UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30 30, 20192017
OR
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File No. 1-8951
M.D.C. HOLDINGS, INC.
(Exact name of Registrant as specified in its charter)
Delaware | 84-0622967 | |
(State or other jurisdiction | (I.R.S. employer | |
of incorporation or organization) | identification no.) |
4350 South Monaco Street, Suite 500 | 80237 | |
Denver, Colorado | (Zip code) | |
(Address of principal executive offices) |
(303) 773-1100
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
Common Stock, $.01 par value | 552676108 | New York Stock Exchange | ||
5⅝% Senior Notes due February 2020 | 552676AP3 | New York Stock Exchange | ||
6% Senior Notes due January 2043 | 552676AQ1 | New York Stock Exchange |
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post 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 November 1October28, 2019, 2017, 51,943,15662,599,890 shares of M.D.C. Holdings, Inc. common stock were outstanding.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2019,2017
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ITEM 1. Unaudited Consolidated Financial Statements
September 30, | December 31, | |||||||||||||||
2017 | 2016 | September 30, | December 31, | |||||||||||||
| (Dollars in thousands, except | 2019 | 2018 | |||||||||||||
per share amounts) | (Dollars in thousands, except | |||||||||||||||
| (Unaudited) | per share amounts) | |||||||||||||||
ASSETS | ||||||||||||||||
Homebuilding: |
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Cash and cash equivalents | $ | 351,399 | $ | 259,087 | $ | 285,338 | $ | 414,724 | ||||||||
Marketable securities | - | 59,770 | ||||||||||||||
Restricted cash | 8,723 | 3,778 | 16,325 | 6,363 | ||||||||||||
Trade and other receivables | 42,904 | 42,492 | 58,528 | 52,982 | ||||||||||||
Inventories: | ||||||||||||||||
Housing completed or under construction | 969,419 | 874,199 | 1,204,641 | 952,436 | ||||||||||||
Land and land under development | 863,002 | 884,615 | 1,191,036 | 1,180,558 | ||||||||||||
Total inventories | 1,832,421 | 1,758,814 | 2,395,677 | 2,132,994 | ||||||||||||
Property and equipment, net | 26,304 | 28,041 | 63,673 | 58,167 | ||||||||||||
Operating lease right-of-use asset | 31,251 | - | ||||||||||||||
Deferred tax asset, net | 64,164 | 74,888 | 27,712 | 37,178 | ||||||||||||
Metropolitan district bond securities (related party) | - | 30,162 | ||||||||||||||
Prepaid and other assets | 72,808 | 60,463 | 46,395 | 45,794 | ||||||||||||
Total homebuilding assets | 2,398,723 | 2,317,495 | 2,924,899 | 2,748,202 | ||||||||||||
Financial Services: | ||||||||||||||||
Cash and cash equivalents | 26,419 | 23,822 | 46,790 | 49,052 | ||||||||||||
Marketable securities | 40,221 | 36,436 | 52,876 | 40,879 | ||||||||||||
Mortgage loans held-for-sale, net | 89,804 | 138,774 | 117,020 | 149,211 | ||||||||||||
Other assets | 11,135 | 12,062 | 16,994 | 13,733 | ||||||||||||
Total financial services assets | 167,579 | 211,094 | 233,680 | 252,875 | ||||||||||||
Total Assets | $ | 2,566,302 | $ | 2,528,589 | $ | 3,158,579 | $ | 3,001,077 | ||||||||
LIABILITIES AND EQUITY | ||||||||||||||||
Homebuilding: | ||||||||||||||||
Accounts payable | $ | 49,390 | $ | 42,088 | $ | 79,043 | $ | 50,505 | ||||||||
Accrued liabilities | 151,661 | 144,566 | 189,296 | 196,247 | ||||||||||||
Operating lease liability | 31,887 | - | ||||||||||||||
Revolving credit facility | 15,000 | 15,000 | 15,000 | 15,000 | ||||||||||||
Senior notes, net | 842,532 | 841,646 | 989,050 | 987,967 | ||||||||||||
Total homebuilding liabilities | 1,058,583 | 1,043,300 | 1,304,276 | 1,249,719 | ||||||||||||
Financial Services: | ||||||||||||||||
Accounts payable and accrued liabilities | 51,697 | 50,734 | 62,031 | 58,543 | ||||||||||||
Mortgage repurchase facility | 65,103 | 114,485 | 90,471 | 116,815 | ||||||||||||
Total financial services liabilities | 116,800 | 165,219 | 152,502 | 175,358 | ||||||||||||
Total Liabilities | 1,175,383 | 1,208,519 | 1,456,778 | 1,425,077 | ||||||||||||
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; 51,933,969 and 51,485,090 issued and outstanding at September 30, 2017 and December 31, 2016, respectively | 519 | 515 | ||||||||||||||
Common stock, $0.01 par value; 250,000,000 shares authorized; 62,597,390 and 56,615,352 issued and outstanding at September 30, 2019 and December 31, 2018, respectively | 626 | 566 | ||||||||||||||
Additional paid-in-capital | 995,132 | 983,532 | 1,341,858 | 1,168,442 | ||||||||||||
Retained earnings | 392,442 | 313,952 | 359,317 | 406,992 | ||||||||||||
Accumulated other comprehensive income | 2,826 | 22,071 | ||||||||||||||
Total Stockholders' Equity | 1,390,919 | 1,320,070 | 1,701,801 | 1,576,000 | ||||||||||||
Total Liabilities and Stockholders' Equity | $ | 2,566,302 | $ | 2,528,589 | $ | 3,158,579 | $ | 3,001,077 | ||||||||
The accompanying Notes are an integral part of these Unaudited Consolidated Financial Statements.
Consolidated Statements of Operations and Comprehensive Income
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||||
September 30, | September 30, | Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | September 30, | September 30, | |||||||||||||||||||||||||||
(Dollars in thousands, except per share amounts) | 2019 | 2018 | 2019 | 2018 | ||||||||||||||||||||||||||||
(Unaudited) | (Dollars in thousands, except per share amounts) | |||||||||||||||||||||||||||||||
Homebuilding: | ||||||||||||||||||||||||||||||||
Home sale revenues | $ | 584,947 | $ | 575,722 | $ | 1,796,046 | $ | 1,541,337 | $ | 750,274 | $ | 766,027 | $ | 2,130,396 | $ | 2,123,323 | ||||||||||||||||
Land sale revenues | 1,340 | 2,290 | 2,938 | 4,930 | ||||||||||||||||||||||||||||
Total home and land sale revenues | 586,287 | 578,012 | 1,798,984 | 1,546,267 | ||||||||||||||||||||||||||||
Home cost of sales | (485,147 | ) | (481,511 | ) | (1,493,166 | ) | (1,287,373 | ) | (609,316 | ) | (619,248 | ) | (1,724,040 | ) | (1,722,283 | ) | ||||||||||||||||
Land cost of sales | (1,259 | ) | (2,318 | ) | (2,672 | ) | (4,197 | ) | ||||||||||||||||||||||||
Inventory impairments | (4,540 | ) | (4,700 | ) | (9,390 | ) | (6,300 | ) | - | (11,098 | ) | (610 | ) | (11,848 | ) | |||||||||||||||||
Total cost of sales | (490,946 | ) | (488,529 | ) | (1,505,228 | ) | (1,297,870 | ) | (609,316 | ) | (630,346 | ) | (1,724,650 | ) | (1,734,131 | ) | ||||||||||||||||
Gross margin | 95,341 | 89,483 | 293,756 | 248,397 | ||||||||||||||||||||||||||||
Gross profit | 140,958 | 135,681 | 405,746 | 389,192 | ||||||||||||||||||||||||||||
Selling, general and administrative expenses | (69,102 | ) | (61,904 | ) | (206,109 | ) | (182,621 | ) | (92,716 | ) | (83,523 | ) | (257,689 | ) | (236,435 | ) | ||||||||||||||||
Interest and other income | 54,548 | 1,869 | 59,722 | 5,358 | 2,336 | 1,953 | 7,491 | 5,586 | ||||||||||||||||||||||||
Other expense | (618 | ) | (1,558 | ) | (1,635 | ) | (2,463 | ) | (1,887 | ) | (1,128 | ) | (4,188 | ) | (2,562 | ) | ||||||||||||||||
Other-than-temporary impairment of marketable securities | - | (215 | ) | (51 | ) | (934 | ) | |||||||||||||||||||||||||
Homebuilding pretax income | 80,169 | 27,675 | 145,683 | 67,737 | 48,691 | 52,983 | 151,360 | 155,781 | ||||||||||||||||||||||||
Financial Services: | ||||||||||||||||||||||||||||||||
Revenues | 17,464 | 17,408 | 54,516 | 44,248 | 22,388 | 19,611 | 58,389 | 60,018 | ||||||||||||||||||||||||
Expenses | (8,849 | ) | (7,955 | ) | (25,247 | ) | (21,739 | ) | (10,352 | ) | (9,408 | ) | (28,883 | ) | (27,850 | ) | ||||||||||||||||
Interest and other income | 925 | 1,035 | 3,142 | 2,648 | 1,312 | 1,230 | 3,943 | 3,490 | ||||||||||||||||||||||||
Other-than-temporary impairment of marketable securities | (29 | ) | (111 | ) | (160 | ) | (111 | ) | ||||||||||||||||||||||||
Net gain on marketable equity securities | 767 | 3,004 | 7,934 | 3,129 | ||||||||||||||||||||||||||||
Financial services pretax income | 9,511 | 10,377 | 32,251 | 25,046 | 14,115 | 14,437 | 41,383 | 38,787 | ||||||||||||||||||||||||
Income before income taxes | 89,680 | 38,052 | 177,934 | 92,783 | 62,806 | 67,420 | 192,743 | 194,568 | ||||||||||||||||||||||||
Provision for income taxes | (28,517 | ) | (11,693 | ) | (60,651 | ) | (29,948 | ) | (12,226 | ) | (14,028 | ) | (47,020 | ) | (38,513 | ) | ||||||||||||||||
Net income | $ | 61,163 | $ | 26,359 | $ | 117,283 | $ | 62,835 | $ | 50,580 | $ | 53,392 | $ | 145,723 | $ | 156,055 | ||||||||||||||||
Other comprehensive income (loss) related to available for sale securities, net of tax | (23,175 | ) | 1,028 | (19,245 | ) | 3,871 | ||||||||||||||||||||||||||
Comprehensive income | $ | 37,988 | $ | 27,387 | $ | 98,038 | $ | 66,706 | $ | 50,580 | $ | 53,392 | $ | 145,723 | $ | 156,055 | ||||||||||||||||
Earnings per share: | ||||||||||||||||||||||||||||||||
Basic | $ | 1.18 | $ | 0.51 | $ | 2.27 | $ | 1.22 | $ | 0.81 | $ | 0.87 | $ | 2.36 | $ | 2.56 | ||||||||||||||||
Diluted | $ | 1.16 | $ | 0.51 | $ | 2.23 | $ | 1.22 | $ | 0.79 | $ | 0.86 | $ | 2.29 | $ | 2.52 | ||||||||||||||||
Weighted average common shares outstanding: | ||||||||||||||||||||||||||||||||
Basic | 51,650,360 | 51,297,132 | 51,502,986 | 51,286,844 | 61,978,195 | 60,665,349 | 61,422,925 | 60,505,916 | ||||||||||||||||||||||||
Diluted | 52,601,118 | 51,460,446 | 52,248,377 | 51,297,765 | 63,968,215 | 61,804,792 | 63,360,535 | 61,592,092 | ||||||||||||||||||||||||
Dividends declared per share | $ | 0.25 | $ | 0.24 | $ | 0.75 | $ | 0.72 | $ | 0.30 | $ | 0.28 | $ | 0.90 | $ | 0.83 | ||||||||||||||||
The accompanying Notes are an integral part of these Unaudited Consolidated Financial Statements.
Consolidated Statements of Cash FlowsChanges in Stockholders’ Equity
(Dollars in thousands, except share amounts)
Nine Months Ended | ||||||||
September 30, | ||||||||
2017 | 2016 | |||||||
(Dollars in thousands) | ||||||||
(Unaudited) | ||||||||
Operating Activities: | ||||||||
Net income | $ | 117,283 | $ | 62,835 | ||||
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | ||||||||
Stock-based compensation expense | 3,100 | 6,636 | ||||||
Depreciation and amortization | 4,205 | 3,702 | ||||||
Inventory impairments | 9,390 | 6,300 | ||||||
Other-than-temporary impairment of marketable securities | 211 | 1,045 | ||||||
Gain on sale of marketable securities | (18,122 | ) | (911 | ) | ||||
Gain on sale of metropolitan district bond securities (related party) | (35,847 | ) | - | |||||
Deferred income tax expense | 22,795 | 11,357 | ||||||
Net changes in assets and liabilities: | ||||||||
Restricted cash | (4,945 | ) | (871 | ) | ||||
Trade and other receivables | 119 | (21,679 | ) | |||||
Mortgage loans held-for-sale | 48,970 | (2,319 | ) | |||||
Housing completed or under construction | (101,997 | ) | (229,739 | ) | ||||
Land and land under development | 19,886 | 141,131 | ||||||
Prepaid expenses and other assets | (11,229 | ) | (4,573 | ) | ||||
Accounts payable and accrued liabilities | 15,345 | 18,183 | ||||||
Net cash provided by (used in) operating activities | 69,164 | (8,903 | ) | |||||
Investing Activities: | ||||||||
Purchases of marketable securities | (17,604 | ) | (28,272 | ) | ||||
Sales of marketable securities | 83,315 | 56,873 | ||||||
Proceeds from sale of metropolitan district bond securities (related party) | 44,253 | - | ||||||
Purchases of property and equipment | (1,917 | ) | (3,865 | ) | ||||
Net cash provided by investing activities | 108,047 | 24,736 | ||||||
Financing Activities: | ||||||||
Advances (payments) on mortgage repurchase facility, net | (49,382 | ) | 3,400 | |||||
Dividend payments | (38,793 | ) | (36,763 | ) | ||||
Payments of deferred financing costs | (2,630 | ) | - | |||||
Proceeds from exercise of stock options | 8,503 | - | ||||||
Net cash used in financing activities | (82,302 | ) | (33,363 | ) | ||||
Net increase (decrease) in cash and cash equivalents | 94,909 | (17,530 | ) | |||||
Cash and cash equivalents: | ||||||||
Beginning of period | 282,909 | 180,988 | ||||||
End of period | $ | 377,818 | $ | 163,458 | ||||
Nine-Month Period Ended September 30, 2019 | ||||||||||||||||||||||||
Accumulated | ||||||||||||||||||||||||
Additional | Other | |||||||||||||||||||||||
Common Stock | Paid-in | Retained | Comprehensive | |||||||||||||||||||||
Shares | Amount | Capital | Earnings | Income | Total | |||||||||||||||||||
Balance at December 31, 2018 | 56,615,352 | $ | 566 | $ | 1,168,442 | $ | 406,992 | $ | - | $ | 1,576,000 | |||||||||||||
Cumulative effect of newly adopted accounting standards (Note 2) | - | - | - | (67 | ) | - | (67 | ) | ||||||||||||||||
Balance at January 1, 2019 | 56,615,352 | 566 | 1,168,442 | 406,925 | - | 1,575,933 | ||||||||||||||||||
Net Income | - | - | - | 40,550 | - | 40,550 | ||||||||||||||||||
Shares issued under stock-based compensation programs, net | 372,344 | 4 | 7,083 | - | - | 7,087 | ||||||||||||||||||
Cash dividends declared | - | - | - | (17,019 | ) | - | (17,019 | ) | ||||||||||||||||
Stock dividend declared | 4,534,908 | 45 | 138,950 | (139,091 | ) | - | (96 | ) | ||||||||||||||||
Stock-based compensation expense | - | - | 4,251 | - | - | 4,251 | ||||||||||||||||||
Forfeiture of restricted stock | (1,714 | ) | - | - | - | - | - | |||||||||||||||||
Balance at March 31, 2019 | 61,520,890 | $ | 615 | $ | 1,318,726 | $ | 291,365 | $ | - | $ | 1,610,706 | |||||||||||||
Net Income | - | - | - | 54,593 | - | 54,593 | ||||||||||||||||||
Shares issued under stock-based compensation programs, net | 405,094 | 4 | 10,237 | - | - | 10,241 | ||||||||||||||||||
Cash dividends declared | - | - | - | (18,521 | ) | - | (18,521 | ) | ||||||||||||||||
Stock-based compensation expense | - | - | 4,132 | - | - | 4,132 | ||||||||||||||||||
Forfeiture of restricted stock | (3,578 | ) | - | - | - | - | - | |||||||||||||||||
Balance at June 30, 2019 | 61,922,406 | $ | 619 | $ | 1,333,095 | $ | 327,437 | $ | - | $ | 1,661,151 | |||||||||||||
Net Income | - | - | - | 50,580 | - | 50,580 | ||||||||||||||||||
Shares issued under stock-based compensation programs, net | 674,984 | 7 | (1,030 | ) | - | - | (1,023 | ) | ||||||||||||||||
Cash dividends declared | - | - | - | (18,700 | ) | - | (18,700 | ) | ||||||||||||||||
Stock-based compensation expense | - | - | 9,793 | - | - | 9,793 | ||||||||||||||||||
Balance at September 30, 2019 | 62,597,390 | $ | 626 | $ | 1,341,858 | $ | 359,317 | $ | - | $ | 1,701,801 | |||||||||||||
The accompanying Notes are an integral part of these Unaudited Consolidated Financial Statements.
M.D.C. HOLDINGS, INC.
Consolidated Statements of Changes in Stockholders’ Equity
(Dollars in thousands, except share amounts)
Nine-Month Period Ended September 30, 2018 | ||||||||||||||||||||||||
Accumulated | ||||||||||||||||||||||||
Additional | Other | |||||||||||||||||||||||
Common Stock | Paid-in | Retained | Comprehensive | |||||||||||||||||||||
Shares | Amount | Capital | Earnings | Income | Total | |||||||||||||||||||
Balance at December 31, 2017 | 56,123,228 | $ | 561 | $ | 1,144,570 | $ | 258,164 | $ | 3,992 | $ | 1,407,287 | |||||||||||||
Cumulative effect of newly adopted accounting standards | - | - | - | 5,766 | (3,992 | ) | 1,774 | |||||||||||||||||
Balance at January 1, 2018 | 56,123,228 | 561 | 1,144,570 | 263,930 | - | 1,409,061 | ||||||||||||||||||
Net Income | - | - | - | 38,764 | - | 38,764 | ||||||||||||||||||
Shares issued under stock-based compensation programs, net | 97,783 | 1 | 281 | - | - | 282 | ||||||||||||||||||
Cash dividends declared | - | - | - | (16,865 | ) | - | (16,865 | ) | ||||||||||||||||
Stock-based compensation expense | - | - | 1,251 | - | - | 1,251 | ||||||||||||||||||
Forfeiture of restricted stock | (1,368 | ) | - | - | - | - | - | |||||||||||||||||
Balance at March 31, 2018 | 56,219,643 | $ | 562 | $ | 1,146,102 | $ | 285,829 | $ | - | $ | 1,432,493 | |||||||||||||
Net Income | - | - | - | 63,899 | - | 63,899 | ||||||||||||||||||
Shares issued under stock-based compensation programs, net | 216,850 | 2 | 5,551 | - | - | 5,553 | ||||||||||||||||||
Cash dividends declared | - | - | - | (16,928 | ) | - | (16,928 | ) | ||||||||||||||||
Stock-based compensation expense | - | - | 4,824 | - | - | 4,824 | ||||||||||||||||||
Forfeiture of restricted stock | (504 | ) | - | - | - | - | - | |||||||||||||||||
Balance at June 30, 2018 | 56,435,989 | $ | 564 | $ | 1,156,477 | $ | 332,800 | $ | - | $ | 1,489,841 | |||||||||||||
Net Income | - | - | - | 53,392 | - | 53,392 | ||||||||||||||||||
Shares issued under stock-based compensation programs, net | 179,845 | 2 | 4,022 | - | - | 4,024 | ||||||||||||||||||
Cash dividends declared | - | - | - | (16,940 | ) | - | (16,940 | ) | ||||||||||||||||
Stock-based compensation expense | - | - | 2,425 | - | - | 2,425 | ||||||||||||||||||
Forfeiture of restricted stock | (1,108 | ) | - | - | - | - | - | |||||||||||||||||
Balance at September 30, 2018 | 56,614,726 | $ | 566 | $ | 1,162,924 | $ | 369,252 | $ | - | $ | 1,532,742 | |||||||||||||
The accompanying Notes toare an integral part of these Unaudited Consolidated Financial StatementsStatements.
Consolidated Statements of Cash Flows
Nine Months Ended | ||||||||
September 30, | ||||||||
2019 | 2018 | |||||||
(Dollars in thousands) | ||||||||
Operating Activities: | ||||||||
Net income | $ | 145,723 | $ | 156,055 | ||||
Adjustments to reconcile net income to net cash used in operating activities: | ||||||||
Stock-based compensation expense | 18,178 | 8,500 | ||||||
Depreciation and amortization | 15,478 | 15,406 | ||||||
Inventory impairments | 610 | 11,848 | ||||||
Net gain on marketable equity securities | (7,934 | ) | (3,129 | ) | ||||
Amortization of discount / premiums on marketable debt securities, net | - | (366 | ) | |||||
Deferred income tax expense | 9,488 | 4,092 | ||||||
Net changes in assets and liabilities: | ||||||||
Trade and other receivables | (4,682 | ) | (7,049 | ) | ||||
Mortgage loans held-for-sale, net | 32,191 | 23,278 | ||||||
Housing completed or under construction | (251,749 | ) | (131,657 | ) | ||||
Land and land under development | (10,461 | ) | (149,963 | ) | ||||
Prepaid and other assets | (3,889 | ) | (12,328 | ) | ||||
Accounts payable and accrued liabilities | 23,929 | 26,067 | ||||||
Net cash used in operating activities | (33,118 | ) | (59,246 | ) | ||||
Investing Activities: | ||||||||
Purchases of marketable securities | (10,340 | ) | (17,183 | ) | ||||
Maturities of marketable securities | - | 50,000 | ||||||
Sales of marketable securities | 6,277 | 13,310 | ||||||
Purchases of property and equipment | (20,128 | ) | (19,899 | ) | ||||
Net cash provided by (used in) investing activities | (24,191 | ) | 26,228 | |||||
Financing Activities: | ||||||||
Payments on mortgage repurchase facility, net | (26,344 | ) | (21,556 | ) | ||||
Dividend payments | (54,337 | ) | (50,733 | ) | ||||
Issuance of shares under stock-based compensation programs, net | 16,304 | 9,859 | ||||||
Net cash used in financing activities | (64,377 | ) | (62,430 | ) | ||||
Net decrease in cash, cash equivalents and restricted cash | (121,686 | ) | (95,448 | ) | ||||
Cash, cash equivalents and restricted cash: | ||||||||
Beginning of period | 470,139 | 514,240 | ||||||
End of period | $ | 348,453 | $ | 418,792 | ||||
Reconciliation of cash, cash equivalents and restricted cash: | ||||||||
Homebuilding: | ||||||||
Cash and cash equivalents | $ | 285,338 | $ | 360,947 | ||||
Restricted cash | 16,325 | 7,866 | ||||||
Financial Services: | ||||||||
Cash and cash equivalents | 46,790 | 49,979 | ||||||
Total cash, cash equivalents and restricted cash | $ | 348,453 | $ | 418,792 | ||||
The accompanying Notes are an integral part of these Unaudited Consolidated Financial Statements.
Basis of Presentation |
The Unaudited Consolidated Financial Statements of M.D.C. Holdings, Inc. ("MDC," “the Company," “we,” “us,” or “our,,” which refers to M.D.C. Holdings, Inc. and its subsidiaries) have been prepared, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC"). Accordingly, they do not include all information and footnotes required by U.S. generally accepted accounting principles (“GAAP”) for complete financial statements. These statements reflect all normal and recurring adjustments which, in the opinion of management, are necessary to present fairly the financial position, results of operations and cash flows of MDC at September 30, 20172019 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, 2016.2018.
On November 21, 2016,January 28, 2019, MDC’sMDC’s board of directors declared a 5%an 8% stock dividend that was distributed on December 20, 2016February 28, 2019 to shareholders of record on December 6, 2016.February 14, 2019. In accordance with Accounting Standards Codification (“ASC”) Topic 260, Earnings Per Share (“ASC 260”), basic and diluted earnings per share amounts, share amounts and dividends declared per share have been restated for any periods or dates prior to the stock dividend record date.
Included in these footnotes are certain statements that constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include statements regarding our business, financial condition, results of operations, cash flows, strategies and prospects. These forward-looking statements may be identified by terminology such as “likely,” “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential” or “continue,” or the negative of such terms and other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements contained in this section are reasonable, we cannot guarantee future results. These statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company to be materially different from those expressed or implied by the forward-looking statements. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. However, any further disclosures made on related subjects in subsequent reports on Forms 10-K, 10-Q and 8-K should be considered.
Where necessary, reclassifications have been made to our prior period financial information to conform to the current year presentation.
2. | Recently Issued Accounting Standards |
In May 2014, the Financial
Adoption of New Accounting Standards Board (“FASB”) issued
Accounting Standards Update (“ASU”) 2014-09,Revenue from Contracts with Customers ("ASU 2014-09") and created ASC Topic 606 (“ASC 606”), which is a comprehensive new revenue recognition model. Under ASU 2014-09, a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods and services. ASU 2014-09 is effective for our interim and annual reporting periods beginning January 1, 2018, and is to be adopted using either a full retrospective or modified retrospective transition method. We intend to adopt the new standard under the modified retrospective approach in the 2018first quarter.
Although we are still in the process of evaluating our contracts and updating our accounting policies, we do not believe the adoption of ASC 606 will have a material impact on the amount or timing of our recognition of revenues. There are certain markets where we are unable to complete certain performance obligations (generally landscaping) at the time of closing due to weather. Based on ASC 606, we have concluded that we will defer revenue and the related cost of sales specific to the unfulfilled performance obligations until it is delivered to the homeowner, which is different than our current accounting treatment. We anticipate that these adjustments to revenue and cost of sales will be immaterial each quarter. ASC 606 also will impact our accounting for land sales. Currently we include the proceeds from land sales in land sale revenues in the homebuilding section of our consolidated statements of operations and comprehensive income and include the associated costs in land cost of sales. Under ASC 606, we have concluded that the entities that we typically sell land to will likely not meet the definition of a customer. In those instances in which our land is sold to a non-customer, our gain (loss) from the sale of the land will now be included in interest and other income in the homebuilding section of our consolidated statements of operations and comprehensive income. However, these sales are infrequent and, as such, each contract and the classification of the transaction will be evaluated when executed.
In addition, ASU 2014-09eliminates the guidance in ASC Topic 970,Real Estate, that currently prescribes the accounting for costs incurred to sell real estate projects. We will apply the new guidance in ASC Topic 340-40,Other Assets and Deferred Costs — Contracts With Customers (“ASC 340-40), to these costs. Under ASC 340-40, incremental costs of obtaining a contract with a customer (i.e., costs that would not have been incurred if the contract had not been obtained) will be recognized as an asset only if we expect to recover them. We are still evaluating the accounting for marketing costs under ASC 340-40, but have concluded that marketing costs that were previously capitalized to a deferred marketing asset will now either be expensed as incurred or will be capitalized to fixed assets and amortized over the life of the community. As a result of this change, the timing of recognition and classification of certain marketing costs will change from the current accounting treatment. We are continuing to evaluate the exact dollar impact ASU 2014-09 will have on recording revenue and our marketing costs in our consolidated financial statements and related disclosures.
M.D.C. HOLDINGS, INC.
Notes to Unaudited Consolidated Financial Statements
In January 2016, the FASB issued ASU 2016-01,Financial Instruments–Overall: Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”), which makes a number of changes to the current GAAP model, including changes to the accounting for equity investments and financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. Under ASU 2016-01, we will primarily be impacted by the changes to accounting for equity instruments with readily determinable fair values as they will no longer be permitted to be classified as available-for-sale (changes in fair value reported through other comprehensive income) and instead, all changes in fair value will be reported in earnings. ASU 2016-01 is effective for our interim and annual reporting periods beginning January 1, 2018 and is to be applied using a modified retrospective transition method. As discussed below, during the 2017third quarter, we sold a significant portion of our investments in equity securities, but there is a possibility we will purchase additional equity securities in the future. If we do have a material amount of investments in equity securities after the date of adoption, we expect that the impact to our consolidated statements of operations and comprehensive income from this update could be material. Furthermore, depending on trends in the stock market, we may see increased volatility in our consolidated statements of operations and comprehensive income.
In February 2016, the FASB issued ASU 2016-02, Leases (“(“ASU 2016-02”), which is codified in ASC 842,Leases (“ASC 842”). ASC 842 supersedes current lease guidance in ASC 840 and requires a lessee to recognize a right-of-use asset and a corresponding lease liability for virtuallysubstantially all leases. The lease liability will be equal to the present value of the remaining lease payments while the right-of-use asset will be based on the liability, subject to adjustment, such assimilarly calculated and then adjusted for initial direct costs. In addition, ASUASC 2016-02842 expands the disclosure requirements for lessees. Upon adoption, we will be required to record a lease assetincrease the transparency and lease liability related to our operatingcomparability of the amount, timing and uncertainty of cash flows arising from leases. ASU 2016-02 is effective for our interim and annual reporting periods beginningOn January 1, 2019, and is to be appliedwe adopted ASC 842 using athe modified retrospective transition method. Early adoption is permitted. We doelected available practical expedients permitted under the transition guidance within the new standard, which among other items, allowed the Company to carry forward its historical lease classification and not planreassess existing leases under the new definition of a lease in ASC 842. In addition, we will account for lease and non-lease components as a single lease component.
Adoption of ASC 842 resulted in the recording of additional net lease assets and lease liabilities of $34.2 million and $34.3 million, respectively, as of January 1, 2019. The difference between the additional lease assets and lease liabilities, net of the deferred tax impact, was recorded as an adjustment to early adopt the guidance and we are currently evaluating theretained earnings. The standard did not materially impact the update will have on our consolidated financial statements of operations and related disclosures.comprehensive income or consolidated cash flows.
