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, 2020 and this Quarterly Report on Form 10-Q. Three Months Ended Nine Months Ended September 30, September 30, 2021 2020 2021 2020 (Dollars in thousands, except per share amounts) Homebuilding: Home sale revenues$ 1,257,701 $
1,000,549
(962,078) (795,172) (2,827,147) (2,061,608)
Gross profit 295,623 205,377 840,185 522,784
Gross margin 23.5 % 20.5 % 22.9 % 20.2 %
Selling, general and administrative expenses (120,116) (103,632) (363,970) (285,269)
Loss on debt retirement (12,150) - (12,150) -
Interest and other income 3,149 756 4,984 3,365
Other expense (1,354) (851) (2,881) (4,640)
Homebuilding pretax income 165,152 101,650 466,168 236,240
Financial Services:
Revenues 43,104 36,803 121,445 91,653
Expenses (16,377) (13,294) (47,922) (36,401)
Other income (expense), net 813 859 2,855 (5,274)
Financial services pretax income 27,540 24,368 76,378 49,978
Income before income taxes 192,692 126,018 542,546 286,218
Provision for income taxes (46,738) (27,080) (131,550) (66,124)
Net income $ 145,954 $ 98,938 $ 410,996 $ 220,094
Earnings per share:
Basic $ 2.07 $ 1.42 $ 5.83 $ 3.21
Diluted $ 1.99 $ 1.38 $ 5.62 $ 3.12
Weighted average common shares outstanding:
Basic 70,301,085 68,977,965 70,130,853 68,179,403
Diluted 72,800,011 71,090,903 72,770,432 70,167,443
Dividends declared per share$ 0.40 $ 0.31 $ 1.17 $ 0.92 Cash provided by (used in): Operating Activities$ (98,606) $ (26,262) $ (86,522) $ 29,442 Investing Activities$ (7,567) $ (7,917) $ (21,014) $ 27,577 Financing Activities$ 232,460 $ (3,965) $ 471,210 $ (8,787) -23-
-------------------------------------------------------------------------------- Table of Contents Overview Industry Conditions and Outlook for MDC* The strong demand for new homes continued during the third quarter of 2021, driven by the current supply-demand imbalance, a continued focus on suburban homeownership, low interest rates and an improving economy. We believe many of these factors will continue to support new home demand in future periods. However, the pace of net new orders during the third quarter of 2021 was lower than the prior year, in part due to the return of more normal seasonal patterns that were not present in the third quarter of the prior year. Supply chains remained stressed and construction cycle times have extended throughout the industry, as a result of the strong demand for new homes as well as challenges brought about by the pandemic. Even with these supply chain challenges, we continued to see strong top and bottom line growth during the third quarter and we remain on track to meet our goal of delivering over 10,000 homes for the fiscal year. We also made significant progress during the quarter towards growing our active community count. We ended the third quarter with 203 active communities, representing a 9% increase fromJune 30, 2021 and a 5% increase from the prior year-end. In addition, we controlled 36,666 lots at the end of the third quarter, representing a 37% increase over the prior year period. While the exact timing of when future communities become active is uncertain and subject to land development and permitting lead times, we remain confident in our ability to further increase our active community count in advance of the 2022 spring selling season. We continued to take steps during the third quarter to further improve our financial position and to ensure we have sufficient capital to meet our growth goals. During the quarter we issued$350 million of 40-year senior notes at a rate of 3.966%, which helped to increase our total liquidity to$2.03 billion as of period end and provides a long-term low-cost source of capital as we continue to grow our business. We also accelerated the retirement of$123.6 million of our 5.500% senior notes scheduled to mature inJanuary 2024 through a cash tender offer, which lowered our debt to capital ratio to 39.7% as ofSeptember 30, 2021 . While we remain confident in the long term growth prospects for the industry, we continue to closely monitor developments related to COVID-19, which are highly uncertain and could adversely impact our operations and financial results in future periods. Three Months EndedSeptember 30, 2021 For the three months endedSeptember 30, 2021 , our net income was$146.0 million , or$1.99 per diluted share, a 48% increase compared to net income of$98.9 million , or$1.38 per diluted share, for the same period in the prior year. The increase was driven by our homebuilding operations, which generated pretax income of$165.2 million . This represented an increase of$63.5 million , or 62% from the third quarter of 2020. The increase in homebuilding pretax income was the result of a 26% increase in home sale revenues and a 380 basis point increase in our operating margin. These increases were partially offset by a loss on debt retirement of$12.2 million . The dollar value of our net new home orders decreased 21% from the prior year period, due to a 32% decrease in the number of net new orders, which was partially offset by a 16% increase in the average selling price of those orders. The decrease in the number of net new orders was due to a decrease in our monthly sales absorption rate resulting from (1) the return of more normal seasonal patterns following the unseasonably high new home demand experienced in the second half of fiscal year 2020 as a result of the pandemic and (2) our efforts to moderate sales activity to better align with our current pace of production. Our monthly sales absorption rate was 4.1 during the third quarter of 2021, which was our second highest third quarter rate in the last 15 years. The increase in the average selling price was the result of strong demand over the past twelve months as well as our efforts to moderate sales activity as mentioned above. Nine Months EndedSeptember 30, 2021 For the nine months endedSeptember 30, 2021 , our net income was$411.0 million , or$5.62 per diluted share, an 87% increase compared to net income of$220.1 million , or$3.12 per diluted share, for the same period in the prior year. Both our homebuilding and financial services businesses contributed to the increase, as pretax income from our homebuilding operations increased$229.9 million , or 97%, and our financial services pretax income increased$26.4 million , or 53%. The main drivers of the increase in homebuilding pretax income are consistent with the third quarter discussed above. The increase in financial services pretax income was primarily due to the overall increase in volume of our homebuilding operations. Additionally,$8.3 million of net losses on equity securities were recognized in the prior year period, further impacting the year-over-year increase in financial services pretax income. * See "Forward-Looking Statements" below. -24- --------------------------------------------------------------------------------
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Homebuilding
Pretax Income:
Three Months Ended Nine Months Ended
September 30, Change September 30, Change
2021 2020 Amount % 2021 2020 Amount %
(Dollars in thousands)
West $ 120,284 $ 59,120 $ 61,164 103 % $ 330,390 $ 144,441 $ 185,949 129 %
Mountain 55,386 48,053 7,333 15 % 165,296 111,372 53,924 48 %
East 15,410 6,020 9,390 156 % 34,091 9,993 24,098 241 %
Corporate (25,928) (11,543) (14,385) (125) % (63,609) (29,566) (34,043) (115) %
Total Homebuilding pretax
income $ 165,152 $ 101,650 $ 63,502 62 % $ 466,168 $ 236,240 $ 229,928 97 %
For the three months ended September 30, 2021 , we recorded homebuilding pretax
income of $165.2 million , an increase of 62% from $101.6 million for the same
period in the prior year. The increase was due to a 26% increase in home sale
revenues, a 300 basis point increase in our gross margin from home sales and an
80 basis point decrease in our selling, general and administrative expenses as a
percentage of revenue.
Our West segment experienced a $61.2 million year-over-year increase in pretax
income, due to an improved gross margin and a 32% increase in home sales
revenue. Our Mountain segment experienced a $7.3 million increase in pretax
income from the prior year, as a result of a 9% increase in home sales revenue
and an improved gross margin. Our East segment experienced a $9.4 million
increase in pretax income from the prior year, due to an improved gross margin
as well as a 47% increase in home sales revenue. Each of our homebuilding
segments also benefited from decreased selling, general and administrative
expenses as a percentage of revenue driven by improved operating leverage. Our
Corporate segment experienced a $14.4 million increase in pretax loss, primarily
due to the $12.2 million loss on retirement of debt recognized in the current
year quarter.
