10-Q 1 mth20220502_10q.htm FORM 10-Q mth20220502_10q.htm
0000833079 Meritage Homes CORP false --12-31 Q2 2022 0.01 0.01 10,000,000 10,000,000 0 0 0 0 0.01 0.01 125,000,000 125,000,000 36,566,975 36,566,975 37,340,855 37,340,855 3 10 3 5 780 780 0 0 0 0 6.00 6.00 2,386 2,975 5.125 5.125 3.875 3.875 18.2 6.00 6.00 5.125 5.125 3.875 3.875 5 3 3 1 100 0 Includes recoveries for costs incurred over several years on a foundation design and performance matter that affected a single community in Texas. Balance consists primarily of cash and cash equivalents, development reimbursements from local municipalities and prepaid expenses and other assets. Performance-based shares that vested and were issued as a result of performance achievement exceeding the originally established targeted number of shares related to respective performance metrics. Amount is reflected in our unaudited consolidated balance sheets in Deposits on real estate under option or contract as of June 30, 2022. Homebuilding revenue includes the following land closing revenue, by segment: Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 Land closing revenue: West $ 1,725 $ 12,956 $ 32,807 $ 12,956 Central 1,709 — 9,505 3,799 East — — 2,600 — Total $ 3,434 $ 12,956 $ 44,912 $ 16,755 Reflects balance of non-recourse notes payable in connection with land purchases. Includes land held for sale of $58.2 million and $62.1 million as of June 30, 2022 and December 31, 2021, respectively. Except for our specific performance contracts recorded on our unaudited consolidated balance sheets as Real estate not owned (if any), none of our purchase or option contracts require us to purchase lots. Balance consists primarily of cash and cash equivalents, deferred tax assets and prepaid expenses and other assets. Real estate not owned represents a single parcel of land intended for multi-family housing that, once purchased, the Company intends to sell. Includes the allocated land and land development costs associated with each lot for these homes. Balance consists primarily of corporate costs and numerous shared service functions such as finance and treasury that are not allocated to the homebuilding or financial services reporting segments. Balance represents Meritage’s interest, as reflected in the financial records of the respective joint ventures. This balance may differ from the balance reported in the accompanying unaudited consolidated financial statements due to the following reconciling items: (i) timing differences for revenue and distributions recognition, (ii) step-up basis and corresponding amortization, (iii) capitalization of interest on qualified assets, (iv) income deferrals as discussed in Note (2) below and (v) the cessation of allocation of losses from joint ventures in which we have previously written down our investment balance to zero and where we have no commitment to fund additional losses. Deposits are refundable at our sole discretion. We have not completed our acquisition evaluation process and we have not internally committed to purchase these lots. Balance consists primarily of cash and cash equivalents, goodwill (see Note 9), prepaid expenses and other assets and property and equipment. Balance consists primarily of cash and cash equivalents, development reimbursements from local municipalities and property and equipment. Deposits are non-refundable except if certain contractual conditions are not performed by the selling party. Includes unvested restricted stock awards, restricted stock units and performance-based awards (assuming 100%/target payout). Includes raw land, land held for development and land held for sale, less impairments, if any. We do not capitalize interest for inactive assets, and all ongoing costs of land ownership (i.e. property taxes, homeowner association dues, etc.) are expensed as incurred. Our share of pre-tax earnings from our mortgage joint venture is recorded in Earnings from financial services unconsolidated entities and other, net on the accompanying unaudited consolidated income statements. Our share of pre-tax earnings from all other joint ventures is recorded in Other (expense)/income, net on the accompanying unaudited consolidated income statements and excludes joint venture profit related to lots we purchased from the joint ventures, if any. 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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

 

For the transition period from                 to                

 

Commission File Number 1-9977

mhlogo.jpg

Meritage Homes Corporation

(Exact Name of Registrant as Specified in its Charter)

 

Maryland

 

86-0611231

(State or Other Jurisdiction of Incorporation or Organization)

 

(IRS Employer Identification No.)

 

8800 E. Raintree Drive, Suite 300, Scottsdale, Arizona 85260

 

(Address of Principal Executive Offices) (Zip Code)

 

(480) 515-8100

 

(Registrants telephone number, including area code)

 

N/A

 

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

 

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

MTH

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 a checkmark whether the registrant has submitted electronically every Interactive Date 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 the definitions 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 not 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 a checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  ☒

 

Common shares outstanding as of July 25, 2022: 36,566,975

 

 

 

MERITAGE HOMES CORPORATION

FORM 10-Q FOR THE QUARTER ENDED June 30, 2022

TABLE OF CONTENTS

 

   

PART I. FINANCIAL INFORMATION

 
 

Item 1. Financial Statements

 
 

Unaudited Consolidated Balance Sheets as of June 30, 2022 and December 31, 2021

3

 

Unaudited Consolidated Income Statements for the Three and Six Months Ended June 30, 2022 and 2021

4

 

Unaudited Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2022 and 2021

5

 

Notes to Unaudited Consolidated Financial Statements

6

 

Item 2. Managements 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

41

 

Items 3-5. Not Applicable

 
 

Item 6. Exhibits

42

 

SIGNATURES

43

 

INDEX OF EXHIBITS

43

 
 

 

 

 

PART I - FINANCIAL INFORMATION

 

Item 1.        Financial Statements

 

MERITAGE HOMES CORPORATION AND SUBSIDIARIES

UNAUDITED CONSOLIDATED BALANCE SHEETS

(in thousands, except share amounts)

 

  

June 30, 2022

  

December 31, 2021

 

Assets

        

Cash and cash equivalents

 $272,147  $618,335 

Other receivables

  171,408   147,548 

Real estate

  4,474,062   3,734,408 

Real estate not owned

  8,011   8,011 

Deposits on real estate under option or contract

  97,967   90,679 

Investments in unconsolidated entities

  11,223   5,764 

Property and equipment, net

  39,030   37,340 

Deferred tax assets, net

  41,271   40,672 

Prepaids, other assets and goodwill

  192,604   124,776 

Total assets

 $5,307,723  $4,807,533 

Liabilities

        

Accounts payable

 $341,717  $216,009 

Accrued liabilities

  326,856   337,277 

Home sale deposits

  60,820   42,610 

Liabilities related to real estate not owned

  7,210   7,210 

Loans payable and other borrowings

  15,613   17,552 

Senior notes, net

  1,143,038   1,142,486 

Total liabilities

  1,895,254   1,763,144 

Stockholders’ Equity

        

Preferred stock, par value $0.01. Authorized 10,000,000 shares; none issued and outstanding at June 30, 2022 and December 31, 2021

      

Common stock, par value $0.01. Authorized 125,000,000 shares; 36,566,975 and 37,340,855 shares issued and outstanding at June 30, 2022 and December 31, 2021, respectively

  366   373 

Additional paid-in capital

  315,590   414,841 

Retained earnings

  3,096,513   2,629,175 

Total stockholders’ equity

  3,412,469   3,044,389 

Total liabilities and stockholders’ equity

 $5,307,723  $4,807,533 

 

See accompanying notes to unaudited consolidated financial statements.

 

 

MERITAGE HOMES CORPORATION AND SUBSIDIARIES

UNAUDITED CONSOLIDATED INCOME STATEMENTS

(in thousands, except per share amounts)

 

  

Three Months Ended June 30,

  

Six Months Ended June 30,

 
  

2022

  

2021

  

2022

  

2021

 

Homebuilding:

                

Home closing revenue

 $1,408,947  $1,264,643  $2,654,403  $2,344,625 

Land closing revenue

  3,434   12,956   44,912   16,755 

Total closing revenue

  1,412,381   1,277,599   2,699,315   2,361,380 

Cost of home closings

  (964,208)  (919,342)  (1,832,015)  (1,732,669)

Cost of land closings

  (2,784)  (13,288)  (33,469)  (16,540)

Total cost of closings

  (966,992)  (932,630)  (1,865,484)  (1,749,209)

Home closing gross profit

  444,739   345,301   822,388   611,956 

Land closing gross profit/(loss)

  650   (332)  11,443   215 

Total closing gross profit

  445,389   344,969   833,831   612,171 

Financial Services:

                

Revenue

  5,139   5,665   9,811   10,416 

Expense

  (2,581)  (2,367)  (5,093)  (4,538)

Earnings from financial services unconsolidated entities and other, net

  1,521   1,317   2,695   2,497 

Financial services profit

  4,079   4,615   7,413   8,375 

Commissions and other sales costs

  (69,383)  (73,889)  (134,923)  (141,633)

General and administrative expenses

  (47,932)  (43,156)  (87,927)  (81,105)

Interest expense

     (77)  (41)  (167)

Other (expense)/income, net

  (458)  1,377   (775)  2,175 

Loss on early extinguishment of debt

     (18,188)     (18,188)

Earnings before income taxes

  331,695   215,651   617,578   381,628 

Provision for income taxes

  (81,611)  (48,262)  (150,240)  (82,396)

Net earnings

 $250,084  $167,389  $467,338  $299,232 

Earnings per common share:

                

Basic

 $6.82  $4.43  $12.69  $7.93 

Diluted

 $6.77  $4.36  $12.55  $7.80 

Weighted average number of shares:

                

Basic

  36,647   37,818   36,820   37,731 

Diluted

  36,962   38,377   37,239   38,357 

 

See accompanying notes to unaudited consolidated financial statements.