InAccounting Standards Issued But MarchNot Yet Adopted
In June 2016, the FASB issued ASU 2016-09,13, Compensation - Stock Compensation: Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”), which amends ASC Topic 718,Compensation – Stock Compensation (“ASC 718”). The standard is intended to simplify several areas of accounting for share-based compensation arrangements, including the accounting for income taxes, classification of excess tax benefits on the statement of cash flows, forfeitures, statutory tax withholding requirements, classification of awards as either equity or liabilities, and classification of employee taxes paid on the statement of cash flows when an employer withholds shares for tax-withholding purposes. ASU 2016-09 became effective for us in the 2017first quarter. The primary impact from this guidance, on a prospective basis, will be to our provision for income taxes line item on our consolidated statements of operations and comprehensive income. Any excess tax benefits or deficiencies from (1) the exercise or expiration of options or (2) the vesting of stock awards will now be recognized through our income tax provision as opposed to additional paid-in capital (to the extent we had a sufficient pool of windfall tax benefits). As a result of exercises of stock options and vesting of stock awards during the three and nine months ended September 30, 2017, we recognized an excess tax deficiency of $0.0 million and an excess tax benefit of $0.1 million, respectively, in our tax provision for each period. Furthermore, as of September 30, 2017, we had options covering approximately 567,000 shares (1) with exercise prices above the MDC closing share price at September 30, 2017 and (2) that will have their ability to exercise expire at some point during the 2017fourth quarter. If the exercise price continues to be greater than the share price of MDC throughout 2017, these options will likely expire unexercised and as a result, we could recognize approximately $2.6 million in additional expense in our provision for income taxes line item on our consolidated statements of operations and comprehensive income in 2017. Another provision of ASU 2016-09 that is relevant to the Company is the classification of excess tax benefits on the statement of cash flows, which was adopted on a prospective basis. This provision did not have a material effect on the statement of cash flows and is not expected to have a material impact on the statement of cash flows in future quarterly or annual filings. Adoption of ASU 2016-09 was not material to our statement of cash flows for the periods presented and we do not anticipate it will be material for the year ending December 31, 2017.
In June 2016, the FASB issued ASU 2016-13,Financial Instruments—Credit Losses (Topic 326):Measurement of Credit Losses on Financial Instruments(“ (“ASU 2016-13”), which requires measurement and recognition of expected credit losses for financial assets held. The amendments in ASU 2016-13 eliminate the probable threshold for initial recognition of a credit loss in current GAAP and reflect an entity’s current estimate of all expected credit losses. ASU 2016-13 is effective for our interim and annual reporting periods beginning January 1, 2021,2020, and is to be applied using a modified retrospective transition method. Earlier adoption is permitted. We do not plan to early adopt ASU 2016-13 and with our current holdings of financial instruments that are subject to credit losses, we do not believe adoption of this guidance will be material to our financial statements.
M.D.C. HOLDINGS, INC.
Notes to Unaudited Consolidated Financial Statements
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force) (“ASU 2016-15”), which amends ASC Topic 230, Statement of Cash Flows, to clarify guidance on the classification of certain cash receipts and payments in the statement of cash flows. The amendments in ASU 2016-15 are intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. ASU 2016-15 is effective for our interim and annual reporting periods beginning January 1, 2018, and is to be applied using a retrospective transition method. Earlier adoption is permitted. We do not plan to early adopt ASU 2016-15 and do not believe the guidance will have a material impact on our statement of cash flows upon adoption.financial statements.
In November 2016, the FASB issued ASU 2016
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 Chief Executive Officer (“CEO”) and the Chief Operating Officer (“COO”).
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, Oregon and Washington) |
● |
|
|
● | East |
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 one1 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.
M.D.C. HOLDINGS, INC.
Notes to Unaudited Consolidated Financial Statements
The following table summarizes home and land sale revenues for our homebuilding operations and revenues for our financial services operations.operations:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
| (Dollars in thousands) | |||||||||||||||
| Homebuilding | ||||||||||||||||
West | $ | 410,414 | $ | 409,001 | $ | 1,164,502 | $ | 1,120,316 | ||||||||
Mountain | 263,802 | 272,989 | 760,470 | 750,162 | ||||||||||||
East | 76,058 | 84,037 | 205,424 | 252,845 | ||||||||||||
Total homebuilding revenues | $ | 750,274 | $ | 766,027 | $ | 2,130,396 | $ | 2,123,323 | ||||||||
Financial Services | ||||||||||||||||
Mortgage operations | $ | 14,395 | $ | 11,919 | $ | 36,258 | $ | 39,162 | ||||||||
Other | 7,993 | 7,692 | 22,131 | 20,856 | ||||||||||||
Total financial services revenues | $ | 22,388 | $ | 19,611 | $ | 58,389 | $ | 60,018 | ||||||||
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
| (Dollars in thousands) | |||||||||||||||
Homebuilding | ||||||||||||||||
West | $ | 326,804 | $ | 284,589 | $ | 959,641 | $ | 745,995 | ||||||||
Mountain | 167,066 | 192,876 | 564,558 | 521,034 | ||||||||||||
East | 92,417 | 100,547 | 274,785 | 279,238 | ||||||||||||
Total homebuilding revenues | $ | 586,287 | $ | 578,012 | $ | 1,798,984 | $ | 1,546,267 | ||||||||
Financial Services | ||||||||||||||||
Mortgage operations | $ | 11,176 | $ | 11,294 | $ | 36,056 | $ | 28,866 | ||||||||
Other | 6,288 | 6,114 | 18,460 | 15,382 | ||||||||||||
Total financial services revenues | $ | 17,464 | $ | 17,408 | $ | 54,516 | $ | 44,248 | ||||||||
The following table summarizes pretax income (loss) for our homebuilding and financial services operations:
Three Months Ended | Nine Months Ended | Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||
September 30, | September 30, | September 30, | September 30, | |||||||||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | 2019 | 2018 | 2019 | 2018 | |||||||||||||||||||||||||
| (Dollars in thousands) | (Dollars in thousands) | ||||||||||||||||||||||||||||||
Homebuilding | ||||||||||||||||||||||||||||||||
West | $ | 17,746 | $ | 18,392 | $ | 54,335 | $ | 43,830 | $ | 34,898 | $ | 28,947 | $ | 103,448 | $ | 91,028 | ||||||||||||||||
Mountain | 18,326 | 18,856 | 61,097 | 49,688 | 31,391 | 34,697 | 89,077 | 94,736 | ||||||||||||||||||||||||
East | 2,613 | (2,267 | ) | 9,989 | 3,600 | 2,136 | 3,771 | 5,761 | 11,287 | |||||||||||||||||||||||
Corporate | 41,484 | (7,306 | ) | 20,262 | (29,381 | ) | (19,734 | ) | (14,432 | ) | (46,926 | ) | (41,270 | ) | ||||||||||||||||||
Total homebuilding pretax income | $ | 80,169 | $ | 27,675 | $ | 145,683 | $ | 67,737 | $ | 48,691 | $ | 52,983 | $ | 151,360 | $ | 155,781 | ||||||||||||||||
Financial Services | ||||||||||||||||||||||||||||||||
Mortgage operations | $ | 5,857 | $ | 6,723 | $ | 21,093 | $ | 16,491 | $ | 8,468 | $ | 6,702 | $ | 19,700 | $ | 23,262 | ||||||||||||||||
Other | 3,654 | 3,654 | 11,158 | 8,555 | 5,647 | 7,735 | 21,683 | 15,525 | ||||||||||||||||||||||||
Total financial services pretax income | $ | 9,511 | $ | 10,377 | $ | 32,251 | $ | 25,046 | $ | 14,115 | $ | 14,437 | $ | 41,383 | $ | 38,787 | ||||||||||||||||
Total pretax income | $ | 89,680 | $ | 38,052 | $ | 177,934 | $ | 92,783 | $ | 62,806 | $ | 67,420 | $ | 192,743 | $ | 194,568 | ||||||||||||||||
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 marketable securities and deferred tax assets. The assets in our financial services segment consist mostly of cash and cash equivalents, marketable securities and mortgage loans held-for-sale.
September 30, | December 31, | |||||||||||||||
September 30, | December 31, | 2019 | 2018 | |||||||||||||
2017 | 2016 | (Dollars in thousands) | ||||||||||||||
Homebuilding assets | (Dollars in thousands) | |||||||||||||||
West | $ | 1,052,795 | $ | 1,035,033 | $ | 1,481,549 | $ | 1,301,374 | ||||||||
Mountain | 677,721 | 571,139 | 873,656 | 793,150 | ||||||||||||
East | 217,238 | 256,816 | 190,677 | 169,485 | ||||||||||||
Corporate | 450,969 | 454,507 | 379,017 | 484,193 | ||||||||||||
Total homebuilding assets | $ | 2,398,723 | $ | 2,317,495 | $ | 2,924,899 | $ | 2,748,202 | ||||||||
Financial services assets | ||||||||||||||||
Mortgage operations | $ | 102,704 | $ | 153,182 | $ | 131,554 | $ | 159,677 | ||||||||
Other | 64,875 | 57,912 | 102,126 | 93,198 | ||||||||||||
Total financial services assets | $ | 167,579 | $ | 211,094 | $ | 233,680 | $ | 252,875 | ||||||||
Total assets | $ | 2,566,302 | $ | 2,528,589 | $ | 3,158,579 | $ | 3,001,077 | ||||||||
M.D.C. HOLDINGS, INC.
Notes to Unaudited Consolidated Financial Statements
4. 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 Three Months Ended Nine Months Ended Three Months Ended Nine Months Ended September 30, September 30, September 30, September 30, 2017 2016 2017 2016 2019 2018 2019 2018 (Dollars in thousands, except per share amounts) (Dollars in thousands, except per share amounts) Numerator Net income Less: distributed earnings allocated to participating securities Less: undistributed earnings allocated to participating securities Net income attributable to common stockholders (numerator for basic earnings per share) Add back: undistributed earnings allocated to participating securities Less: undistributed earnings reallocated to participating securities Numerator for diluted earnings per share under two class method Denominator Weighted-average common shares outstanding Add: dilutive effect of stock options Add: dilutive effect of performance share units Denominator for diluted earnings per share under two class method Basic Earnings Per Common Share Diluted Earnings Per Common Share Diluted EPS for the three and nine months ended September 30, 4. Earnings Per Share 260260.. To calculate diluted EPS, basic EPS is further adjusted to include the effect of potentially dilutive stock options outstanding. The table below shows our basic and diluted EPS calculations. $ 61,163 $ 26,359 $ 117,283 $ 62,835 $ 50,580 $ 53,392 $ 145,723 $ 156,055 (68 ) (45 ) (196 ) (124 ) (122 ) (106 ) (343 ) (307 ) (244 ) (49 ) (375 ) (83 ) (202 ) (222 ) (554 ) (613 ) 60,851 26,265 116,712 62,628 50,256 53,064 144,826 155,135 244 49 375 83 202 222 554 613 (240 ) (49 ) (369 ) (83 ) (195 ) (218 ) (540 ) (602 ) $ 60,855 $ 26,265 $ 116,718 $ 62,628 $ 50,263 $ 53,068 $ 144,840 $ 155,146 51,650,360 51,297,132 51,502,986 51,286,844 61,978,195 60,665,349 61,422,925 60,505,916 950,758 163,314 745,391 10,921 1,990,020 1,139,443 1,570,194 1,086,176 - - 367,416 - 52,601,118 51,460,446 52,248,377 51,297,765 63,968,215 61,804,792 63,360,535 61,592,092 $ 1.18 $ 0.51 $ 2.27 $ 1.22 $ 0.81 $ 0.87 $ 2.36 $ 2.56 $ 1.16 $ 0.51 $ 2.23 $ 1.22 $ 0.79 $ 0.86 $ 2.29 $ 2.52 20172019 excluded options to purchase approximately 0.7 million0.4 and 1.10.4 million shares of common stock, respectively, because the effect of their inclusion would be anti-dilutive. For the same periods in 2016,2018, diluted EPS excluded options to purchase approximately 5.3 million0.6 and 6.40.6 million shares, respectively. The year-over-year decreases for the three and nine months ended September 30, 2017 in anti-dilutive shares and the year-over-year increases in dilutive shares were primarily the result of year-over-year increases in the average price of MDC stock.
M.D.C. HOLDINGS, INC.
Notes to Unaudited Consolidated Financial Statements
| Accumulated Other Comprehensive Income |
The following table sets forth our changes in accumulated other comprehensive income (“AOCI”):
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Unrealized gains on available-for-sale marketable securities 1 : | ||||||||||||||||
Beginning balance | $ | 11,176 | $ | 5,344 | $ | 7,730 | $ | 3,657 | ||||||||
Other comprehensive income before reclassifications | 1,778 | 1,156 | 6,201 | 2,559 | ||||||||||||
Amounts reclassified from AOCI 2 | (10,128 | ) | (201 | ) | (11,105 | ) | 83 | |||||||||
Ending balance | $ | 2,826 | $ | 6,299 | $ | 2,826 | $ | 6,299 | ||||||||
Unrealized gains on available-for-sale metropolitan district bond securities 1 : | ||||||||||||||||
Beginning balance | $ | 14,825 | $ | 13,214 | $ | 14,341 | $ | 12,058 | ||||||||
Other comprehensive income before reclassifications | 7,400 | 73 | 7,884 | 1,229 | ||||||||||||
Amounts reclassified from AOCI | (22,225 | ) | - | (22,225 | ) | - | ||||||||||
Ending balance | $ | - | $ | 13,287 | $ | - | $ | 13,287 | ||||||||
Total ending AOCI | $ | 2,826 | $ | 19,586 | $ | 2,826 | $ | 19,586 | ||||||||
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Beginning balance 1 | $ | - | $ | - | $ | - | $ | 3,992 | ||||||||
Adoption of accounting standards | - | - | - | (3,992 | ) | |||||||||||
Ending balance | $ | - | $ | - | $ | - | $ | - | ||||||||
|
|
|
|
The following table sets forthDuring the activityfirst quarter of 2018, an election was made to reclassify the income tax effects of the Tax Cuts and Jobs Act related to reclassifications out ofnet unrealized gains on equity investments from accumulated other comprehensive income related to available for sale securities:retained earnings.
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
Affected Line Item in the Statements of Operations | 2017 | 2016 | 2017 | 2016 | ||||||||||||
(Dollars in thousands) | ||||||||||||||||
Homebuilding: Interest and other income | $ | 52,211 | $ | 555 | $ | 53,622 | $ | 817 | ||||||||
Homebuilding: Other-than-temporary impairment of marketable securities | - | (215 | ) | (51 | ) | (934 | ) | |||||||||
Financial services: Interest and other income | - | 94 | 347 | 94 | ||||||||||||
Financial services: Other-than-temporary impairment of marketable securities | (29 | ) | (111 | ) | (160 | ) | (111 | ) | ||||||||
Income before income taxes | 52,182 | 323 | 53,758 | (134 | ) | |||||||||||
Provision for income taxes | (19,829 | ) | (122 | ) | (20,428 | ) | 51 | |||||||||
Net income | $ | 32,353 | $ | 201 | $ | 33,330 | $ | (83 | ) | |||||||
| 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.
M.D.C. HOLDINGS, INC.
Notes to Unaudited Consolidated Financial Statements
The following table sets forth the fair values and methods used for measuring the fair values of financial instruments on a recurring basis:
Fair Value | ||||||||||
Financial Instrument | Hierarchy | September 30, 2019 | December 31, 2018 | |||||||
(Dollars in thousands) | ||||||||||
Cash and cash equivalents | ||||||||||
Debt securities (available-for-sale) | Level 1 | $ | - | $ | 34,866 | |||||
Marketable securities | ||||||||||
Equity securities | Level 1 | $ | 52,876 | $ | 40,879 | |||||
Mortgage loans held-for-sale, net | Level 2 | $ | 117,020 | $ | 149,211 | |||||
Fair Value | ||||||||||||
Financial Instrument | Hierarchy | September 30, 2017 | December 31, 2016 | |||||||||
(Dollars in thousands) | ||||||||||||
Marketable equity securities (available-for-sale) | Level 1 | $ | 40,221 | $ | 96,206 | |||||||
Mortgage loans held-for-sale, net | Level 2 | $ | 89,804 | $ | 138,774 | |||||||
Metropolitan district bond securities (related party) (available-for-sale) | Level 3 | $ | - | $ | 30,162 | |||||||
The following methods and assumptions were used to estimate the fair value of each class of financial instruments as of September 30, 20172019 and December 31, 2016.2018.
Cash and cash equivalents (excluding debt securities with an original maturity of three months or less), restricted cash, trade and other receivables, prepaid and other assets, accounts payable, accrued liabilities and borrowings on our revolving credit facility. Fair value approximates carrying value.
Marketable Equity securities. As of September 30, 2017 and December 31, 2016, we held marketableOur equity securities which consist of holdings in corporate equities, preferredcommon stock and exchange traded funds. As of September 30, 20172019 and December 31, 2016,2018, all of our equity securities were recorded at fair value with all changes in fair value recorded to net gain (loss) on marketable equity securities in the financial services section of our consolidated statements of operations and comprehensive income.
Debt securities. Our debt securities consist of U.S. government securities. As of December 31, 2018, all of our debt securities were treated as available-for-sale investments and, as such, are recorded at fair value with all changes in fair value initially recorded through AOCI, subject to an assessment to determine if anany unrealized loss, if applicable, is other-than-temporary.
Each quarter we assess allThe following tables set forth the cost and estimated fair value of our securities in an unrealized loss position for a potential other-than-temporary impairment (“OTTI”). Ifavailable-for-sale debt securities:
December 31, 2018 | ||||||||||||||||
Amortized Cost Basis | OTTI | Net Amortized Cost | Fair Value | |||||||||||||
Financial Services | ||||||||||||||||
Cash and cash equivalents | ||||||||||||||||
Debt securities | $ | 34,866 | $ | - | $ | 34,866 | $ | 34,866 | ||||||||
The following table reconciles the unrealized loss is determined to be other-than-temporary, an OTTI is recorded in other-than-temporary impairment of marketable securities in the homebuilding or financial services sections of our consolidated statements of operations and comprehensive income. Duringnet gain recognized during the three and nine months ended September 30, 2017,2019 we recorded pretax OTTI’s of $0.0 million and $0.22018 million, respectively, for certain of ouron equity securities that were in anto the unrealized loss position as ofgain recognized during the end of each respective period. Forperiods on equity securities still held at the same periods in 2016, we recorded pretax OTTI’s of $0.3 million and $1.0 million, respectively.reporting date.
The following tables set forth the cost and estimated fair value of our available-for-sale marketable securities:
September 30, 2017 | ||||||||||||||||
Cost Basis | OTTI | Net Cost Basis | Fair Value | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Homebuilding equity securities | $ | - | $ | - | $ | - | $ | - | ||||||||
Financial services equity securities | 36,304 | (366 | ) | 35,938 | 40,221 | |||||||||||
Total marketable equity securities | $ | 36,304 | $ | (366 | ) | $ | 35,938 | $ | 40,221 | |||||||
December 31, 2016 | ||||||||||||||||
Cost Basis | OTTI | Net Cost Basis | Fair Value | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Homebuilding equity securities | $ | 48,910 | $ | (685 | ) | $ | 48,225 | $ | 59,770 | |||||||
Financial services equity securities | 35,885 | (373 | ) | 35,512 | 36,436 | |||||||||||
Total marketable equity securities | $ | 84,795 | $ | (1,058 | ) | $ | 83,737 | $ | 96,206 | |||||||
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Net gain recognized during the period on equity securities | $ | 767 | $ | 3,004 | $ | 7,934 | $ | 3,129 | ||||||||
Less: Net gain (loss) recognized during the period on equity securities sold during the period | 299 | (21 | ) | 536 | (484 | ) | ||||||||||
Unrealized gain recognized during the reporting period on equity securities still held at the reporting date | $ | 468 | $ | 3,025 | $ | 7,398 | $ | 3,613 | ||||||||
As of September 30, 2017 and December 31, 2016, our marketable equity securities were in net unrealized gain positions totaling $4.3 million and $12.5 million, respectively. Our individual marketable equity securities that were in unrealized loss positions, excluding those that were impaired as part of any OTTI, aggregated to an unrealized loss of $0.6 million and $0.5 million as of September 30, 2017 and December 31, 2016, respectively.The table below sets forth the aggregated unrealized losses for individual equity securities that were in unrealized loss positions but did not have OTTIs recognized. We do not believe the decline in the value of these marketable securities as of September 30, 2017 is other-than-temporary.
M.D.C. HOLDINGS, INC.
Notes to Unaudited Consolidated Financial Statements
September 30, 2017 | December 31, 2016 | |||||||||||||||||||||||
Number of Securities in a Loss Position | Aggregate Loss Position | Aggregate Fair Value of Securities in a Loss Position | Number of Securities in a Loss Position | Aggregate Loss Position | Aggregate Fair Value of Securities in a Loss Position | |||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Marketable equity securities | 1 | $ | (615 | ) | $ | 1,384 | 5 | $ | (457 | ) | $ | 6,045 | ||||||||||||
The following table sets forth gross realized gains and losses from the sale of available-for-sale marketable securities. We record the net amount of these gains and losses to either other expense or interest and other income, dependent upon whether there is a net realized loss or gain, respectively, in the homebuilding section or financial services section of our consolidated statements of operations and comprehensive income.
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Gross realized gains on sales of available-for-sale securities | $ | 16,577 | $ | 740 | $ | 18,365 | $ | 2,210 | ||||||||
Gross realized losses on sales of available-for-sale securities | (213 | ) | (91 | ) | (243 | ) | (1,299 | ) | ||||||||
Net realized gain on sales of available-for-sale securities | $ | 16,364 | $ | 649 | $ | 18,122 | $ | 911 | ||||||||
Mortgage loans held-for-sale, net. Our mortgage loans held-for-sale, which are measured at fair value on a recurring basis, include (1) mortgage loans held-for-sale that are under commitments to sell and (2) mortgage loans held-for-sale that are not under commitments to sell. At September 30, 20172019 and December 31, 2016,2018, we had $75.3$101.7 million and $96.2$130.8 million, respectively, of mortgage loans held-for-sale under commitments to sell. The fair value for those loans was based on quoted market prices for those mortgage loans, which are Level 2 fair value inputs. At September 30, 20172019 and December 31, 2016,2018, we had $14.5$15.3 million and $42.6$18.5 million, respectively, of mortgage loans held-for-sale that were not under commitments to sell. The fair value for those loans was primarily based upon the estimated market price received from an outside party, which is a Level 2 fair value input.
Gains on sales of mortgage loans, net, are included as a component of revenues in the financial services section of our consolidated statements of operations and comprehensive income. For the three and nine months ended September 30, 2017,2019, we recorded net gains on the sales of mortgage loans of $9.8$14.6 million and $28.5$38.9 million, respectively, compared to $10.0$11.8 million and $22.5$31.1 million for the same periods in the prior year, respectively.
Metropolitan district bond securities (related party). The metropolitan district bond securities (the “Metro Bonds”) are included in the homebuilding section of our consolidated balance sheets. We acquired the Metro Bonds from a quasi-municipal corporation in the state of Colorado (the “Metro District”), which was formed to help fund and maintain the infrastructure associated with a master-planned community being developed by our Company. During the 2017third quarter, we sold the Metro Bonds for net proceeds of $44.3 million. With a cost basis of $8.4 million, we recorded a realized gain of $35.8 million, which is included in interest and other income in the homebuilding section of our consolidated statement of operations and comprehensive income.
Mortgage Repurchase Facility. The debt associated with our mortgage repurchase facility (see Note 1819 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.
M.D.C. HOLDINGS, INC.
Notes to Unaudited Consolidated Financial Statements
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 whichthat were provided by multiple sources.
September 30, 2019 | December 31, 2018 | |||||||||||||||
Carrying | Fair Value | Carrying | Fair Value | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
$250 Million 5⅝% Senior Notes due February 2020, net | $ | 249,638 | $ | 252,193 | $ | 248,850 | $ | 253,413 | ||||||||
$250 Million 5½% Senior Notes due January 2024, net | 248,950 | 274,104 | 248,789 | 242,983 | ||||||||||||
$500 Million 6% Senior Notes due January 2043, net | 490,462 | 516,333 | 490,328 | 386,552 | ||||||||||||
Total | $ | 989,050 | $ | 1,042,630 | $ | 987,967 | $ | 882,948 | ||||||||
September 30, 2017 | December 31, 2016 | |||||||||||||||
Carrying | Fair Value | Carrying | Fair Value | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
5⅝% Senior Notes due February 2020, net | $ | 247,613 | $ | 268,113 | $ | 246,915 | $ | 265,611 | ||||||||
5½% Senior Notes due January 2024, net | 248,535 | 270,250 | 248,391 | 258,800 | ||||||||||||
6% Senior Notes due January 2043, net | 346,384 | 340,423 | 346,340 | 297,087 | ||||||||||||
Total | $ | 842,532 | $ | 878,786 | $ | 841,646 | $ | 821,498 | ||||||||
7. | Inventories |
The following table sets forth, by reportable segment, information relating to our homebuilding inventories:
September 30, | December 31, | September 30, | December 31, | |||||||||||||
2017 | 2016 | 2019 | 2018 | |||||||||||||
(Dollars in thousands) | (Dollars in thousands) | |||||||||||||||
Housing completed or under construction: | ||||||||||||||||
West | $ | 489,753 | $ | 470,503 | $ | 689,849 | $ | 521,960 | ||||||||
Mountain | 343,394 | 277,922 | 415,799 | 347,738 | ||||||||||||
East | 136,272 | 125,774 | 98,993 | 82,738 | ||||||||||||
Subtotal | 969,419 | 874,199 | 1,204,641 | 952,436 | ||||||||||||
Land and land under development: | ||||||||||||||||
West | 489,758 | 499,186 | 697,947 | 705,591 | ||||||||||||
Mountain | 305,953 | 271,252 | 417,150 | 402,657 | ||||||||||||
East | 67,291 | 114,177 | 75,939 | 72,310 | ||||||||||||
Subtotal | 863,002 | 884,615 | 1,191,036 | 1,180,558 | ||||||||||||
Total inventories | $ | 1,832,421 | $ | 1,758,814 | $ | 2,395,677 | $ | 2,132,994 | ||||||||
Our inventories are primarily associated with communities where we intend to construct and sell homes, including models and unsold homes.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
• |
|
• | estimated future undiscounted cash flows and Operating Margin; |
M.D.C. HOLDINGS, INC.
Notes to Unaudited Consolidated Financial Statements
• | 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’ssubdivision’s carrying value, the carrying value of the subdivision is written down to its then estimated fair value. We generally determine the estimated fair value of each subdivision by determining the present value of the estimated future cash flows at discount rates, which are Level 3 inputs, that are commensurate with the risk of the subdivision under evaluation. The evaluation for the recoverability of the carrying value of the assets for each individual subdivision can be impacted significantly by our estimates of future home sale revenues, home construction costs, and development costs per home, all of which are Level 3 inputs.
If land is classified as held for sale, we measure it in accordance with ASC 360 we measure it 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.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.
Impairments of homebuilding inventory by segment for the three and nine months ended September 30, 20172019 and 20162018 are shown in the table below.
Three Months Ended | Nine Months Ended | Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||
September 30, | September 30, | September 30, | September 30, | |||||||||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | 2019 | 2018 | 2019 | 2018 | |||||||||||||||||||||||||
(Dollars in thousands) | (Dollars in thousands) | |||||||||||||||||||||||||||||||
West | $ | 1,885 | $ | - | $ | 5,985 | $ | 1,400 | $ | - | $ | 10,798 | $ | - | $ | 11,173 | ||||||||||||||||
Mountain | 370 | - | 370 | - | - | - | 400 | 175 | ||||||||||||||||||||||||
East | 2,285 | 4,700 | 3,035 | 4,900 | - | 300 | 210 | 500 | ||||||||||||||||||||||||
Total inventory impairments | $ | 4,540 | $ | 4,700 | $ | 9,390 | $ | 6,300 | $ | - | $ | 11,098 | $ | 610 | $ | 11,848 | ||||||||||||||||
The table below provides quantitative data, for the periods presented, used in determining the fair value of the impaired inventory.
Impairment Data | Quantitative Data | |||||||||||||||||||||
Three Months Ended | Total | Inventory | Fair Value of After Impairments | Number of | Discount Rate | |||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||
March 31, 2017 | 33 | $ | 4,850 | $ | 19,952 | 2 | 12% | to | 18% | |||||||||||||
June 30, 2017 | 35 | $ | - | $ | - | - | N/A | |||||||||||||||
September 30, 2017 | 33 | $ | 4,540 | $ | 52,190 | 9 | 10% | to | 15% | |||||||||||||
March 31, 2016 | 14 | $ | - | $ | - | - | N/A | |||||||||||||||
June 30, 2016 | 17 | $ | 1,600 | $ | 6,415 | 2 | 12% | to | 15% | |||||||||||||
September 30, 2016 | 25 | $ | 4,700 | $ | 12,295 | 2 | 15% | to | 18% | |||||||||||||
Impairment Data | Quantitative Data | ||||||||||||||||||||
Three Months Ended | Total | Inventory | Fair Value of | Number of | Discount Rate | ||||||||||||||||
(Dollars in thousands) | |||||||||||||||||||||
March 31, 2019 | 16 | $ | 610 | $ | 10,476 | 2 | N/A | ||||||||||||||
June 30, 2019 | 12 | $ | - | N/A | 0 | N/A | |||||||||||||||
| September 30, 2019 | 16 | $ | - | N/A | 0 | N/A | |||||||||||||||
March 31, 2018 | 24 | $ | 550 | $ | 5,223 | 2 | 12% | ||||||||||||||
June 30, 2018 | 17 | $ | 200 | $ | 767 | 1 | 12% | ||||||||||||||
September 30, 2018 | 17 | $ | 11,098 | $ | 29,874 | 2 | 12% | - | 18% | ||||||||||||
M.D.C. HOLDINGS, INC.
Notes to Unaudited Consolidated Financial Statements
8. | 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 | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Homebuilding interest incurred | $ | 15,879 | $ | 15,641 | $ | 47,890 | $ | 46,905 | ||||||||
Less: Interest capitalized | (15,879 | ) | (15,641 | ) | (47,890 | ) | (46,905 | ) | ||||||||
Homebuilding interest expensed | $ | - | $ | - | $ | - | $ | - | ||||||||
Interest capitalized, beginning of period | $ | 58,193 | $ | 58,227 | $ | 54,845 | $ | 57,541 | ||||||||
Plus: Interest capitalized during period | 15,879 | 15,641 | 47,890 | 46,905 | ||||||||||||
Less: Previously capitalized interest included in home and land cost of sales | (14,451 | ) | (16,636 | ) | (43,114 | ) | (47,214 | ) | ||||||||
Interest capitalized, end of period | $ | 59,621 | $ | 57,232 | $ | 59,621 | $ | 57,232 | ||||||||
9. | 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, and are classified as operating leases. These leases do not contain any residual value guarantees or restrictive covenants and no variable lease payments, except for 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 and expenses in the homebuilding and financial services sections of our consolidated statements of operations and comprehensive income, respectively. Components of operating lease expense were as follows:
Three Months Ended | Nine Months Ended | |||||||
September 30, 2019 | September 30, 2019 | |||||||
(Dollars in thousands) | ||||||||
Operating lease cost 1 | $ | 1,841 | $ | 5,811 | ||||
Less: Sublease income (Note 20) | (37 | ) | (112 | ) | ||||
Net lease cost | $ | 1,804 | $ | 5,699 | ||||
1Includes variable lease costs, which are immaterial.
