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☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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Delaware | 84-0622967 | ||||
(State or other jurisdiction |
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| (I.R.S. employer |
4350 South Monaco Street, Suite 500 | 80237 | ||||||||||
Denver, Colorado | (Zip code) | ||||||||||
(Address of principal executive offices) |
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | |||||||||||||||
Common Stock, $.01 par value | 552676108 | New York Stock Exchange | |||||||||||||||
6% Senior Notes due January 2043 | 552676AQ1 | New York Stock Exchange |
Large Accelerated Filer | ☒ |
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Non-Accelerated Filer | ☐ |
| Smaller Reporting Company | ☐ |
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Emerging growth company | ☐ |
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Statements March 31, December 31, 2020 2019 (Dollars in thousands, except per share amounts) Homebuilding: Cash and cash equivalents Restricted cash Trade and other receivables Inventories: Housing completed or under construction Land and land under development Total inventories Property and equipment, net Deferred tax asset, net Prepaid and other assets Total homebuilding assets Financial Services: Cash and cash equivalents Marketable securities Mortgage loans held-for-sale, net Other assets Total financial services assets Total Assets LIABILITIES AND EQUITY Homebuilding: Accounts payable Accrued and other liabilities Revolving credit facility Senior notes, net Total homebuilding liabilities Financial Services: Accounts payable and accrued liabilities Mortgage repurchase facility Total financial services liabilities Total Liabilities 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; 63,052,495 and 62,574,961 issued and outstanding at March 31, 2020 and December 31, 2019, respectively Additional paid-in-capital Retained earnings Total Stockholders' Equity Total Liabilities and Stockholders' EquityStatements September 30,
2020December 31,
2019 ASSETS ASSETS Homebuilding: $ 386,704 $ 424,186 Cash and cash equivalents $ 432,277 $ 424,186 15,762 14,279 Restricted cash 19,732 14,279 69,301 65,829 Trade and other receivables 90,609 65,829 Inventories: 1,215,214 1,036,191 Housing completed or under construction 1,423,855 1,036,191 1,301,433 1,330,384 Land and land under development 1,221,854 1,330,384 2,516,647 2,366,575 Total inventories 2,645,709 2,366,575 62,316 60,414 Property and equipment, net 64,024 60,414 20,660 21,768 Deferred tax asset, net 13,297 21,768 78,002 78,358 Prepaid and other assets 78,421 78,358 3,149,392 3,031,409 Total homebuilding assets 3,344,069 3,031,409 Financial Services: 22,159 35,747 Cash and cash equivalents 70,435 35,747 43,985 56,747 Marketable securities 0 56,747 133,921 197,021 Mortgage loans held-for-sale, net 160,506 197,021 24,255 17,432 Other assets 37,764 17,432 224,320 306,947 Total financial services assets 268,705 306,947 $ 3,373,712 $ 3,338,356 Total Assets $ 3,612,774 $ 3,338,356 LIABILITIES AND EQUITY Homebuilding: $ 97,980 $ 87,364 Accounts payable $ 103,260 $ 87,364 233,034 245,940 Accrued and other liabilities 259,261 245,940 15,000 15,000 Revolving credit facility 10,000 15,000 1,036,900 989,422 Senior notes, net 1,037,225 989,422 1,382,914 1,337,726 Total homebuilding liabilities 1,409,746 1,337,726 Financial Services: 70,977 68,529 Accounts payable and accrued liabilities 84,168 68,529 108,744 149,616 Mortgage repurchase facility 130,861 149,616 179,721 218,145 Total financial services liabilities 215,029 218,145 1,562,635 1,555,871 Total Liabilities 1,624,775 1,555,871 Stockholders' Equity - - 631 626 Preferred stock, $0.01 par value; 25,000,000 shares authorized; NaN issued or outstanding Preferred stock, $0.01 par value; 25,000,000 shares authorized; NaN issued or outstanding 0 0 Common stock, $0.01 par value; 250,000,000 shares authorized; 64,865,577 and 62,574,961 issued and outstanding at September 30, 2020 and December 31, 2019, respectively Common stock, $0.01 par value; 250,000,000 shares authorized; 64,865,577 and 62,574,961 issued and outstanding at September 30, 2020 and December 31, 2019, respectively 649 626 1,361,362 1,348,733 Additional paid-in-capital 1,397,220 1,348,733 449,084 433,126 Retained earnings 590,130 433,126 1,811,077 1,782,485 Total Stockholders' Equity 1,987,999 1,782,485 $ 3,373,712 $ 3,338,356 Total Liabilities and Stockholders' Equity $ 3,612,774 $ 3,338,356
Three Months Ended | Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||
March 31, | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||||||
2020 | 2019 | ||||||||||||||||||||||||||||||
(Dollars in thousands, except per share amounts) | (Dollars in thousands, except per share amounts) | ||||||||||||||||||||||||||||||
Homebuilding: | Homebuilding: | ||||||||||||||||||||||||||||||
Home sale revenues | $ | 697,085 | $ | 647,278 | Home sale revenues | $ | 1,000,549 | $ | 750,274 | $ | 2,584,392 | $ | 2,130,396 | ||||||||||||||||||
Home cost of sales | (558,647 | ) | (524,552 | ) | Home cost of sales | (795,172) | (609,316) | (2,061,608) | (1,724,040) | ||||||||||||||||||||||
Inventory impairments | - | (610 | ) | Inventory impairments | 0 | 0 | 0 | (610) | |||||||||||||||||||||||
Total cost of sales | (558,647 | ) | (525,162 | ) | Total cost of sales | (795,172) | (609,316) | (2,061,608) | (1,724,650) | ||||||||||||||||||||||
Gross profit | 138,438 | 122,116 | Gross profit | 205,377 | 140,958 | 522,784 | 405,746 | ||||||||||||||||||||||||
Selling, general and administrative expenses | (89,321 | ) | (82,261 | ) | Selling, general and administrative expenses | (103,632) | (92,716) | (285,269) | (257,689) | ||||||||||||||||||||||
Interest and other income | 1,889 | 2,391 | Interest and other income | 756 | 2,336 | 3,365 | 7,491 | ||||||||||||||||||||||||
Other expense | (1,337 | ) | (1,191 | ) | Other expense | (851) | (1,887) | (4,640) | (4,188) | ||||||||||||||||||||||
Homebuilding pretax income | 49,669 | 41,055 | Homebuilding pretax income | 101,650 | 48,691 | 236,240 | 151,360 | ||||||||||||||||||||||||
Financial Services: | Financial Services: | ||||||||||||||||||||||||||||||
Revenues | 21,886 | 17,404 | Revenues | 36,803 | 22,388 | 91,653 | 58,389 | ||||||||||||||||||||||||
Expenses | (10,929 | ) | (8,957 | ) | Expenses | (13,294) | (10,352) | (36,401) | (28,883) | ||||||||||||||||||||||
Other income (expense), net | (12,064 | ) | 6,104 | Other income (expense), net | 859 | 2,079 | (5,274) | 11,877 | |||||||||||||||||||||||
Financial services pretax income (loss) | (1,107 | ) | 14,551 | ||||||||||||||||||||||||||||
Financial services pretax income | Financial services pretax income | 24,368 | 14,115 | 49,978 | 41,383 | ||||||||||||||||||||||||||
Income before income taxes | 48,562 | 55,606 | Income before income taxes | 126,018 | 62,806 | 286,218 | 192,743 | ||||||||||||||||||||||||
Provision for income taxes | (11,802 | ) | (15,056 | ) | Provision for income taxes | (27,080) | (12,226) | (66,124) | (47,020) | ||||||||||||||||||||||
Net income | $ | 36,760 | $ | 40,550 | Net income | $ | 98,938 | $ | 50,580 | $ | 220,094 | $ | 145,723 | ||||||||||||||||||
Comprehensive income | $ | 36,760 | $ | 40,550 | Comprehensive income | $ | 98,938 | $ | 50,580 | $ | 220,094 | $ | 145,723 | ||||||||||||||||||
Earnings per share: | Earnings per share: | ||||||||||||||||||||||||||||||
Basic | $ | 0.58 | $ | 0.66 | Basic | $ | 1.54 | $ | 0.81 | $ | 3.46 | $ | 2.36 | ||||||||||||||||||
Diluted | $ | 0.56 | $ | 0.64 | Diluted | $ | 1.49 | $ | 0.79 | $ | 3.37 | $ | 2.29 | ||||||||||||||||||
Weighted average common shares outstanding: | Weighted average common shares outstanding: | ||||||||||||||||||||||||||||||
Basic | 62,491,238 | 60,939,364 | Basic | 63,868,486 | 61,978,195 | 63,129,077 | 61,422,925 | ||||||||||||||||||||||||
Diluted | 64,931,225 | 62,708,334 | Diluted | 65,824,910 | 63,968,215 | 64,969,855 | 63,360,535 | ||||||||||||||||||||||||
Dividends declared per share | $ | 0.33 | $ | 0.30 | Dividends declared per share | $ | 0.33 | $ | 0.30 | $ | 0.99 | $ | 0.90 |
Three-Month Period Ended March 31, 2020 Additional Common Stock Paid-in Retained Shares Amount Capital Earnings Total Balance at December 31, 2019 Cumulative effect of newly adopted accounting standards (Note 2) Balance at January 1, 2020 Net Income Shares issued under stock-based compensation programs, net Cash dividends declared Stock-based compensation expense Forfeiture of restricted stock Balance at March 31, 2020 Nine Months Ended September 30, 2020 Common Stock Total Shares Amount 62,574,961 $ 626 $ 1,348,733 $ 433,126 $ 1,782,485 Balance at December 31, 2019 62,574,961 $ 626 $ 1,348,733 $ 433,126 $ 1,782,485 - - - (34 ) (34 ) Cumulative effect of newly adopted accounting standards (Note 2) — — — (34) (34) 62,574,961 626 1,348,733 433,092 1,782,451 Balance at January 1, 2020 62,574,961 626 1,348,733 433,092 1,782,451 - - - 36,760 36,760 Net Income — — — 36,760 36,760 477,582 5 8,189 - 8,194 Shares issued under stock-based compensation programs, net 477,582 5 8,189 0 8,194 - - - (20,768 ) (20,768 ) Cash dividends declared — — — (20,768) (20,768) - - 4,440 - 4,440 Stock-based compensation expense — — 4,440 — 4,440 (48 ) - - - - Forfeiture of restricted stock (48) — — — — 63,052,495 $ 631 $ 1,361,362 $ 449,084 $ 1,811,077 Balance at March 31, 2020 63,052,495 $ 631 $ 1,361,362 $ 449,084 $ 1,811,077 Net Income Net Income — 0 0 84,396 84,396 Shares issued under stock-based compensation programs, net Shares issued under stock-based compensation programs, net 334,178 3 (6,865) 0 (6,862) Cash dividends declared Cash dividends declared — — — (20,914) (20,914) Stock-based compensation expense Stock-based compensation expense — — 5,488 — 5,488 Forfeiture of restricted stock Forfeiture of restricted stock (1,807) — — — — Balance at June 30, 2020 Balance at June 30, 2020 63,384,866 $ 634 $ 1,359,985 $ 512,566 $ 1,873,185 Net Income Net Income — — — 98,938 98,938 Shares issued under stock-based compensation programs, net Shares issued under stock-based compensation programs, net 1,480,711 15 28,627 — 28,642 Cash dividends declared Cash dividends declared — — — (21,374) (21,374) Stock-based compensation expense Stock-based compensation expense — — 8,608 — 8,608 Balance at September 30, 2020 Balance at September 30, 2020 64,865,577 $ 649 $ 1,397,220 $ 590,130 $ 1,987,999
Three-Month Period Ended March 31, 2019 | ||||||||||||||||||||
Additional | ||||||||||||||||||||
Common Stock | Paid-in | Retained | ||||||||||||||||||
Shares | Amount | Capital | Earnings | 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 | - | - | - | (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 |
The accompanying Notes are an integral part of these Unaudited Consolidated Financial Statements.
Three Months Ended March 31, 2020 2019 (Dollars in thousands) Operating Activities: Net income Adjustments to reconcile net income to net cash provided by (used in) operating activities: Stock-based compensation expense Depreciation and amortization Inventory impairments Net (gain) loss on marketable equity securities Deferred income tax expense Net changes in assets and liabilities: Trade and other receivables Mortgage loans held-for-sale, net Housing completed or under construction Land and land under development Prepaid and other assets Accounts payable and accrued liabilities Net cash provided by (used in) operating activities Investing Activities: Purchases of marketable securities Sales of marketable securities Purchases of property and equipment Net cash used in investing activities Financing Activities: Payments on mortgage repurchase facility, net Repayment of senior notes Proceeds from issuance of senior notes Dividend payments Issuance of shares under stock-based compensation programs, net Net cash used in financing activities Net increase (decrease) in cash, cash equivalents and restricted cash Cash, cash equivalents and restricted cash: Beginning of period End of period Reconciliation of cash, cash equivalents and restricted cash: Homebuilding: Cash and cash equivalents Restricted cash Financial Services: Cash and cash equivalents Total cash, cash equivalents and restricted cash Cash FlowsChanges in Stockholders’ Equity(Dollars in thousands, except share amounts) $ 36,760 $ 40,550 4,440 4,251 5,152 4,878 - 610 13,268 (4,840 ) 1,131 2,696 (1,611 ) (13,771 ) 63,100 38,401 (178,873 ) 2,137 29,051 (18,496 ) (8,460 ) 1,085 (1,131 ) (3,153 ) (37,173 ) 54,348 (9,782 ) (4,785 ) 9,276 4,737 (6,512 ) (6,386 ) (7,018 ) (6,434 ) (40,872 ) (31,959 ) (250,000 ) - 298,050 - (20,768 ) (17,115 ) 8,194 7,087 (5,396 ) (41,987 ) (49,587 ) 5,927 474,212 470,139 $ 424,625 $ 476,066 $ 386,704 $ 416,374 15,762 8,136 22,159 51,556 $ 424,625 $ 476,066
Nine Months Ended September 30, 2019 | |||||||||||||||||||||||||||||
Common Stock | Additional Paid-in Capital | Retained Earnings | Total | ||||||||||||||||||||||||||
Shares | Amount | ||||||||||||||||||||||||||||
Balance at December 31, 2018 | 56,615,352 | $ | 566 | $ | 1,168,442 | $ | 406,992 | $ | 1,576,000 | ||||||||||||||||||||
Cumulative effect of newly adopted accounting standards | — | — | — | (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 | ||||||||||||||||||||
Nine Months Ended September 30, | |||||||||||
2020 | 2019 | ||||||||||
(Dollars in thousands) | |||||||||||
Operating Activities: | |||||||||||
Net income | $ | 220,094 | $ | 145,723 | |||||||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
Stock-based compensation expense | 18,536 | 18,178 | |||||||||
Depreciation and amortization | 18,881 | 15,478 | |||||||||
Inventory impairments | 0 | 610 | |||||||||
Net (gain) loss on marketable equity securities | 8,285 | (7,934) | |||||||||
Deferred income tax expense | 8,493 | 9,488 | |||||||||
Net changes in assets and liabilities: | |||||||||||
Trade and other receivables | (17,512) | (4,682) | |||||||||
Mortgage loans held-for-sale, net | 36,515 | 32,191 | |||||||||
Housing completed or under construction | (387,269) | (251,749) | |||||||||
Land and land under development | 108,710 | (10,461) | |||||||||
Prepaid and other assets | (20,314) | (3,889) | |||||||||
Accounts payable and accrued and other liabilities | 35,023 | 23,929 | |||||||||
Net cash provided by (used in) operating activities | 29,442 | (33,118) | |||||||||
Investing Activities: | |||||||||||
Purchases of marketable securities | (10,804) | (10,340) | |||||||||
Sales of marketable securities | 59,266 | 6,277 | |||||||||
Purchases of property and equipment | (20,885) | (20,128) | |||||||||
Net cash provided by (used in) investing activities | 27,577 | (24,191) | |||||||||
Financing Activities: | |||||||||||
Payments on mortgage repurchase facility, net | (18,755) | (26,344) | |||||||||
Payments on homebuilding line of credit, net | (5,000) | 0 | |||||||||
Repayment of senior notes | (250,000) | 0 | |||||||||
Proceeds from issuance of senior notes | 298,050 | 0 | |||||||||
Dividend payments | (63,056) | (54,337) | |||||||||
Issuance of shares under stock-based compensation programs, net | 29,974 | 16,304 | |||||||||
Net cash used in financing activities | (8,787) | (64,377) | |||||||||
Net increase (decrease) in cash, cash equivalents and restricted cash | 48,232 | (121,686) | |||||||||
Cash, cash equivalents and restricted cash: | |||||||||||
Beginning of period | 474,212 | 470,139 | |||||||||
End of period | $ | 522,444 | $ | 348,453 | |||||||
Reconciliation of cash, cash equivalents and restricted cash: | |||||||||||
Homebuilding: | |||||||||||
Cash and cash equivalents | $ | 432,277 | $ | 285,338 | |||||||
Restricted cash | 19,732 | 16,325 | |||||||||
Financial Services: | |||||||||||
Cash and cash equivalents | 70,435 | 46,790 | |||||||||
Total cash, cash equivalents and restricted cash | $ | 522,444 | $ | 348,453 |
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Our financial services business consists of the operations of the following operating segments: (1)(1) HomeAmerican Mortgage Corporation (“HomeAmerican”); (2)(2) Allegiant Insurance Company, Inc., A Risk Retention Group (“Allegiant”); (3)(3) StarAmerican Insurance Ltd. (“StarAmerican”) (collectively our “Insurance Entities”); (4)(4) American Home Insurance Agency, Inc.; and (5)(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 1 reportable segment (“other”) because they do not individually exceed 10 percent of: (1)(1) consolidated revenue; (2)(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)(3) consolidated assets.
