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

10-Q 1 mdc-20220630.htm 10-Q mdc-20220630

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 June 30, 2022


☐			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.

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M.D.C. HOLDINGS, INC.

FORM 10-Q

FOR THE QUARTER ENDED June 30, 2022

INDEX


		Page No.
Part I. Financial Information:

Item 1.	Unaudited Consolidated Financial Statements:

	Consolidated Balance Sheets at June 30, 2022 and December 31, 2021	1

	Consolidated Statements of Operations and Comprehensive Income for the three and six months ended June 30, 2022 and 2021	2

	Consolidated Statements of Changes in Stockholders’ Equity for the three and six months ended June 30, 2022 and 2021	3

	Consolidated Statements of Cash Flows for the six months ended June 30, 2022 and 2021	4

	Notes to Unaudited Consolidated Financial Statements	5

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	39

Part II. Other Information:

Item 1.	Legal Proceedings	40

Item 1A.	Risk Factors	40

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	40

Item 6.	Exhibits	41

Signature		41

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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.

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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

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

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

Comprehensive income	$	189,542	$	154,352	$	337,963	$	265,042

Earnings per share:
Basic	$	2.66	$	2.19	$	4.75	$	3.76
Diluted	$	2.59	$	2.11	$	4.61	$	3.62

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

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.

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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


	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

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


	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

Investing Activities:
Purchases of property and equipment	(13,698)		(13,447)
Net cash (used in) investing activities	(13,698)		(13,447)

Financing Activities:
Proceeds from (payments on) mortgage repurchase facility, net	(80,735)		(37,709)


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

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

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.

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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 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.

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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 (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:


	Three Months Ended June 30,				Six Months Ended June 30,
	2022		2021		2022		2021

	(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

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

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


	Three Months Ended June 30,				Six Months Ended June 30,
	2022		2021		2022		2021

	(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

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.


	June 30, 2022		December 31, 2021

	(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

Total assets	$	5,232,827	$	4,963,528

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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 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

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

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.

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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

(Dollars in thousands)

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.


	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

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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.

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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

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

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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	%

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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