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Homebuilding interest incurred | $ | 13,212 | $ | 13,187 | $ | 39,594 | $ | 39,511 | ||||||||
Less: Interest capitalized | (13,212 | ) | (13,187 | ) | (39,594 | ) | (39,511 | ) | ||||||||
Homebuilding interest expensed | $ | - | $ | - | $ | - | $ | - | ||||||||
Interest capitalized, beginning of period | $ | 62,091 | $ | 77,150 | $ | 68,085 | $ | 77,541 | ||||||||
Plus: Interest capitalized during period | 13,212 | 13,187 | 39,594 | 39,511 | ||||||||||||
Less: Previously capitalized interest included in home and land cost of sales | (15,087 | ) | (15,922 | ) | (47,463 | ) | (42,637 | ) | ||||||||
Interest capitalized, end of period | $ | 60,216 | $ | 74,415 | $ | 60,216 | $ | 74,415 | ||||||||
Supplemental cash flow information related to leases was as follows:
Three Months Ended | Nine Months Ended | |||||||
September 30, 2019 | September 30, 2019 | |||||||
| (Dollars in thousands) | ||||||||
Cash paid for amounts included in the measurement of lease liabilities: |
| |||||||
Operating cash flows from operating leases | $ | 1,834 | $ | 5,397 | ||||
Leased assets obtained in exchange for new operating lease liabilities | $ | 646 | $ | 2,676 | ||||
Supplemental cash flow information related to non-cash transactions also includes the recognition of operating lease right-of-use assets of $33.5 million and operating lease liabilities of $34.3 million upon adoption of ASC 842.
Weighted-average remaining lease term and discount rate for operating leases were as follows:
September 30, 2019 | ||||
Weighted-average remaining lease term (in years) | 6.3 | |||
Weighted-average discount rate | 5.5 | % | ||
Maturities of operating lease liabilities were as follows:
Year Ended | ||||
December 31, | ||||
(Dollars in thousands) | ||||
2019 (excluding the nine months ended September 30, 2019) | $ | 1,242 | ||
2020 | 6,716 | |||
2021 | 6,477 | |||
2022 | 6,138 | |||
2023 | 5,294 | |||
Thereafter | 13,162 | |||
Total operating lease payments 1 | $ | 39,029 | ||
Less: Interest | 6,162 | |||
Present value of operating lease liabilities 2 | $ | 32,867 | ||
1 | Operating lease payments exclude $3.3 million of legally binding lease payments for leases signed but not yet commenced. |
2 | Financial services operating lease liabilities of $1.0 million are included as a component of accrued liabilities in the financial services section of our consolidated balance sheet at September 30, 2019. |
| Homebuilding Prepaid and Other Assets |
The following table sets forth the components of homebuilding prepaid and other assets:
September 30, | December 31, | |||||||
2019 | 2018 | |||||||
(Dollars in thousands) | ||||||||
Land option deposits | $ | 23,940 | $ | 23,805 | ||||
Goodwill | 6,008 | 6,008 | ||||||
Prepaid expenses | 8,688 | 7,324 | ||||||
Deferred debt issuance costs on revolving credit facility, net | 6,513 | 7,662 | ||||||
Other | 1,246 | 995 | ||||||
Total | $ | 46,395 | $ | 45,794 | ||||
| September 30, | December 31, | |||||||
2017 | 2016 | |||||||
(Dollars in thousands) | ||||||||
Deferred marketing costs | $ | 37,178 | $ | 35,313 | ||||
Land option deposits | 16,277 | 8,683 | ||||||
Goodwill | 6,008 | 6,008 | ||||||
Prepaid expenses | 6,011 | 4,735 | ||||||
Deferred debt issuance costs on revolving credit facility, net | 6,139 | 4,340 | ||||||
Other | 1,195 | 1,384 | ||||||
Total | $ | 72,808 | $ | 60,463 | ||||
| Homebuilding Accrued Liabilities and Financial Services Accounts Payable and Accrued Liabilities |
The following table sets forth information relating to homebuilding accrued liabilities:
September 30, | December 31, | |||||||
2017 | 2016 | |||||||
(Dollars in thousands) | ||||||||
Customer and escrow deposits | $ | 37,578 | $ | 27,183 | ||||
Warranty accrual | 20,725 | 20,678 | ||||||
Accrued compensation and related expenses | 27,624 | 27,830 | ||||||
Accrued interest | 11,031 | 23,234 | ||||||
Construction defect claim reserves | 7,480 | 8,750 | ||||||
Land development and home construction accruals | 6,212 | 8,695 | ||||||
Other accrued liabilities | 41,011 | 28,196 | ||||||
Total accrued liabilities | $ | 151,661 | $ | 144,566 | ||||
M.D.C. HOLDINGS, INC.
Notes to Unaudited Consolidated Financial Statements
September 30, | December 31, | |||||||
2019 | 2018 | |||||||
(Dollars in thousands) | ||||||||
Customer and escrow deposits | $ | 48,618 | $ | 34,463 | ||||
Warranty accrual | 29,870 | 28,262 | ||||||
Accrued compensation and related expenses | 35,790 | 39,459 | ||||||
Accrued interest | 13,281 | 27,734 | ||||||
Construction defect claim reserves | 8,379 | 8,464 | ||||||
Land development and home construction accruals | 8,472 | 8,683 | ||||||
Other accrued liabilities | 44,886 | 49,182 | ||||||
Total accrued liabilities | $ | 189,296 | $ | 196,247 | ||||
The following table sets forth information relating to financial services accounts payable and accrued liabilities:
September 30, | December 31, | |||||||
2019 | 2018 | |||||||
(Dollars in thousands) | ||||||||
Insurance reserves | $ | 48,926 | $ | 46,844 | ||||
Accounts payable and other accrued liabilities | 13,105 | 11,699 | ||||||
Total accounts payable and accrued liabilities | $ | 62,031 | $ | 58,543 | ||||
September 30, | December 31, | |||||||
2017 | 2016 | |||||||
(Dollars in thousands) | ||||||||
Insurance reserves | $ | 43,016 | $ | 42,204 | ||||
Accounts payable and other accrued liabilities | 8,681 | 8,530 | ||||||
Total accounts payable and accrued liabilities | $ | 51,697 | $ | 50,734 | ||||
1 | Warranty Accrual |
Our homes are sold with limited third-party warranties and, under our agreement with the issuer of the third-party warranties, we are responsible for performing all of the work for the first two years of the warranty coverage and paying for substantially all of the work required to be performed during years three through ten of the warranties. We record accruals for general and structural warranty claims, as well as accruals for known, unusual warranty-related expenditures. Our warranty accrual is recorded based upon historical payment experience in an amount estimated to be adequate to cover expected costs of materials and outside labor during warranty periods. The determination of the warranty accrual rate for closed homes and the evaluation of our warranty accrual balance at period end are based on an internally developed analysis that includes known facts and interpretations of circumstances, including, among other things, our trends in historical warranty payment levels and warranty payments for claims not considered to be normal and recurring.
Our warranty accrual is included in accrued liabilities in the homebuilding section of our consolidated balance sheets and adjustments to our warranty accrual are recorded as an increase or reduction to home cost of sales in the homebuilding section of our consolidated statements of operations and comprehensive income.
The table set forth below summarizes accrual, adjustment and payment activity related to our warranty accrual for the three and nine months ended September 30, 20172019 and 2016.2018. For both thethree and nine months ended September 30, 2017,2018, we recorded adjustments to decreaseincrease our warranty accrual by $0.4 million. The decreases were driven by an adjustment to a specific warranty accrual where we determined that a portion of the previously accrued amount would be covered by insurance. For the three and nine months ended September 30, 2016, we increased our warranty reserve by $1.8$3.1 million and $5.1 million, respectively. The adjustments made during 2016 were due to higher than expected recent warranty related expenditures.
Three Months Ended | Nine Months Ended | Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||
September 30, | September 30, | September 30, | September 30, | |||||||||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | 2019 | 2018 | 2019 | 2018 | |||||||||||||||||||||||||
(Dollars in thousands) | (Dollars in thousands) | |||||||||||||||||||||||||||||||
Balance at beginning of period | $ | 20,965 | $ | 17,217 | $ | 20,678 | $ | 15,328 | $ | 29,349 | $ | 25,666 | $ | 28,262 | $ | 21,909 | ||||||||||||||||
Expense provisions | 2,448 | 2,390 | 7,691 | 6,147 | 3,557 | 3,757 | 10,642 | 10,104 | ||||||||||||||||||||||||
Cash payments | (2,263 | ) | (2,723 | ) | (7,269 | ) | (7,828 | ) | (3,425 | ) | (2,798 | ) | (8,894 | ) | (8,494 | ) | ||||||||||||||||
Adjustments | (425 | ) | 1,825 | (375 | ) | 5,062 | 389 | - | (140 | ) | 3,106 | |||||||||||||||||||||
Balance at end of period | $ | 20,725 | $ | 18,709 | $ | 20,725 | $ | 18,709 | $ | 29,870 | $ | 26,625 | $ | 29,870 | $ | 26,625 | ||||||||||||||||
1 | Insurance and Construction Defect Claim Reserves |
The establishment of reserves for estimated losses associated with insurance policies issued by Allegiant and re-insurance agreements issued by StarAmerican are based on actuarial studies that include known facts and interpretations of circumstances, including our experience with similar cases and historical trends involving claim payment patterns, pending levels of unpaid claims, product mix or concentration, claim severity, frequency patterns depending on the business conducted, and changing regulatory and legal environments. It is possible that changes in the insurance payment experience used in estimating our ultimate insurance losses could have a material impact on our insurance reserves.
The establishment of reserves for estimated losses to be incurred by our homebuilding subsidiaries associated with (1) the self-insured retention (“SIR”) portion of construction defect claims that are expected to be covered under insurance policies with Allegiant and (2) the entire cost of any construction defect claims that are not expected to be covered by insurance policies with Allegiant are based on actuarial studies that include known facts similar to those established for our insurance reserves. It is possible that changes in the payment experience used in estimating our ultimate losses for construction defect claims could have a material impact on our reserves.
M.D.C. HOLDINGS, INC.
Notes to Unaudited Consolidated Financial Statements
The table set forth below summarizes our insurance and construction defect claim reserves activity for the three and nine months ended September 30, 20172019 and 2016.2018. These reserves are included as a component of accrued liabilities in either the financial services orand homebuilding sections of the consolidated balance sheets.
Three Months Ended | Nine Months Ended | Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||
September 30, | September 30, | September 30, | September 30, | |||||||||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | 2019 | 2018 | 2019 | 2018 | |||||||||||||||||||||||||
(Dollars in thousands) | (Dollars in thousands) | |||||||||||||||||||||||||||||||
Balance at beginning of period | $ | 49,647 | $ | 46,900 | $ | 50,954 | $ | 45,811 | $ | 56,817 | $ | 50,707 | $ | 55,308 | $ | 52,686 | ||||||||||||||||
Expense provisions | 2,383 | 1,888 | 6,884 | 5,222 | 3,102 | 2,865 | 8,312 | 7,902 | ||||||||||||||||||||||||
Cash payments, net of recoveries | (1,535 | ) | (635 | ) | (7,343 | ) | (2,880 | ) | (2,614 | ) | (264 | ) | (6,315 | ) | (7,280 | ) | ||||||||||||||||
Balance at end of period | $ | 50,495 | $ | 48,153 | $ | 50,495 | $ | 48,153 | $ | 57,305 | $ | 53,308 | $ | 57,305 | $ | 53,308 | ||||||||||||||||
In the ordinary course of business, we make payments from our insurance and construction defect claim reserves to settle litigation claims arising from our homebuilding activities. These payments are irregular in both their timing and their magnitude. As a result, the cash payments, net of recoveries shown for the three and nine months ended September 30, 20172019 and 20162018 are not necessarily indicative of what future cash payments will be for subsequent periods.
1 | Income Taxes |
At the end of each interim period, we are required to estimate our annual effective tax rate for the fiscal year and use that rate to provide for income taxes for the current year-to-date reporting period. Our overall effective income tax rates were 31.8%19.5% and 34.1%24.4% for the three and nine months ended September 30, 2017, 2019, respectively, compared to 30.7% and 32.3%20.8% and 19.8% for the three and nine months ended September 30, 2016, 2018, respectively. The rates for the three and nine months ended September 30, 2017 2019 resulted in income tax expense of $28.5$12.2 million and $60.7$47.0 million, respectively, compared to income tax expense of $11.7$14.0 million and $29.9$38.5 million for the same periods in 2016.three and nine months ended September 30, 2018, respectively. The year-over-year increase in our effective tax rate for the threenine months ended September 30, 2017 was primarily the result of our estimate of the full year effective tax rate for 2016 including an estimate for energy credits whereas our estimate for the 2017 full year includes no such energy credit as the credit has not been approved by the U.S. Congress. Additionally, our 2016 third quarter benefited from certain positive return-to-provision adjustments as a result of filing our 2015 tax returns, whereas our 2017 third quarter included no such adjustments. However, the impact of these items were substantially offset by the release of a valuation allowance on our Metro Bonds as a result of the gain on the sale of those securities at the end of the 2017 third quarter enabling us to utilize the full deferred tax asset recorded on the Metro Bonds. For the nine months ended September 30, 2017, the year-over-year increase in our effective tax rate 2019 was due to the foregoinga $10.2 million decrease in benefits from energy credits matter coupled with the establishment of a valuation allowance in the 2017 first quarter against certain state net operating loss carryforwards where realizationtax credits. This was more uncertain at the time. These items were somewhatpartially offset by a $2.7 million increase in benefits recognized upon the releasevesting or exercise of equity awards, primarily due to a $2.3 million benefit related to the 2016 performance share units recognized during the 2019third quarter (see Note 16 for further discussion of the Metro Bonds valuation allowance discussed above.2016 performance share unit awards).
At September 30, 20172019 and December 31, 20162018 we had deferred tax assets, net of valuation allowances and deferred tax liabilities, of $64.2$27.7 million and $74.9$37.2 million, respectively. The valuation allowances were primarily related to various state net operating loss carryforwards where realization is more uncertain at this time due to the limited carryforward periods coupled with minimal operating activity that existexists in certain states.
1 | Senior Notes |
The carrying valuevalues of our senior notes as of September 30, 20172019 and December 31, 2016,2018, net of any unamortized debt issuance costs or discount, were as follows:
September 30, | December 31, | September 30, | December 31, | |||||||||||||
2017 | 2016 | 2019 | 2018 | |||||||||||||
(Dollars in thousands) | (Dollars in thousands) | |||||||||||||||
5⅝% Senior Notes due February 2020, net | $ | 247,613 | $ | 246,915 | $ | 249,638 | $ | 248,850 | ||||||||
5½% Senior Notes due January 2024, net | 248,535 | 248,391 | 248,950 | 248,789 | ||||||||||||
6% Senior Notes due January 2043, net | 346,384 | 346,340 | 490,462 | 490,328 | ||||||||||||
Total | $ | 842,532 | $ | 841,646 | $ | 989,050 | $ | 987,967 | ||||||||
Our senior notes are not secured and, while the senior note indentures contain some restrictions on secured debt and other transactions, they do not contain financial covenants. Our senior notes are fully and unconditionally guaranteed on an unsecured basis, jointly and severally, by most of our homebuilding segment subsidiaries.
M.D.C. HOLDINGS, INC.
Notes to Unaudited Consolidated Financial Statements
Subsequent to September 30, 2017, we completed a public offering of an additional $150 million principal amount of our 6% senior notes due 2043. See Note 20 for additional information.
1 | Stock-Based Compensation |
We account for share-based awards in accordance with ASC Topic 718Compensation–Stock Compensation (“ASC 718”), which requires the fair value of stock-based compensation awards to be amortized as an expense over the vesting period. Stock-based compensation awards are valued at fair value on the date of grant. The following table sets forth share-based award expense activity for the three and nine months ended September 30, 20172019 and 2016:2018, which is included as a component of selling general and administrative expenses and expenses in the homebuilding and financial services sections of our consolidated statements of operations and comprehensive income, respectively:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Stock option grants expense | $ | 429 | $ | 583 | $ | 929 | $ | 780 | ||||||||
Restricted stock awards expense | 1,391 | 939 | 2,979 | 2,303 | ||||||||||||
Performance share units expense | 7,975 | 903 | 14,270 | 5,417 | ||||||||||||
Total stock-based compensation | $ | 9,795 | $ | 2,425 | $ | 18,178 | $ | 8,500 | ||||||||
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Stock option grants expense | $ | 391 | $ | 328 | $ | 747 | $ | 5,621 | ||||||||
Restricted stock awards expense | 445 | 145 | 1,224 | 1,015 | ||||||||||||
Performance share units expense | 226 | - | 1,129 | - | ||||||||||||
Total stock based compensation | $ | 1,062 | $ | 473 | $ | 3,100 | $ | 6,636 | ||||||||
On May 18, 2015,August 5, 2019, the Company granted a non-qualified stock option to each of the Chief Executive Officer and the Chief Operating Officer for 1,050,000 shares of common stock under the Company’s 2011 Equity Incentive Plan. The terms of each option provide that, over a five year period, onethird of the option shares will vest as of each of the third, fourth, and fifth anniversary dates of the grant of the option; provided that all unvested option shares will vest immediately in the event the closing price of the Company’s stock, as reported by the New York Stock Exchange, in any 20 out of 30 consecutive trading days closes at a price equal to or greater than 120% of the closing price on the date of grant (the “market-based condition”). The option exercise price is equal to the closing price of the Company’s common stock on the date of grant, which was $27.10 and the expiration date of each option is May 18, 2025.23, 2018, In accordance with ASC 718,June 20, 2017 the market-based awards were assigned a fair value of $5.35 per share (total value of $11.2 million) on the date of grant using a Monte Carlo simulation model and as calculated under that model, all expense was recorded on a straight-line basis through the end of the 2016second quarter. Included in the stock option grant expense for the nine months ended September 30, 2016, shown in the table above, was $5.0 million of stock option grant expense related to these market-based option grants. During the 2017second quarter, the market-based condition was achieved and, as a result, the shares fully vested and became exercisable.
On July 25, 2016,and June 20, 2017, the Company granted long term performance stockshare unit awards (“PSUs”) to each of the CEO, the COO, and the Chief Financial Officer (“CFO”) under the Company’s 2011 Equity Incentive Plan. The PSUs will beare earned based upon the Company’s performance, over a three year period (the “Performance Period”), measured by increasing home sale revenues over a “Base Period”.Period.” Each award is conditioned upon the Company achieving an average gross margin from home sales percentage (excluding impairments) of at least fifteen percent (15%(15%) over the Performance Period. Target goals will be earned if the Company’s three year average home sale revenues over the Performance Period (“Performance Revenues”) exceed the home sale revenues over the Base Period (“Base Revenues”) by at least 10% but less than 20%. If Performance Revenues exceed the Base Revenues by at least 5% but less than 10% (“Threshold Goals”), 50% of the Target Goals will be earned.earned (“Threshold Goals”). If Performance Revenues exceed the Base Revenues by at least 20%,200% of the Target Goals will be earned (“Maximum Goals”). For the PSUs granted in 2017,2018 and 2019, the number of PSUs earned shall be adjusted to be proportional to the partial performance between the Threshold Goals, Target Goals and Maximum Goals. Details for each defined term above for both grants haveeach grant has been provided in the table below.
Threshold Goal | Target Goal | Maximum Goal | ||||||||||||||||||||||||||||||||
Awardee | Date of Award | Performance Period | Base Period | Base Period Revenues | PSUs | Home Sale Revenues | PSUs | Home Sale Revenues | PSUs | Home Sale Revenues | Fair Value per Share | Maximum Potential Expense* | ||||||||||||||||||||||
CEO | July 1, 2016 | July 1, 2015 | 61,236 | 122,472 | 244,944 | $ | 4,815 | |||||||||||||||||||||||||||
COO | July 25, 2016 | to | to | $1.975 billion | 61,236 | $2.074 billion | 122,472 | $2.173 billion | 244,944 | $2.370 billion | $ | 19.66 | 4,815 | |||||||||||||||||||||
CFO | June 30, 2019 | June 30, 2016 | 15,309 | 30,618 | 61,236 | 1,204 | ||||||||||||||||||||||||||||
| $ | 10,834 | |||||||||||||||||||||||||||||||||
CEO | April 1, 2017 | April 1, 2016 | 64,152 | 128,304 | 256,608 | $ | 7,142 | |||||||||||||||||||||||||||
COO | June 20, 2017 | to | to | $2.426 billion | 64,152 | $2.547 billion | 128,304 | $2.669 billion | 256,608 | $2.911 billion | $ | 27.83 | 7,142 | |||||||||||||||||||||
CFO | March 31, 2020 | March 31, 2017 | 16,038 | 32,076 | 64,152 | 1,786 | ||||||||||||||||||||||||||||
| $ | 16,070 | |||||||||||||||||||||||||||||||||
CEO | April 1, 2018 | April 1, 2017 | 64,800 | 129,600 | 259,200 | $ | 6,629 | |||||||||||||||||||||||||||
COO | May 23, 2018 | to | to | $2.543 billion | 64,800 | $2.670 billion | 129,600 | $2.797 billion | 259,200 | $3.052 billion | $ | 25.57 | 6,629 | |||||||||||||||||||||
CFO | March 31, 2021 | March 31, 2018 | 16,200 | 32,400 | 64,800 | 1,657 | ||||||||||||||||||||||||||||
| $ | 14,915 | |||||||||||||||||||||||||||||||||
CEO | January 1, 2019 | January 1, 2018 | 60,000 | 120,000 | 240,000 | $ | 7,824 | |||||||||||||||||||||||||||
COO | August 5, 2019 | to | to | $2.982 billion | 60,000 | $3.131 billion | 120,000 | $3.280 billion | 240,000 | $3.578 billion | $ | 32.60 | 7,824 | |||||||||||||||||||||
CFO | December 31, 2021 | December 31, 2018 | 15,000 | 30,000 | 60,000 | 1,956 | ||||||||||||||||||||||||||||
| $ | 17,604 | |||||||||||||||||||||||||||||||||
M.D.C. HOLDINGS, INC.* Dollars in thousands
Notes to Unaudited Consolidated Financial Statements
Threshold Goal | Target Goal | Maximum Goal | Maximum Potential | |||||||||||||||||||||||||||||||||||||||||||||
Awardee | Date of Award | Performance Period | Base Period | Base Period Revenues | PSUs | Home Sale Revenues | PSUs | Home Sale Revenues | PSUs | Home Sale Revenues | Fair Value per Share | Expense to be Recognized | ||||||||||||||||||||||||||||||||||||
CEO |
|
| July 1, 2016 |
| July 1, 2015 | 52,500 | 105,000 | 210,000 | $ | 4,815 | ||||||||||||||||||||||||||||||||||||||
COO | July 25, 2016 | to | to | $1.975 billion | 52,500 | $2.074 billion | 105,000 | $2.173 billion | 210,000 | $2.370 billion | $ | 22.93 | 4,815 | |||||||||||||||||||||||||||||||||||
CFO | June 30, 2019 | June 30, 2016 | 13,125 | 26,250 | 52,500 | 1,204 | ||||||||||||||||||||||||||||||||||||||||||
| $ | 10,834 | |||||||||||||||||||||||||||||||||||||||||||||||
CEO |
|
| April 1, 2017 |
| April 1, 2016 | 55,000 | 110,000 | 220,000 | $ | 6,802 | ||||||||||||||||||||||||||||||||||||||
COO | June 20, 2017 | to | to | $2.426 billion | 55,000 | $2.547 billion | 110,000 | $2.669 billion | 220,000 | $2.911 billion | $ | 30.92 | 6,802 | |||||||||||||||||||||||||||||||||||
CFO | March 31, 2020 | March 31, 2017 | 13,750 | 27,500 | 55,000 | 1,701 | ||||||||||||||||||||||||||||||||||||||||||
| $ | 15,305 | |||||||||||||||||||||||||||||||||||||||||||||||
In accordance with ASC 718, the PSUs were valued on the date of grant at their fair value. The fair value of these grants was equal to the closing price of MDC stock on the date of grant less the discounted cash flows of expected future dividends over the respective vesting period (as these PSUs do not participate in dividends). The grant date fair value and maximum potential expense if the Maximum Goals were met for these awards has been provided in the table above. ASC 718 does not permit recognition of expense associated with performance basedperformance-based stock awards until achievement of the performance targets are probable of occurring.
2016 PSU Grants. The 2016 PSU awards vested on August 7, 2019 at the Maximum Goal following the achievement of the Maximum Goals and certification by the Compensation Committee that the Maximum Goals had been achieved. As the Performance Period for these awards ended June 30, 2019 and the awards had been fully expensed at that time, 0 share-based award expense was recorded for the three months ended September 30, 2019. For the nine months ended September 30, 2019 the Company recorded share-based award expense of $1.8 million. As of September 30, 2017,2018, the Company determinedhad concluded that achievement of the ThresholdMaximum Goals for these awards was probable for the PSUs granted in 2016 and as such, recorded share-based award expense related to the awards of $0.2$0.9 million and $1.1$5.4 million respectively, for the three and nine months ended September 30, 2017. 2018.For the PSUs granted in
2017 PSU Grants. As of September 30, 2019, the Company determined that achievement between the Target Goals and Maximum Goals for these awards was probable and as such, the Company recorded share-based award expense related to the awards of $5.5 million and $10.0 million for the three and nine months ended September 30, 2019. The maximum potential expense to be recognized over the remaining Performance Period is $3.2 million. As of September 30, 2018, the Company concluded that achievement of any of the performance metrics had not met the level of probability required to record compensation expense at that time and as such, no0 expense related to the grant of these awards had been recognized as of September 30, 2018.
2018PSU Grants. As of September 30, 2019, the Company determined that achievement between the Threshold and Target Goals for these awards was probable and as such, the Company recorded share-based award expense related to the awards of $2.5 million for both the three and nine months ended September 30, 2019. The maximum potential expense to be recognized over the remaining Performance Period is $12.4 million. As of September 30, 2018, the Company concluded that achievement of any of the performance metrics had not met the level of probability required to record compensation expense and as such, 0 expense related to the grant of these awards had been recognized as of September 30, 2018.
2019 PSU Grants. For the PSUs granted in August of 2019, the Company concluded that achievement of any of the performance metrics has not met the level of probability required to record compensation expense and, as such, 0 expense related to these awards has been recognized as of September 30, 2017.2019. The maximum potential expense to be recognized over the remaining Performance Period is $17.6 million.
1 | Commitments and Contingencies |
Surety Bonds and Letters of Credit. We are required to obtain surety bonds and letters of credit in support of our obligations for land development and subdivision improvements, homeowner association dues, warranty work, contractor license fees and earnest money deposits. At September 30, 2017,2019, we had outstanding surety bonds and letters of credit totaling $184.9$251.1 million and $65.5$93.0 million, respectively, including $31.6$66.6 million in letters of credit issued by HomeAmerican. The estimated cost to complete obligations related to these bonds and letters of credit were approximately $33.0$130.4 million and $25.3$49.8 million, respectively. All letters of credit as of September 30, 2017,2019, excluding those issued by HomeAmerican, were issued under our unsecured revolving credit facility (see Note 1819 for further discussion of the revolving credit facility). We expect that the obligations secured by these performance bonds and letters of credit generally will be performed in the ordinary course of business and in accordance with the applicable contractual terms. To the extent that the obligations are performed, the related performance bonds and letters of credit should be released and we should not have any continuing obligations. However, in the event any such performance bonds or letters of credit are called, our indemnity obligations could require us to reimburse the issuer of the performance bond or letter of credit.
We have made no material guarantees with respect to third-party obligations.
Litigation Reserves.Litigation. Due to the nature of the homebuilding business, we have been named as defendants in various claims, complaints and other legal actions arising in the ordinary course of business, including product liability claims and claims associated with the sale and financing of homes. In the opinion of management, the outcome of these ordinary course matters will not have a material adverse effect upon our financial condition, results of operations or cash flows.
Loan Origination Liabilities. HomeAmerican sold to financial institutions certain loans originated prior to 2009 that were subsequently included by such financial institutions in residential mortgage-backed securities offerings or other securitizations issued by those financial institutions. In connection with such sales, we have been put on notice by one institution of a potential claim for indemnification or breach of contract relating to certain loans that were included in securitizations. Our understanding is that the potential claim would relate to alleged misrepresentations by borrowers on certain residential mortgage loans originated by HomeAmerican and/or alleged lack of conformity of certain loans to applicable underwriting guidelines promulgated by the financial institution. We cannot yet quantify HomeAmerican's potential liability, if any, as a result of this potential claim, but, based on the limited information available to us at this time, believe that we would likely have strong legal and factual defenses to any such claim. We currently do not believe, moreover, that this matter will have a material adverse impact on our results of operations, financial position, or cash flows.
Lot Option Contracts. In the ordinary course of business, we enter into lot option purchase contracts (“Option Contracts”), generally through a deposit of cash or a letter of credit, for the right to purchase land or lots at a future point in time with predetermined terms. The use of such land option and other contracts generally allow us to reduce the risks associated with direct land ownership and development, reduces our capital and financial commitments, and minimizes the amount of land inventories on our consolidated balance sheets. In certain cases, these contracts will be settled shortly following the end of the period. Our obligation with respect to Option Contracts is generally limited to forfeiture of the related deposits. At September 30, 2017,2019, we had cash deposits and letters of credit totaling $11.4$19.3 million and $3.6$5.4 million, respectively, at risk associated with the option to purchase 6,3067,345 lots.
M.D.C. HOLDINGS, INC.
Notes to Unaudited Consolidated Financial Statements
| Derivative Financial Instruments |
The derivative instruments we utilize in the normal course of business are interest rate lock commitments and forward sales of mortgage-backed securities, both of which typically are short-term in nature. Forward sales of mortgage-backed securities are utilized to hedge changes in fair value of our interest rate lock commitments as well as mortgage loans held-for-sale not under commitments to sell. For forward sales of mortgage-backed securities, as well as interest rate lock commitments that are still outstanding at the end of a reporting period, we record the changes in fair value of the derivatives in revenues in the financial services section of our consolidated statements of operations and comprehensive income with an offset to other assets or accounts payable and accrued liabilities in the financial services section of our consolidated balance sheets, depending on the nature of the change.
At September 30, 2017,2019, we had interest rate lock commitments with an aggregate principal balance of $101.2$155.1 million. Additionally, we had $14.0$14.6 million of mortgage loans held-for-sale at September 30, 20172019 that had not yet been committed to a mortgage purchaser. In order to hedge the changes in fair value of our interest rate lock commitments and mortgage loans held-for-sale that had not yet been committed to a mortgage purchaser, we had forward sales of securities totaling $85.0$131.5 million at September 30, 2017.2019.
For the three and nine months ended September 30, 2017,2019, we recorded net lossesgains of $0.5$0.5 million and $0.5$1.9 million, respectively, on our derivatives, compared to net gainsloss of $0.1$0.9 million and $1.1a net gain of $1.4 million for the same periods in 2016.2018.