Three Months Ended | ||||||||
March 31, | ||||||||
2020 | 2019 | |||||||
| (Dollars in thousands) | |||||||
Homebuilding | ||||||||
West | $ | 405,498 | $ | 369,558 | ||||
Mountain | 222,858 | 209,192 | ||||||
East | 68,729 | 68,528 | ||||||
Total homebuilding revenues | $ | 697,085 | $ | 647,278 | ||||
Financial Services | ||||||||
Mortgage operations | $ | 14,625 | $ | 10,174 | ||||
Other | 7,261 | 7,230 | ||||||
Total financial services revenues | $ | 21,886 | $ | 17,404 |
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
(Dollars in thousands) | |||||||||||||||||||||||
Homebuilding | |||||||||||||||||||||||
West | $ | 552,319 | $ | 410,414 | $ | 1,447,934 | $ | 1,164,502 | |||||||||||||||
Mountain | 347,095 | 263,802 | 886,619 | 760,470 | |||||||||||||||||||
East | 101,135 | 76,058 | 249,839 | 205,424 | |||||||||||||||||||
Total homebuilding revenues | $ | 1,000,549 | $ | 750,274 | $ | 2,584,392 | $ | 2,130,396 | |||||||||||||||
Financial Services | |||||||||||||||||||||||
Mortgage operations | $ | 28,548 | $ | 14,395 | $ | 67,536 | $ | 36,258 | |||||||||||||||
Other | 8,255 | 7,993 | 24,117 | 22,131 | |||||||||||||||||||
Total financial services revenues | $ | 36,803 | $ | 22,388 | $ | 91,653 | $ | 58,389 |
Three Months Ended | ||||||||
March 31, | ||||||||
2020 | 2019 | |||||||
| (Dollars in thousands) | |||||||
Homebuilding | ||||||||
West | $ | 36,576 | $ | 33,200 | ||||
Mountain | 21,512 | 21,714 | ||||||
East | 900 | 1,473 | ||||||
Corporate | (9,319 | ) | (15,332 | ) | ||||
Total homebuilding pretax income | $ | 49,669 | $ | 41,055 | ||||
Financial Services | ||||||||
Mortgage operations | $ | 8,243 | $ | 4,993 | ||||
Other | (9,350 | ) | 9,558 | |||||
Total financial services pretax income (loss) | $ | (1,107 | ) | $ | 14,551 | |||
Total pretax income | $ | 48,562 | $ | 55,606 |
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
(Dollars in thousands) | |||||||||||||||||||||||
Homebuilding | |||||||||||||||||||||||
West | $ | 59,120 | $ | 34,898 | $ | 144,441 | $ | 103,448 | |||||||||||||||
Mountain | 48,053 | 31,391 | 111,372 | 89,077 | |||||||||||||||||||
East | 6,020 | 2,136 | 9,993 | 5,761 | |||||||||||||||||||
Corporate | (11,543) | (19,734) | (29,566) | (46,926) | |||||||||||||||||||
Total homebuilding pretax income | $ | 101,650 | $ | 48,691 | $ | 236,240 | $ | 151,360 | |||||||||||||||
Financial Services | |||||||||||||||||||||||
Mortgage operations | $ | 20,809 | $ | 8,468 | $ | 46,558 | $ | 19,700 | |||||||||||||||
Other | 3,559 | 5,647 | 3,420 | 21,683 | |||||||||||||||||||
Total financial services pretax income | $ | 24,368 | $ | 14,115 | $ | 49,978 | $ | 41,383 | |||||||||||||||
Total pretax income | $ | 126,018 | $ | 62,806 | $ | 286,218 | $ | 192,743 |
March 31, | December 31, | |||||||
2020 | 2019 | |||||||
| (Dollars in thousands) | |||||||
Homebuilding assets | ||||||||
West | $ | 1,559,410 | $ | 1,461,645 | ||||
Mountain | 907,727 | 869,665 | ||||||
East | 216,063 | 194,592 | ||||||
Corporate | 466,192 | 505,507 | ||||||
Total homebuilding assets | $ | 3,149,392 | $ | 3,031,409 | ||||
Financial services assets | ||||||||
Mortgage operations | $ | 154,546 | $ | 209,946 | ||||
Other | 69,774 | 97,001 | ||||||
Total financial services assets | $ | 224,320 | $ | 306,947 | ||||
Total assets | $ | 3,373,712 | $ | 3,338,356 |
September 30, 2020 | December 31, 2019 | ||||||||||
(Dollars in thousands) | |||||||||||
Homebuilding assets | |||||||||||
West | $ | 1,660,583 | $ | 1,461,645 | |||||||
Mountain | 927,730 | 869,665 | |||||||||
East | 248,028 | 194,592 | |||||||||
Corporate | 507,728 | 505,507 | |||||||||
Total homebuilding assets | $ | 3,344,069 | $ | 3,031,409 | |||||||
Financial services assets | |||||||||||
Mortgage operations | $ | 196,258 | $ | 209,946 | |||||||
Other | 72,447 | 97,001 | |||||||||
Total financial services assets | $ | 268,705 | $ | 306,947 | |||||||
Total assets | $ | 3,612,774 | $ | 3,338,356 |
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Accounting Standards Codification (“ASC”("ASC") Topic 260,Earnings per Share (“"ASC 260”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-classtwo-class method for calculating earnings per share (“EPS”) unless the treasury stock method results in lower EPS. The two-classtwo-class method is an allocation of earnings/(loss) between the holders of common stock and a company’s participating security holders. Under the two-classtwo-class method, earnings/(loss) for the reporting period are allocated between common shareholders and other security holders based on their respective rights to receive distributed earnings (i.e., dividends) and undistributed earnings (i.e., net income/(loss)). Our common shares outstanding are comprised of shareholder owned common stock and shares of unvested restricted stock held by participating security holders. Basic EPS is calculated by dividing income or loss attributable to common stockholders by the weighted average number of shares of common stock outstanding, excluding participating shares in accordance with ASC 260. To calculate diluted EPS, basic EPS is adjusted to include the effect of potentially dilutive stock options outstanding. The table below shows our basic and diluted EPS calculations.
Three Months Ended | ||||||||
March 31, | ||||||||
2020 | 2019 | |||||||
(Dollars in thousands, except per | ||||||||
| share amounts) | |||||||
Numerator | ||||||||
Net income | $ | 36,760 | $ | 40,550 | ||||
Less: distributed earnings allocated to participating securities | (135 | ) | (111 | ) | ||||
Less: undistributed earnings allocated to participating securities | (96 | ) | (139 | ) | ||||
Net income attributable to common stockholders (numerator for basic earnings per share) | 36,529 | 40,300 | ||||||
Add back: undistributed earnings allocated to participating securities | 96 | 139 | ||||||
Less: undistributed earnings reallocated to participating securities | (93 | ) | (136 | ) | ||||
Numerator for diluted earnings per share under two class method | $ | 36,532 | $ | 40,303 | ||||
Denominator | ||||||||
Weighted-average common shares outstanding | 62,491,238 | 60,939,364 | ||||||
Add: dilutive effect of stock options | 1,862,619 | 1,217,846 | ||||||
Add: dilutive effect of performance stock units | 577,368 | 551,124 | ||||||
Denominator for diluted earnings per share under two class method | 64,931,225 | 62,708,334 | ||||||
Basic Earnings Per Common Share | $ | 0.58 | $ | 0.66 | ||||
Diluted Earnings Per Common Share | $ | 0.56 | $ | 0.64 |
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
(Dollars in thousands, except per share amounts) | |||||||||||||||||||||||
Numerator | |||||||||||||||||||||||
Net income | $ | 98,938 | $ | 50,580 | $ | 220,094 | $ | 145,723 | |||||||||||||||
Less: distributed earnings allocated to participating securities | (148) | (122) | (404) | (343) | |||||||||||||||||||
Less: undistributed earnings allocated to participating securities | (502) | (202) | (952) | (554) | |||||||||||||||||||
Net income attributable to common stockholders (numerator for basic earnings per share) | 98,288 | 50,256 | 218,738 | 144,826 | |||||||||||||||||||
Add back: undistributed earnings allocated to participating securities | 502 | 202 | 952 | 554 | |||||||||||||||||||
Less: undistributed earnings reallocated to participating securities | (488) | (195) | (929) | (540) | |||||||||||||||||||
Numerator for diluted earnings per share under two class method | $ | 98,302 | $ | 50,263 | $ | 218,761 | $ | 144,840 | |||||||||||||||
Denominator | |||||||||||||||||||||||
Weighted-average common shares outstanding | 63,868,486 | 61,978,195 | 63,129,077 | 61,422,925 | |||||||||||||||||||
Add: dilutive effect of stock options | 1,810,624 | 1,990,020 | 1,599,722 | 1,570,194 | |||||||||||||||||||
Add: dilutive effect of performance share units | 145,800 | 0 | 241,056 | 367,416 | |||||||||||||||||||
Denominator for diluted earnings per share under two class method | 65,824,910 | 63,968,215 | 64,969,855 | 63,360,535 | |||||||||||||||||||
Basic Earnings Per Common Share | $ | 1.54 | $ | 0.81 | $ | 3.46 | $ | 2.36 | |||||||||||||||
Diluted Earnings Per Common Share | $ | 1.49 | $ | 0.79 | $ | 3.37 | $ | 2.29 |
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ASC Topic 820,5. Fair Value Measurements
Fair Value | ||||||||||
Financial Instrument | Hierarchy | March 31, 2020 | December 31, 2019 | |||||||
(Dollars in thousands) | ||||||||||
Marketable securities | ||||||||||
Equity securities | Level 1 | $ | 43,985 | $ | 56,747 | |||||
Mortgage loans held-for-sale, net | Level 2 | $ | 133,921 | $ | 197,021 |
Fair Value | ||||||||||||||||||||
Financial Instrument | Hierarchy | September 30, 2020 | December 31, 2019 | |||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||
Marketable securities | ||||||||||||||||||||
Equity securities | Level 1 | $ | 0 | $ | 56,747 | |||||||||||||||
Mortgage loans held-for-sale, net | Level 2 | $ | 160,506 | $ | 197,021 |
Equity securities
Three Months Ended | ||||||||
March 31, | ||||||||
2020 | 2019 | |||||||
(Dollars in thousands) | ||||||||
Net gain (loss) recognized during the period on equity securities | $ | (13,268 | ) | $ | 4,840 | |||
Less: Net gain (loss) recognized during the period on equity securities sold during the period | 609 | (237 | ) | |||||
Unrealized gain (loss) recognized during the reporting period on equity securities still held at the reporting date | $ | (13,877 | ) | $ | 4,603 |
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
(Dollars in thousands) | |||||||||||||||||||||||
Net gain (loss) recognized during the period on equity securities | $ | 0 | $ | 767 | $ | (8,285) | $ | 7,934 | |||||||||||||||
Less: Net gain (loss) recognized during the period on equity securities sold during the period | 0 | 299 | (8,285) | 536 | |||||||||||||||||||
Unrealized gain recognized during the reporting period on equity securities still held at the reporting date | $ | 0 | $ | 468 | $ | 0 | $ | 7,398 |
Mortgage loans held-for-sale, net. Our mortgage loans held-for-sale, which are measured at fair value on a recurring basis, include (1)(1) mortgage loans held-for-sale that are under commitments to sell and (2)(2) mortgage loans held-for-sale that are not under commitments to sell. At March 31,September 30, 2020 and December 31, 2019, we had $88.1$105.5 million and $136.8 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 March 31,September 30, 2020 and December 31, 2019, we had $45.8$55.0 million and $60.2 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.
year, respectively.