 

 

MERITAGE HOMES CORPORATION AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

 

  

Six Months Ended June 30,

 
  

2022

  

2021

 

Cash flows from operating activities:

        

Net earnings

 $467,338  $299,232 

Adjustments to reconcile net earnings to net cash used in operating activities:

        

Depreciation and amortization

  11,723   13,414 

Stock-based compensation

  10,045   8,590 

Loss on early extinguishment of debt

     18,188 

Equity in earnings from unconsolidated entities

  (2,145)  (1,807)

Distributions of earnings from unconsolidated entities

  2,339   2,215 

Other

  (601)  2,266 

Changes in assets and liabilities:

        

Increase in real estate

  (729,450)  (469,733)

Increase in deposits on real estate under option or contract

  (7,288)  (14,863)

Increase in other receivables, prepaids and other assets

  (90,419)  (36,390)

Increase in accounts payable and accrued liabilities

  113,421   26,532 

Increase in home sale deposits

  18,210   8,884 

Net cash used in operating activities

  (206,827)  (143,472)

Cash flows from investing activities:

        

Investments in unconsolidated entities

  (5,653)  (1)

Purchases of property and equipment

  (12,852)  (10,970)

Proceeds from sales of property and equipment

  247   292 

Maturities/sales of investments and securities

  1,032   2,697 

Payments to purchase investments and securities

  (1,032)  (2,697)

Net cash used in investing activities

  (18,258)  (10,679)

Cash flows from financing activities:

        

Repayment of loans payable and other borrowings

  (11,800)  (5,758)

Repayment of senior notes

     (317,690)

Proceeds from issuance of senior notes

     450,000 

Payment of debt issuance costs

     (6,102)

Repurchase of shares

  (109,303)  (27,546)

Net cash (used in)/provided by financing activities

  (121,103)  92,904 

Net decrease in cash and cash equivalents

  (346,188)  (61,247)

Cash and cash equivalents, beginning of period

  618,335   745,621 

Cash and cash equivalents, end of period

 $272,147  $684,374 

 

See Supplemental Disclosure of Cash Flow Information in Note 13.

 

See accompanying notes to unaudited consolidated financial statements.

 

 

MERITAGE HOMES CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

NOTE 1 ORGANIZATION AND BASIS OF PRESENTATION

 

Organization. Meritage Homes Corporation ("Meritage Homes") is a leading designer and builder of single-family homes. We primarily build in historically high-growth regions of the United States and offer a variety of entry-level and first move-up homes. We have homebuilding operations in three regions: West, Central and East, which are comprised of ten states: Arizona, California, Colorado, Texas, Florida, Georgia, North Carolina, South Carolina, Tennessee and Utah. We also operate a financial services reporting segment. In this segment, we offer title and escrow, mortgage, and insurance services. Carefree Title Agency, Inc. ("Carefree Title"), our wholly-owned title company, provides title insurance and closing/settlement services to our homebuyers. Managing our own title operations allows us greater control over the entire escrow and closing cycles in addition to generating additional revenue. Meritage Homes Insurance Agency (“Meritage Insurance”), our wholly-owned insurance broker, works in collaboration with insurance companies nationwide to offer homeowners insurance and other insurance products to our homebuyers. Our financial services operations also provides mortgage services to our homebuyers through an unconsolidated joint venture.

 

We commenced our homebuilding operations in 1985 through our predecessor company, Monterey Homes. Meritage Homes Corporation was incorporated in the state of Maryland in 1988 under the name of Homeplex Mortgage Investments Corporation and merged with Monterey Homes in 1996, at which time our name was changed to Monterey Homes Corporation and later ultimately to Meritage Homes Corporation. Since that time, we have engaged in homebuilding and related activities. Meritage Homes Corporation operates as a holding company and has no independent assets or operations. Its homebuilding construction, development and sales activities are conducted through its subsidiaries. Our homebuilding activities are conducted under the name of Meritage Homes in each of our homebuilding markets. At June 30, 2022, we were actively selling homes in 303 communities, with base prices ranging from approximately $244,000 to $1,400,000.

 

Basis of Presentation. The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. These financial statements should be read in conjunction with the audited consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2021. The unaudited consolidated financial statements include the accounts of Meritage Homes Corporation and those of our consolidated subsidiaries, partnerships and other entities in which we have a controlling financial interest, and of variable interest entities (see Note 3) in which we are deemed the primary beneficiary (collectively, “us”, “we”, “our” and “the Company”). Intercompany balances and transactions have been eliminated in consolidation. In the opinion of management, the accompanying unaudited consolidated financial statements include all normal and recurring adjustments that are considered necessary for the fair presentation of our results for the interim periods presented. Results for interim periods are not necessarily indicative of results to be expected for the full fiscal year.

 

Cash and Cash Equivalents. Liquid investments with an initial maturity of three months or less are classified as cash equivalents. Amounts in transit from title companies or closing agents for home closings of approximately $116.6 million and $95.4 million are included in cash and cash equivalents at June 30, 2022 and December 31, 2021, respectively.

 

Real Estate. Real estate inventory is stated at cost unless the community or land is determined to be impaired, at which point the inventory is written down to fair value as required by Accounting Standards Codification (“ASC”) 360-10, Property, Plant and Equipment ("ASC 360-10"). Inventory includes the costs of land acquisition, land development and home construction, capitalized interest, real estate taxes, and direct overhead costs incurred during development and home construction that benefit the entire community, less impairments, if any. Land and development costs are typically allocated and transferred to homes when home construction begins. Home construction costs are accumulated on a per-home basis, while selling and marketing costs are expensed as incurred. Cost of home closings includes the specific construction costs of the home and all related allocated land acquisition, land development and other common costs (both incurred and estimated to be incurred) that are allocated based upon the total number of homes expected to be closed in each community or phase. Any changes to the estimated total development costs of a community or phase are allocated to the remaining homes in that community or phase. When a home closes, we may have incurred costs for goods and services that have not yet been paid. We accrue a liability to capture such obligations in connection with the home closing which is charged directly to Cost of home closings.

 

6

 

We capitalize qualifying interest to inventory during the development and construction periods. Capitalized interest is included in cost of closings when the related inventory is closed. Included within our real estate inventory is land held for development and land held for sale. Land held for development primarily represents land and land development costs related to land where development activity is not currently underway but is expected to begin in the future. For these parcels, we have chosen not to currently develop certain land holdings as they typically represent a portion or phases of a larger land parcel that we plan to build out over several years. We do not capitalize interest for these inactive assets, and all ongoing costs of land ownership (i.e. property taxes, homeowner association dues, etc.) are expensed as incurred.

 

We rely on certain estimates to determine our construction and land development costs. Construction and land costs are comprised of direct and allocated costs, including estimated future costs. In determining these costs, we compile project budgets that are based on a variety of assumptions, including future construction schedules and costs to be incurred. Actual results can differ from budgeted amounts for various reasons, including construction delays, labor or material shortages, absorptions that differ from our expectations, increases in costs that have not yet been committed, changes in governmental requirements, or other unanticipated issues encountered during construction and development and other factors beyond our control. To address uncertainty in these budgets, we assess, update and revise project budgets on a regular basis, utilizing the most current information available to estimate home construction and land development costs.

 

Typically, a community's life cycle ranges from three to five years, commencing with the acquisition of the land, continuing through the land development phase, if applicable, and concluding with the sale, construction and closing of the homes. Actual community lives will vary based on the size of the community, the sales orders absorption rates and whether the land purchased was raw, partially-developed or in finished status. Master-planned communities encompassing several phases and super-block land parcels may have significantly longer lives and projects involving smaller finished lot purchases may be significantly shorter.