For the nine months ended September 30, 2021 , we recorded homebuilding pretax
income of $466.2 million , an increase of 97% from $236.2 million for the same
period in the prior year. The increase was due to a 42% increase in home sale
revenues, a 270 basis point increase in our gross margin from home sales and a
110 basis point decrease in our selling, general and administrative expenses as
a percentage of revenue. Commentary on the drivers of the increase in pretax
income in our individual homebuilding segments is consistent with the 2021 third
quarter discussion above. In addition to the loss on retirement of debt, the
pretax loss for our Corporate segment was further impacted by increases in
stock-based and deferred compensation expenses, increased bonus expense and
increased charitable contributions.
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Assets:
September 30, December 31, Change
2021 2020 Amount %
(Dollars in thousands)
West $ 2,229,687 $ 1,855,567 $ 374,120 20 %
Mountain 1,030,407 905,007 125,400 14 %
East 419,212 274,937 144,275 52 %
Corporate 816,577 470,909 345,668 73 %
Total homebuilding assets $ 4,495,883 $ 3,506,420 $ 989,463 28 %
Total homebuilding assets increased 28% from December 31, 2020 to September 30,
2021 . Increases in each or our homebuilding segments were the result of
increases in our inventory balances. These increases were driven by an increase
in homes completed or under construction as of period end and, with the
exception of our Mountain segment, a greater number of lots acquired during the
period than those delivered to homebuyers. The increase in our Corporate segment
was due to the proceeds from the issuance of senior notes during the year. This
increase was partially offset by the funding of land acquisition and
construction activity by our Corporate segment as well as the retirement of
$123.6 million of our 5.500% senior notes scheduled to mature in January 2024
through a cash tender offer.
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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.
Three Months Ended
2021 2020 % Change
Home
Home Sale Average Home Sale Average Sale
Homes Revenues Price Homes Revenues Price Homes Revenues Average Price
(Dollars in thousands)
West 1,376 $ 729,777 $ 530.4 1,135 $ 552,319 $ 486.6 21 % 32 % 9 %
Mountain 666 379,041 569.1 677 347,095 512.7 (2) % 9 % 11 %
East 377 148,883 394.9 335 101,135 301.9 13 % 47 % 31 %
Total 2,419 $ 1,257,701 $ 519.9 2,147 $ 1,000,549 $ 466.0 13 % 26 % 12 %
Nine Months Ended September 30,
2021 2020 % Change
Home
Home Sale Average Home Sale Average Sale
Homes Revenues Price Homes Revenues Price Homes Revenues Average Price
(Dollars in thousands)
West 4,324 $ 2,194,071 $ 507.4 3,023 $ 1,447,934 $ 479.0 43 % 52 % 6 %
Mountain 1,989 1,104,391 555.2 1,720 886,619 515.5 16 % 25 % 8 %
East 1,006 368,870 366.7 851 249,839 293.6 18 % 48 % 25 %
Total 7,319 $ 3,667,332 $ 501.1 5,594 $ 2,584,392 $ 462.0 31 % 42 % 8 %
For the three and nine months ended September 30, 2021 , the number of new homes
delivered in each of our segments was negatively impacted by an increase in
construction cycle times. Our average sale to close cycle time during the third
quarter of 2021 was approximately 37 weeks. Cycle times increased approximately
two weeks from the second to third quarter of 2021 and have increased
approximately six weeks year-over-year, from the third quarter of 2020 to the
third quarter of 2021. These increases are primarily the result of extended
permitting times, supply chain disruptions and labor shortages as a result of
the pandemic as well as the increased demand for new homes.