March 31, 2020 | December 31, 2019 | |||||||||||||||
Carrying | Fair Value | Carrying | Fair Value | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
$250 Million 5.625% Senior Notes due February 2020, net | $ | - | $ | - | $ | 249,909 | $ | 250,400 | ||||||||
$250 Million 5.500% Senior Notes due January 2024, net | 249,060 | 228,750 | 249,005 | 272,083 | ||||||||||||
$300 Million 3.850% Senior Notes due January 2030, net | 297,285 | 270,750 | - | - | ||||||||||||
$500 Million 6.000% Senior Notes due January 2043, net | 490,555 | 466,250 | 490,508 | 528,542 | ||||||||||||
Total | $ | 1,036,900 | $ | 965,750 | $ | 989,422 | $ | 1,051,025 |
September 30, 2020 | December 31, 2019 | ||||||||||||||||||||||
Carrying Amount | Fair Value | Carrying Amount | Fair Value | ||||||||||||||||||||
(Dollars in thousands) | |||||||||||||||||||||||
$250 million 5.625% Senior Notes due February 2020, net | $ | 0 | $ | 0 | $ | 249,909 | $ | 250,400 | |||||||||||||||
$250 million 5.500% Senior Notes due January 2024, net | 249,174 | 270,388 | 249,005 | 272,083 | |||||||||||||||||||
$300 million 3.850% Senior Notes due January 2030, net | 297,400 | 313,505 | 0 | 0 | |||||||||||||||||||
$500 million 6.000% Senior Notes due January 2043, net | 490,651 | 605,125 | 490,508 | 528,542 | |||||||||||||||||||
Total | $ | 1,037,225 | $ | 1,189,018 | $ | 989,422 | $ | 1,051,025 |
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The following table sets forth, by reportable segment, information relating to our homebuilding inventories:
March 31, | December 31, | |||||||
2020 | 2019 | |||||||
(Dollars in thousands) | ||||||||
Housing completed or under construction: | ||||||||
West | $ | 699,039 | $ | 589,040 | ||||
Mountain | 411,077 | 358,370 | ||||||
East | 105,098 | 88,781 | ||||||
Subtotal | 1,215,214 | 1,036,191 | ||||||
Land and land under development: | ||||||||
West | 760,606 | 772,189 | ||||||
Mountain | 448,492 | 468,718 | ||||||
East | 92,335 | 89,477 | ||||||
Subtotal | 1,301,433 | 1,330,384 | ||||||
Total inventories | $ | 2,516,647 | $ | 2,366,575 |
September 30, 2020 | December 31, 2019 | ||||||||||
(Dollars in thousands) | |||||||||||
Housing completed or under construction: | |||||||||||
West | $ | 844,264 | $ | 589,040 | |||||||
Mountain | 463,690 | 358,370 | |||||||||
East | 115,901 | 88,781 | |||||||||
Subtotal | 1,423,855 | 1,036,191 | |||||||||
Land and land under development: | |||||||||||
West | 698,099 | 772,189 | |||||||||
Mountain | 412,299 | 468,718 | |||||||||
East | 111,456 | 89,477 | |||||||||
Subtotal | 1,221,854 | 1,330,384 | |||||||||
Total inventories | $ | 2,645,709 | $ | 2,366,575 |
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If land is classified as held for sale, we measure it in accordance with ASC 360 at the lower of the carrying value or fair value less estimated costs to sell. In determining fair value, we primarily rely upon the most recent negotiated price, which is a Level 2 input. If a negotiated price is not available, we will consider several factors including, but not limited to, current market conditions, recent comparable sales transactions and market analysis studies, which are considered Level 3 inputs. If the fair value less estimated costs to sell is lower than the current carrying value, the land is impaired down to its estimated fair value less costs to sell.
Three Months Ended | ||||||||
March 31, | ||||||||
2020 | 2019 | |||||||
(Dollars in thousands) | ||||||||
West | $ | - | $ | - | ||||
Mountain | - | 400 | ||||||
East | - | 210 | ||||||
Total inventory impairments | $ | - | $ | 610 |
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
(Dollars in thousands) | |||||||||||||||||||||||
West | $ | 0 | $ | 0 | $ | 0 | $ | 0 | |||||||||||||||
Mountain | 0 | 0 | 0 | 400 | |||||||||||||||||||
East | 0 | 0 | 0 | 210 | |||||||||||||||||||
Total inventory impairments | $ | 0 | $ | 0 | $ | 0 | $ | 610 |
Impairment Data | Quantitative Data | |||||||||||||||
Three Months Ended | Inventory |
Fair Value of Impairments | Number of | Discount Rate | ||||||||||||
March 31, 2019 | $ | 610 | $ | 10,476 | 2 | N/A |
Impairment Data | Quantitative Data | ||||||||||||||||||||||||||||||||||
Three Months Ended | Number of Subdivisions Impaired | Inventory Impairments | Fair Value of Inventory After Impairments | Discount Rate | |||||||||||||||||||||||||||||||
(Dollars in thousands) | |||||||||||||||||||||||||||||||||||
March 31, 2019 | 2 | $ | 610 | $ | 10,476 | N/A |
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Three Months Ended | ||||||||
March 31, | ||||||||
2020 | 2019 | |||||||
(Dollars in thousands) | ||||||||
Homebuilding interest incurred | $ | 16,534 | $ | 16,031 | ||||
Less: Interest capitalized | (16,534 | ) | (16,031 | ) | ||||
Homebuilding interest expensed | $ | - | $ | - | ||||
Interest capitalized, beginning of period | $ | 55,310 | $ | 54,845 | ||||
Plus: Interest capitalized during period | 16,534 | 16,031 | ||||||
Less: Previously capitalized interest included in home cost of sales | (12,767 | ) | (13,929 | ) | ||||
Interest capitalized, end of period | $ | 59,077 | $ | 56,947 |
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
(Dollars in thousands) | |||||||||||||||||||||||
Homebuilding interest incurred | $ | 14,799 | $ | 15,879 | $ | 46,427 | $ | 47,890 | |||||||||||||||
Less: Interest capitalized | (14,799) | (15,879) | (46,427) | (47,890) | |||||||||||||||||||
Homebuilding interest expensed | $ | 0 | $ | 0 | $ | 0 | $ | 0 | |||||||||||||||
Interest capitalized, beginning of period | $ | 56,929 | $ | 58,193 | $ | 55,310 | $ | 54,845 | |||||||||||||||
Plus: Interest capitalized during period | 14,799 | 15,879 | 46,427 | 47,890 | |||||||||||||||||||
Less: Previously capitalized interest included in home cost of sales | (16,511) | (14,451) | (46,520) | (43,114) | |||||||||||||||||||
Interest capitalized, end of period | $ | 55,217 | $ | 59,621 | $ | 55,217 | $ | 59,621 |
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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.
Three Months Ended | ||||||||
March 31, | ||||||||
2020 | 2019 | |||||||
(Dollars in thousands) | ||||||||
Operating lease cost 1 | $ | 2,046 | $ | 1,980 | ||||
Less: Sublease income (Note 19) | (38 | ) | (37 | ) | ||||
Net lease cost | $ | 2,008 | $ | 1,943 | ||||
1 Includes variable lease costs, which are immaterial. |
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
(Dollars in thousands) | |||||||||||||||||||||||
Operating lease cost 1 | $ | 2,083 | $ | 1,841 | $ | 6,249 | $ | 5,811 | |||||||||||||||
Less: Sublease income (Note 19) | (38) | (37) | (114) | (112) | |||||||||||||||||||
Net lease cost | $ | 2,045 | $ | 1,804 | $ | 6,135 | $ | 5,699 |
Three Months Ended | ||||||||
March 31, | ||||||||
2020 | 2019 | |||||||
| (Dollars in thousands) | |||||||
Cash paid for amounts included in the measurement of lease liabilities: | ||||||||
Operating cash flows from operating leases | $ | 1,906 | $ | 1,771 | ||||
Leased assets obtained in exchange for new operating lease liabilities | $ | 2,645 | $ | 1,477 |
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||||
Cash paid for amounts included in the measurement of lease liabilities: | ||||||||||||||||||||||||||
Operating cash flows from operating leases | $ | 1,792 | $ | 1,834 | $ | 5,439 | $ | 5,397 | ||||||||||||||||||
Leased assets obtained in exchange for new operating lease liabilities | $ | 0 | $ | 646 | $ | 4,050 | $ | 2,676 |
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September 30, 2020 | ||||||||
Weighted-average remaining lease term (in years) | 5.6 | |||||||
Weighted-average discount rate | 5.5 | % |
Maturities of operating lease liabilities were as follows:
Year Ended December 31, | |||||
(Dollars in thousands) | |||||
2020 (excluding the nine months ended September 30, 2020) | $ | 1,343 | |||
2021 | 7,421 | ||||
2022 | 7,115 | ||||
2023 | 6,203 | ||||
2024 | 5,607 | ||||
Thereafter | 10,096 | ||||
Total operating lease payments | $ | 37,785 | |||
Less: Interest | 5,290 | ||||
Present value of operating lease liabilities 1 | $ | 32,495 |
Year Ended | ||||
December 31, | ||||
(Dollars in thousands) | ||||
2020 (excluding the three months ended March 31, 2020) | $ | 5,112 | ||
2021 | 7,009 | |||
2022 | 6,670 | |||
2023 | 5,718 | |||
2024 | 5,307 | |||
Thereafter | 9,529 | |||
Total operating lease payments | $ | 39,345 | ||
Less: Interest | 6,073 | |||
Present value of operating lease liabilities 1 | $ | 33,272 |
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March 31, | December 31, | |||||||
2020 | 2019 | |||||||
(Dollars in thousands) | ||||||||
Operating lease right-of-use asset (Note 8) | $ | 31,619 | $ | 30,277 | ||||
Land option deposits | 27,126 | 27,361 | ||||||
Prepaid expenses | 6,997 | 7,294 | ||||||
Goodwill | 6,008 | 6,008 | ||||||
Deferred debt issuance costs on revolving credit facility, net | 5,746 | 6,130 | ||||||
Other | 506 | 1,288 | ||||||
Total | $ | 78,002 | $ | 78,358 |
September 30, 2020 | December 31, 2019 | ||||||||||
(Dollars in thousands) | |||||||||||
Operating lease right-of-use asset (Note 8) | $ | 30,653 | $ | 30,277 | |||||||
Land option deposits | 25,925 | 27,361 | |||||||||
Prepaid expenses | 10,070 | 7,294 | |||||||||
Goodwill | 6,008 | 6,008 | |||||||||
Deferred debt issuance costs on revolving credit facility, net | 4,980 | 6,130 | |||||||||
Other | 785 | 1,288 | |||||||||
Total prepaid and other assets | $ | 78,421 | $ | 78,358 |
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The following table sets forth information relating to homebuilding accrued and other liabilities:
March 31, | December 31, | |||||||
2020 | 2019 | |||||||
(Dollars in thousands) | ||||||||
Customer and escrow deposits | $ | 43,342 | $ | 39,001 | ||||
Warranty accrual | 30,887 | 31,386 | ||||||
Accrued compensation and related expenses | 26,333 | 45,003 | ||||||
Lease liability (Note 8) | 32,182 | 30,830 | ||||||
Accrued interest | 14,018 | 27,734 | ||||||
Construction defect claim reserves | 8,318 | 8,196 | ||||||
Land development and home construction accruals | 8,862 | 9,750 | ||||||
Other accrued liabilities | 69,092 | 54,040 | ||||||
Total accrued liabilities | $ | 233,034 | $ | 245,940 |
September 30, 2020 | December 31, 2019 | ||||||||||
(Dollars in thousands) | |||||||||||
Customer and escrow deposits | $ | 59,468 | $ | 39,001 | |||||||
Warranty accrual | 32,097 | 31,386 | |||||||||
Accrued compensation and related expenses | 48,226 | 45,003 | |||||||||
Lease liability (Note 8) | 31,637 | 30,830 | |||||||||
Accrued interest | 13,825 | 27,734 | |||||||||
Construction defect claim reserves | 8,479 | 8,196 | |||||||||
Land development and home construction accruals | 8,630 | 9,750 | |||||||||
Other accrued liabilities | 56,899 | 54,040 | |||||||||
Total accrued and other liabilities | $ | 259,261 | $ | 245,940 |
March 31, | December 31, | |||||||
2020 | 2019 | |||||||
(Dollars in thousands) | ||||||||
Insurance reserves | $ | 53,132 | $ | 52,219 | ||||
Accounts payable and other accrued liabilities | 17,845 | 16,310 | ||||||
Total accounts payable and accrued liabilities | $ | 70,977 | $ | 68,529 |
September 30, 2020 | December 31, 2019 | ||||||||||
(Dollars in thousands) | |||||||||||
Insurance reserves | $ | 58,601 | $ | 52,219 | |||||||
Accounts payable and other accrued liabilities | 25,567 | 16,310 | |||||||||
Total accounts payable and accrued liabilities | $ | 84,168 | $ | 68,529 |
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Our homes are sold with limited third-partythird-party warranties and, under our agreement with the issuer of the third-partythird-party warranties, we are responsible for performing all of the work for the firsttwo 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.
Three Months Ended | ||||||||
March 31, | ||||||||
2020 | 2019 | |||||||
(Dollars in thousands) | ||||||||
Balance at beginning of period | $ | 31,386 | $ | 28,262 | ||||
Expense provisions | 3,165 | 3,348 | ||||||
Cash payments | (3,664 | ) | (2,493 | ) | ||||
Adjustments | - | 875 | ||||||
Balance at end of period | $ | 30,887 | $ | 29,992 |
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
(Dollars in thousands) | |||||||||||||||||||||||
Balance at beginning of period | $ | 30,458 | $ | 29,349 | $ | 31,386 | $ | 28,262 | |||||||||||||||
Expense provisions | 4,493 | 3,557 | 11,595 | 10,642 | |||||||||||||||||||
Cash payments | (2,683) | (3,425) | (8,713) | (8,894) | |||||||||||||||||||
Adjustments | (171) | 389 | (2,171) | (140) | |||||||||||||||||||
Balance at end of period | $ | 32,097 | $ | 29,870 | $ | 32,097 | $ | 29,870 |
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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.
Three Months Ended | ||||||||
March 31, | ||||||||
2020 | 2019 | |||||||
(Dollars in thousands) | ||||||||
Balance at beginning of period | $ | 60,415 | $ | 55,308 | ||||
Expense provisions | 2,918 | 2,465 | ||||||
Cash payments, net of recoveries | (1,883 | ) | (1,554 | ) | ||||
Balance at end of period | $ | 61,450 | $ | 56,219 |
sheets.
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
(Dollars in thousands) | |||||||||||||||||||||||
Balance at beginning of period | $ | 63,881 | $ | 56,817 | $ | 60,415 | $ | 55,308 | |||||||||||||||
Expense provisions | 4,058 | 3,102 | 10,562 | 8,312 | |||||||||||||||||||
Cash payments, net of recoveries | (859) | (2,614) | (3,897) | (6,315) | |||||||||||||||||||
Balance at end of period | $ | 67,080 | $ | 57,305 | $ | 67,080 | $ | 57,305 |
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At March 31, 2020 and December 31, 2019, we had deferred tax assets, net of valuation allowances and deferred tax liabilities, of $20.7 million and $21.8 million, respectively. The valuation allowances were primarily related to various state net operating loss carryforwards where realization is uncertain at this time due to tax windfalls recognized upon the limited carryforward periods coupled with minimal activity that exists in certain states.