1 | Lines of Credit |
Revolving Credit Facility. We have an unsecured revolving credit agreement (“Revolving Credit Facility”) with a group of lenders which may be used for general corporate purposes. This agreement was amended on September 29, 2017November 1, 2018 to (1) extend the Revolving Credit Facility maturity to December 16, 2022,18, 2023, (2) increase the aggregate commitment from $550$700 million to $700 million$1.0 billion (the “Commitment”) and (3) provide that the aggregate amount of the commitments may increase to an amount not to exceed $1.25$1.5 billion upon our request, subject to receipt of additional commitments from existing or additional lenders and, in the case of additional lenders, the consent of the co-administrative agents. As defined in the Revolving Credit Facility, interest rates on base rate borrowings are equal to the highest of (1) 0.0%, (2) a specified eurocurrencyprime rate, or (3) a federal funds effective rate or primeplus 1.50%, and (4) a specified eurocurrency rate plus 1.00% and, in each case, plus a margin that is determined based on our credit ratings and leverage ratio. Interest rates on eurocurrency borrowings are equal to thea specified eurocurrency rate.rate plus a margin that is determined based on our credit ratings and leverage ratio. At any time at which our leverage ratio, as of the last day of the most recent calendar quarter, exceeds 55%, the aggregate principal amount of all consolidated senior debt borrowings outstanding may not exceed the borrowing base. There is no borrowing base requirement if our leverage ratio, as of the last day of the most recent calendar quarter, is 55% or less.
The Revolving Credit Facility is fully and unconditionally guaranteed, jointly and severally, by most of our homebuilding segment subsidiaries. The facility contains various representations, warranties and covenants that we believe are customary for agreements of this type. The financial covenants include a consolidated tangible net worth test and a leverage test, along with a consolidated tangible net worth covenant, all as defined in the Revolving Credit Facility. A failure to satisfy the foregoing tests does not constitute an event of default, but can trigger a “term-out” of the facility. A breach of the consolidated tangible net worth covenant (but not the consolidated tangible net worth test) or a violation of anti-corruption or sanctions laws would result in an event of default.
The Revolving Credit Facility is subject to acceleration upon certain specified events of default, including breach of the consolidated tangible net worth covenant, a violation of anti-corruption or sanctions laws, failure to make timely payments, breaches of certain representations or covenants, failure to pay other material indebtedness, or another person becoming beneficial owner of 50% or more of our outstanding common stock. We believe we were in compliance with the representations, warranties and covenants included in the Revolving Credit Facility as of September 30, 2017.2019.
We incur costs associated with unused commitment fees pursuant to the terms of the Revolving Credit Facility. At September 30, 20172019 and December 31, 2016,2018, there were $34.0$26.4 million and $23.0$27.8 million, respectively, in letters of credit outstanding, which reduced the amounts available to be borrowed under the Revolving Credit Facility. At both September 30, 2017 and December 31, 2016, weWe had $15.0$15.0 million outstanding under the Revolving Credit Facility. Facility as of September 30, 2019 and December 31, 2018. As of September 30, 2017,2019, availability under the Revolving Credit Facility was approximately $651.0$958.6 million.
M.D.C. HOLDINGS, INC.
Notes to Unaudited Consolidated Financial Statements
Mortgage Repurchase Facility. HomeAmerican has a Master Repurchase Agreement (the “Mortgage Repurchase Facility”) with U.S. Bank National Association (“USBNA”). Effective August 10, 2017,May 23, 2019, thethe Mortgage Repurchase Facility was amended to extend its termination date to August 9, 2018.May 21, 2020. The Mortgage Repurchase Facility provides liquidity to HomeAmerican by providing for the sale of up to an aggregate of $75$75 million (subject to increase by up to $75$75 million under certain conditions) of eligible mortgage loans to USBNA with an agreement by HomeAmerican to repurchase the mortgage loans at a future date. Until such mortgage loans are transferred back to HomeAmerican, the documents relating to such loans are held by USBNA, as custodian, pursuant to the Custody Agreement (“Custody Agreement”), dated as of November 12, 2008, by and between HomeAmerican and USBNA. In the event that an eligible mortgage loan becomes ineligible, as defined under the Mortgage Repurchase Facility, HomeAmerican may be required to repurchase the ineligible mortgage loan immediately. The maximum aggregate commitment of the Mortgage Repurchase Facility was temporarily increased on September 26, 2019 from $75 million to $100 million effective through October 24, 2019. The Mortgage Repurchase Facility also had a temporary increase in the maximum aggregate commitment from $75 million to $130 million on December 27, 20162018 from $75 million to $125 million and was effective through January 25, 2017.2019. At September 30, 20172019 and December 31, 2016,2018, HomeAmerican had $65.1$90.5 million and $114.5$116.8 million, respectively, of mortgage loans that HomeAmerican was obligated to repurchase under the Mortgage Repurchase Facility. Mortgage loans that HomeAmerican is obligated to repurchase under the Mortgage Repurchase Facility are accounted for as a debt financing arrangement and are reported as mortgage repurchase facility in the consolidated balance sheets. Advances under the Mortgage Repurchase Facility carry a price range that is LIBOR-based.based on a LIBOR rate or successor benchmark rate.
The Mortgage Repurchase Facility contains various representations, warranties and affirmative and negative covenants that we believe are customary for agreements of this type. The negative covenants include, among others, (i) a minimum Adjusted Tangible Net Worth requirement, (ii) a maximum Adjusted Tangible Net Worth ratio, (iii) a minimum adjusted net income requirement, and (iv) a minimum Liquidity requirement. The foregoing capitalized terms are defined in the Mortgage Repurchase Facility. We believe HomeAmerican was in compliance with the representations, warranties and covenants included in the Mortgage Repurchase Facility as of September 30, 2017.2019.
| Related Party Transactions |
We contributed $1.5$0.5 million and $1.0$1.0 million in cash to the MDC/Richmond American Homes Foundation (the “Foundation”) during the three and nine months ended September 30, 20172019, and 2016,respectively. The Foundation is a Delaware non-profit corporation that was incorporated on September 30,1999.
The Foundation is a non-profit organization operated exclusively for charitable, educational and other purposes beneficial to social welfare within the meaning of Section 501(c)(3) of the Internal Revenue Code. The following Directors and/or officers of the Company served as directors of the Foundation at September 30, 2017,2019, all of whom serve without compensation:
Name | MDC Title | ||
Larry A. Mizel | Chairman and CEO | ||
David D. Mandarich | President and COO |
Three other individuals, who are independent of the Company, also serve as directors of the Foundation. All directors of the Foundation serve without compensation.
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On October 16, 2017, we completedThe Company has a public offering of an additional $150 million principal amount of our 6% senior notes due 2043, which aresublease agreement with CVentures, Inc. Larry A. Mizel, the Chief Executive Officer of the same series Company, is the President of CVentures, Inc. The sublease is for office space that CVentures, Inc. has continuously leased from the Company since 2005. The current sublease term commenced November 1, 2016 and havewill continue through October 31, 2021, with an option to extend to October 31, 2026. The sublease agreement is for approximately 5,437 rentable square feet at a base rent that increases over the same terms as our senior notes issued on January 10,2013initial term from $26.50 to $28.68 per rentable square foot per year, and May 13, 2013 (collectivelyincreasing over the “6% Notes”). extension term from $29.26 to $31.67 per rentable square foot per year. The 6% Notes, which pay interest semi-annually in arrears on January 15 and July 15 of each year, are general unsecured obligations of MDC and rank equally and ratably with our other general unsecured and unsubordinated indebtedness. We received proceeds of $144.2 million, net of discount and underwriting fees. We plan to use the proceedssublease rent is an allocation of the offering for general corporate purposes, which may include repayment of debt.rent under the master lease agreement based on the sublease square footage.
M.D.C. HOLDINGS, INC.
Notes to Unaudited Consolidated Financial Statements
| Supplemental Guarantor Information |
Our senior notes are fully and unconditionally guaranteed on an unsecured basis, jointly and severally, by the following subsidiaries (collectively, the "Guarantor Subsidiaries"), which are 100%-owned subsidiaries of the Company.Company:
● | M.D.C. Land Corporation |
● |
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● |
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● | Richmond American |
● | Richmond American Homes of |
● | Richmond American Homes of |
● | Richmond American Homes of |
● | Richmond American Homes of |
● | Richmond American Homes of |
● | Richmond American Homes of |
● | Richmond American Homes of |
● | Richmond American Homes of |
● | Richmond American Homes of |
● | Richmond American Homes of |
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● | Richmond American Homes of Washington, Inc. |
The senior note indentures do not provide for a suspension of the guarantees, but do provide that any Guarantor may be released from its guarantee so long as (1) no default or event of default exists or would result from release of such guarantee, (2) the Guarantor being released has consolidated net worth of less than 5% of the Company’sCompany’s consolidated net worth as of the end of the most recent fiscal quarter, (3) the Guarantors released from their guarantees in any year-end period comprise in the aggregate less than 10% (or 15% if and to the extent necessary to permit the cure of a default) of the Company’s consolidated net worth as of the end of the most recent fiscal quarter, (4) such release would not have a material adverse effect on the homebuilding business of the Company and its subsidiaries and (5) the Guarantor is released from its guarantee(s) under all Specified Indebtedness (other than by reason of payment under its guarantee of Specified Indebtedness). Upon delivery of an officers’ certificate and an opinion of counsel stating that all conditions precedent provided for in the indenture relating to such transactions have been complied with and the release is authorized, the guarantee will be automatically and unconditionally released. “Specified Indebtedness” means indebtedness under the senior notes, the Company’s Indenture dated as of December 3, 2002, the Revolving Credit Facility, and any refinancing, extension, renewal or replacement of any of the foregoing.
We have determined that separate, full financial statements of the Guarantor Subsidiaries would not be material to investors and, accordingly, supplemental financial information for the Guarantor and Non-Guarantor Subsidiaries is presented below.
M.D.C. HOLDINGS, INC.
Notes to Unaudited Consolidated Financial Statements
Supplemental Condensed Combining Balance Sheet
September 30, 2017 | September 30, 2019 | |||||||||||||||||||||||||||||||||||||||
Non- | Non- | |||||||||||||||||||||||||||||||||||||||
Guarantor | Guarantor | Eliminating | Consolidated | Guarantor | Guarantor | Eliminating | Consolidated | |||||||||||||||||||||||||||||||||
MDC | Subsidiaries | Subsidiaries | Entries | MDC | MDC | Subsidiaries | Subsidiaries | Entries | MDC | |||||||||||||||||||||||||||||||
| (Dollars in thousands) | (Dollars in thousands) | ||||||||||||||||||||||||||||||||||||||
ASSETS | ||||||||||||||||||||||||||||||||||||||||
Homebuilding: | ||||||||||||||||||||||||||||||||||||||||
Cash and cash equivalents | $ | 347,217 | $ | 4,182 | $ | - | $ | - | $ | 351,399 | $ | 279,346 | $ | 5,992 | $ | - | $ | - | $ | 285,338 | ||||||||||||||||||||
Marketable securities | - | - | - | - | - | |||||||||||||||||||||||||||||||||||
Restricted cash | - | 8,723 | - | - | 8,723 | - | 16,325 | - | - | 16,325 | ||||||||||||||||||||||||||||||
Trade and other receivables | 5,517 | 39,577 | - | (2,190 | ) | 42,904 | 4,444 | 54,084 | - | - | 58,528 | |||||||||||||||||||||||||||||
Inventories: | ||||||||||||||||||||||||||||||||||||||||
Housing completed or under construction | - | 969,419 | - | - | 969,419 | - | 1,204,641 | - | - | 1,204,641 | ||||||||||||||||||||||||||||||
Land and land under development | - | 863,002 | - | - | 863,002 | - | 1,191,036 | - | - | 1,191,036 | ||||||||||||||||||||||||||||||
Total inventories | - | 1,832,421 | - | - | 1,832,421 | - | 2,395,677 | - | - | 2,395,677 | ||||||||||||||||||||||||||||||
Intercompany receivables | 1,603,012 | 2,803 | 5,254 | (1,611,069 | ) | - | 2,050,173 | 4,159 | - | (2,054,332 | ) | - | ||||||||||||||||||||||||||||
Investment in subsidiaries | 278,885 | - | - | (278,885 | ) | - | 390,631 | - | - | (390,631 | ) | - | ||||||||||||||||||||||||||||
Property and equipment, net | 24,408 | 1,896 | - | - | 26,304 | 23,583 | 40,090 | - | - | 63,673 | ||||||||||||||||||||||||||||||
Operating lease right-of-use asset | 24,970 | 6,281 | - | - | 31,251 | |||||||||||||||||||||||||||||||||||
Deferred tax asset, net | 65,284 | - | - | (1,120 | ) | 64,164 | 28,080 | - | - | (368 | ) | 27,712 | ||||||||||||||||||||||||||||
Metropolitan district bond securities (related party) | - | - | - | - | - | |||||||||||||||||||||||||||||||||||
Prepaid and other assets | 8,155 | 64,653 | - | - | 72,808 | 12,682 | 33,713 | - | - | 46,395 | ||||||||||||||||||||||||||||||
Total homebuilding assets | 2,332,478 | 1,954,255 | 5,254 | (1,893,264 | ) | 2,398,723 | 2,813,909 | 2,556,321 | - | (2,445,331 | ) | 2,924,899 | ||||||||||||||||||||||||||||
Financial Services: | ||||||||||||||||||||||||||||||||||||||||
Cash and cash equivalents | - | - | 26,419 | - | 26,419 | - | - | 46,790 | - | 46,790 | ||||||||||||||||||||||||||||||
Marketable securities | - | - | 40,221 | - | 40,221 | - | - | 52,876 | - | 52,876 | ||||||||||||||||||||||||||||||
Intercompany receivables | - | - | 35,765 | (35,765 | ) | - | - | - | 33,122 | (33,122 | ) | - | ||||||||||||||||||||||||||||
Mortgage loans held-for-sale, net | - | - | 89,804 | - | 89,804 | - | - | 117,020 | - | 117,020 | ||||||||||||||||||||||||||||||
Other assets | - | - | 10,015 | 1,120 | 11,135 | - | - | 16,626 | 368 | 16,994 | ||||||||||||||||||||||||||||||
Total financial services assets | - | - | 202,224 | (34,645 | ) | 167,579 | - | - | 266,434 | (32,754 | ) | 233,680 | ||||||||||||||||||||||||||||
Total Assets | $ | 2,332,478 | $ | 1,954,255 | $ | 207,478 | $ | (1,927,909 | ) | $ | 2,566,302 | $ | 2,813,909 | $ | 2,556,321 | $ | 266,434 | $ | (2,478,085 | ) | $ | 3,158,579 | ||||||||||||||||||
LIABILITIES AND EQUITY | ||||||||||||||||||||||||||||||||||||||||
Homebuilding: | ||||||||||||||||||||||||||||||||||||||||
Accounts payable | $ | - | $ | 49,390 | $ | - | $ | - | $ | 49,390 | $ | 31 | $ | 79,012 | $ | - | $ | - | $ | 79,043 | ||||||||||||||||||||
Accrued liabilities | 40,205 | 112,986 | 98 | (1,628 | ) | 151,661 | 45,525 | 139,717 | - | 4,054 | 189,296 | |||||||||||||||||||||||||||||
Operating lease liabilities | 25,606 | 6,281 | - | - | 31,887 | |||||||||||||||||||||||||||||||||||
Advances and notes payable to parent and subsidiaries | 43,822 | 1,572,098 | 26,802 | (1,642,722 | ) | - | 36,896 | 2,041,070 | - | (2,077,966 | ) | - | ||||||||||||||||||||||||||||
Revolving credit facility | 15,000 | - | - | - | 15,000 | 15,000 | - | - | - | 15,000 | ||||||||||||||||||||||||||||||
Senior notes, net | 842,532 | - | - | - | 842,532 | 989,050 | - | - | - | 989,050 | ||||||||||||||||||||||||||||||
Total homebuilding liabilities | 941,559 | 1,734,474 | 26,900 | (1,644,350 | ) | 1,058,583 | 1,112,108 | 2,266,080 | - | (2,073,912 | ) | 1,304,276 | ||||||||||||||||||||||||||||
Financial Services: | ||||||||||||||||||||||||||||||||||||||||
Accounts payable and other liabilities | - | - | 52,259 | (562 | ) | 51,697 | - | - | 66,085 | (4,054 | ) | 62,031 | ||||||||||||||||||||||||||||
Advances and notes payable to parent and subsidiaries | - | - | 4,112 | (4,112 | ) | - | - | - | 9,488 | (9,488 | ) | - | ||||||||||||||||||||||||||||
Mortgage repurchase facility | - | - | 65,103 | - | 65,103 | - | - | 90,471 | - | 90,471 | ||||||||||||||||||||||||||||||
Total financial services liabilities | - | - | 121,474 | (4,674 | ) | 116,800 | - | - | 166,044 | (13,542 | ) | 152,502 | ||||||||||||||||||||||||||||
Total Liabilities | 941,559 | 1,734,474 | 148,374 | (1,649,024 | ) | 1,175,383 | 1,112,108 | 2,266,080 | 166,044 | (2,087,454 | ) | 1,456,778 | ||||||||||||||||||||||||||||
Equity: | ||||||||||||||||||||||||||||||||||||||||
Total Stockholders' Equity | 1,390,919 | 219,781 | 59,104 | (278,885 | ) | 1,390,919 | 1,701,801 | 290,241 | 100,390 | (390,631 | ) | 1,701,801 | ||||||||||||||||||||||||||||
Total Liabilities and Stockholders' Equity | $ | 2,332,478 | $ | 1,954,255 | $ | 207,478 | $ | (1,927,909 | ) | $ | 2,566,302 | $ | 2,813,909 | $ | 2,556,321 | $ | 266,434 | $ | (2,478,085 | ) | $ | 3,158,579 | ||||||||||||||||||
M.D.C. HOLDINGS, INC.
Notes to Unaudited Consolidated Financial Statements
Supplemental Condensed Combining Balance Sheet
December 31, 2016 | December 31, 2018 | |||||||||||||||||||||||||||||||||||||||
Non- | Non- | |||||||||||||||||||||||||||||||||||||||
Guarantor | Guarantor | Eliminating | Consolidated | Guarantor | Guarantor | Eliminating | Consolidated | |||||||||||||||||||||||||||||||||
MDC | Subsidiaries | Subsidiaries | Entries | MDC | MDC | Subsidiaries | Subsidiaries | Entries | MDC | |||||||||||||||||||||||||||||||
| (Dollars in thousands) | Dollars in thousands | ||||||||||||||||||||||||||||||||||||||
ASSETS | ||||||||||||||||||||||||||||||||||||||||
Homebuilding: | ||||||||||||||||||||||||||||||||||||||||
Cash and cash equivalents | $ | 255,679 | $ | 3,408 | $ | - | $ | - | $ | 259,087 | $ | 410,127 | $ | 4,597 | $ | - | $ | - | $ | 414,724 | ||||||||||||||||||||
Marketable securities | 59,770 | - | - | - | 59,770 | |||||||||||||||||||||||||||||||||||
Restricted cash | - | 3,778 | - | - | 3,778 | - | 6,363 | - | - | 6,363 | ||||||||||||||||||||||||||||||
Trade and other receivables | 5,380 | 39,247 | - | (2,135 | ) | 42,492 | 758 | 52,224 | - | - | 52,982 | |||||||||||||||||||||||||||||
Inventories: | ||||||||||||||||||||||||||||||||||||||||
Housing completed or under construction | - | 874,199 | - | - | 874,199 | - | 952,436 | - | - | 952,436 | ||||||||||||||||||||||||||||||
Land and land under development | - | 884,615 | - | - | 884,615 | - | 1,180,558 | - | - | 1,180,558 | ||||||||||||||||||||||||||||||
Total inventories | - | 1,758,814 | - | - | 1,758,814 | - | 2,132,994 | - | - | 2,132,994 | ||||||||||||||||||||||||||||||
Intercompany receivables | 1,475,291 | 2,803 | 5,289 | (1,483,383 | ) | - | 1,735,342 | 7,369 | - | (1,742,711 | ) | - | ||||||||||||||||||||||||||||
Investment in subsidiaries | 295,214 | - | - | (295,214 | ) | - | 455,848 | - | - | (455,848 | ) | - | ||||||||||||||||||||||||||||
Property and equipment, net | 25,495 | 2,546 | - | - | 28,041 | 23,896 | 34,271 | - | - | 58,167 | ||||||||||||||||||||||||||||||
Deferred tax assets, net | 74,119 | - | - | 769 | 74,888 | 36,168 | - | - | 1,010 | 37,178 | ||||||||||||||||||||||||||||||
Metropolitan district bond securities (related party) | 30,162 | - | - | - | 30,162 | |||||||||||||||||||||||||||||||||||
Other assets | 5,267 | 55,196 | - | - | 60,463 | 12,234 | 33,560 | - | - | 45,794 | ||||||||||||||||||||||||||||||
Total Homebuilding Assets | 2,226,377 | 1,865,792 | 5,289 | (1,779,963 | ) | 2,317,495 | 2,674,373 | 2,271,378 | - | (2,197,549 | ) | 2,748,202 | ||||||||||||||||||||||||||||
Financial Services: | ||||||||||||||||||||||||||||||||||||||||
Cash and cash equivalents | - | - | 23,822 | - | 23,822 | - | - | 49,052 | - | 49,052 | ||||||||||||||||||||||||||||||
Marketable securities | - | - | 36,436 | - | 36,436 | - | - | 40,879 | - | 40,879 | ||||||||||||||||||||||||||||||
Intercompany receivables | - | - | 40,042 | (40,042 | ) | - | - | - | 22,346 | (22,346 | ) | - | ||||||||||||||||||||||||||||
Mortgage loans held-for-sale, net | - | - | 138,774 | - | 138,774 | - | - | 149,211 | - | 149,211 | ||||||||||||||||||||||||||||||
Other assets | - | - | 12,831 | (769 | ) | 12,062 | - | - | 14,743 | (1,010 | ) | 13,733 | ||||||||||||||||||||||||||||
Total Financial Services Assets | - | - | 251,905 | (40,811 | ) | 211,094 | - | - | 276,231 | (23,356 | ) | 252,875 | ||||||||||||||||||||||||||||
Total Assets | $ | 2,226,377 | $ | 1,865,792 | $ | 257,194 | $ | (1,820,774 | ) | $ | 2,528,589 | $ | 2,674,373 | $ | 2,271,378 | $ | 276,231 | $ | (2,220,905 | ) | $ | 3,001,077 | ||||||||||||||||||
LIABILITIES AND EQUITY | ||||||||||||||||||||||||||||||||||||||||
Homebuilding: | ||||||||||||||||||||||||||||||||||||||||
Accounts payable | $ | - | $ | 42,088 | $ | - | $ | - | $ | 42,088 | $ | - | $ | 50,505 | $ | - | $ | - | $ | 50,505 | ||||||||||||||||||||
Accrued liabilities | 1,527 | 136,615 | 143 | 6,281 | 144,566 | 65,691 | 125,387 | - | 5,169 | 196,247 | ||||||||||||||||||||||||||||||
Advances and notes payable to parent and subsidiaries | 48,134 | 1,445,276 | 26,266 | (1,519,676 | ) | - | 29,715 | 1,727,248 | 295 | (1,757,258 | ) | - | ||||||||||||||||||||||||||||
Revolving credit facility | 15,000 | - | - | - | 15,000 | 15,000 | - | - | - | 15,000 | ||||||||||||||||||||||||||||||
Senior notes, net | 841,646 | - | - | - | 841,646 | 987,967 | - | - | - | 987,967 | ||||||||||||||||||||||||||||||
Total Homebuilding Liabilities | 906,307 | 1,623,979 | 26,409 | (1,513,395 | ) | 1,043,300 | 1,098,373 | 1,903,140 | 295 | (1,752,089 | ) | 1,249,719 | ||||||||||||||||||||||||||||
Financial Services: | ||||||||||||||||||||||||||||||||||||||||
Accounts payable and accrued liabilities | - | - | 59,150 | (8,416 | ) | 50,734 | - | - | 63,712 | (5,169 | ) | 58,543 | ||||||||||||||||||||||||||||
Advances and notes payable to parent and subsidiaries | - | - | 3,749 | (3,749 | ) | - | - | - | 7,799 | (7,799 | ) | - | ||||||||||||||||||||||||||||
Mortgage repurchase facility | - | - | 114,485 | - | 114,485 | - | - | 116,815 | - | 116,815 | ||||||||||||||||||||||||||||||
Total Financial Services Liabilities | - | - | 177,384 | (12,165 | ) | 165,219 | - | - | 188,326 | (12,968 | ) | 175,358 | ||||||||||||||||||||||||||||
Total Liabilities | 906,307 | 1,623,979 | 203,793 | (1,525,560 | ) | 1,208,519 | 1,098,373 | 1,903,140 | 188,621 | (1,765,057 | ) | 1,425,077 | ||||||||||||||||||||||||||||
Equity: | ||||||||||||||||||||||||||||||||||||||||
Total Stockholders' Equity | 1,320,070 | 241,813 | 53,401 | (295,214 | ) | 1,320,070 | 1,576,000 | 368,238 | 87,610 | (455,848 | ) | 1,576,000 | ||||||||||||||||||||||||||||
Total Liabilities and Stockholders' Equity | $ | 2,226,377 | $ | 1,865,792 | $ | 257,194 | $ | (1,820,774 | ) | $ | 2,528,589 | $ | 2,674,373 | $ | 2,271,378 | $ | 276,231 | $ | (2,220,905 | ) | $ | 3,001,077 | ||||||||||||||||||
M.D.C. HOLDINGS, INC.
Notes to Unaudited Consolidated Financial Statements
Supplemental Condensed Combining Statement of Operations
Three Months Ended September 30, 2017 | Three Months Ended September 30, 2019 | |||||||||||||||||||||||||||||||||||||||
Non- | Non- | |||||||||||||||||||||||||||||||||||||||
Guarantor | Guarantor | Eliminating | Consolidated | Guarantor | Guarantor | Eliminating | Consolidated | |||||||||||||||||||||||||||||||||
MDC | Subsidiaries | Subsidiaries | Entries | MDC | MDC | Subsidiaries | Subsidiaries | Entries | MDC | |||||||||||||||||||||||||||||||
| (Dollars in thousands) | (Dollars in thousands) | ||||||||||||||||||||||||||||||||||||||
Homebuilding: | ||||||||||||||||||||||||||||||||||||||||
Revenues | $ | - | $ | 586,287 | $ | - | $ | - | $ | 586,287 | $ | - | $ | 750,274 | $ | - | $ | - | $ | 750,274 | ||||||||||||||||||||
Cost of sales | - | (486,406 | ) | - | - | (486,406 | ) | - | (609,316 | ) | - | - | (609,316 | ) | ||||||||||||||||||||||||||
Inventory impairments | - | (4,540 | ) | - | - | (4,540 | ) | - | - | - | - | - | ||||||||||||||||||||||||||||
Gross margin | - | 95,341 | - | - | 95,341 | |||||||||||||||||||||||||||||||||||
Gross profit | - | 140,958 | - | - | 140,958 | |||||||||||||||||||||||||||||||||||
Selling, general, and administrative expenses | (11,911 | ) | (56,983 | ) | - | (208 | ) | (69,102 | ) | (21,476 | ) | (71,111 | ) | - | (129 | ) | (92,716 | ) | ||||||||||||||||||||||
Equity income of subsidiaries | 33,329 | - | - | (33,329 | ) | - | 65,311 | - | - | (65,311 | ) | - | ||||||||||||||||||||||||||||
Interest and other income | 53,740 | 941 | 1 | (134 | ) | 54,548 | 2,173 | 460 | - | (297 | ) | 2,336 | ||||||||||||||||||||||||||||
Other expense | 7 | (625 | ) | - | - | (618 | ) | 7 | (1,894 | ) | - | - | (1,887 | ) | ||||||||||||||||||||||||||
Other-than-temporary impairment of marketable securities | - | - | - | - | - | |||||||||||||||||||||||||||||||||||
Homebuilding pretax income (loss) | 75,165 | 38,674 | 1 | (33,671 | ) | 80,169 | 46,015 | 68,413 | - | (65,737 | ) | 48,691 | ||||||||||||||||||||||||||||
Financial Services: | ||||||||||||||||||||||||||||||||||||||||
Financial services pretax income | - | - | 9,169 | 342 | 9,511 | - | - | 13,689 | 426 | 14,115 | ||||||||||||||||||||||||||||||
Income before income taxes | 75,165 | 38,674 | 9,170 | (33,329 | ) | 89,680 | 46,015 | 68,413 | 13,689 | (65,311 | ) | 62,806 | ||||||||||||||||||||||||||||
(Provision) benefit for income taxes | (14,002 | ) | (11,168 | ) | (3,347 | ) | - | (28,517 | ) | 4,565 | (13,596 | ) | (3,195 | ) | - | (12,226 | ) | |||||||||||||||||||||||
Net income | $ | 61,163 | $ | 27,506 | $ | 5,823 | $ | (33,329 | ) | $ | 61,163 | $ | 50,580 | $ | 54,817 | $ | 10,494 | $ | (65,311 | ) | $ | 50,580 | ||||||||||||||||||
Other comprehensive income related to available-for-sale securities, net of tax | (23,175 | ) | - | 927 | (927 | ) | (23,175 | ) | - | - | - | - | - | |||||||||||||||||||||||||||
Comprehensive income | $ | 37,988 | $ | 27,506 | $ | 6,750 | $ | (34,256 | ) | $ | 37,988 | $ | 50,580 | $ | 54,817 | $ | 10,494 | $ | (65,311 | ) | $ | 50,580 | ||||||||||||||||||
Three Months Ended September 30, 2018 | ||||||||||||||||||||
Non- | ||||||||||||||||||||
Guarantor | Guarantor | Eliminating | Consolidated | |||||||||||||||||
MDC | Subsidiaries | Subsidiaries | Entries | MDC | ||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||
| Homebuilding: | ||||||||||||||||||||
Revenues | $ | - | $ | 766,027 | $ | - | $ | - | $ | 766,027 | ||||||||||
Cost of sales | - | (619,248 | ) | - | - | (619,248 | ) | |||||||||||||
Inventory impairments | - | (11,098 | ) | - | - | (11,098 | ) | |||||||||||||
Gross profit | - | 135,681 | - | - | 135,681 | |||||||||||||||
Selling, general, and administrative expenses | (16,172 | ) | (67,406 | ) | - | 55 | (83,523 | ) | ||||||||||||
Equity income of subsidiaries | 64,345 | - | - | (64,345 | ) | - | ||||||||||||||
Interest and other income | 2,013 | 261 | - | (321 | ) | 1,953 | ||||||||||||||
Other expense | 7 | (1,135 | ) | - | - | (1,128 | ) | |||||||||||||
Homebuilding pretax income (loss) | 50,193 | 67,401 | - | (64,611 | ) | 52,983 | ||||||||||||||
Financial Services: | ||||||||||||||||||||
Financial services pretax income | - | - | 14,171 | 266 | 14,437 | |||||||||||||||
Income before income taxes | 50,193 | 67,401 | 14,171 | (64,345 | ) | 67,420 | ||||||||||||||
(Provision) benefit for income taxes | 3,199 | (14,039 | ) | (3,188 | ) | - | (14,028 | ) | ||||||||||||
Net income | $ | 53,392 | $ | 53,362 | $ | 10,983 | $ | (64,345 | ) | $ | 53,392 | |||||||||
Other comprehensive income related to available-for-sale securities, net of tax | - | - | - | - | - | |||||||||||||||
Comprehensive income | $ | 53,392 | $ | 53,362 | $ | 10,983 | $ | (64,345 | ) | $ | 53,392 | |||||||||
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M.D.C. HOLDINGS, INC.