West Segment Commentary
For the three and nine months ended September 30, 2021 , the increase in new home
deliveries was the result of an increase in the number of homes in backlog to
begin the respective periods. These increases were partially offset by a
decrease in backlog conversion rates in most of our markets within this segment
as a result of the increased construction cycle times discussed above. The
average selling price of homes delivered increased as a result of price
increases implemented over the last twelve months as well as a shift in
geographic mix of homes delivered from Arizona to Southern California . These
increases were partially offset by a shift in mix to lower priced communities.
Mountain Segment Commentary
For the three months ended September 30, 2021 , the decrease in new home
deliveries was the result of a decrease in backlog conversion rates in each of
our markets within this segment as a result of (1) the increased construction
cycle times discussed above and (2) the construction status of homes in
beginning backlog, which on average were at a more preliminary stage of
construction as compared to the prior year period. This decrease was mostly
offset by an increase in the number of homes in backlog to begin the period.
For the nine months ended September 30, 2021 , the increase in new home
deliveries was the result of an increase in the number of homes in backlog to
begin the period. This increase were partially offset by a decrease in backlog
conversion rates as a result of the increased construction cycle times discussed
above.
For the three and nine months ended
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East Segment Commentary
For the three and nine months ended September 30, 2021 , the increase in new home
deliveries was the result of an increase in the number of homes in backlog to
begin the respective periods. This increase was partially offset by a decrease
in backlog conversion rates due to (1) the increased construction cycle times
discussed above and (2) a lower percentage of homes both sold and delivered in
the respective periods as compared to the prior year periods. The average
selling price of homes delivered increased as a result of price increases
implemented over the last twelve months as well as a shift in geographic mix of
homes delivered to our mid-Atlantic market.
Gross Margin from Home Sales:
Our gross margin from home sales for the three months ended September 30, 2021 ,
increased 300 basis points year-over-year from 20.5% to 23.5%. Gross margin from
home sales increased across each of our segments driven by price increases
implemented across nearly all of our communities over the past twelve months.
Our gross margin from home sales in the 2021 third quarter was also positively
impacted by a decrease in our capitalized interest in cost of sales as a
percentage of home sale revenues. These improvements were partially offset by an
increase in building material and labor costs year-over-year.
Our gross margin from home sales for the nine months ended September 30, 2021 ,
increased 270 basis points year-over-year from 20.2% to 22.9%. The primary
drivers of the improved gross margin from home sales for the nine months ended
September 30, 2021 are consistent with those noted above for the three months
ended September 30, 2021 .
Selling, General and Administrative Expenses:
Three Months Ended September 30, Nine Months Ended September 30,
2021 2020 Change 2021 2020 Change
(Dollars in thousands)
General and administrative expenses $ 59,935 $ 45,980 $ 13,955 $ 179,056 $ 131,488 $ 47,568
General and administrative expenses as a percentage of home sale revenues 4.8 % 4.6 % 20 bps 4.9 % 5.1 % -20 bps Marketing expenses$ 25,660 $ 24,725 $ 935 $ 78,195 $ 68,828 $ 9,367 Marketing expenses as a percentage of home sale revenues 2.0 % 2.5 % -50 bps 2.1 % 2.7 % -60 bps Commissions expenses$ 34,521 $ 32,927 $ 1,594 $ 106,719 $ 84,953 $ 21,766 Commissions expenses as a percentage of home sale revenues 2.7 % 3.3 % -60 bps 2.9 % 3.3 % -40
bps
Total selling, general and administrative expenses$ 120,116 $ 103,632 $ 16,484 $ 363,970 $ 285,269 $
78,701
