279,034 | | | $ | 210,106 | |
Mountain | 79,135 | | | 64,052 | | | 129,641 | | | 109,910 | |
East | 34,407 | | | 10,846 | | | 65,801 | | | 18,681 | |
Corporate | (21,779) | | | (20,308) | | | (45,706) | | | (37,681) | |
Total homebuilding pretax income | $ | 240,271 | | | $ | 187,509 | | | $ | 428,770 | | | $ | 301,016 | |
Financial Services | | | | | | | |
Mortgage operations | $ | 10,673 | | | $ | 14,088 | | | $ | 18,106 | | | $ | 40,127 | |
Other | 8,019 | | | 3,945 | | | 13,969 | | | 8,711 | |
Total financial services pretax income | $ | 18,692 | | | $ | 18,033 | | | $ | 32,075 | | | $ | 48,838 | |
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Total pretax income | $ | 258,963 | | | $ | 205,542 | | | $ | 460,845 | | | $ | 349,854 | |
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.
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| June 30, 2022 | | December 31, 2021 |
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| (Dollars in thousands) |
Homebuilding assets | | | |
West | $ | 2,653,052 | | | $ | 2,472,378 | |
Mountain | 1,169,938 | | | 1,072,717 | |
East | 508,690 | | | 450,675 | |
Corporate | 547,620 | | | 547,364 | |
Total homebuilding assets | $ | 4,879,300 | | | $ | 4,543,134 | |
Financial services assets | | | |
Mortgage operations | $ | 232,139 | | | $ | 313,373 | |
Other | 121,388 | | | 107,021 | |
Total financial services assets | $ | 353,527 | | | $ | 420,394 | |
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Total assets | $ | 5,232,827 | | | $ | 4,963,528 | |
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.
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| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| | | | | | | |
| (Dollars in thousands, except per share amounts) |
Numerator | | | | | | | |
Net income | $ | 189,542 | | | $ | 154,352 | | | $ | 337,963 | | | $ | 265,042 | |
Less: distributed earnings allocated to participating securities | (161) | | | (133) | | | (355) | | | (291) | |
Less: undistributed earnings allocated to participating securities | (689) | | | (589) | | | (1,261) | | | (1,067) | |
Net income attributable to common stockholders (numerator for basic earnings per share) | 188,692 | | | 153,630 | | | 336,347 | | | 263,684 | |
Add back: undistributed earnings allocated to participating securities | 689 | | | 589 | | | 1,261 | | | 1,067 | |
Less: undistributed earnings reallocated to participating securities | (676) | | | (569) | | | (1,231) | | | (1,032) | |
Numerator for diluted earnings per share under two class method | $ | 188,705 | | | $ | 153,650 | | | $ | 336,377 | | | $ | 263,719 | |
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Denominator | | | | | | | |
Weighted-average common shares outstanding | 70,841,476 | | | 70,291,057 | | | 70,804,019 | | | 70,044,326 | |
Add: dilutive effect of stock options | 1,406,274 | | | 2,424,216 | | | 1,738,041 | | | 2,394,887 | |
Add: dilutive effect of contingently issuable equity awards | 633,262 | | | — | | | 403,688 | | | 314,928 | |
Denominator for diluted earnings per share under two class method | 72,881,012 | | | 72,715,273 | | | 72,945,748 | | | 72,754,141 | |
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Basic Earnings Per Common Share | $ | 2.66 | | | $ | 2.19 | | | $ | 4.75 | | | $ | 3.76 | |
Diluted Earnings Per Common Share | $ | 2.59 | | | $ | 2.11 | | | $ | 4.61 | | | $ | 3.62 | |
Diluted EPS for both the three and six months ended June 30, 2022 excluded options to purchase 15,000 shares of common stock, because the effect of their inclusion would be anti-dilutive. There were zero anti-dilutive options for both the three and six months ended June 30, 2021.
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, except those for which the carrying values approximate fair values: | | | | | | | | | | | | | | | | | | | | |
| | | | Fair Value |
Financial Instrument | | Hierarchy | | June 30, 2022 | | December 31, 2021 |
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| | | | (Dollars in thousands) |
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Mortgage loans held-for-sale, net | | Level 2 | | $ | 190,070 | | | $ | 282,529 | |
The following methods and assumptions were used to estimate the fair value of each class of financial instruments as of June 30, 2022 and December 31, 2021.