 

All of our land inventory and related real estate assets are periodically reviewed for recoverability when certain criteria are met, but at least annually, as our inventory is considered “long-lived” in accordance with GAAP. If the undiscounted cash flows expected to be generated by an asset are lower than its carrying amount, impairment charges are recorded to write down the asset to its estimated fair value. Our determination of fair value is based on projections and estimates. Changes in these expectations may lead to a change in the outcome of our impairment analysis, and actual results may also differ from our assumptions. We conduct an analysis if indicators of a decline in value of our land and real estate assets exists. If an asset is deemed to be impaired, the impairment recognized is measured as the amount by which the assets' carrying amount exceeds their fair value. The impairment of a community is allocated to each lot on a straight-line basis. See Note 2 for additional information related to real estate.

 

Deposits. Deposits paid related to land option and purchase contracts are recorded and classified as Deposits on real estate under option or contract until the related land is purchased. Deposits are reclassified as a component of real estate inventory at the time the deposit is used to offset the acquisition price of the land based on the terms of the underlying agreements. To the extent they are non-refundable, deposits are expensed to Cost of home closings if the land acquisition is terminated or no longer considered probable. Since our acquisition contracts typically do not require specific performance, we do not consider such contracts to be contractual obligations to purchase the land and our total exposure under such contracts is limited to the loss of any non-refundable deposits and any ancillary capitalized costs. Our Deposits on real estate under option or contract were $98.0 million and $90.7 million as of June 30, 2022 and December 31, 2021, respectively.

 

7

 

Goodwill. In accordance with ASC 350, Intangibles, Goodwill and Other ("ASC 350"), we analyze goodwill on an annual basis (or whenever indication of impairment exists) through a qualitative assessment to determine whether it is necessary to perform a goodwill impairment test. ASC 350 states that an entity may assess qualitative factors to determine whether it is necessary to perform a goodwill impairment test. Such qualitative factors include: (1) macroeconomic conditions, such as a deterioration in general economic conditions, (2) industry and market considerations such as deterioration in the environment in which the entity operates, (3) cost factors such as increases in raw materials, labor costs, etc., and (4) overall financial performance such as negative or declining cash flows or a decline in actual or planned revenue or earnings. If the qualitative analysis determines that additional impairment testing is required, a two-step impairment test in accordance with ASC 350 would be initiated. We continually evaluate our qualitative inputs to assess whether events and circumstances have occurred that indicate the goodwill balance may not be recoverable. See Note 9 for additional information on our goodwill assets.

 

Leases. We lease certain office space and equipment for use in our operations. We assess each of these contracts to determine whether the arrangement contains a lease as defined by ASC 842, Leases ("ASC 842"). In order to meet the definition of a lease under ASC 842, the contractual arrangement must convey to us the right to control the use of an identifiable asset for a period of time in exchange for consideration. Leases that meet the criteria of ASC 842 are recorded on our balance sheets as right-of-use ("ROU") assets and lease liabilities. ROU assets are classified within Prepaids, other assets and goodwill on the accompanying unaudited consolidated balance sheets, while lease liabilities are classified within Accrued liabilities on the accompanying unaudited consolidated balance sheets.

 

The table below outlines our ROU assets and lease liabilities (in thousands):

 

  

As of

 
  

June 30, 2022

  

December 31, 2021

 

ROU assets

 $19,725  $21,038 

Lease liabilities

  24,084   26,171 

 

Off-Balance Sheet Arrangements - Joint Ventures. We may participate in land development joint ventures as a means of accessing larger parcels of land and lot positions, expanding our market opportunities, managing our risk profile and leveraging our capital base, although our participation in such ventures is currently limited. See Note 4 for additional discussion of our investments in unconsolidated entities.

 

Off-Balance Sheet Arrangements - Other. In the normal course of business, we may acquire lots from various development entities pursuant to purchase and option agreements. The purchase price generally approximates the market price at the date the contract is executed (with possible future escalators) and may have staggered purchase schedules. See Note 3 for additional information on these off-balance sheet arrangements.

 

Surety Bonds and Letters of Credit. We provide surety bonds and letters of credit in support of our obligations relating to the development of our projects and other corporate purposes in lieu of cash deposits. The amount of these obligations outstanding at any time varies depending on the stage and level of our development activities. Bonds are generally not wholly released until all development activities under the bond are complete. In the event a bond or letter of credit is drawn upon, we would be obligated to reimburse the issuer for any amounts advanced under the bond or letter of credit. We believe it is unlikely that any significant amounts of these bonds or letters of credit will be drawn upon.

 

The table below outlines our surety bond and letter of credit obligations (in thousands):

 

  

As of

 
  

June 30, 2022

  

December 31, 2021

 
      

Estimated work

      

Estimated work

 
      

remaining to

      

remaining to

 
  

Outstanding

  

complete

  

Outstanding

  

complete

 

Sureties:

                

Sureties related to owned projects and lots under contract

 $696,017  $401,730  $620,297  $352,152 

Total Sureties

 $696,017  $401,730  $620,297  $352,152 

Letters of Credit (“LOCs”):

                

LOCs for land development

 $58,124   N/A  $57,396   N/A 

LOCs for general corporate operations

  5,000   N/A   5,000   N/A 

Total LOCs

 $63,124   N/A  $62,396   N/A 

 

8

 

Accrued Liabilities. Accrued liabilities at June 30, 2022 and December 31, 2021 consisted of the following (in thousands):

 

  

As of

 
  

June 30, 2022

  

December 31, 2021

 

Accruals related to real estate development and construction activities

 $150,525  $115,214 

Payroll and other benefits

  73,601   102,773 

Accrued interest

  7,195   5,556 

Accrued taxes

  17,084   37,297 

Warranty reserves

  31,437   26,264 

Lease liabilities

  24,084   26,171 

Other accruals

  22,930   24,002 

Total

 $326,856  $337,277 

 

Warranty Reserves. We provide home purchasers with limited warranties against certain building defects and we have certain obligations related to those post-construction warranties for closed homes. The specific terms and conditions of these limited warranties vary by state, but overall the nature of the warranties include a complete workmanship and materials warranty for the first year after the close of the home, a major mechanical warranty for two years after the close of the home and a structural warranty that typically extends up to 10 years after the close of the home. With the assistance of an actuary, we have estimated these reserves for the structural warranty based on the number of homes still under warranty and historical data and trends for our communities. We may use industry data with respect to similar product types and geographic areas in markets where our experience is incomplete to draw a meaningful conclusion. We regularly review our warranty reserves and adjust them, as necessary, to reflect changes in trends as information becomes available. Based on such reviews of warranty costs incurred, we did not adjust the warranty reserve balance in the three or six months ended June 30, 2022 or 2021. Included in the warranty reserve balances at June 30, 2022 and  December 31, 2021 reflected in the table below are case-specific reserves for warranty matters, as discussed in Note 15.

 

A summary of changes in our warranty reserves follows (in thousands):

 

  

Three Months Ended June 30,

  

Six Months Ended June 30,

 
  

2022

  

2021

  

2022

  

2021

 

Balance, beginning of period

 $26,667  $23,767  $26,264  $23,743 

Additions to reserve from new home deliveries

  5,308   4,514   9,836   8,324 

Warranty claims

  (538)(1) (3,216)  (4,663)(1) (7,002)

Adjustments to pre-existing reserves

            

Balance, end of period

 $31,437  $25,065  $31,437  $25,065 

 

(1)

Includes recoveries for costs incurred over several years on a foundation design and performance matter that affected a single community in Texas.

 

Warranty reserves are included in Accrued liabilities on the accompanying unaudited consolidated balance sheets, and additions and adjustments to the reserves are included in Cost of home closings within the accompanying unaudited consolidated income statements. These reserves are intended to cover costs associated with our contractual and statutory warranty obligations, which include, among other items, claims involving defective workmanship and materials. We believe that our total reserves, coupled with our contractual relationships and rights with our trades and the insurance we maintain, are sufficient to cover our general warranty obligations. However, unanticipated changes in legal, weather, environmental or other conditions could have an impact on our actual warranty costs, and future costs could differ significantly from our estimates.

 

Revenue Recognition. In accordance with ASC 606, Revenue from Contracts with Customers, we apply the following steps in determining the timing and amount of revenue to recognize: (1) identify the contract with our customer; (2) identify the performance obligation(s) in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract, if applicable; and (5) recognize revenue when (or as) we satisfy the performance obligations. The performance obligations and subsequent revenue recognition for our three sources of revenue are outlined below:

 

 

Revenue from closings of residential real estate is recognized when closings have occurred, the risks and rewards of ownership are transferred to the buyer, and we have no continuing involvement with the property, which is generally upon the close of escrow. Revenue is reported net of any discounts and incentives.

 

9

 
 

Revenue from land sales is recognized when a significant down payment is received, title passes, and collectability of the receivable, if any, is reasonably assured, and we have no continuing involvement with the property, which is generally upon the close of escrow.