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The carrying values of our senior notes as of March 31,September 30, 2020 and December 31, 2019, net of any unamortized debt issuance costs or discount, were as follows:
March 31, | December 31, | |||||||
2020 | 2019 | |||||||
(Dollars in thousands) | ||||||||
5.625% Senior Notes due February 2020, net | $ | - | $ | 249,909 | ||||
5.500% Senior Notes due January 2024, net | 249,060 | 249,005 | ||||||
3.850% Senior Notes due January 2030, net | 297,285 | - | ||||||
6.000% Senior Notes due January 2043, net | 490,555 | 490,508 | ||||||
Total | $ | 1,036,900 | $ | 989,422 |
September 30, 2020 | December 31, 2019 | ||||||||||
(Dollars in thousands) | |||||||||||
5.625% Senior Notes due February 2020, net | $ | 0 | $ | 249,909 | |||||||
5.500% Senior Notes due January 2024, net | 249,174 | 249,005 | |||||||||
3.850% Senior Notes due January 2030, net | 297,400 | 0 | |||||||||
6.000% Senior Notes due January 2043, net | 490,651 | 490,508 | |||||||||
Total | $ | 1,037,225 | $ | 989,422 |
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March 31, | ||||||||
2020 | 2019 | |||||||
(Dollars in thousands) | ||||||||
Stock option grants expense | $ | 495 | $ | 255 | ||||
Restricted stock awards expense | 1,517 | 911 | ||||||
Performance share units expense | 2,428 | 3,085 | ||||||
Total stock-based compensation | $ | 4,440 | $ | 4,251 |
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
(Dollars in thousands) | |||||||||||||||||||||||
Stock option grants expense | $ | 814 | $ | 429 | $ | 2,026 | $ | 929 | |||||||||||||||
Restricted stock awards expense | 2,271 | 1,391 | 4,841 | 2,979 | |||||||||||||||||||
Performance share units expense | 5,523 | 7,975 | 11,669 | 14,270 | |||||||||||||||||||
Total stock-based compensation | $ | 8,608 | $ | 9,795 | $ | 18,536 | $ | 18,178 |
On August 20, 2020, August 5, 2019, May 23, 2018, June 20, 2017 and July 25, 2016, the Company granted long term performance share 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 are earned based upon the Company’s performance over a period of three year period years (the “Performance Period”), measured by increasing home sale revenues over a “Base Period.” Each award is conditioned upon the Company achieving an average gross margin from home sales (excluding impairments) of at least fifteen percent (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%, 50% of the Target Goals will be 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, 2019 and 2019,2020, 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 each grant has been provided in the table below.
Threshold Goal | Target Goal | Maximum Goal | Maximum | Maximum | ||||||||||||||||||||||||||
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 | Potential Expense to be Recognized* | Remaining Expense to be Recognized* | ||||||||||||||||||
July 25, 2016 | July 1, 2016 to June 30, 2019 | July 1, 2015 to June 30, 2016 | $1.975 billion | 137,781 | $2.074 billion | 275,562 | $2.173 billion | 551,124 | $2.370 billion | $ | 19.66 | $ | 10,834 | $ | - | |||||||||||||||
June 20, 2017 | April 1, 2017 to March 31, 2020 | April 1, 2016 to March 31, 2017 | $2.426 billion | 144,342 | $2.547 billion | 288,684 | $2.669 billion | 577,368 | $2.911 billion | $ | 27.83 | $ | 16,070 | $ | - | |||||||||||||||
May 23, 2018 | April 1, 2018 to March 31, 2021 | April 1, 2017 to March 31, 2018 | $2.543 billion | 145,800 | $2.670 billion | 291,600 | $2.797 billion | 583,200 | $3.052 billion | $ | 25.57 | $ | 14,915 | $ | 7,641 | |||||||||||||||
August 5, 2019 | January 1, 2019 to December 31, 2021 | January 1, 2018 to December 31, 2018 | $2.982 billion | 135,000 | $3.131 billion | 270,000 | $3.280 billion | 540,000 | $3.578 billion | $ | 32.60 | $ | 17,604 | $ | 17,604 |
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Threshold Goal | Target Goal | Maximum Goal | Maximum Potential Expense to be Recognized * | Maximum Remaining Expense to be Recognized * | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Jul 25, 2016 | July 1, 2016 - June 30, 2019 | July 1, 2015 - June 30, 2016 | $1.975 billion | 137,781 | $2.074 billion | 275,562 | $2.173 billion | 551,124 | $2.370 billion | $ | 19.66 | $ | 10,834 | $ | 0 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Jun 20, 2017 | April 1, 2017 - March 31, 2020 | April 1, 2016 - March 31, 2017 | $2.426 billion | 144,342 | $2.547 billion | 288,684 | $2.669 billion | 577,368 | $2.911 billion | $ | 27.83 | $ | 16,070 | $ | 0 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
May 23, 2018 | April 1, 2018 - March 31, 2021 | April 1, 2017 - March 31, 2018 | $2.543 billion | 145,800 | $2.670 billion | 291,600 | $2.797 billion | 583,200 | $3.052 billion | $ | 25.57 | $ | 14,915 | $ | 2,615 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Aug 5, 2019 | January 1, 2019 - December 31, 2021 | January 1, 2018 - December 31, 2018 | $2.982 billion | 135,000 | $3.131 billion | 270,000 | $3.280 billion | 540,000 | $3.578 billion | $ | 32.60 | $ | 17,604 | $ | 13,391 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Aug 20, 2020 | January 1, 2020 - December 31, 2022 | January 1, 2019 - December 31, 2019 | $3.205 billion | 135,000 | $3.366 billion | 270,000 | $3.526 billion | 540,000 | $3.846 billion | $ | 41.89 | $ | 22,618 | $ | 22,618 |
For the three and nine months ended September 30, 2019, the Company recorded share-based award expense of $5.5 million and $10.0 million, respectively, related to these awards.
2019recognized.
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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 March 31,September 30, 2020, we had outstanding surety bonds and letters of credit totaling $284.0$256.3 million and $96.6$126.3 million, respectively, including $70.9$100.9 million in letters of credit issued by HomeAmerican. The estimated cost to complete obligations related to these bonds and letters of credit were approximately $152.4$96.0 million and $51.2$82.5 million, respectively. All letters of credit as of March 31,September 30, 2020, excluding those issued by HomeAmerican, were issued under our unsecured revolving credit facility (see Note 18 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.
Litigation.
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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.
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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 November 1, 2018 to (1) extend the Revolving Credit Facility maturity to December 18, 2023, (2) increase the aggregate commitment from $700 million to $1.0 billion (the “Commitment”) and (3) provide that the aggregate amount of the commitments may increase to an amount not to exceed $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 prime rate, (3) a federal funds effective rate plus 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 a specified eurocurrency 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 March 31, 2020.
We incur costs associated with unused commitment fees pursuant to the terms of the Revolving Credit Facility. At March 31, 2020 and December 31, 2019, there were $25.7 million and $23.5 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 as of March 31, 2020 and December 31, 2019. As of March 31, 2020, availability under the Revolving Credit Facility was approximately $959.3 million.
Mortgage Repurchase Facility. HomeAmerican has a Master Repurchase Agreement (the “Mortgage Repurchase Facility”) with U.S. Bank National Association (“USBNA”). Effective May 23, 2019, the Mortgage Repurchase Facility was amended to extend its termination date to 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 March 30, 2020 from $75 million to $110 million effective through April 27, 2020. The Mortgage Repurchase Facility also had a temporary increase in the maximum aggregate commitment from $75 million to $150 million on December 24, 2019 effective through January 22, 2020. At March 31, 2020 and December 31, 2019, HomeAmerican had $108.7 million and $149.6 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 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 March 31, 2020.
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We contributed $1.5 million in cash to the MDC/Richmond American Homes Foundation (the “Foundation”) during the three months ended March 31, 2020. 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 March 31, 2020, all of whom serve without compensation:
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Three other individuals, who are independent of the Company, also serve as directors of the Foundation. All directors of the Foundation serve without compensation.
The Company has a sublease agreement with CVentures, Inc. Larry A. Mizel, the Chief Executive Officer of the 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 will 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 initial term from $26.50 to $28.68 per rentable square foot per year, and increasing over the extension term from $29.26 to $31.67 per rentable square foot per year. The sublease rent is an allocation of the rent under the master lease agreement based on the sublease square footage.
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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:
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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’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.
Supplemental Condensed Combining Balance Sheet
March 31, 2020 | ||||||||||||||||||||
Non- | ||||||||||||||||||||
Guarantor | Guarantor | Eliminating | Consolidated | |||||||||||||||||
MDC | Subsidiaries | Subsidiaries | Entries | MDC | ||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||
ASSETS | ||||||||||||||||||||
Homebuilding: | ||||||||||||||||||||
Cash and cash equivalents | $ | 380,318 | $ | 6,386 | $ | - | $ | - | $ | 386,704 | ||||||||||
Restricted cash | - | 15,762 | - | - | 15,762 | |||||||||||||||
Trade and other receivables | 694 | 68,607 | - | - | 69,301 | |||||||||||||||
Inventories: | ||||||||||||||||||||
Housing completed or under construction | - | 1,215,214 | - | - | 1,215,214 | |||||||||||||||
Land and land under development | - | 1,301,433 | - | - | 1,301,433 | |||||||||||||||
Total inventories | - | 2,516,647 | - | - | 2,516,647 | |||||||||||||||
Intercompany receivables | 2,265,553 | 5,919 | - | (2,271,472 | ) | - | ||||||||||||||
Investment in subsidiaries | 279,593 | - | - | (279,593 | ) | - | ||||||||||||||
Property and equipment, net | 23,033 | 39,283 | - | - | 62,316 | |||||||||||||||
Deferred tax asset, net | 18,962 | - | - | 1,698 | 20,660 | |||||||||||||||
Prepaid and other assets | 32,961 | 45,041 | - | - | 78,002 | |||||||||||||||
Total homebuilding assets | 3,001,114 | 2,697,645 | - | (2,549,367 | ) | 3,149,392 | ||||||||||||||
Financial Services: | ||||||||||||||||||||
Cash and cash equivalents | - | - | 22,159 | - | 22,159 | |||||||||||||||
Marketable securities | - | - | 43,985 | - | 43,985 | |||||||||||||||
Intercompany receivables | - | - | 64,666 | (64,666 | ) | - | ||||||||||||||
Mortgage loans held-for-sale, net | - | - | 133,921 | - | 133,921 | |||||||||||||||
Other assets | - | - | 25,953 | (1,698 | ) | 24,255 | ||||||||||||||
Total financial services assets | - | - | 290,684 | (66,364 | ) | 224,320 | ||||||||||||||
Total Assets | $ | 3,001,114 | $ | 2,697,645 | $ | 290,684 | $ | (2,615,731 | ) | $ | 3,373,712 | |||||||||
LIABILITIES AND EQUITY | ||||||||||||||||||||
Homebuilding: | ||||||||||||||||||||
Accounts payable | $ | 515 | $ | 97,465 | $ | - | $ | - | $ | 97,980 | ||||||||||
Accrued and other liabilities | 67,874 | 162,742 | - | 2,418 | 233,034 | |||||||||||||||
Advances and notes payable to parent and subsidiaries | 69,748 | 2,254,742 | - | (2,324,490 | ) | - | ||||||||||||||
Revolving credit facility | 15,000 | - | - | - | 15,000 | |||||||||||||||
Senior notes, net | 1,036,900 | - | - | - | 1,036,900 | |||||||||||||||
Total homebuilding liabilities | 1,190,037 | 2,514,949 | - | (2,322,072 | ) | 1,382,914 | ||||||||||||||
Financial Services: | ||||||||||||||||||||
Accounts payable and other liabilities | - | - | 73,395 | (2,418 | ) | 70,977 | ||||||||||||||
Advances and notes payable to parent and subsidiaries | - | - | 11,648 | (11,648 | ) | - | ||||||||||||||
Mortgage repurchase facility | - | - | 108,744 | - | 108,744 | |||||||||||||||
Total financial services liabilities | - | - | 193,787 | (14,066 | ) | 179,721 | ||||||||||||||
Total Liabilities | 1,190,037 | 2,514,949 | 193,787 | (2,336,138 | ) | 1,562,635 | ||||||||||||||
Equity: | ||||||||||||||||||||
Total Stockholders' Equity | 1,811,077 | 182,696 | 96,897 | (279,593 | ) | 1,811,077 | ||||||||||||||
Total Liabilities and Stockholders' Equity | $ | 3,001,114 | $ | 2,697,645 | $ | 290,684 | $ | (2,615,731 | ) | $ | 3,373,712 |
Supplemental Condensed Combining Balance Sheet
December 31, 2019 | ||||||||||||||||||||
Non- | ||||||||||||||||||||
Guarantor | Guarantor | Eliminating | Consolidated | |||||||||||||||||
MDC | Subsidiaries | Subsidiaries | Entries | MDC | ||||||||||||||||
Dollars in thousands | ||||||||||||||||||||
ASSETS | ||||||||||||||||||||
Homebuilding: | ||||||||||||||||||||
Cash and cash equivalents | $ | 418,822 | $ | 5,364 | $ | - | $ | - | $ | 424,186 | ||||||||||
Restricted cash | - | 14,279 | - | - | 14,279 | |||||||||||||||
Trade and other receivables | 624 | 65,205 | - | - | 65,829 | |||||||||||||||
Inventories: | ||||||||||||||||||||
Housing completed or under construction | - | 1,036,191 | - | - | 1,036,191 | |||||||||||||||
Land and land under development | - | 1,330,384 | - | - | 1,330,384 | |||||||||||||||
Total inventories | - | 2,366,575 | - | - | 2,366,575 | |||||||||||||||
Intercompany receivables | 1,936,075 | 6,370 | - | (1,942,445 | ) | - | ||||||||||||||
Investment in subsidiaries | 488,993 | - | - | (488,993 | ) | - | ||||||||||||||
Property and equipment, net | 23,192 | 37,222 | - | - | 60,414 | |||||||||||||||
Deferred tax assets, net | 22,508 | - | - | (740 | ) | 21,768 | ||||||||||||||
Other assets | 34,728 | 43,630 | - | - | 78,358 | |||||||||||||||
Total Homebuilding Assets | 2,924,942 | 2,538,645 | - | (2,432,178 | ) | 3,031,409 | ||||||||||||||
Financial Services: | ||||||||||||||||||||
Cash and cash equivalents | - | - | 35,747 | - | 35,747 | |||||||||||||||
Marketable securities | - | - | 56,747 | - | 56,747 | |||||||||||||||
Intercompany receivables | - | - | 47,753 | (47,753 | ) | - | ||||||||||||||
Mortgage loans held-for-sale, net | - | - | 197,021 | - | 197,021 | |||||||||||||||
Other assets | - | - | 16,692 | 740 | 17,432 | |||||||||||||||
Total Financial Services Assets | - | - | 353,960 | (47,013 | ) | 306,947 | ||||||||||||||
Total Assets | $ | 2,924,942 | $ | 2,538,645 | $ | 353,960 | $ | (2,479,191 | ) | $ | 3,338,356 | |||||||||
LIABILITIES AND EQUITY | ||||||||||||||||||||
Homebuilding: | ||||||||||||||||||||
Accounts payable | $ | 289 | $ | 87,075 | $ | - | $ | - | $ | 87,364 | ||||||||||