Notes to Unaudited Consolidated Financial Statements
Supplemental Condensed Combining Statement of Operations
Nine Months Ended September 30, 2017 | Nine Months Ended September 30, 2019 | |||||||||||||||||||||||||||||||||||||||
Non- | Non- | |||||||||||||||||||||||||||||||||||||||
Guarantor | Guarantor | Eliminating | Consolidated | Guarantor | Guarantor | Eliminating | Consolidated | |||||||||||||||||||||||||||||||||
MDC | Subsidiaries | Subsidiaries | Entries | MDC | MDC | Subsidiaries | Subsidiaries | Entries | MDC | |||||||||||||||||||||||||||||||
| (Dollars in thousands) | (Dollars in thousands) | ||||||||||||||||||||||||||||||||||||||
Homebuilding: | ||||||||||||||||||||||||||||||||||||||||
Revenues | $ | - | $ | 1,798,984 | $ | - | $ | - | $ | 1,798,984 | $ | - | $ | 2,130,396 | $ | - | $ | - | $ | 2,130,396 | ||||||||||||||||||||
Home and land cost of sales | - | (1,495,838 | ) | - | - | (1,495,838 | ) | - | (1,724,040 | ) | - | - | (1,724,040 | ) | ||||||||||||||||||||||||||
Inventory impairments | - | (9,390 | ) | - | - | (9,390 | ) | - | (610 | ) | - | - | (610 | ) | ||||||||||||||||||||||||||
Gross margin | - | 293,756 | - | - | 293,756 | |||||||||||||||||||||||||||||||||||
Gross profit | - | 405,746 | - | - | 405,746 | |||||||||||||||||||||||||||||||||||
Selling, general, and administrative expenses | (36,539 | ) | (168,988 | ) | - | (582 | ) | (206,109 | ) | (53,042 | ) | (204,271 | ) | - | (376 | ) | (257,689 | ) | ||||||||||||||||||||||
Equity income of subsidiaries | 102,469 | - | - | (102,469 | ) | - | 180,875 | - | - | (180,875 | ) | - | ||||||||||||||||||||||||||||
Interest and other income | 57,748 | 2,281 | 5 | (312 | ) | 59,722 | 7,301 | 981 | - | (791 | ) | 7,491 | ||||||||||||||||||||||||||||
Other expense | 23 | (1,658 | ) | - | - | (1,635 | ) | 22 | (4,210 | ) | - | - | (4,188 | ) | ||||||||||||||||||||||||||
Other-than-temporary impairment of marketable securities | (51 | ) | - | - | - | (51 | ) | |||||||||||||||||||||||||||||||||
Homebuilding pretax income (loss) | 123,650 | 125,391 | 5 | (103,363 | ) | 145,683 | 135,156 | 198,246 | - | (182,042 | ) | 151,360 | ||||||||||||||||||||||||||||
Financial Services: | ||||||||||||||||||||||||||||||||||||||||
Financial services pretax income | - | - | 31,357 | 894 | 32,251 | - | - | 40,216 | 1,167 | 41,383 | ||||||||||||||||||||||||||||||
Income before income taxes | 123,650 | 125,391 | 31,362 | (102,469 | ) | 177,934 | 135,156 | 198,246 | 40,216 | (180,875 | ) | 192,743 | ||||||||||||||||||||||||||||
(Provision) benefit for income taxes | (6,367 | ) | (42,742 | ) | (11,542 | ) | - | (60,651 | ) | 10,567 | (48,362 | ) | (9,225 | ) | - | (47,020 | ) | |||||||||||||||||||||||
Net income | $ | 117,283 | $ | 82,649 | $ | 19,820 | $ | (102,469 | ) | $ | 117,283 | $ | 145,723 | $ | 149,884 | $ | 30,991 | $ | (180,875 | ) | $ | 145,723 | ||||||||||||||||||
Other comprehensive income related to available for sale securities, net of tax | (19,245 | ) | - | 2,217 | (2,217 | ) | (19,245 | ) | - | - | - | - | - | |||||||||||||||||||||||||||
Comprehensive income | $ | 98,038 | $ | 82,649 | $ | 22,037 | $ | (104,686 | ) | $ | 98,038 | $ | 145,723 | $ | 149,884 | $ | 30,991 | $ | (180,875 | ) | $ | 145,723 | ||||||||||||||||||
Nine Months Ended September 30, 2018 | ||||||||||||||||||||
Non- | ||||||||||||||||||||
Guarantor | Guarantor | Eliminating | Consolidated | |||||||||||||||||
MDC | Subsidiaries | Subsidiaries | Entries | MDC | ||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||
| Homebuilding: | ||||||||||||||||||||
Revenues | $ | - | $ | 2,123,323 | $ | - | $ | - | $ | 2,123,323 | ||||||||||
Home and land cost of sales | - | (1,722,283 | ) | - | - | (1,722,283 | ) | |||||||||||||
Inventory impairments | - | (11,848 | ) | - | - | (11,848 | ) | |||||||||||||
Gross profit | - | 389,192 | - | - | 389,192 | |||||||||||||||
Selling, general, and administrative expenses | (45,599 | ) | (190,464 | ) | - | (372 | ) | (236,435 | ) | |||||||||||
Equity income of subsidiaries | 186,855 | - | - | (186,855 | ) | - | ||||||||||||||
Interest and other income | 5,569 | 871 | 4 | (858 | ) | 5,586 | ||||||||||||||
Other expense | 22 | (2,584 | ) | - | - | (2,562 | ) | |||||||||||||
Homebuilding pretax income (loss) | 146,847 | 197,015 | 4 | (188,085 | ) | 155,781 | ||||||||||||||
Financial Services: | ||||||||||||||||||||
Financial services pretax income | - | - | 37,557 | 1,230 | 38,787 | |||||||||||||||
Income before income taxes | 146,847 | 197,015 | 37,561 | (186,855 | ) | 194,568 | ||||||||||||||
(Provision) benefit for income taxes | 9,208 | (38,998 | ) | (8,723 | ) | - | (38,513 | ) | ||||||||||||
Net income | $ | 156,055 | $ | 158,017 | $ | 28,838 | $ | (186,855 | ) | $ | 156,055 | |||||||||
Other comprehensive income related to available for sale securities, net of tax | - | - | - | - | - | |||||||||||||||
Comprehensive income | $ | 156,055 | $ | 158,017 | $ | 28,838 | $ | (186,855 | ) | $ | 156,055 | |||||||||
Nine Months Ended September 30, 2016 | ||||||||||||||||||||
Non- | ||||||||||||||||||||
Guarantor | Guarantor | Eliminating | Consolidated | |||||||||||||||||
MDC | Subsidiaries | Subsidiaries | Entries | MDC | ||||||||||||||||
Homebuilding: | (Dollars in thousands) | |||||||||||||||||||
Revenues | $ | - | $ | 1,546,267 | $ | - | $ | - | $ | 1,546,267 | ||||||||||
Home and land cost of sales | - | (1,291,270 | ) | (300 | ) | - | (1,291,570 | ) | ||||||||||||
Inventory impairments | - | (6,300 | ) | - | - | (6,300 | ) | |||||||||||||
Gross margin | - | 248,697 | (300 | ) | - | 248,397 | ||||||||||||||
Selling, general, and administrative expenses | (31,598 | ) | (150,492 | ) | - | (531 | ) | (182,621 | ) | |||||||||||
Equity income of subsidiaries | 80,990 | - | - | (80,990 | ) | - | ||||||||||||||
Interest and other income | 3,970 | 1,652 | 4 | (268 | ) | 5,358 | ||||||||||||||
Interest expense | - | - | - | - | - | |||||||||||||||
Other expense | (2 | ) | (2,461 | ) | - | - | (2,463 | ) | ||||||||||||
Other-than-temporary impairment of marketable securities | (934 | ) | - | - | - | (934 | ) | |||||||||||||
Homebuilding pretax income (loss) | 52,426 | 97,396 | (296 | ) | (81,789 | ) | 67,737 | |||||||||||||
Financial Services: | ||||||||||||||||||||
Financial services pretax income | - | - | 24,247 | 799 | 25,046 | |||||||||||||||
Income before income taxes | 52,426 | 97,396 | 23,951 | (80,990 | ) | 92,783 | ||||||||||||||
(Provision) benefit for income taxes | 10,409 | (31,438 | ) | (8,919 | ) | - | (29,948 | ) | ||||||||||||
Net income | $ | 62,835 | $ | 65,958 | $ | 15,032 | $ | (80,990 | ) | $ | 62,835 | |||||||||
Other comprehensive income related to available for sale securities, net of tax | 3,871 | - | 680 | (680 | ) | 3,871 | ||||||||||||||
Comprehensive income | $ | 66,706 | $ | 65,958 | $ | 15,712 | $ | (81,670 | ) | $ | 66,706 | |||||||||
M.D.C. HOLDINGS, INC.
Notes to Unaudited Consolidated Financial Statements
Supplemental Condensed Combining Statement of Cash Flows
Nine Months Ended September 30, 2017 | Nine Months Ended September 30, 2019 | |||||||||||||||||||||||||||||||||||||||
Non- | Non- | |||||||||||||||||||||||||||||||||||||||
Guarantor | Guarantor | Eliminating | Consolidated | Guarantor | Guarantor | Eliminating | Consolidated | |||||||||||||||||||||||||||||||||
MDC | Subsidiaries | Subsidiaries | Entries | MDC | MDC | Subsidiaries | Subsidiaries | Entries | MDC | |||||||||||||||||||||||||||||||
(Dollars in thousands) | (Dollars in thousands) | |||||||||||||||||||||||||||||||||||||||
Net cash provided by (used in) operating activities | $ | 26,918 | $ | (21,023 | ) | $ | 63,269 | $ | - | $ | 69,164 | $ | (30,842 | ) | $ | (58,179 | ) | $ | 55,903 | $ | - | $ | (33,118 | ) | ||||||||||||||||
Net cash provided by (used in) investing activities | 97,540 | (198 | ) | (254 | ) | 10,959 | 108,047 | (61,906 | ) | (19,333 | ) | (4,137 | ) | 61,185 | (24,191 | ) | ||||||||||||||||||||||||
Financing activities: | ||||||||||||||||||||||||||||||||||||||||
Payments from (advances to) subsidiaries | - | 21,995 | (11,036 | ) | (10,959 | ) | - | - | 88,869 | (27,684 | ) | (61,185 | ) | - | ||||||||||||||||||||||||||
Mortgage repurchase facility | - | - | (49,382 | ) | - | (49,382 | ) | - | - | (26,344 | ) | - | (26,344 | ) | ||||||||||||||||||||||||||
Dividend payments | (38,793 | ) | - | - | - | (38,793 | ) | (54,337 | ) | - | - | - | (54,337 | ) | ||||||||||||||||||||||||||
Payments of deferred financing costs | (2,630 | ) | - | - | - | (2,630 | ) | |||||||||||||||||||||||||||||||||
Proceeds from exercise of stock options | 8,503 | - | - | - | 8,503 | |||||||||||||||||||||||||||||||||||
| Issuance of shares under stock-based compensation programs, net | 16,304 | - | - | - | 16,304 | |||||||||||||||||||||||||||||||||||
Net cash provided by (used in) financing activities | (32,920 | ) | 21,995 | (60,418 | ) | (10,959 | ) | (82,302 | ) | (38,033 | ) | 88,869 | (54,028 | ) | (61,185 | ) | (64,377 | ) | ||||||||||||||||||||||
Net increase in cash and cash equivalents | 91,538 | 774 | 2,597 | - | 94,909 | |||||||||||||||||||||||||||||||||||
Net increase (decrease) in cash and cash equivalents | (130,781 | ) | 11,357 | (2,262 | ) | - | (121,686 | ) | ||||||||||||||||||||||||||||||||
Cash and cash equivalents: | ||||||||||||||||||||||||||||||||||||||||
Beginning of period | 255,679 | 3,408 | 23,822 | - | 282,909 | 410,127 | 10,960 | 49,052 | - | 470,139 | ||||||||||||||||||||||||||||||
End of period | $ | 347,217 | $ | 4,182 | $ | 26,419 | $ | - | $ | 377,818 | $ | 279,346 | $ | 22,317 | $ | 46,790 | $ | - | $ | 348,453 | ||||||||||||||||||||
Nine Months Ended September 30, 2018 | ||||||||||||||||||||
Non- | ||||||||||||||||||||
Guarantor | Guarantor | Eliminating | Consolidated | |||||||||||||||||
MDC | Subsidiaries | Subsidiaries | Entries | MDC | ||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||
Net cash provided by (used in) operating activities | $ | (6,232 | ) | $ | (99,100 | ) | $ | 46,086 | $ | - | $ | (59,246 | ) | |||||||
Net cash provided by (used in) investing activities | (65,259 | ) | (19,135 | ) | (3,892 | ) | 114,514 | 26,228 | ||||||||||||
Financing activities: | ||||||||||||||||||||
Payments from (advances to) subsidiaries | - | 117,644 | (3,130 | ) | (114,514 | ) | - | |||||||||||||
Mortgage repurchase facility | - | - | (21,556 | ) | - | (21,556 | ) | |||||||||||||
Dividend payments | (50,733 | ) | - | - | - | (50,733 | ) | |||||||||||||
| Issuance of shares under stock-based compensation programs, net | 9,859 | - | - | - | 9,859 | |||||||||||||||
Net cash provided by (used in) financing activities | (40,874 | ) | 117,644 | (24,686 | ) | (114,514 | ) | (62,430 | ) | |||||||||||
Net increase (decrease) in cash and cash equivalents | (112,365 | ) | (591 | ) | 17,508 | - | (95,448 | ) | ||||||||||||
Cash and cash equivalents: | ||||||||||||||||||||
Beginning of period | 468,718 | 13,051 | 32,471 | - | 514,240 | |||||||||||||||
End of period | $ | 356,353 | $ | 12,460 | $ | 49,979 | $ | - | $ | 418,792 | ||||||||||
Nine Months Ended September 30, 2016 | ||||||||||||||||||||
Non- | ||||||||||||||||||||
Guarantor | Guarantor | Eliminating | Consolidated | |||||||||||||||||
MDC | Subsidiaries | Subsidiaries | Entries | MDC | ||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||
Net cash provided by (used in) operating activities | $ | (5,918 | ) | $ | (17,581 | ) | $ | 14,596 | $ | - | $ | (8,903 | ) | |||||||
Net cash provided by (used in) investing activities | 26,166 | (1,252 | ) | (9,797 | ) | 9,619 | 24,736 | |||||||||||||
Financing activities: | ||||||||||||||||||||
Payments from (advances to) subsidiaries | - | 20,284 | (10,665 | ) | (9,619 | ) | - | |||||||||||||
Mortgage repurchase facility | - | - | 3,400 | - | 3,400 | |||||||||||||||
Dividend payments | (36,763 | ) | - | - | - | (36,763 | ) | |||||||||||||
Payments of deferred financing costs | - | - | - | - | - | |||||||||||||||
Proceeds from the exercise of stock options | - | - | - | - | - | |||||||||||||||
Net cash provided by (used in) financing activities | (36,763 | ) | 20,284 | (7,265 | ) | (9,619 | ) | (33,363 | ) | |||||||||||
Net increase in cash and cash equivalents | (16,515 | ) | 1,451 | (2,466 | ) | - | (17,530 | ) | ||||||||||||
Cash and cash equivalents: | ||||||||||||||||||||
Beginning of period | 141,245 | 3,097 | 36,646 | - | 180,988 | |||||||||||||||
End of period | $ | 124,730 | $ | 4,548 | $ | 34,180 | $ | - | $ | 163,458 | ||||||||||
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with, and is qualified in its entirety by, the Unaudited Consolidated Financial Statements and Notes thereto included elsewhere in this Quarterly Report on Form 10-Q. This item contains forward-looking statements that involve risks and uncertainties. The forward-looking statements are based upon management’smanagement’s experiences, observations, and analyses. Actual results may differ materially from those indicated in such forward-looking statements. Factors that may cause such a difference include, but are not limited to, those discussed in "Item 1A: Risk Factors" of our Annual Report on Form 10-K for the year ended December 31, 20162018 and this Quarterly Report on Form 10-Q.The Company distributed an 8% stock dividend on February28, 2019 to shareholders of record on February14, 2019. In accordance with Accounting Standards Codification 260, “Earnings per Share,” basic and diluted earnings per share amounts, weighted-average shares outstanding, and dividends declared per share have been restated for all periods presented to reflect the effect of this stock dividend.
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||||
Three Months Ended | Nine Months Ended | September 30, | September 30, | |||||||||||||||||||||||||||||
September 30, | September 30, | 2019 | 2018 | 2019 | 2018 | |||||||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | (Dollars in thousands, except per share amounts) | ||||||||||||||||||||||||||||
Homebuilding: | (Dollars in thousands, except per share amounts) | |||||||||||||||||||||||||||||||
Home sale revenues | $ | 584,947 | $ | 575,722 | $ | 1,796,046 | $ | 1,541,337 | $ | 750,274 | $ | 766,027 | $ | 2,130,396 | $ | 2,123,323 | ||||||||||||||||
Land sale revenues | 1,340 | 2,290 | 2,938 | 4,930 | ||||||||||||||||||||||||||||
Total home and land sale revenues | 586,287 | 578,012 | 1,798,984 | 1,546,267 | ||||||||||||||||||||||||||||
Home cost of sales | (485,147 | ) | (481,511 | ) | (1,493,166 | ) | (1,287,373 | ) | (609,316 | ) | (619,248 | ) | (1,724,040 | ) | (1,722,283 | ) | ||||||||||||||||
Land cost of sales | (1,259 | ) | (2,318 | ) | (2,672 | ) | (4,197 | ) | ||||||||||||||||||||||||
Inventory impairments | (4,540 | ) | (4,700 | ) | (9,390 | ) | (6,300 | ) | - | (11,098 | ) | (610 | ) | (11,848 | ) | |||||||||||||||||
Total cost of sales | (490,946 | ) | (488,529 | ) | (1,505,228 | ) | (1,297,870 | ) | (609,316 | ) | (630,346 | ) | (1,724,650 | ) | (1,734,131 | ) | ||||||||||||||||
Gross profit | 140,958 | 135,681 | 405,746 | 389,192 | ||||||||||||||||||||||||||||
Gross margin | 95,341 | 89,483 | 293,756 | 248,397 | 18.8 | % | 17.7 | % | 19.0 | % | 18.3 | % | ||||||||||||||||||||
Gross margin % | 16.3 | % | 15.5 | % | 16.3 | % | 16.1 | % | ||||||||||||||||||||||||
Selling, general and administrative expenses | (69,102 | ) | (61,904 | ) | (206,109 | ) | (182,621 | ) | (92,716 | ) | (83,523 | ) | (257,689 | ) | (236,435 | ) | ||||||||||||||||
Interest and other income | 54,548 | 1,869 | 59,722 | 5,358 | 2,336 | 1,953 | 7,491 | 5,586 | ||||||||||||||||||||||||
Other expense | (618 | ) | (1,558 | ) | (1,635 | ) | (2,463 | ) | (1,887 | ) | (1,128 | ) | (4,188 | ) | (2,562 | ) | ||||||||||||||||
Other-than-temporary impairment of marketable securities | - | (215 | ) | (51 | ) | (934 | ) | |||||||||||||||||||||||||
Homebuilding pretax income | 80,169 | 27,675 | 145,683 | 67,737 | 48,691 | 52,983 | 151,360 | 155,781 | ||||||||||||||||||||||||
Financial Services: | ||||||||||||||||||||||||||||||||
Revenues | 17,464 | 17,408 | 54,516 | 44,248 | 22,388 | 19,611 | 58,389 | 60,018 | ||||||||||||||||||||||||
Expenses | (8,849 | ) | (7,955 | ) | (25,247 | ) | (21,739 | ) | (10,352 | ) | (9,408 | ) | (28,883 | ) | (27,850 | ) | ||||||||||||||||
Interest and other income | 925 | 1,035 | 3,142 | 2,648 | 1,312 | 1,230 | 3,943 | 3,490 | ||||||||||||||||||||||||
Other-than-temporary impairment of marketable securities | (29 | ) | (111 | ) | (160 | ) | (111 | ) | ||||||||||||||||||||||||
Net gain on marketable equity securities | 767 | 3,004 | 7,934 | 3,129 | ||||||||||||||||||||||||||||
Financial services pretax income | 9,511 | 10,377 | 32,251 | 25,046 | 14,115 | 14,437 | 41,383 | 38,787 | ||||||||||||||||||||||||
Income before income taxes | 89,680 | 38,052 | 177,934 | 92,783 | 62,806 | 67,420 | 192,743 | 194,568 | ||||||||||||||||||||||||
Provision for income taxes | (28,517 | ) | (11,693 | ) | (60,651 | ) | (29,948 | ) | (12,226 | ) | (14,028 | ) | (47,020 | ) | (38,513 | ) | ||||||||||||||||
Net income | $ | 61,163 | $ | 26,359 | $ | 117,283 | $ | 62,835 | $ | 50,580 | $ | 53,392 | $ | 145,723 | $ | 156,055 | ||||||||||||||||
Earnings per share: | ||||||||||||||||||||||||||||||||
Basic | $ | 1.18 | $ | 0.51 | $ | 2.27 | $ | 1.22 | $ | 0.81 | $ | 0.87 | $ | 2.36 | $ | 2.56 | ||||||||||||||||
Diluted | $ | 1.16 | $ | 0.51 | $ | 2.23 | $ | 1.22 | $ | 0.79 | $ | 0.86 | $ | 2.29 | $ | 2.52 | ||||||||||||||||
Weighted average common shares outstanding: | ||||||||||||||||||||||||||||||||
Basic | 51,650,360 | 51,297,132 | 51,502,986 | 51,286,844 | 61,978,195 | 60,665,349 | 61,422,925 | 60,505,916 | ||||||||||||||||||||||||
Diluted | 52,601,118 | 51,460,446 | 52,248,377 | 51,297,765 | 63,968,215 | 61,804,792 | 63,360,535 | 61,592,092 | ||||||||||||||||||||||||
Dividends declared per share | $ | 0.25 | $ | 0.24 | $ | 0.75 | $ | 0.72 | $ | 0.30 | $ | 0.28 | $ | 0.90 | $ | 0.83 | ||||||||||||||||
Cash provided by (used in): | ||||||||||||||||||||||||||||||||
Operating Activities | $ | (51,723 | ) | $ | 13,183 | $ | 69,164 | $ | (8,903 | ) | $ | (88,783 | ) | $ | (3,058 | ) | $ | (33,118 | ) | $ | (59,246 | ) | ||||||||||
Investing Activities | $ | 110,004 | $ | (7,486 | ) | $ | 108,047 | $ | 24,736 | $ | (10,272 | ) | $ | (8,522 | ) | $ | (24,191 | ) | $ | 26,228 | ||||||||||||
Financing Activities | $ | (18,439 | ) | $ | (13,545 | ) | $ | (82,302 | ) | $ | (33,363 | ) | $ | (12,293 | ) | $ | (2,951 | ) | $ | (64,377 | ) | $ | (62,430 | ) | ||||||||
OOverviewverview
Three Months Ended Months EndedSeptember 30, 20172019
For the three months ended September 30, 2017,2019, our net income was $61.2$50.6 million, or $1.16$0.79 per diluted share, a 132% increase5% decrease compared to net income of $26.4$53.4 million, or $0.51$0.86 per diluted share, for the same period in the prior year. The increasedecrease was primarily the result of a $52.5$4.3 million improvementdecrease in our pretax income from homebuilding operations, which benefited from a 2%as an increase in home sale revenues, an 80 basis point improvement in our gross margin from home sale revenues percentage, and a $52.7 million increase in our interest and other income as a result of the sale of investments held by our Corporate segment. These items were slightly offset by a 100 basis point increase in our selling, general and administrative (“SG&A”) expensescosts was only partially offset by an increase in homebuilding gross profit. Financial services pretax income decreased $0.3 million as a percentagenet gains on equity securities in the third quarter of home sale revenues (“SG&A rate”).2019 totaled $0.8 million as compared to $3.0 million for the same period in the prior year. This decrease was mostly offset by increased mortgage origination income due to higher interest rate lock volume.
Home sale revenues were updown from $575.7$766.0 million in the 20162018 third quarter to $584.9$750.3 million in the 20172019 third quarter. The $9.2$15.7 million improvementyear-over-year decrease was primarily the result of a 2%9% decrease in the average price of homes delivered during the quarter, which was mostly offset by an 8% increase in the number of homes delivered, as our backlog to start the quarter was up 2% year-over-year. Our number of homes delivered during the 2017 third quarter was negatively impacted by the Weyerhaeuser joist issue (see below) and Hurricane Irma (see below). Because of these two issues, approximately 115 homes that had been scheduled to close during the 2017 third quarter were delayed to later periods.delivered.
The dollar value of our net new home orders increased 6%50% from the prior year period, driven by an 8%a 58% increase in our average selling price of net new orders that was offset partially by a 2% decline in our the number of net new orders. OurThe increase in net new orders was the result of a 34% increase in our monthly sales absorption pace improved by 2% year-over-year. However,coupled with a 4% decline19% increase in average active communities forsubdivisions. The increase in the 2017 third quarter drove the decrease in our number of net new orders.orders was slightly offset by a 5% decrease in the average selling price, consistent with our ongoing strategy of offering more affordable home plans.
Nine Months Ended months endedSeptember 30, 20172019
For the nine months ended September 30, 2017,2019, our net income was $117.3$145.7 million, or $2.23$2.29 per diluted share, an 87% increasea 7% decrease compared to net income of $62.8$156.1 million, or $1.22$2.52 per diluted share, for the same period in the prior year. The increasedecrease was primarily the result of an increase in our 2019 effective tax rate due to a $77.9$10.2 million improvementdecrease in benefits from energy tax credits. This was slightly offset by a $2.3 million benefit recognized upon vesting of the 2016 performance share unit awards (“PSUs”) during the 2019 third quarter. Consistent with the three months ended September 30, 2019, our pretax income from homebuilding operations whichdecreased $4.4 million as an increase in selling, general and administrative costs was only partially offset by an increase in homebuilding gross profit. Financial services pretax income increased $2.6 million as net gains on equity securities for the period totaled $7.9 million as compared to $3.1 million for the same period in the prior year. This increase was slightly offset by $1.4 million of gains recognized in the prior year on the sale of mortgage servicing rights, as well as a year-over-year decrease in the servicing income related to those loans.
Industry Conditions and Outlook for MDC*
New home sales activity continued to improve on a seasonally adjusted basis during the third quarter of 2019 as a growing availability of more affordable home offerings has been well-received by first time and move down homebuyers. In addition to more affordable home offerings, demand continues to benefit from lower interest rates and a positive economic environment driven by factors such as wage growth and lower unemployment. In combination, these factors helped drive a 34% increase in our monthly absorption pace.
New home sales further benefited from a 17% increaseour higher active subdivision count, which ended the quarter 20% higher than the prior year. Most of this growth occurred in more affordable communities, such as those featuring our SeasonsTM Collection. Affordability remains one of our top priorities in today’s market, and our distinct build-to-order model continues to differentiate us from our peers.
Our dollar value of homes in backlog to end the 2019 third quarter increased 16% year-over-year to $2.1 billion and the number of homes in backlog increased 25% to 4,616, both at their highest levels since the third quarter of 2006. This growth provides us with the opportunity for significant year-over-year increases in home sale revenues and pretax income in coming quarters. Furthermore, our average gross margin in backlog at September 30, 2019 remained healthy, at a $54.4 million increase in our interest and other income as a resultlevel slightly above the 2019 third quarter closing gross margin of the sale of investments held by our Corporate Segment, as discussed above.18.8%.
Industry Conditions and Outlook for MDC
ThroughOur liquidity to end the first three quarters of 2017, solid economic fundamentals2019 third quarter was up 21% year-over-year to $1.35 billion, providing us with sufficient resources to fund continued to support the homebuilding industry, driving robust demand for new homes, especially in the first-time homebuyer segment.growth. To meet the growing demand,that end, we have taken a number of steps to grow community count.
First, we have substantially increased our approvals of futureapproved over 3,400 lots for purchase. During the 2017 third quarter, we approved the purchase of nearly 2,500 lots and year-to-date we have approved the purchase of over 7,800 lots, which is more than double the approvals from the same period a year ago. Increasingly, our lot approvals have focused on the first-time homebuyer segment, which has responded favorably to one of our newest product lines, the SeasonsTM collection.
Second, in September 2017, we announced that we will commence operations in the greater Portland area, giving us additional exposure to the Pacific Northwest, where we have experienced solid results.
Third, because our growth initiatives may require additional capital, we (1) expanded the capacity under our line of credit at the end ofduring the third quarter, to $700 million and extended its maturity by two years to December 2022, and (2) at the start of the fourth quarter, added $150 million to our senior notes due January 2043.
We ended the 2017 third quarter with liquidity of $1.08 billion, anrepresenting a 19% increase of 40% over the prior year. Theyear period. We remain focused on taking steps to drive the continued growth of our business, with a goal of driving our active community count higher liquidity provides us with additional resources to fund our increased lot approval activity, providingfor a third consecutive year in 2020, which gives us the foundation for community count growth in 2018.*best opportunity to generate higher top and bottom line results.
Other
Defective Weyerhaeuser Joists
During the 2017 third quarter, we were notified by Weyerhaeuser Company, a product vendor, of a manufacturing defect with certain of its floor I-joists used in certain homes built in our Colorado market (the “joist issue”). The joist issue impacted 216 homes, 23 of which had closed. Of the 193 homes that had not yet closed, approximately 90 were scheduled to close in the 2017 third quarter that did not close. The vendor has committed to us that it will absorb the costs associated with the removal and replacement of the defective joists. While this issue negatively impacted our number of homes delivered, absorption rate and cancellation rate in our Colorado market during the quarter, and may continue to impact these metrics in the next two quarters, we do not believe the resolution of this issue will be material to our results of operations, liquidity, or our financial condition.* See "Forward-Looking Statements" below.
Hurricane Irma
Both sales and deliveries for the 2017 third quarter in our Florida market were negatively impacted by Hurricane Irma. Delivery of approximately 25 homes that had been scheduled to close during the 2017 third quarter were delayed to later periods. In addition, sales were also disrupted as sales offices had to be closed for several days. There was no other material impact from this event.
* See "Forward-Looking Statements"below.