 

 

Revenue from financial services is recognized when closings have occurred and all financial services have been rendered, which is generally upon the close of escrow.

 

Home closing and land closing revenue expected to be recognized in any future year related to remaining performance obligations (if any) and the associated contract liabilities expected to be recognized as revenue, excluding revenue pertaining to contracts that have an original expected duration of one year or less, is not material. Revenue from financial services includes estimated future insurance policy renewal commissions as our performance obligations are satisfied upon issuance of the initial policy with a third party broker. The related contract assets for these estimated future renewal commissions are not material at June 30, 2022 and December 31, 2021. Our three sources of revenue are disaggregated by type in the accompanying unaudited consolidated income statements.

 

Recent Accounting Pronouncements.

 

There are no recent accounting pronouncements that are expected to have a material impact on our financial statements or financial statement disclosures.

 

 

NOTE 2 REAL ESTATE AND CAPITALIZED INTEREST

 

Real estate consists of the following (in thousands):

 

  

As of

 
  

June 30, 2022

  

December 31, 2021

 

Homes under contract under construction (1)

 $1,527,013  $1,039,822 

Unsold homes, completed and under construction (1)

  748,845   484,999 

Model homes (1)

  89,539   81,049 

Finished home sites and home sites under development (2) (3)

  2,108,665   2,128,538 

Total

 $4,474,062  $3,734,408 

 

(1)

Includes the allocated land and land development costs associated with each lot for these homes.

 

(2)

Includes raw land, land held for development and land held for sale, less impairments, if any. We do not capitalize interest for inactive assets, and all ongoing costs of land ownership (i.e. property taxes, homeowner association dues, etc.) are expensed as incurred.

 

(3)

Includes land held for sale of $58.2 million and $62.1 million as of June 30, 2022 and December 31, 2021, respectively.

 

10

 

Subject to sufficient qualifying assets, we capitalize our development period interest costs incurred to applicable qualifying assets in connection with our real estate development and construction activities. Capitalized interest is allocated to active real estate when incurred and charged to Cost of closings when the related property is delivered. A summary of our capitalized interest is as follows (in thousands):

 

  

Three Months Ended June 30,

  

Six Months Ended June 30,

 
  

2022

  

2021

  

2022

  

2021

 

Capitalized interest, beginning of period

 $59,082  $57,540  $56,253  $58,940 

Interest incurred

  15,171   16,321   30,384   32,413 

Interest expensed

     (77)  (41)  (167)

Interest amortized to cost of home and land closings

  (12,794)  (17,074)  (25,137)  (34,476)

Capitalized interest, end of period

 $61,459  $56,710  $61,459  $56,710 

 

 

NOTE 3 VARIABLE INTEREST ENTITIES AND CONSOLIDATED REAL ESTATE NOT OWNED

 

We enter into purchase and option agreements for land or lots as part of the normal course of business. These purchase and option agreements enable us to acquire properties at one or multiple future dates at pre-determined prices. We believe these acquisition structures allow us to better leverage our balance sheet and reduce our financial risk associated with land acquisitions. In accordance with ASC 810, Consolidation, we evaluate all purchase and option agreements for land to determine whether they are a variable interest entity ("VIE"), and if so, whether we are the primary beneficiary. Although we do not have legal title to the underlying land, if we are the primary beneficiary we are required to consolidate the VIE in our financial statements and reflect such assets and liabilities as Real estate not owned and Liabilities related to real estate not owned, respectively. As a result of our analyses, we determined that as of June 30, 2022 and December 31, 2021, we were not the primary beneficiary of any VIEs from which we have acquired rights to land or lots under option contracts.

 

The table below presents a summary of our lots under option at June 30, 2022 (dollars in thousands): 

 

  

Projected

      

Option/

  
  

Number

  

Purchase

  

Earnest Money

  
  

of Lots

  

Price

  

Deposits–Cash

  

Purchase and option contracts recorded on balance sheet as Real estate not owned (1)

  1  $8,011  $801  

Option contracts — non-refundable deposits, committed (2)

  11,991   644,294   64,290  

Purchase contracts — non-refundable deposits, committed (2)

  10,880   302,555   22,712  

Purchase and option contracts —refundable deposits, committed

  1,450   35,228   1,477  

Total committed

  24,322   990,088   89,280  

Purchase and option contracts — refundable deposits, uncommitted (3)

  26,541   877,421   9,488  

Total lots under contract or option

  50,863  $1,867,509  $98,768  

Total purchase and option contracts not recorded on balance sheet (4)

  50,862  $1,859,498  $97,967 

(5)

 

(1)

Real estate not owned represents a single parcel of land intended for multi-family housing that, once purchased, the Company intends to sell.

 

(2)

Deposits are non-refundable except if certain contractual conditions are not performed by the selling party.

 

(3)

Deposits are refundable at our sole discretion. We have not completed our acquisition evaluation process and we have not internally committed to purchase these lots.

 

(4)

Except for our specific performance contracts recorded on our unaudited consolidated balance sheets as Real estate not owned (if any), none of our purchase or option contracts require us to purchase lots.

 

(5)

Amount is reflected in our unaudited consolidated balance sheets in Deposits on real estate under option or contract as of June 30, 2022.

 

Generally, our options to purchase lots remain effective so long as we purchase a pre-established minimum number of lots each month or quarter, as determined by the respective agreement. Although the pre-established number is typically structured to approximate our expected rate of home construction starts, during a weakened homebuilding market, we may purchase lots at an absorption level that exceeds our sales and home starts pace needed to meet the pre-established minimum number of lots or restructure our original contract to terms that more accurately reflect our revised orders pace expectations. During a strong homebuilding market, we may accelerate our pre-established minimum purchases if allowed by the contract.

 

11

 

NOTE 4 - INVESTMENTS IN UNCONSOLIDATED ENTITIES

 

We may enter into joint ventures as a means of accessing larger parcels of land, expanding our market opportunities, managing our risk profile, optimizing deal structure for the impacted parties and leveraging our capital. While purchasing land through a joint venture can be beneficial, currently we do not view joint ventures as critical to the success of our homebuilding operations. Our joint venture partners generally are other homebuilders, land sellers or other real estate investors. We generally do not have a controlling interest in these ventures, which means our joint venture partners could cause the venture to take actions we disagree with, or fail to take actions we believe should be undertaken, including the sale of the underlying property to repay debt or recoup all or part of the partners' investments. Based on the structure of these joint ventures, they may or may not be consolidated into our results. As of June 30, 2022, we had two active equity-method land ventures and one mortgage joint venture, which is engaged in mortgage activities and primarily provides services to our homebuyers.

 

Summarized condensed combined financial information related to unconsolidated joint ventures that are accounted for using the equity method was as follows (in thousands):

 

  

As of

 
  

June 30, 2022

  

December 31, 2021

 

Assets:

        

Cash

 $2,826  $7,983 

Real estate

  16,784   7,989 

Other assets

  7,024   3,903 

Total assets

 $26,634  $19,875 

Liabilities and equity:

        

Accounts payable and other liabilities

 $5,990  $7,899 

Equity of:

        

Meritage (1)

  10,198   4,752 

Other

  10,446   7,224 

Total liabilities and equity

 $26,634  $19,875 

 

  

Three Months Ended June 30,

  

Six Months Ended June 30,

 
  

2022

  

2021

  

2022

  

2021

 

Revenue

 $9,840  $10,108  $19,078  $19,103 

Costs and expenses

  (7,936)  (8,404)  (16,208)  (16,529)

Net earnings of unconsolidated entities

 $1,904  $1,704  $2,870  $2,574 

Meritage’s share of pre-tax earnings (1) (2)

 $1,208  $1,057  $2,192  $1,807 

 

(1)

Balance represents Meritage’s interest, as reflected in the financial records of the respective joint ventures. This balance may differ from the balance reported in the accompanying unaudited consolidated financial statements due to the following reconciling items: (i) timing differences for revenue and distributions recognition, (ii) step-up basis and corresponding amortization, (iii) capitalization of interest on qualified assets, (iv) income deferrals as discussed in Note (2) below and (v) the cessation of allocation of losses from joint ventures in which we have previously written down our investment balance to zero and where we have no commitment to fund additional losses.

 

(2)

Our share of pre-tax earnings from our mortgage joint venture is recorded in Earnings from financial services unconsolidated entities and other, net on the accompanying unaudited consolidated income statements. Our share of pre-tax earnings from all other joint ventures is recorded in Other (expense)/income, net on the accompanying unaudited consolidated income statements and excludes joint venture profit related to lots we purchased from the joint ventures, if any. Such profit is deferred until homes are delivered by us and title passes to a homebuyer.