Accrued and other liabilities | 84,088 | 156,652 | - | 5,200 | 245,940 | |||||||||||||||
Advances and notes payable to parent and subsidiaries | 53,658 | 1,912,969 | - | (1,966,627 | ) | - | ||||||||||||||
Revolving credit facility | 15,000 | - | - | - | 15,000 | |||||||||||||||
Senior notes, net | 989,422 | - | - | - | 989,422 | |||||||||||||||
Total Homebuilding Liabilities | 1,142,457 | 2,156,696 | - | (1,961,427 | ) | 1,337,726 | ||||||||||||||
Financial Services: | ||||||||||||||||||||
Accounts payable and accrued liabilities | - | - | 73,729 | (5,200 | ) | 68,529 | ||||||||||||||
Advances and notes payable to parent and subsidiaries | - | - | 23,571 | (23,571 | ) | - | ||||||||||||||
Mortgage repurchase facility | - | - | 149,616 | - | 149,616 | |||||||||||||||
Total Financial Services Liabilities | - | - | 246,916 | (28,771 | ) | 218,145 | ||||||||||||||
Total Liabilities | 1,142,457 | 2,156,696 | 246,916 | (1,990,198 | ) | 1,555,871 | ||||||||||||||
Equity: | ||||||||||||||||||||
Total Stockholders' Equity | 1,782,485 | 381,949 | 107,044 | (488,993 | ) | 1,782,485 | ||||||||||||||
Total Liabilities and Stockholders' Equity | $ | 2,924,942 | $ | 2,538,645 | $ | 353,960 | $ | (2,479,191 | ) | $ | 3,338,356 |
Supplemental Condensed Combining Statement of Operations
Three Months Ended March 31, 2020 | ||||||||||||||||||||
Non- | ||||||||||||||||||||
Guarantor | Guarantor | Eliminating | Consolidated | |||||||||||||||||
MDC | Subsidiaries | Subsidiaries | Entries | MDC | ||||||||||||||||
Homebuilding: | (Dollars in thousands) | |||||||||||||||||||
Revenues | $ | - | $ | 697,085 | $ | - | $ | - | $ | 697,085 | ||||||||||
Cost of sales | - | (558,647 | ) | - | - | (558,647 | ) | |||||||||||||
Inventory impairments | - | - | - | - | - | |||||||||||||||
Gross profit | - | 138,438 | - | - | 138,438 | |||||||||||||||
Selling, general, and administrative expenses | (10,782 | ) | (78,408 | ) | - | (131 | ) | (89,321 | ) | |||||||||||
Equity income of subsidiaries | 43,236 | - | - | (43,236 | ) | - | ||||||||||||||
Interest and other income | 1,783 | 291 | - | (185 | ) | 1,889 | ||||||||||||||
Other expense | 8 | (1,345 | ) | - | - | (1,337 | ) | |||||||||||||
Homebuilding pretax income (loss) | 34,245 | 58,976 | - | (43,552 | ) | 49,669 | ||||||||||||||
Financial Services: | ||||||||||||||||||||
Financial services pretax income | - | - | (1,423 | ) | 316 | (1,107 | ) | |||||||||||||
Income before income taxes | 34,245 | 58,976 | (1,423 | ) | (43,236 | ) | 48,562 | |||||||||||||
(Provision) benefit for income taxes | 2,515 | (14,333 | ) | 16 | - | (11,802 | ) | |||||||||||||
Net income | $ | 36,760 | $ | 44,643 | $ | (1,407 | ) | $ | (43,236 | ) | $ | 36,760 | ||||||||
Other comprehensive income related to available-for-sale securities, net of tax | - | - | - | - | - | |||||||||||||||
Comprehensive income | $ | 36,760 | $ | 44,643 | $ | (1,407 | ) | $ | (43,236 | ) | $ | 36,760 |
Three Months Ended March 31, 2019 | ||||||||||||||||||||
Non- | ||||||||||||||||||||
Guarantor | Guarantor | Eliminating | Consolidated | |||||||||||||||||
MDC | Subsidiaries | Subsidiaries | Entries | MDC | ||||||||||||||||
Homebuilding: | (Dollars in thousands) | |||||||||||||||||||
Revenues | $ | - | $ | 647,278 | $ | - | $ | - | $ | 647,278 | ||||||||||
Cost of sales | - | (524,552 | ) | - | - | (524,552 | ) | |||||||||||||
Inventory impairments | - | (610 | ) | - | - | (610 | ) | |||||||||||||
Gross profit | - | 122,116 | - | - | 122,116 | |||||||||||||||
Selling, general, and administrative expenses | (17,438 | ) | (64,701 | ) | - | (122 | ) | (82,261 | ) | |||||||||||
Equity income of subsidiaries | 52,165 | - | - | (52,165 | ) | - | ||||||||||||||
Interest and other income | 2,409 | 155 | - | (173 | ) | 2,391 | ||||||||||||||
Other expense | 7 | (1,198 | ) | - | - | (1,191 | ) | |||||||||||||
Homebuilding pretax income (loss) | 37,143 | 56,372 | - | (52,460 | ) | 41,055 | ||||||||||||||
Financial Services: | ||||||||||||||||||||
Financial services pretax income | - | - | 14,256 | 295 | 14,551 | |||||||||||||||
Income before income taxes | 37,143 | 56,372 | 14,256 | (52,165 | ) | 55,606 | ||||||||||||||
(Provision) benefit for income taxes | 3,407 | (15,264 | ) | (3,199 | ) | - | (15,056 | ) | ||||||||||||
Net income | $ | 40,550 | $ | 41,108 | $ | 11,057 | $ | (52,165 | ) | $ | 40,550 | |||||||||
Other comprehensive income related to available-for-sale securities, net of tax | - | - | - | - | - | |||||||||||||||
Comprehensive income | $ | 40,550 | $ | 41,108 | $ | 11,057 | $ | (52,165 | ) | $ | 40,550 |
Supplemental Condensed Combining Statement of Cash Flows
Three Months Ended March 31, 2020 | ||||||||||||||||||||
Non- | ||||||||||||||||||||
Guarantor | Guarantor | Eliminating | Consolidated | |||||||||||||||||
MDC | Subsidiaries | Subsidiaries | Entries | MDC | ||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||
Net cash provided by (used in) operating activities | $ | (13,287 | ) | $ | (89,277 | ) | $ | 65,391 | $ | - | $ | (37,173 | ) | |||||||
Net cash provided by (used in) investing activities | (60,693 | ) | (6,384 | ) | (506 | ) | 60,565 | (7,018 | ) | |||||||||||
Financing activities: | ||||||||||||||||||||
Payments from (advances to) subsidiaries | - | 98,166 | (37,601 | ) | (60,565 | ) | - | |||||||||||||
Mortgage repurchase facility | - | - | (40,872 | ) | - | (40,872 | ) | |||||||||||||
Proceeds from issuance of senior notes | 298,050 | - | - | - | 298,050 | |||||||||||||||
Repayment of senior notes | (250,000 | ) | - | - | - | (250,000 | ) | |||||||||||||
Dividend payments | (20,768 | ) | - | - | - | (20,768 | ) | |||||||||||||
Issuance of shares under stock-based compensation programs, net | 8,194 | - | - | - | 8,194 | |||||||||||||||
Net cash provided by (used in) financing activities | 35,476 | 98,166 | (78,473 | ) | (60,565 | ) | (5,396 | ) | ||||||||||||
Net increase (decrease) in cash and cash equivalents | (38,504 | ) | �� | 2,505 | (13,588 | ) | - | (49,587 | ) | |||||||||||
Cash and cash equivalents: | ||||||||||||||||||||
Beginning of period | 418,822 | 19,643 | 35,747 | - | 474,212 | |||||||||||||||
End of period | $ | 380,318 | $ | 22,148 | $ | 22,159 | $ | - | $ | 424,625 |
Three Months Ended March 31, 2019 | ||||||||||||||||||||
Non- | ||||||||||||||||||||
Guarantor | Guarantor | Eliminating | Consolidated | |||||||||||||||||
MDC | Subsidiaries | Subsidiaries | Entries | MDC | ||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||
Net cash provided by (used in) operating activities | $ | (18,145 | ) | $ | 31,508 | $ | 40,985 | $ | - | $ | 54,348 | |||||||||
Net cash provided by (used in) investing activities | 29,796 | (6,094 | ) | (93 | ) | (30,043 | ) | (6,434 | ) | |||||||||||
Financing activities: | ||||||||||||||||||||
Payments from (advances to) subsidiaries | - | (23,614 | ) | (6,429 | ) | 30,043 | - | |||||||||||||
Mortgage repurchase facility | - | - | (31,959 | ) | - | (31,959 | ) | |||||||||||||
Dividend payments | (17,115 | ) | - | - | - | (17,115 | ) | |||||||||||||
Issuance of shares under stock-based compensation programs, net | 7,087 | - | - | - | 7,087 | |||||||||||||||
Net cash provided by (used in) financing activities | (10,028 | ) | (23,614 | ) | (38,388 | ) | 30,043 | (41,987 | ) | |||||||||||
Net increase (decrease) in cash and cash equivalents | 1,623 | 1,800 | 2,504 | - | 5,927 | |||||||||||||||
Cash and cash equivalents: | ||||||||||||||||||||
Beginning of period | 410,127 | 10,960 | 49,052 | - | 470,139 | |||||||||||||||
End of period | $ | 411,750 | $ | 12,760 | $ | 51,556 | $ | - | $ | 476,066 |
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’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, 2019 and this Quarterly Report on Form 10-Q.
Specifically, as a result of the Coronavirus/COVID-19 pandemic, we experienced increasingly adverse business conditions, especially in the latter half of March 2020, which negatively impacted our operating results. These adverse business conditions have continued into the 2020 second quarter. It is unclear how long these adverse conditions will persist or how they will impact our results in future periods.
Three Months Ended | ||||||||
March 31, | ||||||||
2020 | 2019 | |||||||
Homebuilding: | (Dollars in thousands, except per share amounts) | |||||||
Home sale revenues | $ | 697,085 | $ | 647,278 | ||||
Home cost of sales | (558,647 | ) | (524,552 | ) | ||||
Inventory impairments | - | (610 | ) | |||||
Total cost of sales | (558,647 | ) | (525,162 | ) | ||||
Gross profit | 138,438 | 122,116 | ||||||
Gross margin | 19.9 | % | 18.9 | % | ||||
Selling, general and administrative expenses | (89,321 | ) | (82,261 | ) | ||||
Interest and other income | 1,889 | 2,391 | ||||||
Other expense | (1,337 | ) | (1,191 | ) | ||||
Homebuilding pretax income | 49,669 | 41,055 | ||||||
Financial Services: | ||||||||
Revenues | 21,886 | 17,404 | ||||||
Expenses | (10,929 | ) | (8,957 | ) | ||||
Other income (expense), net | (12,064 | ) | 6,104 | |||||
Financial services pretax income (loss) | (1,107 | ) | 14,551 | |||||
Income before income taxes | 48,562 | 55,606 | ||||||
Provision for income taxes | (11,802 | ) | (15,056 | ) | ||||
Net income | $ | 36,760 | $ | 40,550 | ||||
Earnings per share: | ||||||||
Basic | $ | 0.58 | $ | 0.66 | ||||
Diluted | $ | 0.56 | $ | 0.64 | ||||
Weighted average common shares outstanding: | ||||||||
Basic | 62,491,238 | 60,939,364 | ||||||
Diluted | 64,931,225 | 62,708,334 | ||||||
Dividends declared per share | $ | 0.33 | $ | 0.30 | ||||
Cash provided by (used in): | ||||||||
Operating Activities | $ | (37,173 | ) | $ | 54,348 | |||
Investing Activities | $ | (7,018 | ) | $ | (6,434 | ) | ||
Financing Activities | $ | (5,396 | ) | $ | (41,987 | ) |
Overview
Industry Conditions
During the first quarter of 2020, the new Coronavirus/COVID-19 pandemic emerged as a threat to global health and economic conditions. Starting in March 2020, the pandemic dramatically changed the everyday lives of individuals throughout much of the United States. For example, stay at home and shelter in place orders were issued by many state and local governments, including the required closure of non-essential businesses in many areas, which have had a significant impact on not only our industry, but the overall economy. Some state and local governments did not identify residential construction as an essential business, which has impacted our ability to physically construct homes, while others limited the operations of sales centers and model homes. While certain of these restrictions have started to lapse during the second quarter, the extent to which the pandemic will impact our financial results in the coming periods depends on future developments, which are highly uncertain and cannot be predicted at this time.
Our first priority with regard to the pandemic is to address the health and safety of our employees, customers, subcontractors and suppliers, as well as the communities in which we operate. We have implemented work-from-home arrangements for employees where practical, increased sanitization procedures in offices and subdivisions, imposed significant business travel restrictions and otherwise promoted social distancing measures. We have implemented virtual processes for key operational activities that have traditionally been done in-person, such as model home tours, Home Gallery appointments, and pre-closing walk-throughs. While we have continued to see some demand for new housing, overall we have experienced a significant decline in traffic and net home orders during the second half of March and continuing into the second quarter. The decline in activity to start the second quarter was evident in our net new orders for the month of April, which fell 53% year-over-year.
Three Months Ended March 31, 2020
For the three months ended March 31, 2020, our homebuilding operations generated pretax income of $49.7 million, which was a 21% increase compared to $41.1 million for the same period in the prior year. The increase was the result of an improvement in gross margin from home sales as well as an increase in home sale revenues year-over-year. Gross margin from home sales for the first quarter of 2020 rose 100 basis points to 19.9% compared to 18.9% in the prior year. Home sale revenues increased 8% from $647.3 million in the prior year period to $697.1 million in the first quarter of 2020.
Our financial services business incurred a pretax loss of $1.1 million for the three months ended March 31, 2020 compared to pretax income of $14.6 million for the same period in the prior year. This decrease was the result of unrealized losses on equity securities during the first quarter of 2020 totaling $13.9 million as compared to unrealized gains of $4.6 million during the first quarter of 2019. These equity securities form part of the investment portfolio held by our Insurance Entities and the holding period of these investments is intended to align with the longer-term nature of the underlying insurance reserves held by these entities.
For the three months ended March 31, 2020, we reported net income of $36.8 million, or $0.56 per diluted share, a 9% decrease compared to net incomegains of $40.6 million, or $0.64 per diluted share, for the same period in the prior year. This decrease was the result of the losses incurred on the investment portfolio discussed above, which were partially offset by the growth in homebuilding pretax income as well as tax benefits recognized during the first quarter of 2020 related to vested share-based awards and energy tax credits.
Outlook for MDC*
We remain confident in our ability to manage through the uncertainty created by the pandemic, even though the extent to which it will impact our financial results in the coming periods depends on future developments, which are highly uncertain and cannot be predicted at this time (see discussion above and in Risk Factors below). Our financial position to end the 2020 first quarter remained strong, with cash and investment balances exceeding $450$0.5 million and available borrowing capacity on our Revolving Credit Facility exceeding $950 million, resulting in total liquidity of more than $1.4 billion. We ended the quarter with $2.2 billion dollars of homes in backlog, which was 31% higher than at the end of the 2019 first quarter. However, our ability to convert that backlog into closings has been negatively impacted by a higher rate of cancellations and some limitations that have temporarily been placed on construction and closing activity. We have taken steps to improve cash flow and reduce costs to diminish the future impacts of the pandemic on our business. We have been successful in extending the closing date of some of our planned land purchases and have re-evaluated planned development activities to decrease cash expenditures. Our experienced senior leadership team continues to monitor the impact of the pandemic on a daily basis adjusting day-to-day business operations and our ongoing operating strategy as necessary to adapt to our current environment.
* See "Forward-Looking Statements" below.