Homebuilding
Pretax Income:
Three Months Ended | Nine Months Ended | Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
September 30, | Change | September 30, | Change | September 30, | Change | September 30, | Change | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2017 | 2016 | Amount | % | 2017 | 2016 | Amount | % | 2019 | 2018 | Amount | % | 2019 | 2018 | Amount | % | |||||||||||||||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | (Dollars in thousands) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
West | $ | 17,746 | $ | 18,392 | $ | (646 | ) | (4) | % | $ | 54,335 | $ | 43,830 | $ | 10,505 | 24 | % | $ | 34,898 | $ | 28,947 | $ | 5,951 | 21 | % | $ | 103,448 | $ | 91,028 | $ | 12,420 | 14 | % | |||||||||||||||||||||||||||||||
Mountain | 18,326 | 18,856 | (530 | ) | (3) | % | 61,097 | 49,688 | 11,409 | 23 | % | 31,391 | 34,697 | (3,306 | ) | (10 | )% | 89,077 | 94,736 | (5,659 | ) | (6 | )% | |||||||||||||||||||||||||||||||||||||||||
East | 2,613 | (2,267 | ) | 4,880 | (215) | % | 9,989 | 3,600 | 6,389 | 177 | % | 2,136 | 3,771 | (1,635 | ) | (43 | )% | 5,761 | 11,287 | (5,526 | ) | (49 | )% | |||||||||||||||||||||||||||||||||||||||||
Corporate | 41,484 | (7,306 | ) | 48,790 | (668) | % | 20,262 | (29,381 | ) | 49,643 | (169) | % | (19,734 | ) | (14,432 | ) | (5,302 | ) | (37 | )% | (46,926 | ) | (41,270 | ) | (5,656 | ) | (14 | )% | ||||||||||||||||||||||||||||||||||||
Total homebuilding pretax income | $ | 80,169 | $ | 27,675 | $ | 52,494 | 190 | % | $ | 145,683 | $ | 67,737 | $ | 77,946 | 115 | % | ||||||||||||||||||||||||||||||||||||||||||||||||
Total Homebuilding pretax income | $ | 48,691 | $ | 52,983 | $ | (4,292 | ) | (8 | )% | $ | 151,360 | $ | 155,781 | $ | (4,421 | ) | (3 | )% | ||||||||||||||||||||||||||||||||||||||||||||||
HomebuildingFor the three months ended September 30, 2019, we recorded homebuilding pretax income for the 2017 third quarter was $80.2of $48.7 million, an increasea decrease of $52.5$4.3 million from $27.7$53.0 million for the same period in the prior year. The increasedecrease was primarily attributabledue to a 2% increasedecrease in home sale revenues an 80and a 150 basis point increase in our selling, general and administrative expenses as a percentage of revenue. These decreases in pretax income were partially offset by a 110 basis point improvement in our gross margin from home sale revenues percentage, andsales.
Our West segment experienced a $52.7$6.0 million year-over-year increase in our interest and otherpretax income, as a result of the sale of investments held by our Corporate segment.
For our West segment, the benefit of a 15% year-over-year improvement indue to an improved gross margin from home sale revenuessales, which was more thanslightly offset by higher G&A costs, due mostly to headcount growth, and a one-time legal charge taken during the 2017 third quarter. While ourincreased marketing expenses driven by an increase in average active communities. Our Mountain segment experienced a 13%$3.3 million decrease in pretax income from the prior year, due to a 3% decrease in home sales revenue and a $1.0 million increase in project abandonment costs. Our East segment experienced a $1.6 million year-over-year declinedecrease in pretax income from the prior year, primarily due to a 9% decrease in home sale revenues,revenues. Our Corporate segment experienced a $5.3 million decrease in pretax income, due mostly to a year-over-year increase in stock-based compensation expense associated with performance-based equity awards that were granted in 2017 and 2018.
For the nine months ended September 30, 2019, we were ablerecorded homebuilding pretax income of $151.4 million, a decrease of $4.4 million from $155.8 million for the same period in the prior year. The decrease was due to mostlya 100 basis point increase in our selling, general and administrative expenses as a percentage of revenue. This decrease was partially offset the impact of the decrease with anby a 70 basis point improvement in our gross margin from home sales percentage. sales.
Our EastWest segment experienced a $4.9$12.4 million year-over-year improvement in pretax income, primarily due to a $2.4 million reduction in inventory impairments coupled with an improved gross margin from home sales percentage. Theand a 4% increase in home sale revenues, which were slightly offset by increased selling, general and administrative expenses driven by an increase in average active communities and higher average headcount. Our Mountain segment experienced a $5.7 million decrease in pretax gain for ourincome from the prior year period, largely due to increased marketing expenses driven by an increased average active community count. Our East segment experienced a $5.5 million decrease in pretax income from the prior year, mainly due to a 19% decrease in home sale revenues. Our Corporate segment experienced a $5.7 million decrease in pretax income mostly due to a year-over-year increase in expense associated with performance-based equity awards consistent with the explanation for the three month period above, which was driven by the higher interest and other income discussed above, partiallyslightly offset by an increase in compensation-related expenses that was driven by an increaseinterest income due to increases in headcount as we plan for future growth.our average cash balance and average interest rates during the period.
For the nine months ended September 30, 2017, we recorded homebuilding pretax income
Assets:
September 30, | December 31, | Change | September 30, | December 31, | Change | |||||||||||||||||||||||||||
2017 | 2016 | Amount | % | 2019 | 2018 | Amount | % | |||||||||||||||||||||||||
(Dollars in thousands) | (Dollars in thousands) | |||||||||||||||||||||||||||||||
West | $ | 1,052,795 | $ | 1,035,033 | $ | 17,762 | 2 | % | $ | 1,481,549 | $ | 1,301,374 | $ | 180,175 | 14 | % | ||||||||||||||||
Mountain | 677,721 | 571,139 | 106,582 | 19 | % | 873,656 | 793,150 | 80,506 | 10 | % | ||||||||||||||||||||||
East | 217,238 | 256,816 | (39,578 | ) | (15) | % | 190,677 | 169,485 | 21,192 | 13 | % | |||||||||||||||||||||
Corporate | 450,969 | 454,507 | (3,538 | ) | (1) | % | 379,017 | 484,193 | (105,176 | ) | (22 | )% | ||||||||||||||||||||
Total homebuilding assets | $ | 2,398,723 | $ | 2,317,495 | $ | 81,228 | 4 | % | $ | 2,924,899 | $ | 2,748,202 | $ | 176,697 | 6 | % | ||||||||||||||||
Total homebuilding assets increased 4%6% from December 31, 20162018 to September 30, 2017, mostly driven by2019. Homebuilding assets increased in each of our Mountain segment, which had (1) higher land and land under development balancesoperating segments largely due to strong land acquisition activity during the nine months ended September 30, 2017, and (2) a highergreater number of homes completed or under construction as a result of an increase in backlog under construction. Theperiod-end. However, the funds for the land acquisitionconstruction activity came from our Corporate segment, drivingcausing a decline in our Corporate segment’s assets that was mostly offset by our positive operating results and gains on the sale of investments. Homebuilding assets in our East segment are down from December 31, 2017 due to reduced land acquisition activity as our returns in our Maryland and Virginia markets have been lower than the returns we expect to realize.
Home and Land Sale Revenues
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||||
September 30, | Change | September 30, | Change | |||||||||||||||||||||||||||||
2017 | 2016 | Amount | % | 2017 | 2016 | Amount | % | |||||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||||||||||
West | $ | 326,804 | $ | 284,589 | $ | 42,215 | 15 | % | $ | 959,641 | $ | 745,995 | $ | 213,646 | 29 | % | ||||||||||||||||
Mountain | 167,066 | 192,876 | (25,810 | ) | (13) | % | 564,558 | 521,034 | 43,524 | 8 | % | |||||||||||||||||||||
East | 92,417 | 100,547 | (8,130 | ) | (8) | % | 274,785 | 279,238 | (4,453 | ) | (2) | % | ||||||||||||||||||||
Total home and land sale revenues | $ | 586,287 | $ | 578,012 | $ | 8,275 | 1 | % | $ | 1,798,984 | $ | 1,546,267 | $ | 252,717 | 16 | % | ||||||||||||||||
For the 2017 third quarter, home and land sale revenues increased $8.3 million year-over-year to $586.3 million. For the nine months ended September 30, 2017 home and land sale revenues increased $252.7 million from the same period in the prior year to $1.80 billion. The increases for both the three and nine months ended September 30, 2017 compared to the same periods in the prior year were primarily driven by increases in new home deliveries of 2% and 15%, respectively.assets.
New Home Deliveries
Three Months Ended September 30, | ||||||||||||||||||||||||||||||||||||
2017 | 2016 | % Change | ||||||||||||||||||||||||||||||||||
Homes | Dollar | Average Price | Homes | Dollar | Average Price | Homes | Dollar | Average Price | ||||||||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||||||||||||||
Arizona | 186 | $ | 58,640 | $ | 315.3 | 221 | $ | 64,314 | $ | 291.0 | (16) | % | (9) | % | 8 | % | ||||||||||||||||||||
California | 223 | 135,745 | 608.7 | 195 | 125,602 | 644.1 | 14 | % | 8 | % | (5) | % | ||||||||||||||||||||||||
Nevada | 240 | 81,483 | 339.5 | 177 | 59,601 | 336.7 | 36 | % | 37 | % | 1 | % | ||||||||||||||||||||||||
Washington | 98 | 50,936 | 519.8 | 75 | 35,072 | 467.6 | 31 | % | 45 | % | 11 | % | ||||||||||||||||||||||||
West | 747 | 326,804 | 437.5 | 668 | 284,589 | 426.0 | 12 | % | 15 | % | 3 | % | ||||||||||||||||||||||||
Colorado | 314 | 146,883 | 467.8 | 343 | 169,858 | 495.2 | (8) | % | (14) | % | (6) | % | ||||||||||||||||||||||||
Utah | 45 | 18,843 | 418.7 | 55 | 20,728 | 376.9 | (18) | % | (9) | % | 11 | % | ||||||||||||||||||||||||
Mountain | 359 | 165,726 | 461.6 | 398 | 190,586 | 478.9 | (10) | % | (13) | % | (4) | % | ||||||||||||||||||||||||
Maryland | 41 | 21,506 | 524.5 | 61 | 27,297 | 447.5 | (33) | % | (21) | % | 17 | % | ||||||||||||||||||||||||
Virginia | 68 | 33,537 | 493.2 | 78 | 39,795 | 510.2 | (13) | % | (16) | % | (3) | % | ||||||||||||||||||||||||
Florida | 102 | 37,374 | 366.4 | 88 | 33,455 | 380.2 | 16 | % | 12 | % | (4) | % | ||||||||||||||||||||||||
East | 211 | 92,417 | 438.0 | 227 | 100,547 | 442.9 | (7) | % | (8) | % | (1) | % | ||||||||||||||||||||||||
Total | 1,317 | $ | 584,947 | $ | 444.2 | 1,293 | $ | 575,722 | $ | 445.3 | 2 | % | 2 | % | (0) | % | ||||||||||||||||||||
Nine Months Ended September 30, | ||||||||||||||||||||||||||||||||||||
2017 | 2016 | % Change | ||||||||||||||||||||||||||||||||||
Homes | Dollar | Average Price | Homes | Dollar | Average Price | Homes | Dollar | Average Price | ||||||||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||||||||||||||
Arizona | 586 | $ | 183,258 | $ | 312.7 | 582 | $ | 170,352 | $ | 292.7 | 1 | % | 8 | % | 7 | % | ||||||||||||||||||||
California | 662 | 403,974 | 610.2 | 512 | 319,116 | 623.3 | 29 | % | 27 | % | (2) | % | ||||||||||||||||||||||||
Nevada | 642 | 223,303 | 347.8 | 432 | 149,861 | 346.9 | 49 | % | 49 | % | 0 | % | ||||||||||||||||||||||||
Washington | 290 | 149,106 | 514.2 | 234 | 106,665 | 455.8 | 24 | % | 40 | % | 13 | % | ||||||||||||||||||||||||
West | 2,180 | 959,641 | 440.2 | 1,760 | 745,994 | 423.9 | 24 | % | 29 | % | 4 | % | ||||||||||||||||||||||||
Colorado | 1,064 | 510,211 | 479.5 | 945 | 463,534 | 490.5 | 13 | % | 10 | % | (2) | % | ||||||||||||||||||||||||
Utah | 126 | 51,409 | 408.0 | 145 | 53,238 | 367.2 | (13) | % | (3) | % | 11 | % | ||||||||||||||||||||||||
Mountain | 1,190 | 561,620 | 471.9 | 1,090 | 516,772 | 474.1 | 9 | % | 9 | % | (0) | % | ||||||||||||||||||||||||
Maryland | 140 | 65,870 | 470.5 | 178 | 84,742 | 476.1 | (21) | % | (22) | % | (1) | % | ||||||||||||||||||||||||
Virginia | 171 | 92,432 | 540.5 | 193 | 98,572 | 510.7 | (11) | % | (6) | % | 6 | % | ||||||||||||||||||||||||
Florida | 304 | 116,483 | 383.2 | 251 | 95,257 | 379.5 | 21 | % | 22 | % | 1 | % | ||||||||||||||||||||||||
East | 615 | 274,785 | 446.8 | 622 | 278,571 | 447.9 | (1) | % | (1) | % | (0) | % | ||||||||||||||||||||||||
Total | 3,985 | $ | 1,796,046 | $ | 450.7 | 3,472 | $ | 1,541,337 | $ | 443.9 | 15 | % | 17 | % | 2 | % | ||||||||||||||||||||
For the three months ended September 30, 2017, we realized a 2% increase in the number of homes delivered, primarily due to a 2% year-over-year increase in the number of homes in backlog to start the quarter. For all our markets, excluding California and Colorado, the year-over-year change in the number of homes delivered was mostly the result of the change in the number of homes in beginning backlog. In our California market, we started off the quarter with backlog down 8% but were able to achieve a 14% increase in the number of homes delivered primarily due to a shift in the mix of homes delivered to communities that have shorter construction cycle times. While our beginning backlog in our Colorado market was up 4% year-over-year, the number of homes delivered declined by 8%. This decrease is almost solely attributable to the joist issue, which only impacted our Colorado market. Delivery of approximately 90 homes that were previously projected to close in the 2017 third quarter was delayed to later quarters as a result of this issue. Furthermore, we anticipate that closings over the next two quarters will continue to be impacted by this issue*. In our Florida market, despite beginning backlog being up 31% year-over-year, we only realized a 16% increase in the number of homes delivered as a result of Hurricane Irma. Delivery of approximately 25 homes that were previously scheduled to close in the 2017 third quarter was delayed to later quarters as a result of the hurricane.
Our Washington, Utah and Maryland markets each experienced notable increases in the average selling price of homes delivered due to price increases implemented over the past year coupled with a shift in mix to higher priced communities. Our Colorado market had the largest decrease in the average selling price of homes delivered, due to a significant increase in the share of its closings coming from our more affordable plans designed for the first-time homebuyer. In our California market, price increases implemented in the past year were more than offset by a shift in the mix of deliveries to non-coastal communities, which have a lower average selling price. For most of our remaining markets, the average selling price benefited from price increases that have been implemented over the past twelve months. Any remaining differences were due to a shift in mix to differently priced communities.
For the nine months ended September 30, 2017, the year-over-year changes in homes delivered in most of our markets was primarily the result of the year-over-year change in the number of units in backlog to begin the year. In our Maryland and Virginia markets, while we started the year with beginning backlog units up from the prior year, our number of homes delivered is down year-over-year primarily due to year-over-year declines in the number of net new orders in the first part of 2017 as a result of community count decreases. Commentary around average selling price for the nine-months ended September 30, 2017 is consistent with the commentary above for the three-months ended September 30, 2017.
* See "Forward-Looking Statements" below
Gross Margin
Our gross margin from home sales percentage for the three months ended September 30, 2017 increased to 16.3% from 15.5% in the three months ended September 30, 2016. During the 2017 and 2016 third quarters, we recorded inventory impairments of $4.5 million and $4.7 million, respectively. The impairments recorded for each period negatively impacted gross margin by 80 basis points. Additionally, during the 2016 third quarter we recorded adjustments of $1.8 million (a 30 basis point negative impact to gross margins) to increase our warranty accrual while for our 2017 third quarter, we recorded adjustments to decrease our warranty accrual by $0.4 million (a 10 basis point positive impact to gross margins).
Our gross margin from home sales percentage for the nine months ended September 30, 2017 increased by 20 basis points year-over-year to 16.3%. The nine months ended September 30, 2017 included $9.4 million (a 50 basis point negative impact to gross margins) of inventory impairments, while the same period in 2016 included $6.3 million (a 40 basis point negative impact to gross margins) of inventory impairments and $5.1 million (a 30 basis point negative impact to gross margins) of adjustments to increase our warranty accrual.
Inventory Impairments
Impairments of homebuilding inventory by segment for the three months and nine months ended September 30, 2017 and 2016 are shown in the table below.
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
West | $ | 1,885 | $ | - | $ | 5,985 | $ | 1,400 | ||||||||
Mountain | 370 | - | 370 | - | ||||||||||||
East | 2,285 | 4,700 | 3,035 | 4,900 | ||||||||||||
Total inventory impairments | $ | 4,540 | $ | 4,700 | $ | 9,390 | $ | 6,300 | ||||||||
The table below provides quantitative data, for the periods presented, used in determining the fair value of the impaired inventory. Two communities combined for $3.0 million of our impairments recorded during the 2017 third quarter. The impairment in one community in our West segment was the result of significant pricing pressures while the impairment in one community in our East segment was due to expected future negative cash flows from a limited number of lots that drove total expected future cash flows for the community negative. The remaining impairments were relatively small on a community-by-community basis and were primarily related to close-out communities.
Impairment Data | Quantitative Data | ||||||||||||||||||||
Three Months Ended | Total | Inventory | Fair Value of | Number of | Discount Rate | ||||||||||||||||
(Dollars in thousands) | |||||||||||||||||||||
March 31, 2017 | 33 | $ | 4,850 | $ | 19,952 | 2 | 12% | to | 18% | ||||||||||||
June 30, 2017 | 35 | $ | - | $ | - | - | N/A | ||||||||||||||
September 30, 2017 | 33 | $ | 4,540 | $ | 52,190 | 9 | 10% | to | 15% | ||||||||||||
March 31, 2016 | 14 | $ | - | $ | - | - | N/A | ||||||||||||||
June 30, 2016 | 17 | $ | 1,600 | $ | 6,415 | 2 | 12% | to | 15% | ||||||||||||
September 30, 2016 | 25 | $ | 4,700 | $ | 12,295 | 2 | 15% | to | 18% | ||||||||||||
Selling, General and Administrative Expenses
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||
2017 | 2016 | Change | 2017 | 2016 | Change | |||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
General and administrative expenses | $ | 33,170 | $ | 27,758 | $ | 5,412 | $ | 97,831 | $ | 90,638 | $ | 7,193 | ||||||||||||
General and administrative expenses as a percentage of home sale revenues | 5.7 | % | 4.8 | % | 90 bps | 5.4 | % | 5.9 | % | (50) bps | ||||||||||||||
Marketing expenses | $ | 16,445 | $ | 15,262 | $ | 1,183 | $ | 48,545 | $ | 41,728 | $ | 6,817 | ||||||||||||
Marketing expenses as a percentage of home sale revenues | 2.8 | % | 2.7 | % | 10 bps | 2.7 | % | 2.7 | % | 0 bps | ||||||||||||||
Commissions expenses | $ | 19,487 | $ | 18,884 | $ | 603 | $ | 59,733 | $ | 50,255 | $ | 9,478 | ||||||||||||
Commissions expenses as a percentage of home sale revenues | 3.3 | % | 3.3 | % | 0 bps | 3.3 | % | 3.3 | % | 0 bps | ||||||||||||||
Total selling, general and administrative expenses | $ | 69,102 | $ | 61,904 | $ | 7,198 | $ | 206,109 | $ | 182,621 | $ | 23,488 | ||||||||||||
Total selling, general and administrative expenses as a percentage of home sale revenues | 11.8 | % | 10.8 | % | 100 bps | 11.5 | % | 11.8 | % | (30) bps | ||||||||||||||
For both the three and nine months ended September 30, 2017, as we continued to plan for the future growth of our business, we increased headcount, resulting in higher compensation-related expenses, which increased our general and administrative expenses. For the nine months ended September 30, 2017, we were able to leverage our 17% year-over-year increase in home sale revenues, to produce a year-over-year improvement in our SG&A rate of 30 basis points. However, for our 2017 third quarter, we experienced a 100 basis point increase in our SG&A rate. As discussed in the New Home Deliveries section above, deliveries and home sale revenues in our Colorado and Florida markets during the 2017 quarter were negatively impacted by the joist issue and Hurricane Irma, respectively. Absent these issues, we estimate that our SG&A rate might have increased by only 40 basis points year-over-year. & Home Sale Revenues:
Our commissions expenses are variable with home sale revenues. As such, the year-over-year increasesChanges in home sale revenues drove theare impacted by changes in commissions expenses year-over-yearthe number of new homes delivered and the average selling price of those delivered homes. Commentary for each of our segments on significant changes in these two metrics is provided below.
Three Months Ended September 30, | |||||||||||||||||||||||||||||||||||||
2019 | 2018 | % Change | |||||||||||||||||||||||||||||||||||
Homes | Home Sale Revenues | Average Price | Homes | Home Sale Revenues | Average Price | Homes | Home Sale Revenues | Average Price | |||||||||||||||||||||||||||||
(Dollars in thousands) | |||||||||||||||||||||||||||||||||||||
West | 927 | $ | 410,414 | $ | 442.7 | 836 | $ | 409,001 | $ | 489.2 | 11 | % | 0 | % | (10 | )% | |||||||||||||||||||||
Mountain | 537 | 263,802 | 491.2 | 535 | 272,989 | 510.3 | 0 | % | (3 | )% | (4 | )% | |||||||||||||||||||||||||
East | 249 | 76,058 | 305.5 | 213 | 84,037 | 394.5 | 17 | % | (9 | )% | (23 | )% | |||||||||||||||||||||||||
Total | 1,713 | $ | 750,274 | $ | 438.0 | 1,584 | $ | 766,027 | $ | 483.6 | 8 | % | (2 | )% | (9 | )% | |||||||||||||||||||||
Nine Months Ended September 30, | |||||||||||||||||||||||||||||||||||||
2019 | 2018 | % Change | |||||||||||||||||||||||||||||||||||
Homes | Home Sale Revenues | Average Price | Homes | Home Sale Revenues | Average Price | Homes | Home Sale Revenues | Average Price | |||||||||||||||||||||||||||||
(Dollars in thousands) | |||||||||||||||||||||||||||||||||||||
West | 2,464 | $ | 1,164,502 | $ | 472.6 | 2,286 | $ | 1,120,316 | $ | 490.1 | 8 | % | 4 | % | (4 | )% | |||||||||||||||||||||
Mountain | 1,480 | 760,470 | 513.8 | 1,473 | 750,162 | 509.3 | 0 | % | 1 | % | 1 | % | |||||||||||||||||||||||||
East | 641 | 205,424 | 320.5 | 611 | 252,845 | 413.8 | 5 | % | (19 | )% | (23 | )% | |||||||||||||||||||||||||
Total | 4,585 | $ | 2,130,396 | $ | 464.6 | 4,370 | $ | 2,123,323 | $ | 485.9 | 5 | % | 0 | % | (4 | )% | |||||||||||||||||||||
West Segment Commentary
For both periods presented. The increases in marketing expenses were partially attributable to the growth three and nine months ended September 30, 2019, the increase in new home deliveries.deliveries was primarily the result of an increase in the number of homes in backlog to begin the respective periods. The average selling price of homes delivered decreased as a result of a decline in the percentage of deliveries coming from our higher priced communities in Southern California. In addition, increased model costs pera greater percentage of closings within nearly all of our Western markets during the current periods were from our more affordable product offerings.
Mountain Segment Commentary
For the three months ended September 30, 2019, new home deliveries were relatively unchanged as the number of homes in beginning backlog and backlog conversion rates remained consistent year-over-year. While the backlog conversion rate continued to benefit from cycle time improvements in our Colorado markets as a result of (1) an increase in the percentage of SeasonsTM deliveries, which have some of the shortest cycle times of all of our product offerings and (2) improved cycle times across all of our product offerings in these markets, this was offset by a lower percentage of homes in backlog to start the 2019 third quarter that were under construction. The 4% decrease in the average selling price of homes delivered for the three months ended September 30, 2019 was driven by a greater percentage of closings from our more affordable product offerings during the current period.
For the nine months ended September 30, 2019, new home deliveries were relatively unchanged as a 17% decrease in homes in beginning backlog was entirely offset by an improved backlog conversion rate due to shorter average cycle times. The primary drivers of the improved cycle times are consistent with those noted above for the three months ended September 30, 2019.
East Segment Commentary
For both the three and nine months ended September 30, 2019, the decrease in the average selling price of homes delivered in our East segment was due to a change in mix resulting from (1) a higher headcount drovepercentage of our deliveries coming from our Florida markets, which have a lower average selling price than our mid-Atlantic market and (2) a higher percentage of deliveries in this segment coming from communities that offer more affordable home plans.
For the year-over-year increasesthree months ended September 30, 2019, the 17% increase new home deliveries was driven by a 29% increase in marketing costs.homes in backlog to begin the period, which was slightly offset by a decrease in the backlog conversion rate. The decreased backlog conversion rate was the result of a lower percentage of homes in backlog to start the 2019 third quarter that were under construction, which was largely offset by shorter cycle times resulting from a higher percentage of deliveries from our more affordable product offerings.
For the nine months ended September 30, 2019, the 5% increase in new home deliveries was driven by an improved backlog conversion rate due to shorter cycle times resulting from a higher percentage of deliveries from our more affordable product offerings. These improvements in backlog conversion were partially offset by a 19% decrease in homes in backlog to begin the period.
Interest and Other IncomeGross Margin from Home Sales:
Our gross margin from home sales for the three months ended September 30, 2019, increased 110 basis points year-over-year from 17.7% to 18.8%. During the three months ended September 30, 2018 we recorded inventory impairments of $11.1 million, which negatively impacted gross margin by 140 basis points in the prior year. Gross margins were negatively impacted in the current year due to lower gross margins on spec homes, particularly in our California markets.
Our gross margin from home sales for the nine months ended September 30, 2019, increased 70 basis points year-over-year from 18.3% to 19.0%. The primary drivers of the improved gross margin from home sales for the nine months ended September 30, 2019 are consistent with those noted above for the three months ended September 30, 2019.
Inventory Impairments:
Our interest and other incomeImpairments of homebuilding inventory by segment for the three and nine months ended September 30, 2017 was $54.5 million2019 and $59.7 million, respectively, compared to $1.9 million and $5.4 million, respectively,2018 are shown in the table below:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
West | $ | - | $ | 10,798 | $ | - | $ | 11,173 | ||||||||
Mountain | - | - | 400 | 175 | ||||||||||||
East | - | 300 | 210 | 500 | ||||||||||||
Total inventory impairments | $ | - | $ | 11,098 | $ | 610 | $ | 11,848 | ||||||||
The table below provides quantitative data, for the same periods presented, used in determining the prior year. Thefair value of the impaired inventory.
Impairment Data | Quantitative Data | ||||||||||||||||||||
Three Months Ended | Total | Inventory | Fair Value of | Number of | Discount Rate | ||||||||||||||||
(Dollars in thousands) | |||||||||||||||||||||
March 31, 2019 | 16 | $ | 610 | $ | 10,476 | 2 | N/A | ||||||||||||||
June 30, 2019 | 12 | $ | - | $ | N/A | 0 | N/A | ||||||||||||||
September 30, 2019 | 16 | $ | - | $ | N/A | 0 | N/A | ||||||||||||||
March 31, 2018 | 24 | $ | 550 | $ | 5,223 | 2 | 12% | ||||||||||||||
June 30, 2018 | 17 | $ | 200 | $ | 767 | 1 | 12% | ||||||||||||||
September 30, 2018 | 17 | $ | 11,098 | $ | 29,874 | 2 | 12% | - | 18% | ||||||||||||
Selling, General and Administrative Expenses:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||
2019 | 2018 | Change | 2019 | 2018 | Change | |||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
General and administrative expenses | $ | 46,951 | $ | 40,237 | $ | 6,714 | $ | 128,849 | $ | 116,362 | $ | 12,487 | ||||||||||||
General and administrative expenses as a percentage of home sale revenues | 6.3 | % | 5.3 | % | 100 bps | 6.0 | % | 5.5 | % | 50 bps | ||||||||||||||
Marketing expenses | $ | 20,457 | $ | 18,102 | $ | 2,355 | $ | 58,266 | $ | 50,888 | $ | 7,378 | ||||||||||||
Marketing expenses as a percentage of home sale revenues | 2.7 | % | 2.4 | % | 30 bps | 2.7 | % | 2.4 | % | 30 bps | ||||||||||||||
Commissions expenses | $ | 25,308 | $ | 25,184 | $ | 124 | $ | 70,574 | $ | 69,185 | $ | 1,389 | ||||||||||||
Commissions expenses as a percentage of home sale revenues | 3.4 | % | 3.3 | % | 10 bps | 3.3 | % | 3.3 | % | 0 bps | ||||||||||||||
Total selling, general and administrative expenses | $ | 92,716 | $ | 83,523 | $ | 9,193 | $ | 257,689 | $ | 236,435 | $ | 21,254 | ||||||||||||
Total selling, general and administrative expenses as a percentage of home sale revenues | 12.4 | % | 10.9 | % | 150 bps | 12.1 | % | 11.1 | % | 100 bps | ||||||||||||||
For the three months ended September 30, 2019, the increase in our general and administrative expenses was due to increased compensation-related expenses driven by a $7.3 million year-over-year increase in stock-based compensation expense, mainly driven by performance-based equity awards that were granted in 2017 and 2018. These performance-based awards are earned based on achieving various levels of home sale revenues growth and maintaining a required gross margin over a three year performance period. Based on the year-over-year increases in interest and other income were primarily driven by (1) net new orders during the salethird quarter of our “Metro Bonds”2019, and (2) the saledollar value of marketable equity securities held by our Corporate segment. Duringhomes in backlog at September 30, 2019, a large portion of the 2017expense associated with these awards was accelerated into the third quarter we soldof 2019 due to the Metro Bonds withincreased probability of achieving the maximum revenue goals as set out by the respective awards.
For the nine months ended September 30, 2019, the increase in our general and administrative expenses was due to increased compensation-related expenses driven by a cost basis of $8.4$9.7 million for net proceeds of $44.2 million resultingyear-over-year increase in a realized gain of $35.8 million. The sale of our marketablestock-based compensation expense, mainly due to performance-based equity securities held by our Corporate segment resulted in realized gains of $16.4 millionawards as noted above, and $17.8 million forhigher average headcount.
For both the three and nine months ended September 30, 2017, respectively.2019, marketing expenses increased due to increased sales office expense and product advertising, resulting from an increased number of average active subdivisions, as well as increased compensation expenses driven by higher average headcount.