 

12

 

NOTE 5 LOANS PAYABLE AND OTHER BORROWINGS

 

Loans payable and other borrowings consist of the following (in thousands):

 

  

As of

 
  

June 30, 2022

  

December 31, 2021

 

Other borrowings, real estate notes payable (1)

 $15,613  $17,552 

$780.0 million unsecured revolving credit facility

      

Total

 $15,613  $17,552 

 

(1)

Reflects balance of non-recourse notes payable in connection with land purchases.

 

The Company entered into an amended and restated unsecured revolving credit facility ("Credit Facility") in 2014 that has been amended from time to time. In December 2021, the Credit Facility was amended to extend the maturity date to December 22, 2026 and replace LIBOR as the benchmark interest rate with the Secured Overnight Financing Rate ("SOFR") as described below. The Credit Facility's aggregate commitment is $780.0 million with an accordion feature permitting the size of the facility to increase to a maximum of $880.0 million, subject to certain conditions, including the availability of additional bank commitments. Borrowings under the Credit Facility bear interest at the Company's option, at either (1) term SOFR (based on 1, 3, or 6 month interest periods, as selected by the Company) plus a 10 basis point adjustment plus an applicable margin (ranging from 125 basis points to 175 basis points (the "applicable margin")) based on the Company's leverage ratio as determined in accordance with a pricing grid, (2) the higher of (i) the prime lending rate, (ii) an overnight bank rate plus 50 basis points and (iii) term SOFR (based on a 1 month interest period) plus a 10 basis point adjustment plus 1%, in each case plus a margin ranging from 25 basis points to 75 basis points based on the Company's leverage in accordance with a pricing grid, or (3) daily simple SOFR plus a 10 basis point adjustment plus the applicable margin. At June 30, 2022, the interest rate on outstanding borrowings under the Credit Facility would have been 3.040% per annum, calculated in accordance with option (1) discussed previously and using the 1-month term SOFR. We are obligated to pay a fee on the undrawn portion of the Credit Facility at a rate equal to the applicable margin then in effect.

 

The Credit Facility also contains certain financial covenants, including (a) a minimum tangible net worth requirement of $1.9 billion (which amount is subject to increase over time based on subsequent earnings and proceeds from equity offerings), and (b) a maximum leverage covenant that prohibits the leverage ratio (as defined therein) from exceeding 60%. In addition, we are required to maintain either (i) an interest coverage ratio (EBITDA to interest expense, as defined therein) of at least 1.50 to 1.00 or (ii) liquidity (as defined therein) of an amount not less than our consolidated interest incurred during the trailing 12 months. We were in compliance with all Credit Facility covenants as of June 30, 2022.

 

We had no outstanding borrowings under the Credit Facility as of June 30, 2022 and December 31, 2021. There were no borrowings or repayments during the three and six months ended June 30, 2022 and 2021. As of June 30, 2022, we had outstanding letters of credit issued under the Credit Facility totaling $63.1 million, leaving $716.9 million available under the Credit Facility to be drawn.

 

13

 

NOTE 6 SENIOR NOTES, NET

 

Senior notes, net consist of the following (in thousands):

 

  

As of

 
  

June 30, 2022

  

December 31, 2021

 

6.00% senior notes due 2025. At June 30, 2022 and December 31, 2021 there was approximately $2,386 and $2,795 in net unamortized premium, respectively.

 $402,386  $402,795 

5.125% senior notes due 2027

  300,000   300,000 

3.875% senior notes due 2029

  450,000   450,000 

Net debt issuance costs

  (9,348)  (10,309)

Total

 $1,143,038  $1,142,486 

 

The indentures for all of our senior notes contain non-financial covenants including, among others, limitations on the amount of secured debt we may incur, and limitations on sale and leaseback transactions and mergers. We were in compliance with all such covenants as of June 30, 2022.

 

Obligations to pay principal and interest on the senior notes are guaranteed by substantially all of our wholly-owned subsidiaries (each a “Guarantor” and, collectively, the “Guarantor Subsidiaries”), each of which is directly or indirectly 100% owned by Meritage Homes Corporation. Such guarantees are full and unconditional, and joint and several. In the event of a sale or other disposition of all of the assets of any Guarantor, by way of merger, consolidation or otherwise, or a sale or other disposition of all of the equity interests of any Guarantor then held by Meritage and its subsidiaries, then that Guarantor may be released and relieved of any obligations under its note guarantee. There are no significant restrictions on our ability or the ability of any Guarantor to obtain funds from their respective subsidiaries, as applicable, by dividend or loan. We do not provide separate financial statements of the Guarantor Subsidiaries because Meritage (the parent company) has no independent assets or operations and the guarantees are full and unconditional and joint and several. Subsidiaries of Meritage Homes Corporation that are non-guarantor subsidiaries are, individually and in the aggregate, minor.

 

In April 2021, we completed an offering of $450.0 million aggregate principal amount of 3.875% Senior Notes due 2029. We used a portion of the net proceeds from this offering to redeem all $300.0 million aggregate principal outstanding of our 7.00% Senior Notes due 2022, incurring $18.2 million in early debt extinguishment charges in the three and six months ended June 30, 2021, reflected as Loss on early extinguishment of debt in the accompanying unaudited consolidated income statements.

 

 

NOTE 7 FAIR VALUE DISCLOSURES

 

ASC 820-10, Fair Value Measurement ("ASC 820"), defines fair value, establishes a framework for measuring fair value and addresses required disclosures about fair value measurements. This standard establishes a three-level hierarchy for fair value measurements based upon the significant inputs used to determine fair value. Observable inputs are those which are obtained from market participants external to the Company while unobservable inputs are generally developed internally, utilizing management’s estimates, assumptions and specific knowledge of the assets/liabilities and related markets. The three levels are defined as follows:

 

 

Level 1 — Valuation is based on quoted prices in active markets for identical assets and liabilities.

 

Level 2 — Valuation is determined from quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar instruments in markets that are not active, or by model-based techniques in which all significant inputs are observable in the market.

 

Level 3 — Valuation is derived from model-based techniques in which at least one significant input is unobservable and based on the Company’s own estimates about the assumptions that market participants would use to value the asset or liability.

 

14

 

If the only observable inputs are from inactive markets or for transactions which the Company evaluates as “distressed”, the use of Level 1 inputs should be modified by the Company to properly address these factors, or the reliance of such inputs may be limited, with a greater weight attributed to Level 3 inputs.

 

Financial Instruments: The fair value of our fixed-rate debt is derived from quoted market prices by independent dealers (Level 2 inputs as per the discussion above) and is as follows (in thousands): 

 

  

As of

 
  

June 30, 2022

  

December 31, 2021

 
  

Aggregate

  

Estimated Fair

  

Aggregate

  

Estimated Fair

 
  

Principal

  

Value

  

Principal

  

Value

 

6.00% senior notes due 2025

 $400,000  $390,000  $400,000  $446,520 

5.125% senior notes due 2027

 $300,000  $274,500  $300,000  $329,640 

3.875% senior notes due 2029

 $450,000  $372,375  $450,000  $472,500 

 

Due to the short-term nature of other financial assets and liabilities, including our Loans payable and other borrowings, we consider the carrying amounts of our other short-term financial instruments to approximate fair value.

 

 

NOTE 8 EARNINGS PER SHARE

 

Basic and diluted earnings per common share were calculated as follows (in thousands, except per share amounts):

 

  

Three Months Ended June 30,

  

Six Months Ended June 30,

 
  

2022

  

2021

  

2022

  

2021

 

Basic weighted average number of shares outstanding

  36,647   37,818   36,820   37,731 

Effect of dilutive securities:

                

Unvested restricted stock

  315   559   419   626 

Diluted average shares outstanding

  36,962   38,377   37,239   38,357 

Net earnings

 $250,084  $167,389  $467,338  $299,232 

Basic earnings per share

 $6.82  $4.43  $12.69  $7.93 

Diluted earnings per share

 $6.77  $4.36  $12.55  $7.80 

 

15

 

NOTE 9 ACQUISITIONS AND GOODWILL

 

Goodwill. In prior years, we have entered new markets through the acquisition of the homebuilding assets and operations of local/regional homebuilders in Georgia, South Carolina and Tennessee. As a result of these transactions, we recorded approximately $33.0 million of goodwill. Goodwill represents the excess purchase price of our acquisitions over the fair value of the net assets acquired. Our acquisitions were recorded in accordance with ASC 805, Business Combinations, and ASC 820, using the acquisition method of accounting. The purchase price for acquisitions was allocated based on estimated fair value of the assets and liabilities at the date of the acquisition. The combined excess purchase price of our acquisitions over the fair value of the net assets is classified as goodwill and is included in our unaudited consolidated balance sheets in Prepaids, other assets and goodwill. In accordance with ASC 350, we assess the recoverability of goodwill annually, or more frequently, if impairment indicators are present.