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 June 30, 2022 and December 31, 2021, we had $134.4 million and $157.7 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 June 30, 2022 and December 31, 2021, we had $55.7 million and $124.9 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 six months ended June 30, 2022, we recorded gain (loss) on mortgage loans held-for-sale, net of $(4.3) million and $(9.3) million, compared to $28.8 million and $46.2 million for the same period in the prior year.
For the financial assets and liabilities that the Company does not reflect at fair value, the following methods and assumptions were used to estimate the fair value of each class of financial instruments.
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.
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.
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| June 30, 2022 | | December 31, 2021 |
| Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value |
| | | | | | | |
| (Dollars in thousands) |
$300 million 3.850% Senior Notes due January 2030, net | $ | 297,821 | | | $ | 251,498 | | | $ | 297,699 | | | $ | 319,057 | |
$350 million 2.500% Senior Notes due January 2031, net | 347,269 | | | 257,216 | | | 347,126 | | | 339,185 | |
$500 million 6.000% Senior Notes due January 2043, net | 491,010 | | | 410,815 | | | 490,903 | | | 628,092 | |
$350 million 3.966% Senior Notes due August 2061, net | 346,074 | | | 200,097 | | | 346,053 | | | 337,017 | |
Total | $ | 1,482,174 | | | $ | 1,119,626 | | | $ | 1,481,781 | | | $ | 1,623,351 | |
6. Inventories
The following table sets forth, by reportable segment, information relating to our homebuilding inventories:
| | | | | | | | | | | |
| June 30, 2022 | | December 31, 2021 |
| | | |
| (Dollars in thousands) |
Housing completed or under construction: | | | |
West | $ | 1,362,339 | | | $ | 1,077,256 | |
Mountain | 720,864 | | | 596,164 | |
East | 302,360 | | | 244,196 | |
Subtotal | 2,385,563 | | | 1,917,616 | |
Land and land under development: | | | |
West | 1,143,752 | | | 1,235,363 | |
Mountain | 403,142 | | | 435,958 | |
East | 170,128 | | | 171,914 | |
Subtotal | 1,717,022 | | | 1,843,235 | |
Total inventories | $ | 4,102,585 | | | $ | 3,760,851 | |
Our inventories are primarily associated with communities where we intend to construct and sell homes, including models and unsold homes. 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.
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 “Operating 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);
•estimated future undiscounted cash flows and Operating Margin;
•forecasted Operating 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.
Inventory impairments recognized by segment for the three and six months ended ended June 30, 2022 and 2021 are shown in the table below.
| | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | Six Months Ended June 30, |
| 2022 | | 2021 | 2022 | | 2021 |
| (Dollars in thousands) | (Dollars in thousands) |
West | $ | — | | | $ | — | | $ | 660 | | | $ | — | |
Mountain | — | | | — | | — | | | — | |
East | — | | | — | | — | | | — | |
Total Inventory Impairments | $ | — | | | $ | — | | $ | 660 | | | $ | — | |
The table below provides quantitative data, for the periods presented, where applicable, used in determining the fair value of the impaired inventory. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Impairment Data | | Quantitative Data |
Three Months Ended | | Number of Subdivisions Impaired | | Inventory Impairments | | Fair Value of Inventory After Impairments | | Discount Rate |
| | (Dollars in thousands) | | | | | | |
March 31, 2022 | | 1 | | $ | 660 | | | $ | 1,728 | | | | | N/A | | |
Total | | | | $ | 660 | | | | | | | | | |
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 June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| | | | | | | |
| (Dollars in thousands) |
Homebuilding interest incurred | $ | 17,382 | | | $ | 17,409 | | | $ | 34,640 | | | $ | 34,741 | |
Less: Interest capitalized | (17,382) | | | (17,409) | | | (34,640) | | | (34,741) | |
Homebuilding interest expensed | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| | | | | | | |
Interest capitalized, beginning of period | $ | 60,468 | | | $ | 55,268 | | | $ | 58,054 | | | $ | 52,777 | |
Plus: Interest capitalized during period | 17,382 | | | 17,409 | | | 34,640 | | | 34,741 | |
Less: Previously capitalized interest included in home cost of sales | (15,681) | | | (18,326) | | | (30,525) | | | (33,167) | |
Interest capitalized, end of period | $ | 62,169 | | | $ | 54,351 | | | $ | 62,169 | | | $ | 54,351 | |
8. Leases
We lease certain property, land and equipment, the majority of which comprise property related leases to provide office space where we operate our business. Leases with an initial term of 12 months or less are not recorded on the balance sheet. We recognize lease expense for these leases on a straight-line basis over the lease term.