Total selling, general and administrative expenses as a percentage of home sale revenues 9.6 % 10.4 % -80 bps 9.9 % 11.0 % -110 bps General and administrative expenses increased for the three and nine months endedSeptember 30, 2021 due to (1) increased stock-based and deferred compensation expenses, (2) increased bonus expense and (3) increased salary related expenses due to higher average headcount during the respective periods. Marketing expenses increased for the three and nine months endedSeptember 30, 2021 as a result of increased deferred selling amortization and master marketing fees resulting from increased closings. Commissions expenses increased for the three and nine months endedSeptember 30, 2021 due to the increase in homes sale revenues year-over-year. -28- -------------------------------------------------------------------------------- Table of Contents Other Homebuilding Operating DataNet 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. Three Months Ended September 30, 2021 2020 % Change Monthly Monthly Dollar Average Absorption Average Monthly Dollar Absorption Homes Value Price Rate * Homes Dollar Value Price Absorption Rate * Homes Value Average Price Rate (Dollars in thousands) West 1,437$ 783,072 $ 544.9 4.91 1,955$ 932,111 $ 476.8 6.58 (26) % (16) % 14 % (25) % Mountain 505 323,018 639.6 2.99 1,051 542,375 516.1 5.70 (52) % (40) % 24 % (48) % East 457 199,985 437.6 3.67 509 176,896 347.5 5.39 (10) % 13 % 26 % (32) % Total 2,399$ 1,306,075 $ 544.4 4.10 3,515$ 1,651,382 $ 469.8 6.10 (32) % (21) % 16 % (33) % Nine Months Ended September 30, 2021 2020 % Change Monthly Monthly Monthly Dollar Average Absorption Average Absorption Dollar Absorption Homes Value Price Rate * Homes Dollar Value Price Rate * Homes Value Average Price Rate (Dollars in thousands) West 4,814$ 2,613,279 $ 542.8 5.42 4,646$ 2,265,557 $ 487.6 5.47 4 % 15 % 11 % (1) % Mountain 2,222 1,375,442 619.0 4.35 2,502 1,309,176 523.3 4.39 (11) % 5 % 18 % (1) % East 1,286 558,716 434.5 3.91 1,156 393,913 340.8 4.23 11 % 42 % 27 % (8) % Total 8,322$ 4,547,437 $ 546.4 4.82 8,304$ 3,968,646 $ 477.9 4.91 - % 15 % 14 % (2) %
*Calculated as total net new orders (gross orders less cancellations) in period ÷ average active communities during period ÷ number of months in period.
Average Active Subdivisions Average Active Subdivisions
Active Subdivisions Three Months Ended Nine Months Ended
September 30, % September 30, %
September 30, %
2021 2020 Change 2021 2020 Change 2021 2020 Change
West 104 102 2 % 98 99 (1) % 99 94 5 %
Mountain 56 61 (8) % 56 62 (10) % 57 63 (10) %
East 43 31 39 % 42 32 31 % 37 30 23 %
Total 203 194 5 % 196 193 2 % 193 187 3 %
West Segment Commentary
For the three months ended
For the three and nine months endedSeptember 30, 2021 , the increase in average selling price was due to price increases implemented over the past twelve months within nearly all of our communities. This increase was slightly offset by a shift in mix to lower priced communities. -29-
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Mountain Segment Commentary
For the three months ended September 30, 2021 , the decrease in net new orders
was primarily due to a decrease in the monthly sales absorption rate as
previously discussed. For the three and nine months ended September 30, 2021 ,
net new orders were also negatively impacted by a decrease in average active
subdivisions within our Colorado markets.
For the three and nine months ended September 30, 2021 , the increase in average
selling price was due to price increases implemented over the last twelve months
within nearly all of our communities.
East Segment Commentary
For the three months ended September 30, 2021 , the decrease in net new orders
was due to a decrease in the monthly sales absorption rate as previously
discussed. This decrease was partially offset by an increase in average active
subdivisions within each of our Florida and mid-Atlantic markets.
For the nine months ended September 30, 2021 , the increase in net new orders was
driven by an increase in average active subdivisions within each of our Florida
and mid-Atlantic markets. This increase was partially offset by a decrease in
the monthly sales absorption rate.
For the three and nine months ended September 30, 2021 , the increase in average
selling price was due to price increases implemented over the last twelve months
within nearly all of our communities. Additionally, we experienced a shift in
mix within several markets to higher priced communities.
