M.D.C. HOLDINGS, INC. 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 endedDecember 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 ofMarch 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 (Dollars in thousands, except per Homebuilding: 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 ) - 28 -
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Table of Contents 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 inMarch 2020 , the pandemic dramatically changed the everyday lives of individuals throughout much ofthe 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
For the three months endedMarch 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 endedMarch 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 endedMarch 31, 2020 , we reported net income of$36.8 million , or$0.56 per diluted share, a 9% decrease compared to net income 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 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.
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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.
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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
Home Sale Average Home Sale Average Home Sale Average
Homes Revenues Price Homes Revenues Price Homes Revenues 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.
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Table of Contents Gross Margin from Home Sales: Our gross margin from home sales for the three months endedMarch 31, 2020 , increased 100 basis points year-over-year from 18.9% to 19.9%. During the three months endedMarch 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
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
Fair Value of Number of
Inventory Inventory After Subdivisions
Three Months Ended Impairments Impairments Impaired Discount Rate
March 31, 2019 $ 610 $ 10,476 2 N/A
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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
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.
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Other Homebuilding Operating Data
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
Monthly Monthly Monthly
Dollar Average Absorption Dollar Average Absorption Dollar Average Absorption
Homes Value Price Rate * Homes Value Price Rate * Homes Value Price 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).
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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
Dollar Average Dollar Average Dollar Average
Homes Value Price Homes Value Price Homes Value 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
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Homes Completed or
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 Lots Lots Lots Total %
Owned Optioned Total Owned Optioned 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.
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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 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
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 endedMarch 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 theFederal 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. - 37 -
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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 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
amount of executive compensation that is deductible under Internal Revenue Code
Section 162(m).
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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
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.
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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 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 . We are currently in negotiations
to extend the Mortgage Repurchase Facility. 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.
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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 TangibleNet Worth requirement, (ii) a maximum Adjusted TangibleNet 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 ofMarch 31, 2020 . Dividends
During the three months ended
MDC Common Stock Repurchase Program
AtMarch 31, 2020 , we were authorized to repurchase up to 4,000,000 shares of our common stock. We did not repurchase any shares of our common stock during the three months endedMarch 31, 2020 . Consolidated Cash Flow During the three months endedMarch 31, 2020 , we used$37.2 million of cash for operating activities compared with cash provided by operating activities of$54.3 million in the prior year period. Cash used to increase housing completed or under construction was$178.9 million for the three months endedMarch 31, 2020 , as homes in inventory increased by 508 homes fromDecember 31, 2019 . Cash provided by the decrease in housing completed or under construction was$2.1 million in the prior year period as homes in inventory increased only marginally. Cash provided by the decrease in land and land under development was$29.1 million for the three months endedMarch 31, 2020 , as home starts outnumbered lot acquisitions during the quarter due to the slowdown in land acquisition during the quarter as a result of the pandemic. Cash used to increase land and land under development was$18.5 million in the prior year period primarily due to increased land development spend. Cash provided from the sale of mortgage loans for the three months endedMarch 31, 2020 and 2019, was$63.1 million and$38.4 million resulting from increased loan activity during the month of December.
During the three months ended
During the three months endedMarch 31, 2020 , net cash used in financing activities was$5.4 compared with cash use of$42.0 million in the prior year period. The primary driver of this decrease in cash used in financing activities is due to net proceeds from the issuance of senior notes of$48.1 million during the three months endedMarch 31, 2020 . This was slightly offset by an increase in payments on the mortgage repurchase facility driven by the increased proceeds from the sale of mortgage loans noted above. Cash used to fund dividend payments increased slightly year-over-year as a result of the 10% increase in the cash dividend announced inJanuary 2020 .
Off-Balance Sheet Arrangements
Lot Option Purchase Contracts. In the ordinary course of business, we enter into lot option purchase contracts in order to procure lots for the construction of homes. Lot option contracts enable us to control lot positions with a minimal capital investment, which substantially reduces the risks associated with land ownership and development. AtMarch 31, 2020 , we had deposits of$27.1 million in the form of cash and$9.3 million in the form of letters of credit that secured option contracts to purchase 8,533 lots for a total estimated purchase price of$498.5 million . Surety Bonds and Letters of Credit. AtMarch 31, 2020 , we had outstanding surety bonds and letters of credit totaling$284.0 million and$96.6 million , respectively, including$70.9 million in letters of credit issued by HomeAmerican. The estimated cost to complete obligations related to these bonds and letters of credit was approximately$152.4 million and$51.2 million , respectively. We expect that the obligations secured by these performance bonds and letters of credit generally will be performed in the ordinary course of business and in accordance with the applicable contractual terms. To the extent that the obligations are performed, the related performance bonds and letters of credit should be released and we should not have any continuing obligations. However, in the event any such performance bonds or letters of credit are called, our indemnity obligations could require us to reimburse the issuer of the performance bond or letter of credit.
We have made no material guarantees with respect to third-party obligations.
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IMPACT OF INFLATION, CHANGING PRICES AND ECONOMIC CONDITIONS
The impact of inflation and changing prices have not changed materially from the
disclosure in our
OTHER
Forward-Looking Statements
Certain statements in this Quarterly Report on Form 10-Q, as well as statements
made by us in periodic press releases, oral statements made by our officials in
the course of presentations about the Company and conference calls in connection
with quarterly earnings releases, constitute "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. These
forward-looking statements include statements regarding our business, financial
condition, results of operations, cash flows, strategies and prospects. These
forward-looking statements may be identified by terminology such as "likely,"
"may," "will," "should," "expects," "plans," "anticipates," "believes,"
"estimates," "predicts," "potential" or "continue," or the negative of such
terms and other comparable terminology. Although we believe that the
expectations reflected in the forward-looking statements contained in this
Report are reasonable, we cannot guarantee future results. These statements
involve known and unknown risks, uncertainties and other factors that may cause
the actual results, performance or achievements of the Company to be materially
different from those expressed or implied by the forward-looking statements. We
undertake no obligation to publicly update any forward-looking statements,
whether as a result of new information, future events or otherwise. However, any
further disclosures made on related subjects in subsequent reports on Forms
10-K, 10-Q and 8-K should be considered. Additionally, information about issues
that could lead to material changes in performance and risk factors that have
the potential to affect us is contained under the caption "Risk Factors" in Item
1A of our Annual Report on Form 10-K for the year ended December 31, 2019 and
Item 1A of Part II of this Quarterly Report on Form 10-Q.
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