Our property related leases typically have terms of between three and five years, with the exception of the lease governing the Company’s headquarters. All of our property related leases are classified as operating leases. These leases do not contain any residual value guarantees or restrictive covenants and do not include variable lease payments, except for the payment of common area maintenance and real estate taxes. Many of our property related leases give us the option to extend the lease term for a period of time, generally consistent with the initial lease term. These options are excluded from our calculation of the right-of-use asset and lease liability until such time as we determine it is reasonably certain that the option will be exercised.
The property related lease for the Company’s headquarters in Denver, Colorado is ten years in length with an expiration date of October 31, 2026 and contains a ten year option to extend the term of the lease through 2036. This option has been excluded from our calculation of the right-of-use asset and lease liability as it is not currently considered reasonably certain that the option will be exercised.
Operating lease expense is included as a component of selling, general and administrative expenses in the homebuilding and expenses in the financial services sections of our consolidated statements of operations and comprehensive income, respectively. Components of operating lease expense were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| | | | | | | |
| (Dollars in thousands) |
Operating lease cost 1 | $ | 2,107 | | | $ | 1,995 | | | $ | 4,238 | | | $ | 3,972 | |
Less: Sublease income (Note 19) | (142) | | | (39) | | | (225) | | | (78) | |
Net lease cost | $ | 1,965 | | | $ | 1,956 | | | $ | 4,013 | | | $ | 3,894 | |
1Includes variable lease costs, which are immaterial.
Supplemental cash flow information related to leases was as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| | | | | | | |
| (Dollars in thousands) |
Cash paid for amounts included in the measurement of lease liabilities: | | |
Operating cash flows from operating leases | $ | 1,999 | | | $ | 1,887 | | | $ | 4,021 | | | $ | 3,745 | |
Right of use assets obtained in exchange for new operating lease liabilities | $ | 547 | | | $ | — | | | $ | 4,295 | | | $ | 830 | |
Weighted-average remaining lease term and discount rate for operating leases were as follows:
| | | | | | | | |
| June 30, 2022 | June 30, 2021 |
Weighted-average remaining lease term (in years) | 4.4 | 4.9 |
Weighted-average discount rate | 5.5 | % | 5.5 | % |
Maturities of operating lease liabilities were as follows:
| | | | | |
| Year Ended December 31, |
| (Dollars in thousands) |
2022 (excluding the six months ended June 30, 2022) | $ | 3,451 | |
2023 | 7,150 | |
2024 | 6,498 | |
2025 | 6,373 | |
2026 | 5,573 | |
Thereafter | 1,119 | |
Total operating lease payments 1 | $ | 30,164 | |
Less: Interest | 3,396 | |
Present value of operating lease liabilities 2 | $ | 26,768 | |
_______________________________________________________________
1Operating lease payments exclude $1.3 million of legally binding lease payments for leases signed but not yet commenced.
2Homebuilding and financial services operating lease liabilities of $26.7 million and $0.1 million, respectively, are included as a component of accrued and other liabilities and accounts payable and accrued liabilities, respectively, in the homebuilding and financial services sections of our consolidated balance sheet at June 30, 2022.
9. Homebuilding Prepaids and Other Assets
The following table sets forth the components of homebuilding prepaids and other assets:
| | | | | | | | | | | |
| June 30, 2022 | | December 31, 2021 |
| | | |
| (Dollars in thousands) |
Operating lease right-of-use asset (Note 8) | $ | 25,689 | | | $ | 25,514 | |
Land option deposits | 43,564 | | | 41,617 | |
Prepaids | 14,302 | | | 26,058 | |
Deferred debt issuance costs on revolving credit facility, net | 6,192 | | | 7,166 | |
Goodwill | 6,008 | | | |