Cancellation Rate:
Cancellations as a Percentage of Homes in Beginning Backlog
2021 2020
Three Months Ended
March 31, June 30, September 30, March 31, June 30, September 30,
West 7 % 5 % 8 % 15 % 14 % 11 %
Mountain 8 % 5 % 7 % 22 % 20 % 12 %
East 13 % 9 % 7 % 23 % 22 % 18 %
Total 8 % 6 % 7 % 18 % 17 % 12 %
Our cancellations as a percentage of homes in beginning backlog to start the
quarter ("cancellation rate") decreased year-over-year in each of our segments
due to the strong demand for new homes.
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Backlog:
September 30,
2021 2020 % Change
Dollar Average Dollar Average Dollar Average
Homes Value Price Homes Value Price Homes Value Price
(Dollars in thousands)
West 4,200 $ 2,295,570 $ 546.6 3,646 $ 1,743,547 $ 478.2 15 % 32 % 14 %
Mountain 2,251 1,408,945 625.9 1,993 1,033,264 518.4 13 % 36 % 21 %
East 1,207 537,983 445.7 872 298,965 342.9 38 % 80 % 30 %
Total 7,658 $ 4,242,498 $ 554.0 6,511 $ 3,075,776 $ 472.4 18 % 38 % 17 %
At September 30, 2021 , we had 7,658 homes in backlog with a total value of
$4.24 billion . This represented an 18% increase in the number of homes in
backlog and a 38% increase in the dollar value of homes in backlog from
September 30, 2020 . The increase in the number of homes in backlog is primarily
a result of the unseasonably high net new order volume in the fourth quarter of
2020 as well as an increase in cycle times within nearly all of our markets. The
increase in the average selling price of homes in backlog is due to price
increases implemented over the past twelve months in nearly all of our
communities as well as a shift in our net new order mix in our East segment as
discussed above. Our ability to convert backlog into closings could be
negatively impacted in future periods by the pandemic, the extent to which is
highly uncertain and depends on future developments. See "Forward-Looking
Statements" below.
Homes Completed or Under Construction (WIP lots):
September 30, %
2021 2020 Change
Unsold:
Completed 21 74 (72) %
Under construction 345 129 167 %
Total unsold started homes 366 203 80 %
Sold homes under construction or completed 6,468 4,540 42 %
Model homes under construction or completed 490 505 (3) %
Total homes completed or under construction 7,324 5,248 40 %
The increase in sold homes under construction or completed is due to the
year-over-year increase in the number of homes in backlog as noted above as well
as a 1,400 basis point decrease year-over-year in the number of homes in backlog
that were sold but where construction had not yet started as of period end.
Lots Owned and Optioned (including homes completed or under construction):
September 30, 2021 September 30, 2020
Total
Lots Lots Lots Lots %
Owned Optioned Total Owned Optioned Total Change
West 14,209 5,811 20,020 10,140 3,280 13,420 49 %
Mountain 6,258 4,236 10,494 6,217 2,708 8,925 18 %
East 3,824 2,328 6,152 2,716 1,769 4,485 37 %
Total 24,291 12,375 36,666 19,073 7,757 26,830 37 %
Our total owned and optioned lots at September 30, 2021 were 36,666, which was a
37% increase year-over-year. We believe that our total lot supply, coupled with
our planned acquisition activity, can support growth in future periods. See
"Forward-Looking Statements" below.