 

A summary of the carrying amount of goodwill follows (in thousands):

 

              

Financial

         
  

West

  

Central

  

East

  

Services

  

Corporate

  

Total

 

Balance at December 31, 2021

 $  $  $32,962  $  $  $32,962 

Additions

                  

Balance at June 30, 2022

 $  $  $32,962  $  $  $32,962 

 

 

NOTE 10 STOCKHOLDERS EQUITY

 

A summary of changes in stockholders’ equity is presented below (in thousands):   

 

  

Six Months Ended June 30, 2022

 
  

(In thousands)

 
          

Additional

         
  

Number of

  

Common

  

Paid-In

  

Retained

     
  

Shares

  

Stock

  

Capital

  

Earnings

  

Total

 

Balance at December 31, 2021

  37,341  $373  $414,841  $2,629,175  $3,044,389 

Net earnings

           217,254   217,254 

Stock-based compensation expense

        5,975      5,975 

Issuance of stock

  392   4   (4)      

Share repurchases

  (1,038)  (10)  (99,293)     (99,303)

Balance at March 31, 2022

  36,695  $367  $321,519  $2,846,429  $3,168,315 

Net earnings

           250,084   250,084 

Stock-based compensation expense

        4,070      4,070 

Share repurchases

  (128)  (1)  (9,999)     (10,000)

Balance at June 30, 2022

  36,567  $366  $315,590  $3,096,513  $3,412,469 

 

  

Six Months Ended June 30, 2021

 
  

(In thousands)

 
          

Additional

         
  

Number of

  

Common

  

Paid-In

  

Retained

     
  

Shares

  

Stock

  

Capital

  

Earnings

  

Total

 

Balance at December 31, 2020

  37,512  $375  $455,762  $1,891,731  $2,347,868 

Net earnings

           131,843   131,843 

Stock-based compensation expense

        5,367      5,367 

Issuance of stock

  435   4   (4)      

Share repurchases

  (100)  (1)  (8,384)     (8,385)

Balance at March 31, 2021

  37,847  $378  $452,741  $2,023,574  $2,476,693 

Net earnings

           167,389   167,389 

Stock-based compensation expense

        3,223      3,223 

Issuance of stock

  (200)  (2)  (19,159)     (19,161)

Balance at June 30, 2021

  37,647  $376  $436,805  $2,190,963  $2,628,144 

 

16

 

NOTE 11 STOCK-BASED AND DEFERRED COMPENSATION

 

We have a stock compensation plan, the Meritage Homes Corporation 2018 Stock Incentive Plan (the “2018 Plan"), that was approved by our Board of Directors and our stockholders and adopted in May 2018. The 2018 Plan is administered by our Board of Directors and allows for the grant of stock appreciation rights, restricted stock awards, restricted stock units, performance share awards and performance-based awards in addition to non-qualified and incentive stock options. All available shares from expired, terminated, or forfeited awards that remained under prior plans were merged into and became available for grant under the 2018 Plan. The 2018 Plan authorizes awards to officers, key employees, non-employee directors and consultants. The 2018 Plan authorizes 6,600,000 shares of stock to be awarded, of which 722,718 shares remain available for grant at June 30, 2022. We believe that such awards provide a means of performance-based compensation to attract and retain qualified employees and better align the interests of our employees with those of our stockholders. Non-vested stock awards are usually granted with a five-year ratable vesting period for employees, a three-year cliff vesting for both restricted stock and performance-based awards granted to senior executive officers, and either a three-year cliff vesting or one-year vesting for non-employee directors, dependent on their start date.

 

Compensation cost related to time-based restricted stock awards is measured as of the closing price on the date of grant and is expensed, less forfeitures, on a straight-line basis over the vesting period of the award. Compensation cost related to performance-based restricted stock awards is also measured as of the closing price on the date of grant but is expensed in accordance with ASC 718-10-25-20, Compensation Stock Compensation ("ASC 718"), which requires an assessment of probability of attainment of the performance target. As our performance targets are dependent on performance over a specified measurement period, once we determine that the performance target outcome is probable, the cumulative expense is recorded immediately with the remaining expense recorded on a straight-line basis through the end of the award vesting period. A portion of the performance-based restricted stock awards granted to our executive officers contain market conditions as defined by ASC 718. ASC 718 requires that compensation expense for stock awards with market conditions be expensed based on a derived grant date fair value and expensed over the service period. We engage a third party to perform a valuation analysis on the awards containing market conditions and our associated expense with those awards is based on the derived fair value from that analysis and is expensed straight-line over the service period of the awards. Below is a summary of stock-based compensation expense and stock award activity (dollars in thousands):

 

  

Three Months Ended June 30,

  

Six Months Ended June 30,

 
  

2022

  

2021

  

2022

  

2021

 

Stock-based compensation expense

 $4,070  $3,223  $10,045  $8,590 

Non-vested shares granted

        264,862   221,552 

Performance-based non-vested shares granted

        40,004   46,593 

Performance-based shares issued in excess of target shares granted (1)

        37,146   37,425 

Restricted stock awards vested (includes performance-based awards)

        392,160   434,729 

 

(1)

Performance-based shares that vested and were issued as a result of performance achievement exceeding the originally established targeted number of shares related to respective performance metrics.

 

The following table includes additional information regarding our stock compensation plan (dollars in thousands):

 

  

As of

 
  

June 30, 2022

  

December 31, 2021

 

Unrecognized stock-based compensation cost

 $38,340  $25,007 

Weighted average years expense recognition period

  2.13   1.97 

Total equity awards outstanding (1)

  816,513   883,280 

 

 

(1)

Includes unvested restricted stock awards, restricted stock units and performance-based awards (assuming 100%/target payout).

 

17

 

We also offer a non-qualified deferred compensation plan ("deferred compensation plan") to highly compensated employees in order to allow them additional pre-tax income deferrals above and beyond the limits that qualified plans, such as 401(k) plans, impose on highly compensated employees. We do not currently offer a contribution match on the deferred compensation plan. All contributions to the plan to date have been funded by the employees and, therefore, we have no associated expense related to the deferred compensation plan for the three and six months ended June 30, 2022 or 2021, other than minor administrative costs.

 

 

NOTE 12 INCOME TAXES

 

Components of the income tax provision are as follows (in thousands):   

 

  

Three Months Ended June 30,

  

Six Months Ended June 30,

 
  

2022

  

2021

  

2022

  

2021

 

Federal

 $67,118  $38,713  $123,463  $67,826 

State

  14,493   9,549   26,777   14,570 

Total

 $81,611  $48,262  $150,240  $82,396 

 

The effective tax rate for the three and six months ended June 30, 2022 was 24.6% and 24.3%, respectively and for the three and six months ended June 30, 2021 was 22.4% and 21.6%, respectively. The higher tax rate for the three and six months ended June 30, 2022 is due to the expiration of Internal Revenue Code ("IRC") §45L new energy efficient homes credit, which was enacted into law under the Taxpayer Certainty and Disaster Tax Relief Act of 2019 and subsequently extended through December 31, 2021 by enactment of the Taxpayer Certainty and Disaster Tax Relief Act of 2020. Since the new energy efficient homes credit has not been extended beyond 2021, the effective tax rates in 2022 do not include such benefits.

 

At June 30, 2022 and December 31, 2021, we have no unrecognized tax benefits. We believe that our current income tax filing positions and deductions will be sustained on audit and do not anticipate any adjustments that will result in a material change. Our policy is to accrue interest and penalties on unrecognized tax benefits and include them in the provision for income taxes.

 

We determine our deferred tax assets and liabilities in accordance with ASC 740, Income Taxes. We evaluate our deferred tax assets, including the benefit from net operating losses ("NOLs"), by jurisdiction to determine if a valuation allowance is required. Companies must assess whether a valuation allowance should be established based on the consideration of all available evidence using a “more likely than not” standard with significant weight being given to evidence that can be objectively verified. This assessment considers, among other matters, the nature, frequency and severity of cumulative losses, forecasts of future profitability, the length of statutory carry forward periods, experiences with operating losses and experiences of utilizing tax credit carry forwards and tax planning alternatives. We have no valuation allowance on our deferred tax assets and no NOL carryovers at June 30, 2022.

 

At June 30, 2022, we have a current income tax payable of $5.6 million and no income taxes receivable. The income taxes payable primarily consists of current federal and state income tax accruals, net of current energy tax credits and estimated tax payments. This amount is recorded in Accrued liabilities on the accompanying unaudited consolidated balance sheets at June 30, 2022.