Other Homebuilding Operating Data
Net New Orders:Orders and Active Subdivisions:
Three Months Ended September 30, | ||||||||||||||||||||||||||||||||||||||||||||||||
2017 | 2016 | % Change | ||||||||||||||||||||||||||||||||||||||||||||||
Homes | Dollar | Average Price | Monthly Absorption Rate * | Homes | Dollar Value | Average Price | Monthly Absorption Rate * | Homes | Dollar Value | Average Price | Monthly Absorption Rate | |||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||||||||||||||||||||||||||
Arizona | 192 | $ | 64,765 | $ | 337.3 | 2.53 | 225 | $ | 67,424 | $ | 299.7 | 2.56 | (15) | % | (4) | % | 13 | % | (1) | % | ||||||||||||||||||||||||||||
California | 250 | 164,265 | 657.1 | 4.17 | 260 | 152,901 | 588.1 | 4.08 | (4) | % | 7 | % | 12 | % | 2 | % | ||||||||||||||||||||||||||||||||
Nevada | 184 | 70,130 | 381.1 | 3.23 | 175 | 58,443 | 334.0 | 2.75 | 5 | % | 20 | % | 14 | % | 17 | % | ||||||||||||||||||||||||||||||||
Washington | 66 | 37,570 | 569.2 | 2.84 | 83 | 38,061 | 458.6 | 2.26 | (20) | % | (1) | % | 24 | % | 26 | % | ||||||||||||||||||||||||||||||||
West | 692 | 336,730 | 486.6 | 3.20 | 743 | 316,829 | 426.4 | 2.95 | (7) | % | 6 | % | 14 | % | 8 | % | ||||||||||||||||||||||||||||||||
Colorado | 333 | 162,725 | 488.7 | 2.45 | 321 | 146,911 | 457.7 | 3.82 | 4 | % | 11 | % | 7 | % | (36) | % | ||||||||||||||||||||||||||||||||
Utah | 48 | 23,041 | 480.0 | 2.29 | 35 | 14,718 | 420.5 | 1.41 | 37 | % | 57 | % | 14 | % | 62 | % | ||||||||||||||||||||||||||||||||
Mountain | 381 | 185,766 | 487.6 | 2.43 | 356 | 161,629 | 454.0 | 3.27 | 7 | % | 15 | % | 7 | % | (26) | % | ||||||||||||||||||||||||||||||||
Maryland | 39 | 17,006 | 436.1 | 2.00 | 50 | 22,612 | 452.2 | 1.42 | (22) | % | (25) | % | (4) | % | 41 | % | ||||||||||||||||||||||||||||||||
Virginia | 44 | 20,984 | 476.9 | 3.45 | 52 | 26,869 | 516.7 | 2.04 | (15) | % | (22) | % | (8) | % | 69 | % | ||||||||||||||||||||||||||||||||
Florida | 114 | 36,229 | 317.8 | 2.20 | 95 | 35,938 | 378.3 | 1.74 | 20 | % | 1 | % | (16) | % | 26 | % | ||||||||||||||||||||||||||||||||
East | 197 | 74,219 | 376.7 | 2.35 | 197 | 85,419 | 433.6 | 1.71 | 0 | % | (13) | % | (13) | % | 37 | % | ||||||||||||||||||||||||||||||||
Total | 1,270 | $ | 596,715 | $ | 469.9 | 2.78 | 1,296 | $ | 563,877 | $ | 435.1 | 2.72 | (2) | % | 6 | % | 8 | % | 2 | % | ||||||||||||||||||||||||||||
Changes in the dollar value of net new orders are impacted by changes in the number of net new orders and the average selling price of those homes. Commentary for each of our segments on significant changes in these two metrics is provided below.
Nine Months Ended September 30, | ||||||||||||||||||||||||||||||||||||||||||||||||
2017 | 2016 | % Change | ||||||||||||||||||||||||||||||||||||||||||||||
Homes | Dollar | Average Price | Monthly Absorption Rate * | Homes | Dollar Value | Average Price | Monthly Absorption Rate * | Homes | Dollar Value | Average Price | Monthly Absorption Rate | |||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||||||||||||||||||||||||||
Arizona | 638 | $ | 209,547 | $ | 328.4 | 2.76 | 684 | $ | 207,456 | $ | 303.3 | 2.52 | (7) | % | 1 | % | 8 | % | 10 | % | ||||||||||||||||||||||||||||
California | 727 | 465,164 | 639.8 | 4.21 | 797 | 476,341 | 597.7 | 4.36 | (9) | % | (2) | % | 7 | % | (3) | % | ||||||||||||||||||||||||||||||||
Nevada | 746 | 265,691 | 356.2 | 4.17 | 634 | 220,799 | 348.3 | 3.31 | 18 | % | 20 | % | 2 | % | 26 | % | ||||||||||||||||||||||||||||||||
Washington | 332 | 184,112 | 554.6 | 3.80 | 325 | 156,546 | 481.7 | 2.82 | 2 | % | 18 | % | 15 | % | 35 | % | ||||||||||||||||||||||||||||||||
West | 2,443 | 1,124,514 | 460.3 | 3.64 | 2,440 | 1,061,142 | 434.9 | 3.20 | 0 | % | 6 | % | 6 | % | 14 | % | ||||||||||||||||||||||||||||||||
Colorado | 1,292 | 627,845 | 485.9 | 3.40 | 1,227 | 583,309 | 475.4 | 4.00 | 5 | % | 8 | % | 2 | % | (15) | % | ||||||||||||||||||||||||||||||||
Utah | 171 | 77,114 | 451.0 | 2.41 | 178 | 67,394 | 378.6 | 2.47 | (4) | % | 14 | % | 19 | % | (2) | % | ||||||||||||||||||||||||||||||||
Mountain | 1,463 | 704,959 | 481.9 | 3.24 | 1,405 | 650,703 | 463.1 | 3.71 | 4 | % | 8 | % | 4 | % | (13) | % | ||||||||||||||||||||||||||||||||
Maryland | 122 | 54,468 | 446.5 | 1.65 | 208 | 96,590 | 464.4 | 1.89 | (41) | % | (44) | % | (4) | % | (13) | % | ||||||||||||||||||||||||||||||||
Virginia | 171 | 88,600 | 518.1 | 3.58 | 210 | 108,779 | 518.0 | 2.75 | (19) | % | (19) | % | 0 | % | 30 | % | ||||||||||||||||||||||||||||||||
Florida | 365 | 128,091 | 350.9 | 2.22 | 325 | 133,533 | 410.9 | 2.19 | 12 | % | (4) | % | (15) | % | 1 | % | ||||||||||||||||||||||||||||||||
East | 658 | 271,159 | 412.1 | 2.30 | 743 | 338,902 | 456.1 | 2.22 | (11) | % | (20) | % | (10) | % | 4 | % | ||||||||||||||||||||||||||||||||
Total | 4,564 | $ | 2,100,632 | $ | 460.3 | 3.24 | 4,588 | $ | 2,050,747 | $ | 447.0 | 3.11 | (1) | % | 2 | % | 3 | % | 4 | % | ||||||||||||||||||||||||||||
Three Months Ended September 30, | ||||||||||||||||||||||||||||||||||||||||||||||||
2019 | 2018 | % Change | ||||||||||||||||||||||||||||||||||||||||||||||
Homes | Dollar | Average Price | Monthly Absorption Rate * | Homes | Dollar Value | Average Price | Monthly Absorption Rate * | Homes | Dollar Value | Average Price | Monthly Absorption Rate | |||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||||||||||||||||||||||||||
West | 1,168 | $ | 516,000 | $ | 441.8 | 4.09 | 690 | $ | 316,556 | $ | 458.8 | 3.06 | 69 | % | 63 | % | (4 | )% | 34 | % | ||||||||||||||||||||||||||||
Mountain | 565 | 271,800 | 481.1 | 2.86 | 418 | 206,945 | 495.1 | 2.22 | 35 | % | 31 | % | (3 | )% | 29 | % | ||||||||||||||||||||||||||||||||
East | 303 | 83,896 | 276.9 | 3.58 | 182 | 57,649 | 316.8 | 2.64 | 66 | % | 46 | % | (13 | )% | 35 | % | ||||||||||||||||||||||||||||||||
Total | 2,036 | $ | 871,696 | $ | 428.1 | 3.59 | 1,290 | $ | 581,150 | $ | 450.5 | 2.67 | 58 | % | 50 | % | (5 | )% | 34 | % | ||||||||||||||||||||||||||||
Nine Months Ended September 30, | ||||||||||||||||||||||||||||||||||||||||||||||||
2019 | 2018 | % Change | ||||||||||||||||||||||||||||||||||||||||||||||
Homes | Dollar | Average Price | Monthly Absorption Rate * | Homes | Dollar Value | Average Price | Monthly Absorption Rate * | Homes | Dollar Value | Average Price | Monthly Absorption Rate | |||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||||||||||||||||||||||||||
West | 3,379 | $ | 1,543,584 | $ | 456.8 | 4.14 | 2,743 | $ | 1,274,115 | $ | 464.5 | 4.14 | 23 | % | 21 | % | (2 | )% | 0 | % | ||||||||||||||||||||||||||||
Mountain | 1,974 | 960,109 | 486.4 | 3.30 | 1,593 | 814,939 | 511.6 | 3.02 | 24 | % | 18 | % | (5 | )% | 9 | % | ||||||||||||||||||||||||||||||||
East | 912 | 268,578 | 294.5 | 4.02 | 579 | 207,394 | 358.2 | 2.78 | 58 | % | 30 | % | (18 | )% | 45 | % | ||||||||||||||||||||||||||||||||
Total | 6,265 | $ | 2,772,271 | $ | 442.5 | 3.82 | 4,915 | $ | 2,296,448 | $ | 467.2 | 3.51 | 27 | % | 21 | % | (5 | )% | 9 | % | ||||||||||||||||||||||||||||
*Calculated as total net new orders in period ÷ average active communities during period ÷ number of months in period
Average Active Subdivisions | Average Active Subdivisions | |||||||||||||||||||||||||||||||||||
Active Subdivisions | Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||||||||||||
September 30, | % | September 30, | % | September 30, | % | |||||||||||||||||||||||||||||||
2019 | 2018 | Change | 2019 | 2018 | Change | 2019 | 2018 | Change | ||||||||||||||||||||||||||||
West | 93 | 73 | 27 | % | 96 | 75 | 28 | % | 92 | 73 | 26 | % | ||||||||||||||||||||||||
Mountain | 67 | 64 | 5 | % | 66 | 63 | 5 | % | 66 | 59 | 12 | % | ||||||||||||||||||||||||
East | 30 | 21 | 43 | % | 29 | 23 | 26 | % | 25 | 24 | 4 | % | ||||||||||||||||||||||||
Total | 190 | 158 | 20 | % | 191 | 161 | 19 | % | 183 | 156 | 17 | % | ||||||||||||||||||||||||
West Segment Commentary
For the three months ended September 30, 2019, the increase in net new orders was driven by increases in both the monthly sales absorption rate and average active subdivisions. While all markets experienced an improvement in their sales pace year-over-year, Phoenix experienced the most significant increase driven by a shift in product mix to more affordable home offerings. Average active subdivisions were also up in nearly all markets, with our California and Nevada markets experiencing the largest increases. The decrease in average selling price is due to a shift in mix to more affordable communities in our California markets as well as the shift in mix to more affordable home offerings in Phoenix noted above.
For the nine months ended September 30, 2019, the increase in net new orders was driven by an increase in average active subdivisions in all of our markets in this segment, with California, Nevada and Washington experiencing the largest increases. The decrease in average selling price is due to a shift in the mix of home orders to our more affordable markets, most notably from our California to our Arizona markets as well as the mix shift in Phoenix noted above.
Mountain Segment Commentary
For the three and nine months ended September 30, 2019, the increase in net new orders was driven by increases in both the monthly sales absorption rates and average active subdivisions. All markets experienced a year-over-year improvement in their sales pace for the third quarter of 2019, while our Colorado markets were the main driver for the year-over-year increase in sales pace for the nine month period. These improvements in our sales pace are a result of the demand for our expanded offering of more affordable home plans. The increase in average active community count was a result of growth in most of our markets, most notably Utah. The decrease in average selling price is due to a shift in mix to lower priced communities, consistent with our ongoing focus on offering more affordable home plans.
East Segment Commentary
For both the three and nine months ended September 30, 2017,2019, the dollar value ofincrease in net new orders was up year-over-year asprimarily driven by increases in monthly sales absorption rates. For the average price of homes sold were partially offsetthree months ended September 30, 2019, this increase was further impacted by declines in the number of net new orders.
During the 2017 third quarter, our Nevada, Colorado and Utah markets experienced the largest percentage increases in the dollar value of net new orders as a result of year-over-year improvements in both the number of net new orders and average selling price of net new orders. In our Nevada and Colorado markets, the increases in average selling price were the result of both price increases implemented in most existing communities and shifts in mix to higher priced communities (in Colorado, this occurred even with our more affordable Seasons™ product line becoming a more significant contributor to our net new orders). The26% increase in average selling priceactive community count as we experienced growth in both our Utah marketFlorida and mid-Atlantic markets. The improved sales pace was predominantlyprimarily due to a shift in product mix to higher priced communities. The increases in net new orders for our Nevada and Utah markets were driven by improvements in our monthly sales absorption paces despite year-over-year declines in average active subdivisions. The 2017 third quarter absorption pace in our Colorado market was negatively impacted by a number of factors including (1) a higher cancellation rate and lower sales pace as a result of the joist issue, (2) a higher number of sales coming from inactive communities in 2016 third quarter compared to the 2017 third quarter, and (3) close-out of certain communities prior to the start of the 2017 third quarter that had robust monthly sales absorption paces in the 2016 third quarter. Despite our monthly absorption pace in our Colorado market being driven down by the above factors, we were able to achieve growth in the number of net new orders as our average active community count was up 61% year-over-year. While sales activitymore affordable products in our Florida market was impacted negatively by Hurricane Irma, we were still able to achieve a 26% year-over-year increase in our monthly sales absorption pace as a result of strong demand. In our Maryland and Virginia markets, strong improvements in our monthly sales absorption pace, driven by improving demand for higher density products, were more than offset by the impact of substantial declines in average active subdivisions.
For the nine months ended September 30, 2017, the dollar value of net new orders was up slightly when compared to the same period in 2016 as slight improvements in average selling price and our monthly sales absorption pace were modestly offset by a lower average active community count. Our Nevada, Washington, Utah and Colorado markets experienced the most meaningful year-over-year improvements in the dollar value of net new orders.markets. The increase in Nevada’s dollar value of net new orders was primarily the result of a substantially improved monthly sales absorption pace due to higher demand in newly opened communities. In our Washington market, the primary driver of the increase in the dollar value of net new orders was an increase in the average selling price due to price increases implemented in existing communities that were prompted by high demand in this market. A 24% year-over-year increase in the number of average active subdivisions in our Colorado market was partially offset by a lower monthly sales absorption rate due mostly to the joist issue discussed above. The increase in dollar value of net new orders for our Utah market was primarily the result of an increasedecrease in the average selling price of net new orders is due to price increases implemented in most existing communities. As discussed above, inmix as a result of: (1) a higher percentage of our Maryland and Virginia markets, the year-over-year declines in the dollar value of net new orders were primarily driven by decreases incoming from an expanded offering of more affordable home plans, due to an increasing level of demand for these plans, and (2) a higher percentage of our net new orders coming from our Florida markets, which have a lower average active subdivisions.
Active Subdivisions:selling price than our mid-Atlantic operations.
Average Active Subdivisions | Average Active Subdivisions | |||||||||||||||||||||||||||||||||||
Active Subdivisions | Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||||||||||||
September 30, | % | September 30, | % | September 30, | % | |||||||||||||||||||||||||||||||
2017 | 2016 | Change | 2017 | 2016 | Change | 2017 | 2016 | Change | ||||||||||||||||||||||||||||
Arizona | 27 | 30 | (10) | % | 25 | 29 | (14) | % | 26 | 30 | (13) | % | ||||||||||||||||||||||||
California | 23 | 21 | 10 | % | 20 | 21 | (5) | % | 19 | 20 | (5) | % | ||||||||||||||||||||||||
Nevada | 19 | 20 | (5) | % | 19 | 21 | (10) | % | 20 | 21 | (5) | % | ||||||||||||||||||||||||
Washington | 7 | 14 | (50) | % | 8 | 12 | (33) | % | 10 | 13 | (23) | % | ||||||||||||||||||||||||
West | �� | 76 | 85 | (11) | % | 72 | 83 | (13) | % | 75 | 84 | (11) | % | |||||||||||||||||||||||
Colorado | 48 | 28 | 71 | % | 45 | 28 | 61 | % | 42 | 34 | 24 | % | ||||||||||||||||||||||||
Utah | 7 | 9 | (22) | % | 7 | 8 | (13) | % | 8 | 8 | 0 | % | ||||||||||||||||||||||||
Mountain | 55 | 37 | 49 | % | 52 | 36 | 44 | % | 50 | 42 | 19 | % | ||||||||||||||||||||||||
Maryland | 5 | 11 | (55) | % | 7 | 12 | (42) | % | 8 | 12 | (33) | % | ||||||||||||||||||||||||
Virginia | 4 | 8 | (50) | % | 4 | 9 | (56) | % | 5 | 9 | (44) | % | ||||||||||||||||||||||||
Florida | 14 | 18 | (22) | % | 17 | 18 | (6) | % | 18 | 17 | 6 | % | ||||||||||||||||||||||||
East | 23 | 37 | (38) | % | 28 | 39 | (28) | % | 31 | 38 | (18) | % | ||||||||||||||||||||||||
Total | 154 | 159 | (3) | % | 152 | 158 | (4) | % | 156 | 164 | (5) | % | ||||||||||||||||||||||||
At September 30, 2017, we had 154 active subdivisions, up slightly from the end of our 2017 second quarter and down 3% from September 30, 2016. For Colorado, the increase was due to increased land acquisition activity over the last two years. In Virginia and Maryland, we have tempered our land acquisition activity over the past two years as our returns in these markets have been lower than returns we expect to realize. Active subdivisions in our Washington market were down 50% year-over-year as of September 30, 2017. While a large driver of that decline was the closeout of communities earlier than anticipated due to strong sales, our land acquisition activity was lower than anticipated due to increased competition for the acquisition of new communities. For all remaining markets, the year-over-year changes were primarily driven by the timing of opening new communities versus closing out older ones, with many communities closing earlier than anticipated due to higher monthly absorption paces during 2017 compared to 2016. Furthermore, through the nine months ended September 30, 2017, we approved the acquisition of over 7,800 lots, more than double the number during the same period a year ago.
Cancellation Rate:
Cancellations as a Percentage of Homes in Beginning Backlog | ||||||||||||||||||||||||
2019 | 2018 | |||||||||||||||||||||||
Three Months Ended | ||||||||||||||||||||||||
Mar 31 | Jun 30 | Sep 30 | Mar 31 | Jun 30 | Sep 30 | |||||||||||||||||||
West | 14 | % | 13 | % | 12 | % | 14 | % | 10 | % | 10 | % | ||||||||||||
Mountain | 14 | % | 13 | % | 16 | % | 11 | % | 12 | % | 12 | % | ||||||||||||
East | 11 | % | 18 | % | 22 | % | 23 | % | 17 | % | 20 | % | ||||||||||||
Total | 14 | % | 14 | % | 15 | % | 14 | % | 12 | % | 12 | % | ||||||||||||
Cancellations As a Percentage of Homes in Beginning Backlog | Cancellations As a Percentage of Gross Sales* | |||||||||||||||||||||||||||||||||||
Three Months Ended September 30, | Change in | Three Months Ended September 30, | Change in | Nine Months Ended September 30, | Change in | |||||||||||||||||||||||||||||||
2017 | 2016 | Percentage | 2017 | 2016 | Percentage | 2017 | 2016 | Percentage | ||||||||||||||||||||||||||||
Arizona | 18 | % | 19 | % | (1) | % | 26 | % | 26 | % | 0 | % | 18 | % | 24 | % | (6) | % | ||||||||||||||||||
California | 9 | % | 14 | % | (5) | % | 16 | % | 23 | % | (7) | % | 20 | % | 21 | % | (1) | % | ||||||||||||||||||
Nevada | 9 | % | 15 | % | (6) | % | 19 | % | 26 | % | (7) | % | 11 | % | 18 | % | (7) | % | ||||||||||||||||||
Washington | 8 | % | 6 | % | 2 | % | 27 | % | 17 | % | 10 | % | 17 | % | 17 | % | 0 | % | ||||||||||||||||||
West | 11 | % | 14 | % | (3) | % | 21 | % | 24 | % | (3) | % | 16 | % | 20 | % | (4) | % | ||||||||||||||||||
Colorado | 13 | % | 9 | % | 4 | % | 32 | % | 24 | % | 8 | % | 17 | % | 19 | % | (2) | % | ||||||||||||||||||
Utah | 13 | % | 10 | % | 3 | % | 28 | % | 31 | % | (3) | % | 22 | % | 22 | % | 0 | % | ||||||||||||||||||
Mountain | 13 | % | 9 | % | 4 | % | 32 | % | 24 | % | 8 | % | 18 | % | 20 | % | (2) | % | ||||||||||||||||||
Maryland | 9 | % | 18 | % | (9) | % | 15 | % | 32 | % | (17) | % | 31 | % | 25 | % | 6 | % | ||||||||||||||||||
Virginia | 7 | % | 15 | % | (8) | % | 17 | % | 30 | % | (13) | % | 21 | % | 20 | % | 1 | % | ||||||||||||||||||
Florida | 11 | % | 19 | % | (8) | % | 24 | % | 32 | % | (8) | % | 21 | % | 28 | % | (7) | % | ||||||||||||||||||
East | 10 | % | 17 | % | (7) | % | 21 | % | 31 | % | (10) | % | 23 | % | 25 | % | (2) | % | ||||||||||||||||||
Total | 12 | % | 13 | % | (1) | % | 24 | % | 25 | % | (1) | % | 18 | % | 21 | % | (3) | % | ||||||||||||||||||
* Cancellations as a percentage of gross sales data has been provided for information only. No commentary is included below.
Our cancellations as a percentage of homes in beginning backlog to start the quarter (“cancellation rate”) improved from 13%increased year-over-year in the 2016 third quarter to 12% in the 2017 third quarter. Eacheach of our California, Nevada, Maryland, Virginia and Florida markets had notable decreases in their cancellation rates assegments. These increases are mostly a result of process improvements around accepting sales and managing backlog. The increasedthe 58% increase in net new orders during the third quarter, as these homes are subject to cancellation rateduring the quarter, but not included in our Colorado market isbeginning backlog. Cancellations as a percentage of gross sales actually decreased during the resultthree months ended September 30, 2019 as compared to the prior year period.
Backlog:
At September 30, | ||||||||||||||||||||||||||||||||||||
2017 | 2016 | % Change | ||||||||||||||||||||||||||||||||||
Homes | Dollar | Average Price | Homes | Dollar | Average Price | Homes | Dollar | Average Price | ||||||||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||||||||||||||
Arizona | 374 | $ | 133,074 | $ | 355.8 | 423 | $ | 132,929 | $ | 314.3 | (12) | % | 0 | % | 13 | % | ||||||||||||||||||||
California | 546 | 378,448 | 693.1 | 627 | 389,622 | 621.4 | (13) | % | (3) | % | 12 | % | ||||||||||||||||||||||||
Nevada | 411 | 151,726 | 369.2 | 397 | 139,731 | 352.0 | 4 | % | 9 | % | 5 | % | ||||||||||||||||||||||||
Washington | 279 | 156,974 | 562.6 | 270 | 133,367 | 494.0 | 3 | % | 18 | % | 14 | % | ||||||||||||||||||||||||
West | 1,610 | 820,222 | 509.5 | 1,717 | 795,649 | 463.4 | (6) | % | 3 | % | 10 | % | ||||||||||||||||||||||||
Colorado | 1,192 | 595,675 | 499.7 | 1,104 | 530,662 | 480.7 | 8 | % | 12 | % | 4 | % | ||||||||||||||||||||||||
Utah | 149 | 67,830 | 455.2 | 141 | 53,180 | 377.2 | 6 | % | 28 | % | 21 | % | ||||||||||||||||||||||||
Mountain | 1,341 | 663,505 | 494.8 | 1,245 | 583,842 | 468.9 | 8 | % | 14 | % | 6 | % | ||||||||||||||||||||||||
Maryland | 74 | 34,102 | 460.8 | 120 | 56,837 | 473.6 | (38) | % | (40) | % | (3) | % | ||||||||||||||||||||||||
Virginia | 111 | 58,225 | 524.5 | 118 | 64,228 | 544.3 | (6) | % | (9) | % | (4) | % | ||||||||||||||||||||||||
Florida | 327 | 132,238 | 404.4 | 248 | 111,499 | 449.6 | 32 | % | 19 | % | (10) | % | ||||||||||||||||||||||||
East | 512 | 224,565 | 438.6 | 486 | 232,564 | 478.5 | 5 | % | (3) | % | (8) | % | ||||||||||||||||||||||||
Total | 3,463 | $ | 1,708,292 | $ | 493.3 | 3,448 | $ | 1,612,055 | $ | 467.5 | 0 | % | 6 | % | 6 | % | ||||||||||||||||||||
September 30, | ||||||||||||||||||||||||||||||||||||
2019 | 2018 | % Change | ||||||||||||||||||||||||||||||||||
Homes | Dollar | Average Price | Homes | Dollar | Average Price | Homes | Dollar | Average Price | ||||||||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||||||||||||||
West | 2,438 | $ | 1,146,912 | $ | 470.4 | 1,908 | $ | 939,247 | $ | 492.3 | 28 | % | 22 | % | (4 | )% | ||||||||||||||||||||
Mountain | 1,537 | 768,317 | 499.9 | 1,373 | 717,988 | 522.9 | 12 | % | 7 | % | (4 | )% | ||||||||||||||||||||||||
East | 641 | 183,856 | 286.8 | 423 | 145,829 | 344.7 | 52 | % | 26 | % | (17 | )% | ||||||||||||||||||||||||
Total | 4,616 | $ | 2,099,085 | $ | 454.7 | 3,704 | $ | 1,803,064 | $ | 486.8 | 25 | % | 16 | % | (7 | )% | ||||||||||||||||||||
At September 30, 2017,2019, we had 3,4634,616 homes in backlog with a total value of $1.71 billion, representing respective increases$2.1 billion. This represented a 25% increase in the number of 15 homes in backlog and $96.2 million from September 30, 2016. The majority of our markets experienced year-over-year growtha 16% increase in the dollar value of homes in backlog from September 30, 2018. The increase in the number of homes in backlog is primarily as a result of the year-over-year increase in net new orders in the second and third quarter of 2019, offset slightly by an increase in backlog conversion rates due to improved cycle times. The decrease in the average selling price increases overof homes in backlog is due to a shift in mix to lower priced communities, consistent with our ongoing strategy of offering more affordable home plans, as well as a shift in geographical mix with an increased proportion of net new orders coming from our Florida (East segment) markets, which have the last twelve months. Backloglowest average selling prices in our Maryland and Virginia markets declined from September 30, 2016 as a result of reduced sales activity over the last twelve months, mostly due to lower community count.Company.
Homes Completed or Under Construction (WIP lots):
September 30, | % | September 30, | % | |||||||||||||||||||||
2017 | 2016 | Change | 2019 | 2018 | Change | |||||||||||||||||||
Unsold: | ||||||||||||||||||||||||
Completed | 78 | 81 | (4) | % | 82 | 129 | (36 | )% | ||||||||||||||||
Under construction | 218 | 298 | (27) | % | 255 | 311 | (18 | )% | ||||||||||||||||
Total unsold started homes | 296 | 379 | (22) | % | 337 | 440 | (23 | )% | ||||||||||||||||
Sold homes under construction or completed | 2,591 | 2,626 | (1) | % | 3,433 | 2,835 | 21 | % | ||||||||||||||||
Model homes under construction or completed | 319 | 293 | 9 | % | 455 | 403 | 13 | % | ||||||||||||||||
Total homes completed or under construction | 3,206 | 3,298 | (3) | % | 4,225 | 3,678 | 15 | % | ||||||||||||||||
OverBoth the past couple of years, we have increased our focus on build-to-order homes and limited the number of unsold homes that we start without a sales contract, giving our customers the best opportunity to personalize their homes. As a result, our supply of unsold homes has declined by 22% year-over-year from September 30, 2016. The decline in unsold homes was partially offset by an increase in model homes, while sold homes under construction was nearly unchanged fromor completed and the prior year.decrease in unsold started homes are due to the increased demand we have experienced in the second and third quarters of 2019 as a result of our increased offering of more affordable home plans.
Lots Owned and Optioned (including homes completed or under construction):
September 30, 2017 | September 30, 2016 | |||||||||||||||||||||||||||
Lots Owned | Lots Optioned | Total | Lots Owned | Lots Optioned | Total | Total % Change | ||||||||||||||||||||||
Arizona | 1,971 | 761 | 2,732 | 1,515 | 269 | 1,784 | 53 | % | ||||||||||||||||||||
California | 1,454 | 679 | 2,133 | 1,753 | 75 | 1,828 | 17 | % | ||||||||||||||||||||
Nevada | 2,150 | 401 | 2,551 | 2,051 | 200 | 2,251 | 13 | % | ||||||||||||||||||||
Washington | 655 | 64 | 719 | 853 | - | 853 | (16) | % | ||||||||||||||||||||
West | 6,230 | 1,905 | 8,135 | 6,172 | 544 | 6,716 | 21 | % | ||||||||||||||||||||
Colorado | 4,622 | 2,960 | 7,582 | 4,051 | 1,347 | 5,398 | 40 | % | ||||||||||||||||||||
Utah | 456 | 132 | 588 | 380 | - | 380 | 55 | % | ||||||||||||||||||||
Mountain | 5,078 | 3,092 | 8,170 | 4,431 | 1,347 | 5,778 | 41 | % | ||||||||||||||||||||
Maryland | 122 | 48 | 170 | 261 | 143 | 404 | (58) | % | ||||||||||||||||||||
Virginia | 282 | 30 | 312 | 429 | 15 | 444 | (30) | % | ||||||||||||||||||||
Florida | 941 | 1,231 | 2,172 | 962 | 455 | 1,417 | 53 | % | ||||||||||||||||||||
East | 1,345 | 1,309 | 2,654 | 1,652 | 613 | 2,265 | 17 | % | ||||||||||||||||||||
Total | 12,653 | 6,306 | 18,959 | 12,255 | 2,504 | 14,759 | 28 | % | ||||||||||||||||||||
September 30, 2019 | September 30, 2018 | |||||||||||||||||||||||||||
Lots Owned | Lots Optioned | Total | Lots Owned | Lots Optioned | Total | Total % Change | ||||||||||||||||||||||
West | 9,128 | 2,203 | 11,331 | 7,736 | 4,215 | 11,951 | (5 | )% | ||||||||||||||||||||
Mountain | 6,456 | 3,139 | 9,595 | 6,020 | 3,648 | 9,668 | (1 | )% | ||||||||||||||||||||
East | 2,014 | 2,003 | 4,017 | 1,895 | 1,497 | 3,392 | 18 | % | ||||||||||||||||||||
Total | 17,598 | 7,345 | 24,943 | 15,651 | 9,360 | 25,011 | (0 | )% | ||||||||||||||||||||
Our total owned and optioned lots at September 30, 20172019 were 18,959, up 28%24,943, down only slightly from our recent high at September 30, 2016, due to substantial growth in our optioned lots as a result of our significant land acquisition approval activity over the past nine months. The decline in lots controlled in our Maryland and Virginia markets is primarily due to reductions in land acquisition activity over the past two years as our recent returns in these markets have been lower than returns we expect to realize. Though our lots controlled count is down year-over-year in Washington, we remain committed to that market and continue to pursue all land acquisition opportunities as they arise.2018. We believe that our total lot supply, of approximately 3.4 years (which is based on our last twelve months deliveries and is within our stated strategic range), coupled with our planned acquisition activity, can support growth in future periods. See "Forward-Looking Statements" below.