Homebuilding
Pretax Income:
Three Months Ended | |||||||||||||||
March 31, | Change | ||||||||||||||
2020 | 2019 | Amount | % | ||||||||||||
(Dollars in thousands) | |||||||||||||||
West | $ | 36,576 | $ | 33,200 | $ | 3,376 | 10 | % | |||||||
Mountain | 21,512 | 21,714 | (202 | ) | (1) | % | |||||||||
East | 900 | 1,473 | (573 | ) | (39) | % | |||||||||
Corporate | (9,319 | ) | (15,332 | ) | 6,013 | 39 | % | ||||||||
Total Homebuilding pretax income | $ | 49,669 | $ | 41,055 | $ | 8,614 | 21 | % |
As noted above, we generated homebuilding pretax income for the quarter of $49.7 million, an increase of $8.6 million from $41.1 million for the same period in the prior year. The increase was due to a 100 basis point improvement in our gross margin from home sales and an 8% increase in home sale revenues.
Our West segment experienced a $3.4 million year-over-year increase in pretax income, due to an improved gross margin from home sales and a 10% increase in home sales revenue, which was slightly offset by a $3.4 million increase in general and administrative expenses resulting from a change in our Corporate cost allocation discussed below. Our Mountain segment experienced a $0.2 million decrease in pretax income from the prior year, as a result of a $1.6 million increase in general and administrative expenses due to a change in our Corporate cost allocation, which was mostly offset by a 7% increase in home sales revenue. Our East segment experienced a $0.6 million decrease in pretax income from the prior year, due primarily to a $0.7 million increase in general and administrative expenses resulting from a change in our Corporate cost allocation. Our Corporate segment experienced a $6.0 million increase in pretax income, due mostly to the impact of the change in our Corporate cost allocation.
On a periodic basis, we assess our Corporate cost allocation estimates. Our most recent assessment resulted in increases in Corporate cost allocations to both our homebuilding and financial services segments beginning January 1, 2020, to reflect the use of centralized administrative functions. Applying the most recent cost allocation estimate to the three months ended March 31, 2019 would have resulted in decreased pretax income for our homebuilding and financial services segments of approximately $2.7 million and $0.4 million, respectively, with corresponding increases in our Corporate segment pretax income. Additionally, beginning January 1, 2020, we have reflected the expense associated with all homebuilding employee bonuses in the respective homebuilding segment to which the employee reports, consistent with how the CODM is now evaluating homebuilding division performance and making operating decisions. Had these bonuses been reflected in a similar manner during the three months ended March 31, 2019, pretax income for our homebuilding segments would have decreased by an additional $3.0 million with a corresponding increase in our Corporate segment pretax income.
Assets:
March 31, | December 31, | Change | ||||||||||||||
2020 | 2019 | Amount | % | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
West | $ | 1,559,410 | $ | 1,461,645 | $ | 97,765 | 7 | % | ||||||||
Mountain | 907,727 | 869,665 | 38,062 | 4 | % | |||||||||||
East | 216,063 | 194,592 | 21,471 | 11 | % | |||||||||||
Corporate | 466,192 | 505,507 | (39,315 | ) | (8) | % | ||||||||||
Total homebuilding assets | $ | 3,149,392 | $ | 3,031,409 | $ | 117,983 | 4 | % |
Total homebuilding assets increased 4% from December 31, 2019 to March 31, 2020. Homebuilding assets increased in each of our operating segments largely due to a greater number of homes completed or under construction as of March 31, 2020. However, the funds for the construction activity came from our Corporate segment, causing a decline in our Corporate segment’s assets.
New Home Deliveries & Home Sale Revenues:
Changes in home sale revenues are impacted by changes in the 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. Our backlog conversion rate has been negatively impacted by the pandemic due to a higher rate of cancellations and some limitations that have temporarily been placed on construction activity.
Three Months Ended March 31, | ||||||||||||||||||||||||||||||||||||
2020 | 2019 | % Change | ||||||||||||||||||||||||||||||||||
Homes | Home Sale Revenues | Average Price | Homes | Home Sale Revenues | Average Price | Homes | Home Sale Revenues | Average Price | ||||||||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||||||||||||||
West | 871 | $ | 405,498 | $ | 465.6 | 752 | $ | 369,558 | $ | 491.4 | 16 | % | 10 | % | (5) | % | ||||||||||||||||||||
Mountain | 435 | 222,858 | 512.3 | 409 | 209,192 | 511.5 | 6 | % | 7 | % | 0 | % | ||||||||||||||||||||||||
East | 241 | 68,729 | 285.2 | 197 | 68,528 | 347.9 | 22 | % | 0 | % | (18) | % | ||||||||||||||||||||||||
Total | 1,547 | $ | 697,085 | $ | 450.6 | 1,358 | $ | 647,278 | $ | 476.6 | 14 | % | 8 | % | (5) | % |
West Segment Commentary
For the three months ended March 31, 2020, the increase in new home deliveries was the result of a 33% increase in the number of homes in backlog to begin the period. This increase was partially offset by a decrease in backlog conversion rates in most of our markets within this segment. This decrease was driven by a lower percentage of homes both sold and delivered in the first quarter of 2020 as compared to the 2019 first quarter. 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, a greater percentage of closings within nearly all of our Western markets during the current period were from our more affordable product offerings.
Mountain Segment Commentary
For the three months ended March 31, 2020, the increase in new home deliveries was the result of a 16% increase in the number homes in backlog to begin the period. This increase was partially offset by a decrease in backlog conversion rates in our Colorado markets due to a lower percentage of homes in backlog to start the 2020 first quarter that were under construction at that time.
East Segment Commentary
For the three months ended March 31, 2020, the increase in new home deliveries was the result of a 53% increase in the number of homes in backlog to begin the period. This increase was partially offset by a decrease in backlog conversion rates in most of our markets within this segment due to (1) a lower percentage of homes in backlog to start the 2020 first quarter that were under construction at that time and (2) a lower percentage of homes both sold and delivered in the first quarter of 2020 as compared to the 2019 first quarter. 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 percentage of deliveries in this segment coming from communities that offer more affordable home plans and (2) a higher percentage of our deliveries coming from our Florida markets, which have a lower average selling price than our mid-Atlantic market.
Gross Margin from Home Sales:
Our gross margin from home sales for the three months ended March 31, 2020, increased 100 basis points year-over-year from 18.9% to 19.9%. During the three months ended March 31, 2019 we recorded inventory impairments of $0.6 million and warranty adjustments of $0.9 million, which negatively impacted gross margin by 20 basis points in the prior year. Gross margins increased in the first quarter of 2020 on both build-to-order and speculative home deliveries driven by price increases implemented across the majority of our communities over the past nine-months. Gross margins were also positively impacted as a result of a lower percentage of speculative home deliveries in the quarter, which typically have a lower gross margin than our build-to-order deliveries.
Inventory Impairments:
Impairments of homebuilding inventory by segment for the three months ended March 31, 2020 and 2019 are shown in the table below:
Three Months Ended March 31, | ||||||||
2020 | 2019 | |||||||
(Dollars in thousands) | ||||||||
West | $ | - | $ | - | ||||
Mountain | - | 400 | ||||||
East | - | 210 | ||||||
Total inventory impairments | $ | - | $ | 610 |
The table below provides quantitative data for the periods presented, where applicable, used in determining the fair value of the impaired inventory.
Impairment Data | Quantitative Data | |||||||||||||||
Three Months Ended | Inventory | Fair Value of Impairments | Number of | Discount Rate | ||||||||||||
March 31, 2019 | $ | 610 | $ | 10,476 | 2 | N/A |
Selling, General and Administrative Expenses:
Three Months Ended March 31, | ||||||||||||
2020 | 2019 | Change | ||||||||||
(Dollars in thousands) | ||||||||||||
General and administrative expenses | $ | 45,089 | $ | 42,572 | $ | 2,517 | ||||||
General and administrative expenses as a percentage of home sale revenues | 6.5% | 6.6% | (10) bps | |||||||||
Marketing expenses | $ | 21,446 | $ | 18,296 | $ | 3,150 | ||||||
Marketing expenses as a percentage of home sale revenues | 3.1% | 2.8% | 30 bps | |||||||||
Commissions expenses | $ | 22,786 | $ | 21,393 | $ | 1,393 | ||||||
Commissions expenses as a percentage of home sale revenues | 3.3% | 3.3% | 0 bps | |||||||||
Total selling, general and administrative expenses | $ | 89,321 | $ | 82,261 | $ | 7,060 | ||||||
Total selling, general and administrative expenses as a percentage of home sale revenues | 12.8% | 12.7% | 10 bps |
For the three months ended March 31, 2020, the increase in our marketing expenses was driven by (1) increased sales office expense and product advertising resulting from an increased number of average active subdivisions and (2) increased compensation expense due to a higher average headcount during the quarter.
General and administrative expenses increased for the three months ended March 31, 2020 due to increased compensation-related expenses driven by higher average headcount during the quarter.
Other Homebuilding Operating Data
Net New Orders and Active Subdivisions:
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. Our monthly absorption rate has been negatively impacted by the pandemic due to a higher rate of cancellations and a decrease in customer traffic resulting from stay at home and shelter in place orders. The negative impact is shown in net new home orders for the month of March, which decreased 27% year-over-year to 611. Furthermore, to start the 2020 second quarter, April net new orders decreased 53% year-over-year to 357.
Three Months Ended March 31, | |||||||||||||||||||||||||||||||||
2020 | 2019 | % 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 | 1,382 | $ | 655,892 | $ | 474.6 | 5.13 | 965 | $ | 433,307 | $ | 449.0 | 3.82 | 43 | % | 51 | % | 6 | % | 34 | % | |||||||||||||
Mountain | 693 | 339,132 | 489.4 | 3.54 | 719 | 336,932 | 468.6 | 3.52 | (4) | % | 1 | % | 4 | % | 1 | % | |||||||||||||||||
East | 324 | 97,723 | 301.6 | 3.66 | 272 | 81,179 | 298.5 | 4.17 | 19 | % | 20 | % | 1 | % | (12) | % | |||||||||||||||||
Total | 2,399 | $ | 1,092,747 | $ | 455.5 | 4.33 | 1,956 | $ | 851,418 | $ | 435.3 | 3.75 | 23 | % | 28 | % | 5 | % | 16 | % |
*Calculated as total net new orders in period ÷ average active communities during period ÷ number of months in period
Average Active Subdivisions | ||||||||||||||||||
Active Subdivisions | Three Months Ended | |||||||||||||||||
March 31, | % | March 31, | % | |||||||||||||||
2020 | 2019 | Change | 2020 | 2019 | Change | |||||||||||||
West | 92 | 88 | 5 | % | 90 | 84 | 7 | % | ||||||||||
Mountain | 64 | 64 | 0 | % | 65 | 69 | (6 | )% | ||||||||||
East | 29 | 26 | 12 | % | 30 | 22 | 36 | % | ||||||||||
Total | 185 | 178 | 4 | % | 185 | 175 | 6 | % |
West Segment Commentary
For the three months ended March 31, 2020, the increase in net new orders was driven by increases in both the monthly sales absorption rate and average active subdivisions. Nearly all markets experienced an improvement in their sales pace year-over-year, with our Nevada, Phoenix and California markets all experiencing a sales pace in excess of five net new orders per community per month. The increase in average selling price was due to price increases implemented over the past nine-months within the majority of our communities as well as a shift in mix of homes sold from Nevada to more expensive Southern California markets.
Mountain Segment Commentary
For the three months ended March 31, 2020, the decrease in net new orders was the result of (1) a slight decrease in the number of average active subdivisions in Colorado and (2) an increased cancellation rate (see further discussion below). The increase in average selling price was the result of price increases implemented across the majority of our communities over the past nine-months.
East Segment Commentary
For the three months ended March 31, 2020, the increase in net new orders was driven by an increase in the number of average active subdivisions in each of our Florida and mid-Atlantic markets. This increase was partially offset by a decrease in the monthly sales absorption rate due to (1) a decrease in close out communities in our mid-Atlantic market and (2) an increased cancellation rate (see further discussion below).
Cancellation Rate:
Cancellations as a Percentage of Homes in Beginning Backlog | |||||||||
Three Months Ended March 31, | Change in | ||||||||
2020 | 2019 | Percentage | |||||||
West | 15 | % | 14 | % | 1 | % | |||
Mountain | 22 | % | 14 | % | 8 | % | |||
East | 23 | % | 11 | % | 12 | % | |||
Total | 18 | % | 14 | % | 4 | % |
Our cancellations as a percentage of homes in beginning backlog to start the quarter (“cancellation rate”) increased year-over-year in each of our segments, most notably in our Colorado and Florida markets. In general, we experienced a higher cancellation rate during the month of March due to the pandemic as a result of general economic uncertainty and changes in our homebuyers’ employment status. Additionally, our Florida market was impacted by a shift in mix to include more first-time homebuyers who have a higher likelihood of cancellation. Cancellations as a percentage of homes in beginning backlog for the month of April were 6.6% compared to 4.3% in the prior year.
Backlog:
March 31, | ||||||||||||||||||||||||||||||||||||
2020 | 2019 | % Change | ||||||||||||||||||||||||||||||||||
Homes | Dollar | Average Price | Homes | Dollar | Average Price | Homes | Dollar | Average Price | ||||||||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||||||||||||||
West | 2,534 | $ | 1,227,996 | $ | 484.6 | 1,736 | $ | 830,703 | $ | 478.5 | 46 | % | 48 | % | 1 | % | ||||||||||||||||||||
Mountain | 1,469 | 754,155 | 513.4 | 1,353 | 690,623 | 510.4 | 9 | % | 9 | % | 1 | % | ||||||||||||||||||||||||
East | 650 | 191,972 | 295.3 | 445 | 133,140 | 299.2 | 46 | % | 44 | % | (1) | % | ||||||||||||||||||||||||
Total | 4,653 | $ | 2,174,123 | $ | 467.3 | 3,534 | $ | 1,654,466 | $ | 468.2 | 32 | % | 31 | % | (0) | % |
At March 31, 2020, we had 4,653 homes in backlog with a total value of $2.2 billion. This represented a 32% increase in the number of homes in backlog and a 31% increase in the dollar value of homes in backlog from March 31, 2019. The increase in the number of homes in backlog is primarily a result of the year-over-year increase in net new orders during the last six-months, offset slightly by improved cycle times across each of our Segments. However, our ability to convert backlog into closings has been negatively impacted by the pandemic due to a higher rate of cancellations and some limitations that have temporarily been placed on construction activity, and therefore the year-over-year increase in backlog at March 31, 2020 might not result in a year-over-year increase in closings during future periods. At April 30, 2020, we had 4,487 homes in backlog, representing an 18% increase from April 30, 2019
Homes Completed or Under Construction (WIP lots):
March 31, | % | |||||||||||
2020 | 2019 | Change | ||||||||||
Unsold: | ||||||||||||
Completed | 160 | 120 | 33 | % | ||||||||
Under construction | 216 | 177 | 22 | % | ||||||||
Total unsold started homes | 376 | 297 | 27 | % | ||||||||
Sold homes under construction or completed | 3,259 | 2,362 | 38 | % | ||||||||
Model homes under construction or completed | 502 | 459 | 9 | % | ||||||||
Total homes completed or under construction | 4,137 | 3,118 | 33 | % |
The increase in sold homes under construction or completed is due to the increased demand we have experienced in recent periods as a result of our increased offering of more affordable home plans. The increase in unsold started homes is due to the increased cancellation rate experienced during the first quarter of 2020, particularly during the month of March as a result of the pandemic. We believe that the higher rate of cancellations is likely to continue during the second quarter, which could result in a continued increase in the number of unsold started homes.