 

We conduct business and are subject to tax in the U.S. both federally and in several states. With few exceptions, we are no longer subject to U.S. federal, state, or local income tax examinations by taxing authorities for years prior to 2017. We have no federal or state income tax examinations being conducted at this time.

 

 

18

 

NOTE 13 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

 

The following table presents certain supplemental cash flow information (in thousands):

 

  

Six Months Ended June 30,

 
  

2022

  

2021

 

Cash paid during the year for:

        

Interest, net of interest capitalized

 $(1,282) $227 

Income taxes paid

 $168,464  $83,127 

Non-cash operating activities:

        

Real estate acquired through notes payable

 $9,861  $2,198 

 

 

NOTE 14 OPERATING AND REPORTING SEGMENTS

 

We operate with two principal business segments: homebuilding and financial services. As defined in ASC 280-10, Segment Reporting, we have ten homebuilding operating segments. The homebuilding segments are engaged in the business of acquiring and developing land, constructing homes, marketing and selling those homes and providing warranty and customer services. We aggregate our homebuilding operating segments into reporting segments based on similar long-term economic characteristics and geographical proximity. Our current reportable homebuilding segments are as follows:

 

 

West:

Arizona, California, Colorado and Utah

 

Central:

Texas

 

East:

Florida, Georgia, North Carolina, South Carolina and Tennessee

 

Management’s evaluation of segment performance is based on segment operating income, which we define as home and land closing revenues less cost of home and land closings, including land development and other land sales costs, commissions and other sales costs, and other general and administrative costs incurred by or allocated to each segment, including impairments. Each reportable segment follows the same accounting policies described in Note 1, “Organization and Basis of Presentation.” Operating results for each segment may not be indicative of the results for such segment had it been an independent, stand-alone entity for the periods presented.

 

The following segment information is in thousands: 

 

  

Three Months Ended June 30,

  

Six Months Ended June 30,

 
  

2022

  

2021

  

2022

  

2021

 

Homebuilding revenue (1):

                

West

 $487,803  $452,165  $982,309  $845,595 

Central

  424,036   403,838   779,660   726,022 

East

  500,542   421,596   937,346   789,763 

Consolidated total

 $1,412,381  $1,277,599  $2,699,315  $2,361,380 

Homebuilding segment operating income:

                

West

 $115,403  $78,938  $236,259  $143,189 

Central

  100,203   84,965   175,463   141,958 

East

  119,395   73,477   212,943   123,656 

Total homebuilding segment operating income

  335,001   237,380   624,665   408,803 

Financial services segment profit

  4,079   4,615   7,413   8,375 

Corporate and unallocated costs (2)

  (6,927)  (9,456)  (13,684)  (19,370)

Interest expense

     (77)  (41)  (167)

Other (expense)/income, net

  (458)  1,377   (775)  2,175 

Loss on early extinguishment of debt

     (18,188)     (18,188)

Net earnings before income taxes

 $331,695  $215,651  $617,578  $381,628 

 

19

 

(1)

Homebuilding revenue includes the following land closing revenue, by segment:

 

  

Three Months Ended June 30,

  

Six Months Ended June 30,

 
  

2022

  

2021

  

2022

  

2021

 

Land closing revenue:

                

West

 $1,725  $12,956  $32,807  $12,956 

Central

  1,709      9,505   3,799 

East

        2,600    

Total

 $3,434  $12,956  $44,912  $16,755 

 

(2)

Balance consists primarily of corporate costs and numerous shared service functions such as finance and treasury that are not allocated to the homebuilding or financial services reporting segments.

 

  

At June 30, 2022

 
                             
                 

Financial

  

Corporate and

      
  

West

   

Central

   

East

   

Services

  

Unallocated

   

Total

 

Deposits on real estate under option or contract

 $28,922   $10,714   $58,331   $  $   $97,967 

Real estate

  1,861,310    1,316,092    1,296,660           4,474,062 

Investments in unconsolidated entities

  110    2,936    7,360       817    11,223 

Other assets

  77,526 

(1)

  209,131 

(2)

  120,461 

(3)

  519   316,834 

(4)

  724,471 

Total assets

 $1,967,868   $1,538,873   $1,482,812   $519  $317,651   $5,307,723 

 

(1)

Balance consists primarily of cash and cash equivalents, development reimbursements from local municipalities and property and equipment.

 

(2)

Balance consists primarily of cash and cash equivalents, development reimbursements from local municipalities and prepaids and other assets.

 

(3)

Balance consists primarily of cash and cash equivalents, goodwill (see Note 9), prepaids and other assets and property and equipment.

 

(4)

Balance consists primarily of cash and cash equivalents, deferred tax assets and prepaids and other assets.

 

20

 
  

At December 31, 2021

 
                             
                 

Financial

  

Corporate and

      
  

West

   

Central

   

East

   

Services

  

Unallocated

   

Total

 

Deposits on real estate under option or contract

 $26,687   $11,132   $52,860   $  $   $90,679 

Real estate

  1,571,477    1,076,300    1,086,631           3,734,408 

Investments in unconsolidated entities

  87    2,974    1,707       996    5,764 

Other assets

  66,897 (1)  199,791 (2)  102,073 (3)  610   607,311 (4)  976,682 

Total assets

 $1,665,148   $1,290,197   $1,243,271   $610  $608,307   $4,807,533 

 

(1)

Balance consists primarily of cash and cash equivalents, development reimbursements from local municipalities and property and equipment.

 

(2)

Balance consists primarily of cash and cash equivalents, development reimbursements from local municipalities and prepaids and other assets.

 

(3)

Balance consists primarily of cash and cash equivalents, real estate not owned, goodwill, prepaids and other assets and property and equipment.

 

(4)

Balance consists primarily of cash and cash equivalents, deferred tax assets and prepaids and other assets.

 

 

NOTE 15 COMMITMENTS AND CONTINGENCIES

 

We are involved in various routine legal and regulatory proceedings, including, without limitation, claims and litigation alleging construction defects. In general, the proceedings are incidental to our business, and most exposure is subject to and should be covered by warranty and indemnity obligations of our consultants and subcontractors. Additionally, some such claims are also covered by insurance. With respect to the majority of pending litigation matters, our ultimate legal and financial responsibility, if any, cannot be estimated with certainty and, in most cases, any potential losses related to these matters are not considered probable. Historically, most disputes regarding warranty claims are resolved prior to litigation. We believe there are no pending legal or warranty matters as of June 30, 2022 that could have a material adverse impact upon our consolidated financial condition, results of operations or cash flows that have not been sufficiently reserved.

 

As discussed in Note 1 under the heading “Warranty Reserves”, we have case-specific reserves within our $31.4 million of total warranty reserves related to alleged stucco defects in certain homes we constructed predominantly between 2006 and 2017. Our review and handling of this matter is ongoing and our estimate of and reserves for resolving this matter is based on internal data, our judgment and various assumptions and estimates. Due to the degree of judgment and the potential for variability in our underlying assumptions and data, as we obtain additional information, we may revise our estimate and thus our related reserves. As of June 30, 2022, after considering potential recoveries from the consultants and contractors involved and their insurers and the potential recovery under our general liability insurance policies, we believe our reserves are sufficient to cover the above mentioned matter. See Note 1 for information related to our warranty obligations.

 

21

 
 

Special Note of Caution Regarding Forward-Looking Statements

 

In passing the Private Securities Litigation Reform Act of 1995 (“PSLRA”), Congress encouraged public companies to make “forward-looking statements” by creating a safe-harbor to protect companies from securities law liability in connection with forward-looking statements. We intend to qualify both our written and oral forward-looking statements for protection under the PSLRA.

 

The words “believe,” “expect,” “anticipate,” “forecast,” “plan,” “intend,” “may,” “will,” “should,” “could,” “estimate,” "target," and “project” and similar expressions identify forward-looking statements, which speak only as of the date the statement was made. All statements we make other than statements of historical fact are forward-looking statements within the meaning of that term in Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934 (the "Exchange Act"). Forward-looking statements in this Annual Report include statements concerning our belief that we have ample liquidity; our goals, strategies and strategic initiatives including our all-spec strategy for entry-level homes and the anticipated benefits relating thereto; our intentions and the expected benefits and advantages of our product and land positioning strategies, including with respect to our focus on the first-time and first move-up buyer and housing demand for affordable homes; the benefits of and our intentions to use options to acquire land; our delivery of substantially all of our backlog existing as of year end; our positions and our expected outcome relating to litigation in general; our intentions to not pay dividends; that we may repurchase our debt and equity securities; our non-use of derivative financial instruments; expectations regarding our industry and our business for the remainder of 2022 and beyond, including our all-spec strategy for entry-level homes; the demand for and the pricing of our homes; our land and lot acquisition strategy (including that we will redeploy cash to acquire well-positioned finished lots and that we may participate in joint ventures or opportunities outside of our existing markets if opportunities arise and the benefits relating thereto); that we may expand into new markets; the availability of labor and materials for our operations; that we may seek additional debt or equity capital; our expectation that existing guarantees, letters of credit and performance and surety bonds will not be drawn on; the sufficiency of our insurance coverage and warranty reserves; the sufficiency of our capital resources to support our business strategy; the sufficiency of our land pipeline; the impact of new accounting standards and changes in accounting estimates; trends and expectations concerning future demand for homes, sales prices, sales orders, cancellations, construction and materials costs, gross margins, land costs, community counts and profitability and future home supply and inventories; our future cash needs; the impact of seasonality; and our future compliance with debt covenants.