Financial ServicesServices
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||||
September 30, | Change | September 30, | Change | |||||||||||||||||||||||||||||
2017 | 2016 | Amount | % | 2017 | 2016 | Amount | % | |||||||||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||||||||||
Financial services revenues | ||||||||||||||||||||||||||||||||
Mortgage operations | $ | 11,176 | $ | 11,294 | $ | (118 | ) | (1) | % | $ | 36,056 | $ | 28,866 | $ | 7,190 | 25 | % | |||||||||||||||
Other | 6,288 | 6,114 | 174 | 3 | % | 18,460 | 15,382 | 3,078 | 20 | % | ||||||||||||||||||||||
Total financial services revenues | $ | 17,464 | $ | 17,408 | $ | 56 | 0 | % | $ | 54,516 | $ | 44,248 | $ | 10,268 | 23 | % | ||||||||||||||||
Financial services pretax income | ||||||||||||||||||||||||||||||||
Mortgage operations | $ | 5,857 | $ | 6,723 | $ | (866 | ) | (13) | % | $ | 21,093 | $ | 16,491 | $ | 4,602 | 28 | % | |||||||||||||||
Other | 3,654 | 3,654 | - | 0 | % | 11,158 | 8,555 | 2,603 | 30 | % | ||||||||||||||||||||||
Total financial services pretax income | $ | 9,511 | $ | 10,377 | $ | (866 | ) | (8) | % | $ | 32,251 | $ | 25,046 | $ | 7,205 | 29 | % | |||||||||||||||
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||||
September 30, | Change | September 30, | Change | |||||||||||||||||||||||||||||
2019 | 2018 | Amount | % | 2019 | 2018 | Amount | % | |||||||||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||||||||||
Financial services revenues |
| |||||||||||||||||||||||||||||||
Mortgage operations | $ | 14,395 | $ | 11,919 | $ | 2,476 | 21 | % | $ | 36,258 | $ | 39,162 | $ | (2,904 | ) | (7 | )% | |||||||||||||||
Other | 7,993 | 7,692 | 301 | 4 | % | 22,131 | 20,856 | 1,275 | 6 | % | ||||||||||||||||||||||
Total financial services revenues | $ | 22,388 | $ | 19,611 | $ | 2,777 | 14 | % | $ | 58,389 | $ | 60,018 | $ | (1,629 | ) | (3 | )% | |||||||||||||||
Financial services pretax income | ||||||||||||||||||||||||||||||||
Mortgage operations | $ | 8,468 | $ | 6,702 | $ | 1,766 | 26 | % | $ | 19,700 | $ | 23,262 | $ | (3,562 | ) | (15 | )% | |||||||||||||||
Other | 5,647 | 7,735 | (2,088 | ) | (27 | )% | 21,683 | 15,525 | 6,158 | 40 | % | |||||||||||||||||||||
Total financial services pretax income | $ | 14,115 | $ | 14,437 | $ | (322 | ) | (2 | )% | $ | 41,383 | $ | 38,787 | $ | 2,596 | 7 | % | |||||||||||||||
For the three months ended September 30, 2017,2019, our financial serviceservices pretax income decreased $0.9$0.3 million, or 8%2%, from the same period in the prior year. The declinedecrease was primarily due to our other financial services segment, which recognized $0.8 million of net gains on equity securities as compared to $3.0 million of net gains on equity securities for the same period in the prior year. This decrease was mostly offset by an increase in our mortgage operations segment due to higher interest rate lock volume as a result of a decline in the increased number and dollar value of loans locked, originatedhomes in backlog and sold in our mortgage operations. borrowers taking advantage of low interest rates.
For the nine months ended September 30, 2017,2019, our financial services pretax income was up $7.2increased $2.6 million, or 29%7% from the same period in 2016.the prior year. The increase in pretax income for our mortgage operations segment was the result of (1) increases in the dollar value of loans locked, originated and sold; and (2) higher gains on loans locked and originated. The higher pretax income inprimarily due to our other financial services segment, which recognized $7.9 million of net gains on equity securities as compared to $3.1 million of net gains on equity securities for the ninesame period in the prior year. This was partially offset by a decrease in our mortgage operations segment, which saw a decrease in both revenues and pretax income due to a $1.4 million gain recognized on the sale of conventional mortgage servicing rights during the three months ended SeptemberJune 30, 2017 was primarily2018, as well as year-over-year decreases in mortgage servicing income, due to the result of increased new home deliveries.sale.
The following table sets forth information for our mortgage operations segment relating to mortgage loans originated and capture rate. “Capture rate” is defined as the number of mortgage loans originated by our mortgage operations segment for our homebuyers as a percent of our total home closings.
Three Months Ended | % or | Nine Months Ended | % or | Three Months Ended | % or | Nine Months Ended | % or | |||||||||||||||||||||||||||||||||||||||||
September 30, | Percentage | September 30, | Percentage | September 30, | Percentage | September 30, | Percentage | |||||||||||||||||||||||||||||||||||||||||
2017 | 2016 | Change | 2017 | 2016 | Change | 2019 | 2018 | Change | 2019 | 2018 | Change | |||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | (Dollars in thousands) | ||||||||||||||||||||||||||||||||||||||||||||||
Total Originations (including transfer loans): |
| |||||||||||||||||||||||||||||||||||||||||||||||
Loans | 824 | 862 | (4) | % | 2,497 | 2,146 | 16 | % | 1,095 | 970 | 13 | % | 2,809 | 2,699 | 4 | % | ||||||||||||||||||||||||||||||||
Principal | $ | 288,326 | $ | 296,456 | (3) | % | $ | 872,781 | $ | 747,941 | 17 | % | $ | 386,613 | $ | 348,325 | 11 | % | $ | 1,023,287 | $ | 987,199 | 4 | % | ||||||||||||||||||||||||
Capture Rate Data: | ||||||||||||||||||||||||||||||||||||||||||||||||
Capture rate as % of all homes delivered | 62 | % | 66 | % | (4) | % | 62 | % | 61 | % | 1 | % | 64 | % | 61 | % | 3 | % | 61 | % | 62 | % | (1 | )% | ||||||||||||||||||||||||
Capture rate as % of all homes delivered (excludes cash sales) | 66 | % | 69 | % | (3) | % | 66 | % | 64 | % | 2 | % | 68 | % | 67 | % | 1 | % | 66 | % | 67 | % | (1 | )% | ||||||||||||||||||||||||
Mortgage Loan Origination Product Mix: | ||||||||||||||||||||||||||||||||||||||||||||||||
FHA loans | 20 | % | 21 | % | (1) | % | 19 | % | 20 | % | (1) | % | 20 | % | 17 | % | 3 | % | 17 | % | 16 | % | 1 | % | ||||||||||||||||||||||||
Other government loans (VA & USDA) | 20 | % | 22 | % | (2) | % | 21 | % | 24 | % | (3) | % | 20 | % | 19 | % | 1 | % | 20 | % | 19 | % | 1 | % | ||||||||||||||||||||||||
Total government loans | 40 | % | 43 | % | (3) | % | 40 | % | 44 | % | (4) | % | 40 | % | 36 | % | 4 | % | 37 | % | 35 | % | 2 | % | ||||||||||||||||||||||||
Conventional loans | 60 | % | 57 | % | 3 | % | 60 | % | 56 | % | 4 | % | 60 | % | 64 | % | (4 | )% | 63 | % | 65 | % | (2 | )% | ||||||||||||||||||||||||
| 100 | % | 100 | % | 0 | % | 100 | % | 100 | % | 0 | % | 100 | % | 100 | % | 0 | % | 100 | % | 100 | % | 0 | % | |||||||||||||||||||||||||
Loan Type: | ||||||||||||||||||||||||||||||||||||||||||||||||
Fixed rate | 97 | % | 97 | % | 0 | % | 97 | % | 98 | % | (1) | % | 98 | % | 97 | % | 1 | % | 97 | % | 97 | % | 0 | % | ||||||||||||||||||||||||
ARM | 3 | % | 3 | % | 0 | % | 3 | % | 2 | % | 1 | % | 2 | % | 3 | % | (1 | )% | 3 | % | 3 | % | 0 | % | ||||||||||||||||||||||||
Credit Quality: | ||||||||||||||||||||||||||||||||||||||||||||||||
Average FICO Score | 735 | 735 | 0 | % | 735 | 736 | (0) | % | 738 | 741 | (0 | )% | 739 | 742 | (0 | )% | ||||||||||||||||||||||||||||||||
Other Data: |
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Average Combined LTV ratio | 83 | % | 83 | % | 0 | % | 83 | % | 84 | % | (1) | % | 84 | % | 81 | % | 3 | % | 82 | % | 81 | % | 1 | % | ||||||||||||||||||||||||
Full documentation loans | 100 | % | 100 | % | 0 | % | 100 | % | 100 | % | 0 | % | 100 | % | 100 | % | 0 | % | 100 | % | 100 | % | 0 | % | ||||||||||||||||||||||||
Loans Sold to Third Parties: | ||||||||||||||||||||||||||||||||||||||||||||||||
Loans | 836 | 840 | (0) | % | 2,645 | 2,144 | 23 | % | 1,064 | 931 | 14 | % | 2,882 | 2,736 | 5 | % | ||||||||||||||||||||||||||||||||
Principal | $ | 293,375 | $ | 295,818 | (1) | % | $ | 921,431 | $ | 744,958 | 24 | % | $ | 377,213 | $ | 338,940 | 11 | % | $ | 1,047,637 | $ | 1,006,194 | 4 | % | ||||||||||||||||||||||||
Income Taxes
At the end of each interim period, we are required to estimate our annual effective tax rate for the fiscal year and use that rate to provide for income taxes for the current year-to-date reporting period. Our overall effective income tax rates were 31.8%19.5% and 34.1%24.4% for the three and nine months ended September 30, 2017,2019, respectively, compared to 30.7% and 32.3%20.8% and 19.8% for the three and nine months ended September 30, 2016,2018, respectively. The rates for the three and nine months ended September 30, 2017 resulted in income tax expense of $28.5 million and $60.7 million, respectively, compared to income tax expense of $11.7 million and $29.9 million for the same periods in 2016. The year-over-year increase in our effective tax rate for the three months ended September 30, 2017 was primarily the result of our estimate of the full year effective tax rate for 2016 including an estimate for energy credits whereas our estimate for the 2017 full year includes no such energy credit as the credit has not been approved by the U.S. Congress. Additionally, our 2016 third quarter benefited from certain positive return-to-provision adjustments as a result of filing our 2015 tax returns, whereas our 2017 third quarter included no such adjustments. However, the impact of these items were substantially offset by the release of a valuation allowance on our Metro Bonds as a result of the gain on the sale of those securities at the end of the 2017 third quarter enabling us to utilize the full deferred tax asset recorded on the Metro Bonds. For the nine months ended September 30, 2017, the year-over-year increase in our effective tax rate2019 was due to the foregoinga $10.2 million decrease in benefits from energy credits matter coupled with the establishment of a valuation allowance in the 2017 first quarter against certain state net operating loss carryforwards where realizationtax credits. This was more uncertain at the time. These items were somewhatpartially offset by a $2.7 million increase in benefits recognized upon the releasevesting or exercise of equity awards, primarily due to a $2.3 million benefit related to the Metro Bonds valuation allowance discussed above.2016 performance share units recognized during the 2019 third quarter.
CRITICAL ACCOUNTING ESTIMATES AND POLICIES
The preparation of financial statements in conformity with accounting policies generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Management evaluates such estimates and judgments on an on-going basis and makes adjustments as deemed necessary. Actual results could differ from these estimates if conditions are significantly different in the future. See "Forward-Looking Statements" below.
Our critical accounting estimates and policies have not changed from those reported in Management’sManagement’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2016.2018.
LIQUIDITY AND CAPITAL RESOURCES
We use our liquidity and capital resources to:to: (1) support our operations, including the purchase of land, land development and construction of homes; (2) provide working capital; and (3) provide mortgage loans for our homebuyers. Our liquidity includes our cash and cash equivalents, marketable securities, revolving credit facilityRevolving Credit Facility and mortgage repurchase facility.Mortgage Repurchase Facility (both defined below). Additionally, we have an existing effective shelf registration statement that allows us to issue equity, debt or hybrid securities up to $1.5 billion ($1.35 billion after the public offering of an additional $150 million principal amount of our 6% senior notes due 2043). See Note 20 for additional information.$2.0 billion.
We have marketable equity securities that consist primarily of holdings in corporate equities.common stock and exchange traded funds.
Capital Resources
Our capital structure is primarily a combination ofof: (1) permanent financing, represented by stockholders’ equity; (2) long-term financing, represented by our 5⅝% senior notes due 2020, 5½% senior notes due 2024 and our 6% senior notes due 2043 (see Note 20 for additional information on the public offering of an additional $150 million principal amount of these notes);2043; (3) short-term financing, represented by our 5⅝% senior notes due 2020; (4) our Revolving Credit Facility (defined below); and (4)(5) our Mortgage Repurchase Facility (defined below). Because of our current balance of cash, cash equivalents, marketable securities, ability to access the capital markets, and available capacity under both our Revolving Credit Facility and Mortgage Repurchase Facility, we believe that our capital resources are adequate to satisfy our short and long-term capital requirements, including meeting future payments on our senior notes as they become due. See "Forward-Looking Statements" below.
We may from time to time seek to retire or purchase our outstanding seniorsenior notes through cash purchases, whether through open market purchases, privately negotiated transactions or otherwise. Such repurchases, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material.
Senior Notes, Revolving Credit Facility and Mortgage Repurchase Facility
Senior Notes. Our senior notes are not secured and, while the senior note indentures contain some restrictions on secured debt and other transactions, they do not contain financial covenants. Our senior notes are fully and unconditionally guaranteed on an unsecured basis, jointly and severally, by most of our homebuilding segment subsidiaries. We believe that we are in compliance with the representations, warranties and covenants in the senior note indentures.
Revolving Credit Facility. We have an unsecured revolving credit agreement (“Revolving Credit Facility”) with a group of lenders which may be used for general corporate purposes. This agreement was amended on September 29, 2017November 1, 2018 to (1) extend the Revolving Credit Facility maturity to December 16, 2022,18, 2023, (2) increase the aggregate commitment from $550$700 million to $700 million$1.0 billion (the “Commitment”) and (3) provide that the aggregate amount of the commitments may increase to an amount not to exceed $1.25$1.5 billion upon our request, subject to receipt of additional commitments from existing or additional lenders and, in the case of additional lenders, the consent of the co-administrative agents. As defined in the Revolving Credit Facility, interest rates on base rate borrowings are equal to the highest of (1) 0.0%, (2) a specified eurocurrencyprime rate, or (3) a federal funds effective rate or primeplus 1.50%, and (4) a specified eurocurrency rate plus 1.00% and, in each case, plus a margin that is determined based on our credit ratings and leverage ratio. Interest rates on eurocurrency borrowings are equal to thea specified eurocurrency rate.rate plus a margin that is determined based on our credit ratings and leverage ratio. At any time at which our leverage ratio, as of the last day of the most recent calendar quarter, exceeds 55%, the aggregate principal amount of all consolidated senior debt borrowings outstanding may not exceed the borrowing base. There is no borrowing base requirement if our leverage ratio, as of the last day of the most recent calendar quarter, is 55% or less.
The Revolving Credit Facility is fully and unconditionally guaranteed, jointly and severally, by most of our homebuilding segment subsidiaries. The facility contains various representations, warranties and covenants that we believe are customary for agreements of this type. The financial covenants include a consolidated tangible net worth test and a leverage test, along with a consolidated tangible net worth covenant, all as defined in the Revolving Credit Facility. A failure to satisfy the foregoing tests does not constitute an event of default, but can trigger a “term-out” of the facility. A breach of the consolidated tangible net worth covenant (but not the consolidated tangible net worth test) or a violation of anti-corruption or sanctions laws would result in an event of default.
The Revolving Credit Facility is subject to acceleration upon certain specified events of default, including breach of the consolidated tangible net worth covenant, a violation of anti-corruption or sanctions laws, failure to make timely payments, breaches of certain representations or covenants, failure to pay other material indebtedness, or another person becoming beneficial owner of 50% or more of our outstanding common stock. We believe we were in compliance with the representations, warranties and covenants included in the Revolving Credit Facility as of September 30, 2017.2019.
AsWe incur costs associated with unused commitment fees pursuant to the terms of the Revolving Credit Facility. At September 30, 2017, we had $15.02019 and December 31, 2018, there were $26.4 million in borrowings and $34.0$27.8 million, respectively, in letters of credit outstanding, which reduced the amounts available to be borrowed under the Revolving Credit Facility. We had $15.0 million outstanding under the Revolving Credit Facility leaving remaining borrowing capacityas of $651.0September 30, 2019 and December 31, 2018. As of September 30, 2019, availability under the Revolving Credit Facility was approximately $958.6 million.
Mortgage Repurchase Facility. HomeAmerican has a Master Repurchase Agreement (the “Mortgage Repurchase Facility”) with U.S. Bank National Association (“USBNA”). Effective August 10, 2017,May 23, 2019, the Mortgage Repurchase Facility was amended to extend its termination date to August 9, 2018.May 21, 2020. The Mortgage Repurchase Facility provides liquidity to HomeAmerican by providing for the sale of up to an aggregate of $75 million (subject to increase by up to $75 million under certain conditions) of eligible mortgage loans to USBNA with an agreement by HomeAmerican to repurchase the mortgage loans at a future date. Until such mortgage loans are transferred back to HomeAmerican, the documents relating to such loans are held by USBNA, as custodian, pursuant to the Custody Agreement (“Custody Agreement”), dated as of November 12, 2008, by and between HomeAmerican and USBNA. In the event that an eligible mortgage loan becomes ineligible, as defined under the Mortgage Repurchase Facility, HomeAmerican may be required to repurchase the ineligible mortgage loan immediately. The maximum aggregate commitment of the Mortgage Repurchase Facility was temporarily increased on December 27, 2016September 26, 2019 from $75 million to $125$100 million and waseffective through October 24, 2019. The Mortgage Repurchase Facility also had a temporary increase in the maximum aggregate commitment from $75 million to $130 million on December 27, 2018 effective through January 25, 2017.2019. At September 30, 20172019 and December 31, 2016,2018, HomeAmerican had $65.1$90.5 million and $114.5$116.8 million, respectively, of mortgage loans that HomeAmerican was obligated to repurchase under the Mortgage Repurchase Facility. Mortgage loans that HomeAmerican is obligated to repurchase under the Mortgage Repurchase Facility are accounted for as a debt financing arrangement and are reported as mortgage repurchase facility in the consolidated balance sheets. Advances under the Mortgage Repurchase Facility carry a price range that is LIBOR-based.based on a LIBOR rate or successor benchmark rate.
The Mortgage Repurchase Facility contains various representations, warranties and affirmative and negative covenants that we believe are customary for agreements of this type. The negative covenants include, among others, (i) a minimum Adjusted Tangible Net Worth requirement, (ii) a maximum Adjusted Tangible Net Worth ratio, (iii) a minimum adjusted net income requirement, and (iv) a minimum Liquidity requirement. The foregoing capitalized terms are defined in the Mortgage Repurchase Facility. We believe HomeAmerican was in compliance with the representations, warranties and covenants included in the Mortgage Repurchase Facility as of September 30, 2017.2019.
Dividends
During the three and nine months ended September 30, 2017,2019 and 2018, we paid dividends of $0.25$0.30 per share and $0.75$0.28 per share, respectively, compared to $0.24 per share and $0.72 per share for the same periods in the prior year, respectively.
MDC Common Stock Repurchase Program
At September 30, 2017,2019, we were authorized to repurchase up to 4,000,000 shares of our common stock. We did not repurchase any shares of our common stock during the three months ended September 30, 2017.2019.
ConsolidatedConsolidated Cash Flow
During the nine months ended September 30, 2017,2019, we generated $69.2used $33.1 million of cash fromfor operating activities, primarily due to (1)to: 1) a net increase in housing completed or under construction of $251.7 million, 2) a net increase in land and land under development of $10.5 million, 3) net gains on marketable equity securities of $7.9 million, 4) a net increase in trade and other receivables of $4.7 million and 5) a net increase in prepaid and other assets of $3.9 million. These amounts were partially offset by: 1) net income of $117.3$145.7 million, (2)2) non-cash add-backs to net income related to depreciation and stock-based compensation totaling $33.7 million, 3) a $49.0 millionnet decrease in mortgage loans held-for-sale (3)of $32.2 million, 4) a $22.8 million decrease in our deferred tax asset, and (4) a $15.3 millionnet increase in accounts payable and accrued liabilities. The increases were partially offset byliabilities of $23.9 million and 4) a decrease in our net increase in housing inventorydeferred tax assets of $82.1 million, an $11.2 million increase in prepaid and other assets, and net gains on the sale of investments, including our Metro Bonds of $54.0$9.5 million.
During the nine months ended September 30, 2017,2019, we generated $108.0used $24.2 million of cash for investing activities, primarily attributabledue to net proceeds from the sale and purchase of marketable equity securities of $65.7 million and proceeds from the sale of the Metro Bonds of $44.3 million. These amounts were slightly offset by the purchase of $1.9$20.1 million in property and equipment.equipment and net purchases of marketable securities of $4.1 million.
During the nine months ended September 30, 2017,2019, we used $82.3$64.4 million inof cash for financing activities, primarily related to payments of $49.4dividend payments totaling $54.3 million and net payments on our mortgage repurchase facility and dividend payments totaling $38.8of $26.4 million. These amounts were slightly offset by net proceeds of $8.5$16.3 million from the exercisenet settlement of stock options.issuance of stock-based compensation awards.
Off-Balance Sheet Arrangements
Lot Option Purchase Contracts. In the ordinary course of business, we enter into lot option purchase contracts in order to procure lots for the construction of homes. Lot option contracts enable us to control lot positions with a minimal capital investment, which substantially reduces the risks associated with land ownership and development. At September 30, 2017,2019, we had deposits of $11.1$23.9 million in the form of cash and $3.6$6.8 million in the form of letters of credit that secured option contracts to purchase 6,3067,345 lots for a total estimated purchase price of $463.0$516.2 million.
Surety Bonds and Letters of Credit. At September 30, 2017,2019, we had outstanding surety bonds and letters of credit totaling $184.9$251.1 million and $65.5$93.0 million, respectively, including $31.6$66.6 million in letters of credit issued by HomeAmerican. The estimated cost to complete obligations related to these bonds and letters of credit was approximately $33.0$130.4 million and $25.3$49.8 million, respectively. We expect that the obligations secured by these performance bonds and letters of credit generally will be performed in the ordinary course of business and in accordance with the applicable contractual terms. To the extent that the obligations are performed, the related performance bonds and letters of credit should be released and we should not have any continuing obligations. However, in the event any such performance bonds or letters of credit are called, our indemnity obligations could require us to reimburse the issuer of the performance bond or letter of credit.
We have mademade no material guarantees with respect to third-party obligations.
IMPACT OF INFLATION, CHANGING PRICES AND ECONOMIC CONDITIONS
The impact of inflation and changing prices have not changed materially from the disclosure in our December 31, 20162018 Annual Report on Form 10-K.
OTHER
Forward-Looking Statements
Certain statements in this Quarterly Report on Form 10-Q, as well as statements made by us in periodic press releases, oral statements made by our officials in the course of presentations about the Company and conference calls in connection with quarterly earnings releases, 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 Report 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. Additionally, information about issues that could lead to material changes in performance and risk factors that have the potential to affect us is contained under the caption “Risk Factors” in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 20162018 and Item 1A of Part II of this Quarterly Report on Form 10-Q.
Item 3. Quantitative and Qualitative Disclosures About Market RiskItem 3.Quantitativeand Qualitative Disclosures About Market Risk
OurWe have a cash and investment policy and strategy isthat enables us to achieve an appropriate investment return while preserving principal and managing risk. OurUnder this policy, our cash and cash equivalents may include immediately availableU.S. government securities, commercial bank deposits, commercial paper, certificates of deposit, money market funds, certificates of deposit and time deposits.deposits, with maturities of three months or less. Our marketable securities consist of under this policy may include holdings in U.S. government securities with a maturity of more than three months, equity securities and corporate equities, preferred stock and exchange traded funds. debt securities.
The market value and/or income derived from our equity securities can be negatively impacted bymay go up or down, sometimes rapidly or unpredictably. Equity securities may decline in value due to factors affecting equity securities markets generally, particular industries represented in those markets, or the issuer itself. The values of equity securities may decline due to general market conditions that are not specifically related to a particular company, such as real or perceived adverse economic conditions, changes in the general outlook for corporate earnings, changes in interest or currency rates or adverse investor sentiment generally. They may also decline due to factors that affect a particular industry or industries, such as labor shortages or increased production costs and competitive conditions within an industry. The value of equity securities may also decline for a number of market risk factors, including changes in interest rates, general economic conditionsother reasons that directly relate to the issuer, such as management performance, financial leverage, the issuer’s historical and equity markets. prospective earnings, the value of its assets and reduced demand for its goods and services. Equity securities generally have greater price volatility than bonds and other debt securities.
As of September 30, 2017, we had2019, our cash and cash equivalents included commercial bank deposits, money market funds and time deposits, with maturities of three months or less. As of September 30, 2019, our marketable securities included holdings in unrealized loss positions totaling $0.6 million, against which we recorded impairments totaling $0.0 million during the current quarter. For the remaining marketable securities in unrealized loss positions totaling $0.6 million, there can be no assurances that the cost basis of these securities will be recovered in the future. If we elect to sell, or are otherwise were required to sell these securities, we could be required to record losses if the market values do not increase prior to any sales. Such losses, if any, would be recorded as a component of our results of operations.common stock and exchange traded funds.
We are exposed to market risks related to fluctuations in interest rates on mortgage loans held-for-sale, mortgage interest rate lock commitments and debt. Derivative instruments utilized in the normal course of business by HomeAmerican include interest rate lock commitments and forward sales of mortgage-backed securities, which are used to manage the price risk on fluctuations in interest rates on our mortgage loans in inventory and interest rate lock commitments to originate mortgage loans. Such contracts are the only significant financial derivative instruments utilized by MDC. HomeAmerican’sHomeAmerican’s mortgage loans in process for which a rate and price commitment had been made to a borrower that had not closed at September 30, 20172019 had an aggregate principal balance of $101.2$155.1 million, all of which were under interest rate lock commitments at an average interest rate of 3.99%3.67%. In addition, HomeAmerican had mortgage loans held-for-sale with an aggregate principal balance of $87.1$113.6 million at September 30, 2017,2019, of which $14.0$14.6 million had not yet been committed to a mortgage purchaser and had an average interest rate of 4.04%3.62%. In order to hedge the changes in fair value of interest rate lock commitments and mortgage loans held-for-sale thatwhich had not yet been committed to a mortgage purchaser, HomeAmerican had forward sales of securities totaling $85.0$131.5 million and $65.5 million at September 30, 2017.2019 and December 31, 2018, respectively.
HomeAmerican provides mortgage loans that generally are sold forward and subsequently delivered to a third-party purchaser between 1510 and 4035 days. Forward commitments are used for non-trading purposes to sell mortgage loans and hedge price risk due to fluctuations in interest rates on rate-locked mortgage loans in process that have not closed. Due to this economic hedging philosophy, the market risk associated with these mortgages is limited. For forward sales commitments, as well as commitments to originate mortgage loans that are still outstanding at the end of a reporting period, we record the fair value of the derivatives in the consolidated statements of operations and comprehensive income with an offset to either derivative assets or liabilities, depending on the nature of the change.
We utilize our Revolving Credit Facility, our Mortgage Repurchase Facility and senior notes in our financing strategy. For fixed rate debt, changes in interest rates generally affect the fair value of the debt instrument, but do not affect our earnings or cash flows. We do not have an obligation to prepay our senior notes prior to maturity and, as a result, interest rate risk and changes in fair value do not have an impact on our financial position, results of operations or cash flows. For variable rate debt such as our Revolving Credit Facility and Mortgage Repurchase Facility, changes in interest rates generally do not affect the fair value of the outstanding borrowing on the debt facilities, but doesdo affect our earnings and cash flows. See “Forward-Looking Statements” above.
Controls and ProceduresI
(a) Conclusion regarding the effectiveness of disclosure controls and procedures - An evaluation of the effectiveness of the design and operation of our disclosure controls and procedures was performed under the supervision, and with the participation, of our management, including the Chief Executive Officer (principle executive officer) and the Chief Financial Officer (principal financial officer). Based on that evaluation, our management, including the Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.
(b)Changes in internal control over financial reporting - There were no changes in our internal control over financial reporting that occurred during the quarter ended September 30, 20172019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
FORM 10-Q10-Q
Legal Proceedings |
Because of the nature of the homebuilding business, we and certain of our subsidiaries and affiliates have been named as defendants in various claims, complaints and other legal actions arising in the ordinary course of business, including product liability claims and claims associated with the sale and financing of our homes. In the opinion of management, the outcome of these ordinary course matters will not have a material adverse effect upon our financial condition, results of operations or cash flows.
Risk Factors |
There have been no significant changes in the risk factors previously identified as being attendant to our business in our Annual Report on Form 10-K for the year ended December 31, 2016.2018. For a more complete discussion of other risk factors that affect our business, see “Risk Factors” in our Form 10-K for the year ended December 31, 2016,2018, which include the following:
● | Changes in general economic, real estate and other business conditions may have an adverse effect on the homebuilding and mortgage industries, which could have a negative impact on our business. |
● | Increased competition levels in the homebuilding and mortgage lending industries could have a negative impact on our homebuilding and mortgage operations. |
● | If land is not available at reasonable prices or terms, we could be required to scale back our operations in a given market and/or we may operate at lower levels of profitability. |
● | Supply shortages and other risks related to the demand for skilled labor and building materials could increase costs and delay deliveries. |
● | If mortgage interest rates rise, if down payment requirements are increased, if loan limits are decreased, or if mortgage financing otherwise becomes less available, it could adversely affect our business. |
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● | Changes in energy prices or regulations may have an adverse effect on |
● | We have financial needs that we meet through the capital markets, including the debt and secondary mortgage markets, and disruptions in these markets could have an adverse impact on the results of our business. |
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● | Repurchase requirements associated with |
● | Because of the seasonal nature of our business, our quarterly operating results can fluctuate. |
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● | The interests of certain controlling shareholders may be adverse to other investors. |
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The Company did not repurchase any shares during the three or nine months ended September 30, 2017.2019. Additionally, there were no sales of unregistered equity securities during the period.
Exhibits |
10.1 | ||
31.1 | ||
31.2 | ||
32.1 | ||
32.2 | ||
| 101 | ||
The following financial statements, formatted in |
104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). |
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* Incorporated by referencereference.
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: | M.D.C. HOLDINGS, INC. | ||
| (Registrant) | |||
By: | /s/ Robert N. Martin |
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Robert N. Martin | |||
Officer(principal financial officer and duly authorized officer) | |||
INDEX TO EXHIBITS
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* Incorporated by reference
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