Lots Owned and Optioned (including homes completed or under construction):
March 31, 2020 | March 31, 2019 | |||||||||||||||||||||||||||
Lots Owned | Lots Optioned | Total | Lots Owned | Lots Optioned | Total | Total % Change | ||||||||||||||||||||||
West | 9,641 | 2,393 | 12,034 | 7,894 | 2,462 | 10,356 | 16 | % | ||||||||||||||||||||
Mountain | 6,540 | 4,007 | 10,547 | 6,636 | 2,612 | 9,248 | 14 | % | ||||||||||||||||||||
East | 2,410 | 2,133 | 4,543 | 1,989 | 1,294 | 3,283 | 38 | % | ||||||||||||||||||||
Total | 18,591 | 8,533 | 27,124 | 16,519 | 6,368 | 22,887 | 19 | % |
Our total owned and optioned lots at March 31, 2020 were 27,124, up 19% from March 31, 2019, but down slightly from 27,386 at December 31, 2019, due to a slowdown in land acquisition during the quarter as a result of the pandemic. We believe that our total lot supply, coupled with our planned acquisition activity, can support growth in future periods. However, due to the pandemic, there is also an increased likelihood that planned acquisition activity may be delayed or abandoned. See "Forward-Looking Statements" below.
Financial Services
Three Months Ended | ||||||||||||||||
March 31, | Change | |||||||||||||||
2020 | 2019 | Amount | % | |||||||||||||
Financial services revenues | (Dollars in thousands) | |||||||||||||||
Mortgage operations | $ | 14,625 | $ | 10,174 | $ | 4,451 | 44 | % | ||||||||
Other | 7,261 | 7,230 | 31 | 0 | % | |||||||||||
Total financial services revenues | $ | 21,886 | $ | 17,404 | $ | 4,482 | 26 | % | ||||||||
Financial services pretax income | ||||||||||||||||
Mortgage operations | $ | 8,243 | $ | 4,993 | $ | 3,250 | 65 | % | ||||||||
Other | (9,350 | ) | 9,558 | (18,908 | ) | (198) | % | |||||||||
Total financial services pretax income (loss) | $ | (1,107 | ) | $ | 14,551 | $ | (15,658 | ) | (108) | % |
For the three months ended March 31, 2020, our financial services business incurred a pretax loss of $1.1 million compared to pretax income of $14.6 million for the same period in the prior year. This decrease was due to our other financial services segment, which had unrealized losses on equity securities during the first quarter of 2020 totaling $13.9 million as compared to unrealized gains of $4.6 million during the first quarter of 2019.
Based on the size and duration of the liabilities held by our Insurance Entities, as well as regulatory capital requirements, we have historically invested the premiums collected by our Insurance Entities in a portfolio of assets to appropriately match these liabilities in duration and also maintain required levels of capital. Based on our investment policy, this portfolio has historically comprised money market funds, U.S. Government securities and equity securities. Given the expected duration of the underlying insurance liabilities and our current liquidity, we do not anticipate a need to liquidate any investments held by our Insurance Entities in the next twelve months.
For the three months ended March 31, 2020, our mortgage operations pretax income increased $3.2 million due to higher interest rate lock volume driven by the year-over-year increase in homes in beginning backlog and to a lesser extent lower interest rates during the quarter.
Our mortgage operations have not yet experienced a significant slowdown in loan originations due to the pandemic, but a reduction in our home sales activity would directly impact our mortgage lending activities. As a result of the government intervention in the financial markets, including the Federal Reserve’s purchase of mortgage backed securities, we expect to be able to continue making loans that can be readily sold into the secondary mortgage market.
The following table sets forth information for our mortgage operations segment relating to mortgage loans originated and capture rate.
Three Months Ended | % or | |||||||||||
March 31, | Percentage | |||||||||||
2020 | 2019 | Change | ||||||||||
Total Originations (including transfer loans): | (Dollars in thousands) | |||||||||||
Loans | 1,029 | 783 | 31 | % | ||||||||
Principal | $ | 379,306 | $ | 285,525 | 33 | % | ||||||
Capture Rate Data: | ||||||||||||
Capture rate as % of all homes delivered | 66% | 58% | 8 | % | ||||||||
Capture rate as % of all homes delivered (excludes cash sales) | 69% | 62% | 7 | % | ||||||||
Mortgage Loan Origination Product Mix: | ||||||||||||
FHA loans | 22% | 17% | 5 | % | ||||||||
Other government loans (VA & USDA) | 22% | 20% | 2 | % | ||||||||
Total government loans | 44% | 37% | 7 | % | ||||||||
Conventional loans | 56% | 63% | (7) | % | ||||||||
100% | 100% | 0 | % | |||||||||
Loan Type: | ||||||||||||
Fixed rate | 99% | 96% | 3 | % | ||||||||
ARM | 1% | 4% | (3) | % | ||||||||
Credit Quality: | ||||||||||||
Average FICO Score | 735 | 736 | (0) | % | ||||||||
Other Data: | ` | ` | ||||||||||
Average Combined LTV ratio | 85% | 81% | 4 | % | ||||||||
Full documentation loans | 100% | 100% | 0 | % | ||||||||
Loans Sold to Third Parties: | ||||||||||||
Loans | 1,199 | 889 | 35 | % | ||||||||
Principal | $ | 438,101 | $ | 320,414 | 37 | % |
Income Taxes
Our overall effective income tax rates were 24.3% and 27.1% for the three months ended March 31, 2020 and 2019, respectively, resulting in income tax expense of $11.8 million and $15.1$1.9 million for the same periods respectively. The year-over-year decrease in our effective tax rate for the three months ended March 31, 2020 was primarily impacted by a windfall on non-qualifying stock options exercised and lapsed restricted stock awards during the three months ended March 31, 2020 as well as energy tax credits related to homes closed during the quarter. These benefits were partially offset by a decrease in the amount2019.
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’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, 2019.
LIQUIDITY AND CAPITAL RESOURCES
We use our liquidity and capital resources 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 Facility and 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 $2.0 billion. Following the issuance of $300 million of 3.850% senior notes on January 9, 2020, $1.70 billion remains on our effective shelf registration statement.
We have marketable equity securities that consist primarily of holdings in common stock and exchange traded funds.
Capital Resources
Our capital structure is primarily a combination of: (1) permanent financing, represented by stockholders’ equity; (2) long-term financing, represented by our 5.500% senior notes due 2024, 3.850% senior notes due 2030 and our 6.000% senior notes due 2043; (3) our Revolving Credit Facility (defined below); and (4) 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 senior 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 November 1, 2018 to (1) extend the Revolving Credit Facility maturity to December 18, 2023, (2) increase the aggregate commitment from $700 million to $1.0 billion (the “Commitment”) and (3) provide that the aggregate amount of the commitments may increase to an amount not to exceed $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 prime rate, (3) a federal funds effective rate plus 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 a specified eurocurrency 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 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, 2020.
Name | MDC Title | ||||||||||
Larry A. Mizel | Chairman and CEO | ||||||||||
David D. Mandarich | President and COO |
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
(Dollars in thousands, except per share amounts) | |||||||||||||||||||||||
Homebuilding: | |||||||||||||||||||||||
Home sale revenues | $ | 1,000,549 | $ | 750,274 | $ | 2,584,392 | $ | 2,130,396 | |||||||||||||||
Home cost of sales | (795,172) | (609,316) | (2,061,608) | (1,724,040) | |||||||||||||||||||
Inventory impairments | — | — | — | (610) | |||||||||||||||||||
Total cost of sales | (795,172) | (609,316) | (2,061,608) | (1,724,650) | |||||||||||||||||||
Gross profit | 205,377 | 140,958 | 522,784 | 405,746 | |||||||||||||||||||
Gross margin | 20.5 | % | 18.8 | % | 20.2 | % | 19.0 | % | |||||||||||||||
Selling, general and administrative expenses | (103,632) | (92,716) | (285,269) | (257,689) | |||||||||||||||||||
Interest and other income | 756 | 2,336 | 3,365 | 7,491 | |||||||||||||||||||
Other expense | (851) | (1,887) | (4,640) | (4,188) | |||||||||||||||||||
Homebuilding pretax income | 101,650 | 48,691 | 236,240 | 151,360 | |||||||||||||||||||
Financial Services: | |||||||||||||||||||||||
Revenues | 36,803 | 22,388 | 91,653 | 58,389 | |||||||||||||||||||
Expenses | (13,294) | (10,352) | (36,401) | (28,883) | |||||||||||||||||||
Other income (expense), net | 859 | 2,079 | (5,274) | 11,877 | |||||||||||||||||||
Financial services pretax income | 24,368 | 14,115 | 49,978 | 41,383 | |||||||||||||||||||
Income before income taxes | 126,018 | 62,806 | 286,218 | 192,743 | |||||||||||||||||||
Provision for income taxes | (27,080) | (12,226) | (66,124) | (47,020) | |||||||||||||||||||
Net income | $ | 98,938 | $ | 50,580 | $ | 220,094 | $ | 145,723 | |||||||||||||||
Earnings per share: | |||||||||||||||||||||||
Basic | $ | 1.54 | $ | 0.81 | $ | 3.46 | $ | 2.36 | |||||||||||||||
Diluted | $ | 1.49 | $ | 0.79 | $ | 3.37 | $ | 2.29 | |||||||||||||||
Weighted average common shares outstanding: | |||||||||||||||||||||||
Basic | 63,868,486 | 61,978,195 | 63,129,077 | 61,422,925 | |||||||||||||||||||
Diluted | 65,824,910 | 63,968,215 | 64,969,855 | 63,360,535 | |||||||||||||||||||
Dividends declared per share | $ | 0.33 | $ | 0.30 | $ | 0.99 | $ | 0.90 | |||||||||||||||
Cash provided by (used in): | |||||||||||||||||||||||
Operating Activities | $ | (26,262) | $ | (88,783) | $ | 29,442 | $ | (33,118) | |||||||||||||||
Investing Activities | $ | (7,917) | $ | (10,272) | $ | 27,577 | $ | (24,191) | |||||||||||||||
Financing Activities | $ | (3,965) | $ | (12,293) | $ | (8,787) | $ | (64,377) |
Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||
September 30, | Change | September 30, | Change | ||||||||||||||||||||||||||||||||||||||||||||
2020 | 2019 | Amount | % | 2020 | 2019 | Amount | % | ||||||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | |||||||||||||||||||||||||||||||||||||||||||||||
West | $ | 59,120 | $ | 34,898 | $ | 24,222 | 69 | % | $ | 144,441 | $ | 103,448 | $ | 40,993 | 40 | % | |||||||||||||||||||||||||||||||
Mountain | 48,053 | 31,391 | 16,662 | 53 | % | 111,372 | 89,077 | 22,295 | 25 | % | |||||||||||||||||||||||||||||||||||||
East | 6,020 | 2,136 | 3,884 | 182 | % | 9,993 | 5,761 | 4,232 | 73 | % | |||||||||||||||||||||||||||||||||||||
Corporate | (11,543) | (19,734) | 8,191 | 42 | % | (29,566) | (46,926) | 17,360 | 37 | % | |||||||||||||||||||||||||||||||||||||
Total Homebuilding pretax income | $ | 101,650 | $ | 48,691 | $ | 52,959 | 109 | % | $ | 236,240 | $ | 151,360 | $ | 84,880 | 56 | % |
September 30, 2020 | December 31, 2019 | Change | |||||||||||||||||||||
Amount | % | ||||||||||||||||||||||
(Dollars in thousands) | |||||||||||||||||||||||
West | $ | 1,660,583 | $ | 1,461,645 | 198,938 | 14 | % | ||||||||||||||||
Mountain | 927,730 | 869,665 | 58,065 | 7 | % | ||||||||||||||||||
East | 248,028 | 194,592 | 53,436 | 27 | % | ||||||||||||||||||
Corporate | 507,728 | 505,507 | 2,221 | 0 | % | ||||||||||||||||||
Total homebuilding assets | $ | 3,344,069 | $ | 3,031,409 | $ | 312,660 | 10 | % |
Three Months Ended September 30, | |||||||||||||||||||||||||||||||||||||||||||||||||||||
2020 | 2019 | % Change | |||||||||||||||||||||||||||||||||||||||||||||||||||
Homes | Home Sale Revenues | Average Price | Homes | Home Sale Revenues | Average Price | Homes | Home Sale Revenues | Average Price | |||||||||||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
West | 1,135 | $ | 552,319 | $ | 486.6 | 927 | $ | 410,414 | $ | 442.7 | 22 | % | 35 | % | 10 | % | |||||||||||||||||||||||||||||||||||||
Mountain | 677 | 347,095 | 512.7 | 537 | 263,802 | 491.2 | 26 | % | 32 | % | 4 | % | |||||||||||||||||||||||||||||||||||||||||
East | 335 | 101,135 | 301.9 | 249 | 76,058 | 305.5 | 35 | % | 33 | % | (1) | % | |||||||||||||||||||||||||||||||||||||||||
Total | 2,147 | $ | 1,000,549 | $ | 466.0 | 1,713 | $ | 750,274 | $ | 438.0 | 25 | % | 33 | % | 6 | % |
Nine Months Ended September 30, | |||||||||||||||||||||||||||||||||||||||||||||||||||||
2020 | 2019 | % Change | |||||||||||||||||||||||||||||||||||||||||||||||||||
Homes | Home Sale Revenues | Average Price | Homes | Home Sale Revenues | Average Price | Homes | Home Sale Revenues | Average Price | |||||||||||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
West | 3,023 | $ | 1,447,934 | $ | 479.0 | 2,464 | $ | 1,164,502 | $ | 472.6 | 23 | % | 24 | % | 1 | % | |||||||||||||||||||||||||||||||||||||
Mountain | 1,720 | 886,619 | 515.5 | 1,480 | 760,470 | 513.8 | 16 | % | 17 | % | 0 | % | |||||||||||||||||||||||||||||||||||||||||
East | 851 | 249,839 | 293.6 | 641 | 205,424 | 320.5 | 33 | % | 22 | % | (8) | % | |||||||||||||||||||||||||||||||||||||||||
Total | 5,594 | $ | 2,584,392 | $ | 462.0 | 4,585 | $ | 2,130,396 | $ | 464.6 | 22 | % | 21 | % | (1) | % |
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
(Dollars in thousands) | |||||||||||||||||||||||
West | $ | — | $ | — | $ | — | $ | — | |||||||||||||||
Mountain | — | — | — | 400 | |||||||||||||||||||
East | — | — | — | 210 | |||||||||||||||||||
Total inventory impairments | — | — | — | 610 |
Impairment Data | |||||||||||||||||||||||||||||||||||
Three Months Ended | Number of Subdivisions Impaired | Inventory Impairments | Fair Value of Inventory After Impairments | Discount Rate | |||||||||||||||||||||||||||||||
(Dollars in thousands) | |||||||||||||||||||||||||||||||||||