 

Important factors that could cause actual results to differ materially from those in forward-looking statements, and that could negatively affect our business include, but are not limited to, the following: changes in interest rates and the availability and pricing of residential mortgages and the potential benefits of rate locks; inflation in the cost of materials used to develop communities and construct homes; supply chain and labor constraints; our ability to acquire and develop lots may be negatively impacted if we are unable to obtain performance and surety bonds; the ability of our potential buyers to sell their existing homes; legislation related to tariffs; the adverse effect of slow absorption rates; impairments of our real estate inventory; cancellation rates; competition; home warranty and construction defect claims; failures in health and safety performance; fluctuations in quarterly operating results; our level of indebtedness; our ability to obtain financing if our credit ratings are downgraded; our potential exposure to and impacts from natural disasters or severe weather conditions; the availability and cost of finished lots and undeveloped land; the success of our strategy to offer and market entry-level and first move-up homes; a change to the feasibility of projects under option or contract that could result in the write-down or write-off of earnest or option deposits; our limited geographic diversification; the replication of our energy-efficient technologies by our competitors; shortages in the availability and cost of subcontract labor; our exposure to information technology failures and security breaches and the impact thereof; the loss of key personnel; changes in tax laws that adversely impact us or our homebuyers; our inability to prevail on contested tax positions; failure of our employees and representatives to comply with laws and regulations; our compliance with government regulations related to our financial services operations; negative publicity that affects our reputation; potential disruptions to our business by an epidemic or pandemic (such as COVID-19), and measures that federal, state and local governments and/or health authorities implement to address it; and other factors identified in documents filed by the Company with the Securities and Exchange Commission, including those set forth in this Form 10-Q and our Form 10-K for the year ended December 31, 2021 under the caption "Risk Factors."

 

Forward-looking statements express expectations of future events. All forward-looking statements are inherently uncertain, as they are based on various expectations and assumptions concerning future events and they are subject to numerous known and unknown risks and uncertainties that could cause actual events or results to differ materially from those projected. Due to these inherent uncertainties, the investment community is urged not to place undue reliance on forward-looking statements. In addition, we disclaim and undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to projections over time, except as required by law.

 

 

Item 2.

Managements Discussion and Analysis of Financial Condition and Results of Operations

 

Overview and Outlook

 

The housing market was strong for the majority of the second quarter of 2022, although the unprecedented demand that has been present the past several years showed signs of slowing in June, which we believe was in response to rising interest rates that impact affordability, as well as a return of regular seasonality. We think the continuing low supply of housing inventory and favorable demographics are positive factors for housing demand, but anticipate that demand will slow as the market adjusts to the higher interest rates and general inflation-related increases in household costs. We expect that current buyer psychology and market volatility will continue to impact demand, sales incentives and home pricing in the near term, but we feel that our all-spec strategy for entry-level homes differentiates us from some other new home builders, as it provides our customers with a shorter timeline to close and the ability to lock in their interest rates, helping to alleviate some of the uncertainty surrounding their monthly payments.

 

The longstanding supply chain constraints and labor shortages that presented themselves in 2021, caused by COVID-19 and other economic-related disruptions, have impacted production costs and cycle times in the homebuilding industry as a whole and have continued throughout the second quarter of 2022. We have been successful, to date, in offsetting the higher costs with sales price increases due to the elevated buyer demand in recent quarters, although we have experienced elongated cycle times. We continue to carefully navigate this constrained operating environment by expanding our trade base and strengthening critical relationships, although we are uncertain that we will be able to continue to offset future cost increases, if any, with incremental price increases moving forward.

 

Our focus on maintaining a high level of customer satisfaction and building energy-efficient homes was recognized and rewarded again in 2022. For the ninth time since 2013, we received the ENGERY STAR® Partner of the Year award for Sustained Excellence, and thirteen of our divisions received Avid Awards for excellence in customer service performance in the homebuilding industry. 

 

Summary Company Results

 

Total home closing revenue was $1.4 billion on 3,221 homes closed for the three months ended June 30, 2022 compared to $1.3 billion on 3,273 homes closed for the second quarter of 2021. This 11.4% increase in home closing revenue year-over-year was entirely driven by the 13.2% increase in average sales price ("ASP") on closings due to pricing power resulting from strong buyer demand as volume fell slightly by 1.6% due to production delays, as previously mentioned. In addition to higher home closing revenue, second quarter home closing gross margin improved 430 basis points to 31.6%, for home closing gross profit of $444.7 million compared to $345.3 million in the second quarter of 2021. The margin improvement is primarily due to pricing power experienced over the past few quarters due to elevated demand, resulting in ASP increases more than offsetting materials and labor cost increases. Gross margin in the second quarter of 2022 also benefited from lower cost of land for entry-level homes and lower amortization of previously capitalized interest, the result of lower interest rates from our debt refinancing transactions in recent years. Commissions and other sales costs decreased $4.5 million, and as a percentage of home closing revenue improved 90 basis points in the three months ended June 30, 2022 as compared to prior year, due to lower commission expense and technological efficiencies in marketing. General and administrative expenses increased $4.8 million, or 11.1%, due to costs associated with higher headcount and a return of travel expenses as COVID-19 restrictions have lifted. Higher home closing revenues provided leverage on these fixed expenses, and as a result, general and administrative expenses as a percentage of revenue were consistent quarter over quarter despite the dollar increase. During the three months ended June 30, 2021, we recognized an $18.2 million loss on early extinguishment of debt in connection with our debt refinancing in April 2021. There were no such transactions during the second quarter of 2022. Earnings before income taxes improved by $116.0 million, or 54%, year over year to $331.7 million for the second quarter of 2022. These improved year-over-year results were partially offset with a higher effective income tax rate of 24.6% as compared to 22.4% in 2021 due to the elimination of tax credits for energy efficient homes, resulting in net earnings of $250.1 million in the second quarter of 2022 versus $167.4 million in the second quarter of 2021. Similar to the second quarter, year-to-date results reflect a $210.4 million increase in home closing gross profit compared to the six months ended June 30, 2021. Higher gross profit, technology-enabled marketing and commission savings, leverage of higher home closing revenue on fixed expenses, no loss on early extinguishment of debt in 2022 and a higher effective tax rate of 24.3% led to net income of $467.3 million for the six months ended June 30, 2022 compared to $299.2 million for the 2021 period.

 

In addition to growth in home closing revenue and improved profitability, we had another record breaking quarter in home orders, with the highest second quarter orders in Company history of 3,767 for the three months ended June 30, 2022, a 6.4% increase over 3,542 in the same period of 2021. The growth in orders was attributable to a 33.1% increase in average active communities, partially offset by a 20.0% lower orders pace of 4.4 per month compared to 5.5 per month in 2021. Home order value increased 20.7% year-over-year, to $1.8 billion during the three months ended June 30, 2022, versus $1.5 billion in the same period of 2021. The increase in order value is due to the higher volume combined with a 13.5% increase in ASP on orders. Order cancellation rates increased to 13% for the second quarter of 2022, compared to 8% for the prior year period, a reflection of the softening in the market. For the six months ended June 30, 2022, home orders and home order value increased 9.2% and 25.6%, respectively, over the prior year, with a cancellation rate of 11% compared to 9% for the prior year period. We ended the second quarter of 2022 with 7,241 homes in backlog valued at $3.4 billion, a 31.4% increase in units and a 48.4% increase in value over June 30, 2021.

 

 

We achieved our long-term growth target of 300 active communities by ending the second quarter of 2022 with 303 active communities, up from 226 at June 30, 2021 and sequentially from 268 at March 31, 2022. This reflects the opening of 49 new communities during the second quarter, despite an environment of supply chain constraints and limited labor availability. During the six months ended June 30, 2022 we have purchased approximately 7,600 lots for $301.4 million, spent $492.0 million on land development and started construction on 9,039 homes.

 

Company Positioning