March 31, 2019 | 2 | $ | 610 | $ | 10,476 | N/A |
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||||||||||
2020 | 2019 | Change | 2020 | 2019 | Change | ||||||||||||||||||||||||||||||
(Dollars in thousands) | |||||||||||||||||||||||||||||||||||
General and administrative expenses | $ | 45,980 | $ | 46,951 | $ | (971) | $ | 131,488 | $ | 128,849 | $ | 2,639 | |||||||||||||||||||||||
General and administrative expenses as a percentage of home sale revenues | 4.6 | % | 6.3 | % | -170 bps | 5.1 | % | 6.0 | % | -90 bps | |||||||||||||||||||||||||
Marketing expenses | $ | 24,725 | $ | 20,457 | $ | 4,268 | $ | 68,828 | $ | 58,266 | $ | 10,562 | |||||||||||||||||||||||
Marketing expenses as a percentage of home sale revenues | 2.5 | % | 2.7 | % | -20 bps | 2.7 | % | 2.7 | % | 0 bps | |||||||||||||||||||||||||
Commissions expenses | $ | 32,927 | $ | 25,308 | $ | 7,619 | $ | 84,953 | $ | 70,574 | $ | 14,379 | |||||||||||||||||||||||
Commissions expenses as a percentage of home sale revenues | 3.3 | % | 3.4 | % | -10 bps | 3.3 | % | 3.3 | % | 0 bps | |||||||||||||||||||||||||
Total selling, general and administrative expenses | $ | 103,632 | $ | 92,716 | $ | 10,916 | $ | 285,269 | $ | 257,689 | $ | 27,580 | |||||||||||||||||||||||
Total selling, general and administrative expenses as a percentage of home sale revenues | 10.4 | % | 12.4 | % | -200 bps | 11.0 | % | 12.1 | % | -110 bps |
Three Months Ended September 30, | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2020 | 2019 | % Change | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Homes | Dollar Value | 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 | 1,955 | $ | 932,111 | $ | 476.8 | 6.58 | 1,168 | $ | 516,000 | $ | 441.8 | 4.09 | 67 | % | 81 | % | 8 | % | 61 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||
Mountain | 1,051 | 542,375 | 516.1 | 5.70 | 565 | 271,800 | 481.1 | 2.86 | 86 | % | 100 | % | 7 | % | 99 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
East | 509 | 176,896 | 347.5 | 5.39 | 303 | 83,896 | 276.9 | 3.58 | 68 | % | 111 | % | 26 | % | 50 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total | 3,515 | $ | 1,651,382 | $ | 469.8 | 6.10 | 2,036 | $ | 871,696 | $ | 428.1 | 3.59 | 73 | % | 89 | % | 10 | % | 70 | % |
Nine Months Ended September 30, | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2020 | 2019 | % Change | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Homes | Dollar Value | 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 | 4,646 | $ | 2,265,557 | $ | 487.6 | 5.47 | 3,379 | $ | 1,543,584 | $ | 456.8 | 4.14 | 37 | % | 47 | % | 7 | % | 32 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||
Mountain | 2,502 | 1,309,176 | 523.3 | 4.39 | 1,974 | 960,109 | 486.4 | 3.30 | 27 | % | 36 | % | 8 | % | 33 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
East | 1,156 | 393,913 | 340.8 | 4.23 | 912 | 268,578 | 294.5 | 4.02 | 27 | % | 47 | % | 16 | % | 5 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total | 8,304 | $ | 3,968,646 | $ | 477.9 | 4.91 | 6,265 | $ | 2,772,271 | $ | 442.5 | 3.82 | 33 | % | 43 | % | 8 | % | 28 | % |
Average Active Subdivisions | Average Active Subdivisions | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Active Subdivisions | Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||
September 30, | % | September 30, | % | September 30, | % | ||||||||||||||||||||||||||||||||||||||||||||||||
2020 | 2019 | Change | 2020 | 2019 | Change | 2020 | 2019 | Change | |||||||||||||||||||||||||||||||||||||||||||||
West | 102 | 93 | 10 | % | 99 | 96 | 3 | % | 94 | 92 | 2 | % | |||||||||||||||||||||||||||||||||||||||||
Mountain | 61 | 67 | (9) | % | 62 | 66 | (6) | % | 63 | 66 | (5) | % | |||||||||||||||||||||||||||||||||||||||||
East | 31 | 30 | 3 | % | 32 | 29 | 10 | % | 30 | 25 | 20 | % | |||||||||||||||||||||||||||||||||||||||||
Total | 194 | 190 | 2 | % | 193 | 191 | 1 | % | 187 | 183 | 2 | % |
Cancellations as a Percentage of Homes in Beginning Backlog | ||||||||||||||||||||||||||||||||||||||
2020 | 2019 | |||||||||||||||||||||||||||||||||||||
Three Months Ended | ||||||||||||||||||||||||||||||||||||||
September 30, | June 30, | March 31, | September 30, | June 30, | March 31, | |||||||||||||||||||||||||||||||||
West | 11 | % | 14 | % | 15 | % | 12 | % | 13 | % | 14 | % | ||||||||||||||||||||||||||
Mountain | 12 | % | 20 | % | 22 | % | 16 | % | 13 | % | 14 | % | ||||||||||||||||||||||||||
East | 18 | % | 22 | % | 23 | % | 22 | % | 18 | % | 11 | % | ||||||||||||||||||||||||||
Total | 12 | % | 17 | % | 18 | % | 15 | % | 14 | % | 14 | % |
September 30, | |||||||||||||||||||||||||||||||||||||||||||||||||||||
2020 | 2019 | % Change | |||||||||||||||||||||||||||||||||||||||||||||||||||
Homes | Dollar Value | Average Price | Homes | Dollar Value | Average Price | Homes | Dollar Value | Average Price | |||||||||||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
West | 3,646 | $ | 1,743,547 | $ | 478.2 | 2,438 | $ | 1,146,912 | $ | 470.4 | 50 | % | 52 | % | 2 | % | |||||||||||||||||||||||||||||||||||||
Mountain | 1,993 | 1,033,264 | 518.4 | 1,537 | 768,317 | 499.9 | 30 | % | 34 | % | 4 | % | |||||||||||||||||||||||||||||||||||||||||
East | 872 | 298,965 | 342.9 | 641 | 183,856 | 286.8 | 36 | % | 63 | % | 20 | % | |||||||||||||||||||||||||||||||||||||||||
Total | 6,511 | $ | 3,075,776 | $ | 472.4 | 4,616 | $ | 2,099,085 | $ | 454.7 | 41 | % | 47 | % | 4 | % |
September 30, | % | ||||||||||||||||
2020 | 2019 | Change | |||||||||||||||
Unsold: | |||||||||||||||||
Completed | 74 | 82 | (10) | % | |||||||||||||
Under construction | 129 | 255 | (49) | % | |||||||||||||
Total unsold started homes | 203 | 337 | (40) | % | |||||||||||||
Sold homes under construction or completed | 4,540 | 3,433 | 32 | % | |||||||||||||
Model homes under construction or completed | 505 | 455 | 11 | % | |||||||||||||
Total homes completed or under construction | 5,248 | 4,225 | 24 | % |
September 30, 2020 | September 30, 2019 | ||||||||||||||||||||||||||||||||||||||||
Lots Owned | Lots Optioned | Total | Lots Owned | Lots Optioned | Total | Total % Change | |||||||||||||||||||||||||||||||||||
West | 10,140 | 3,280 | 13,420 | 9,128 | 2,203 | 11,331 | 18 | % | |||||||||||||||||||||||||||||||||
Mountain | 6,217 | 2,708 | 8,925 | 6,456 | 3,139 | 9,595 | (7) | % | |||||||||||||||||||||||||||||||||
East | 2,716 | 1,769 | 4,485 | 2,014 | 2,003 | 4,017 | 12 | % | |||||||||||||||||||||||||||||||||
Total | 19,073 | 7,757 | 26,830 | 17,598 | 7,345 | 24,943 | 8 | % |
Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||
September 30, | Change | September 30, | Change | ||||||||||||||||||||||||||||||||||||||||||||||||||
2020 | 2019 | Amount | % | 2020 | 2019 | Amount | % | ||||||||||||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Financial services revenues | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Mortgage operations | $ | 28,548 | $ | 14,395 | $ | 14,153 | 98 | % | $ | 67,536 | $ | 36,258 | $ | 31,278 | 86 | % | |||||||||||||||||||||||||||||||||||||
Other | 8,255 | 7,993 | 262 | 3 | % | 24,117 | 22,131 | 1,986 | 9 | % | |||||||||||||||||||||||||||||||||||||||||||
Total financial services revenues | $ | 36,803 | $ | 22,388 | $ | 14,415 | 64 | % | $ | 91,653 | $ | 58,389 | $ | 33,264 | 57 | % | |||||||||||||||||||||||||||||||||||||
Financial services pretax income | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Mortgage operations | $ | 20,809 | $ | 8,468 | $ | 12,341 | 146 | % | $ | 46,558 | $ | 19,700 | $ | 26,858 | 136 | % | |||||||||||||||||||||||||||||||||||||
Other | 3,559 | 5,647 | (2,088) | (37) | % | 3,420 | 21,683 | $ | (18,263) | (84) | % | ||||||||||||||||||||||||||||||||||||||||||
Total financial services pretax income | $ | 24,368 | $ | 14,115 | $ | 10,253 | 73 | % | $ | 49,978 | $ | 41,383 | $ | 8,595 | 21 | % | |||||||||||||||||||||||||||||||||||||
Three Months Ended | % or Percentage | Nine Months Ended | % or Percentage | ||||||||||||||||||||||||||||||||
September 30, | September 30, | ||||||||||||||||||||||||||||||||||
2020 | 2019 | Change | 2020 | 2019 | Change | ||||||||||||||||||||||||||||||
(Dollars in thousands) | |||||||||||||||||||||||||||||||||||
Total Originations (including transfer loans): | |||||||||||||||||||||||||||||||||||
Loans | 1,476 | 1,095 | 35 | % | 3,841 | 2,809 | 37 | % | |||||||||||||||||||||||||||
Principal | $ | 563,047 | $ | 386,613 | 46 | % | $ | 1,439,918 | $ | 1,023,287 | 41 | % | |||||||||||||||||||||||
Capture Rate Data: | |||||||||||||||||||||||||||||||||||
Capture rate as % of all homes delivered | 68 | % | 64 | % | 4 | % | 68 | % | 61 | % | 7 | % | |||||||||||||||||||||||
Capture rate as % of all homes delivered (excludes cash sales) | 71 | % | 68 | % | 3 | % | 71 | % | 66 | % | 5 | % | |||||||||||||||||||||||
Mortgage Loan Origination Product Mix: | |||||||||||||||||||||||||||||||||||
FHA loans | 20 | % | 20 | % | — | % | 21 | % | 17 | % | 4 | % | |||||||||||||||||||||||
Other government loans (VA & USDA) | 22 | % | 20 | % | 2 | % | 22 | % | 20 | % | 2 | % | |||||||||||||||||||||||
Total government loans | 42 | % | 40 | % | 2 | % | 43 | % | 37 | % | 6 | % | |||||||||||||||||||||||
Conventional loans | 58 | % | 60 | % | (2) | % | 57 | % | 63 | % | (6) | % | |||||||||||||||||||||||
100 | % | 100 | % | — | % | 100 | % | 100 | % | — | % | ||||||||||||||||||||||||
Loan Type: | |||||||||||||||||||||||||||||||||||
Fixed rate | 100 | % | 98 | % | 2 | % | 99 | % | 97 | % | 2 | % | |||||||||||||||||||||||
ARM | — | % | 2 | % | (2) | % | 1 | % | 3 | % | (2) | % | |||||||||||||||||||||||
Credit Quality: | |||||||||||||||||||||||||||||||||||
Average FICO Score | 736 | 738 | — | % | 736 | 739 | — | % | |||||||||||||||||||||||||||
Other Data: | ` | ` | |||||||||||||||||||||||||||||||||
Average Combined LTV ratio | 85 | % | 84 | % | 1 | % | 85 | % | 82 | % | 3 | % | |||||||||||||||||||||||
Full documentation loans | 100 | % | 100 | % | — | % | 100 | % | 100 | % | — | % | |||||||||||||||||||||||
Loans Sold to Third Parties: | |||||||||||||||||||||||||||||||||||
Loans | 1,530 | 1,064 | 44 | % | 3,958 | 2,882 | 37 | % | |||||||||||||||||||||||||||
Principal | $ | 574,239 | $ | 377,213 | 52 | % | $ | 1,472,452 | $ | 1,047,637 | 41 | % |
Consolidated
Cash used to increase housing completed or under construction for the nine months ended September 30, 2020 and 2019 was $387.3 million and $251.7 million, respectively, as homes in inventory increased significantly during both periods.
IMPACT OF INFLATION, CHANGING PRICES AND ECONOMIC CONDITIONS
(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.
Period: Total Number of Shares Purchased (1) Average Price Paid Per Share Total Number of Shares Purchased as Part of Publicly Announced Plan or Program (2) Maximum Number of Shares that may yet be Purchased under the Plan or Program (2) January 1 to January 31, 2020 February 1 to February 29, 2020 March 1 to March 31, 2020 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). By: Senior Vice have instituted restrictions that have substantially limited the operations of non-essential businesses and the activities of individuals. ThereWhile some of these restrictions have been eased, there is still significant uncertainty around the extent and duration of those still in place, the possibility for restrictions to be increased again in the future and the impact these restrictions as well as their ultimate impactwill have on the U.S. economy and consumer confidence. The degree to which the pandemic will impact our financial results in the coming periods depends on future developments whichthat are highly uncertain, and cannot be predicted at this time, including new information that may emerge concerning the severity of the pandemic, whether there are additional outbreaks of COVID-19 and the actions taken to contain or treataddress the virus. As a result of the pandemic, our sales centers and model homes have experienced a significant decline in traffic and cancellations of sales contracts have increased. If the pandemic continues to cause significant negative impacts to the U.S. economy and consumer confidence, our results of operations, financial condition and cash flows willcould be significantly and adversely impacted.March 31,September 30, 2020: - N/A - 4,000,000 14,376 $ 42.14 - 4,000,000 - N/A - 4,000,000 (1)Represents sharesPeriod common stock withheld by usShares Purchased (1)Average Price Paid Per Share July 1 to cover withholding taxes due, at the election of certain holders of nonvested shares, with market value approximating the amount of withholding taxes due.July 31, 2020— N/A — 4,000,000 August 1 to August 31, 2020 (2)We are authorized—N/A — 4,000,000 September 1 to repurchase up to September 30, 2020— N/A — 4,000,000 shares of our common stock. There were no shares of MDC common stock repurchased under this repurchase program during the three month period ended March 31, 2020.- 44 --41-Exhibits 4.1110.1 31.110.210.3 22 31.1 31.2 32.1 32.2 101 March 31,September 30, 2020 and December 31, 2019, (ii) Consolidated Statements of Operations for the three and nine months ended March 31,September 30, 2020 and 2019, (iii) Consolidated Statements of Changes in Stockholders’ Equity for the three and nine months ended March 31,September 30, 2020 and 2019, (iv) Consolidated Statements of Cash Flows for the threenine months ended March 31,September 30, 2020 and 2019; and (v) Notes to the Unaudited Consolidated Financial Statements, tagged as blocks of text.104 Date: May 5,October 29, 2020M.D.C. HOLDINGS, INC. (Registrant) /s/ /s/ Robert N. MartinPresident,President, Chief Financial Officer and Principal Accounting Officer (principal(principal financial officer andduly authorized officer)By: /s/ Staci M. Woolsey - 45 --43-