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Table of Contents
Financial Services
Three Months Ended Nine Months Ended
September 30, Change September 30, Change
2021 2020 Amount % 2021 2020 Amount %
(Dollars in thousands)
Financial services
revenues
Mortgage operations $ 31,122 $ 28,548 $ 2,574 9 % $ 89,608 $ 67,536 $ 22,072 33 %
Other 11,982 8,255 3,727 45 % 31,837 24,117 7,720 32 %
Total financial services $ 43,104 $ 36,803 $ 6,301 17 %
33 % revenues Financial services pretax income Mortgage operations$ 21,214 $ 20,809 405 2 %$ 61,341 $ 46,558 $ 14,783 32 % Other 6,326 3,559 2,767 78 % 15,037 3,420$ 11,617 N/M Total financial services pretax income (loss)$ 27,540 $ 24,368 3,172 13 %$ 76,378 $ 49,978 $ 26,400 53 % For the three months endedSeptember 30, 2021 , our financial services pretax income increased by$3.2 million , or 13% from the same period in the prior year. The increase was primarily due to other financial services, driven by the overall increase in volume of our homebuilding operations. The increase in our mortgage operations was due to a$3.5 million gain recognized on the sale of conventional mortgage servicing rights during the period. This was mostly offset by increased competition in the primary mortgage market as well as increased compensation related costs. For the nine months endedSeptember 30, 2021 , our financial services pretax income increased$26.4 million , or 53% from the same period in the prior year. The increase was due to both our mortgage operations as well as other financial services. The increase in our mortgage operations was due to an increase in loan origination and sales activity driven by the overall increase in volume of our homebuilding operations as well as the gain on sale of servicing noted above. The increase in other financial services was the result of$8.3 million of net losses on equity securities recognized during the prior year period and to a lesser extent the increase in volume of our homebuilding operations. -32- -------------------------------------------------------------------------------- Table of Contents The following table sets forth information for our mortgage operations segment relating to mortgage loans originated and capture rate. Three Months Ended % or Nine Months Ended September 30, Percentage September 30, % or 2021 2020 Change 2021 2020 Percentage Change (Dollars in thousands) Total Originations (including transfer loans): Loans 1,453 1,476 (2) % 4,585 3,841 19 % Principal$ 620,454 $ 563,047 10 %$ 1,879,587 $ 1,439,918 31 % Capture Rate Data: Capture rate as % of all homes delivered 60 % 68 % (8) % 62 % 68 % (6) % Capture rate as % of all homes delivered (excludes cash sales) 62 % 71 % (9) % 65 % 71 % (6) % Mortgage Loan Origination Product Mix: FHA loans 14 % 20 % (6) % 17 % 21 % (4) % Other government loans (VA & USDA) 19 % 22 % (3) % 18 % 22 % (4) % Total government loans 33 % 42 % (9) % 35 % 43 % (8) % Conventional loans 67 % 58 % 9 % 65 % 57 % 8 % 100 % 100 % - % 100 % 100 % - % Loan Type: Fixed rate 100 % 100 % - % 100 % 99 % 1 % ARM - % - % - % - % 1 % (1) % Credit Quality: Average FICO Score 740 736 1 % 739 736 - % Other Data: ` ` Average Combined LTV ratio 84 % 85 % (1) % 84 % 85 % (1) % Full documentation loans 100 % 100 % - % 100 % 100 % - % Loans Sold to Third Parties: Loans 1,325 1,530 (13) % 4,612 3,958 17 % Principal$ 557,876 $ 574,239 (3) %$ 1,858,303 $ 1,472,452 26 % Income Taxes Our overall effective income tax rates were 24.3% and 24.2% for the three and nine months endedSeptember 30, 2021 and 21.5% and 23.1% for the three and nine months endedSeptember 30, 2020 , respectively. The rates for the three and nine months endedSeptember 30, 2021 resulted in income tax expense of$46.7 million and$131.5 million , respectively, compared to income tax expense of$27.1 million and$66.1 million for the three and nine months endedSeptember 30, 2020 , respectively. The year-over-year increase in our effective tax rate for the three and nine months endedSeptember 30, 2021 , is primarily due to a decrease in tax windfalls recognized upon the vesting and exercise of equity awards, which is partially offset by a year-over-year increase in home energy credits. -33-
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CRITICAL ACCOUNTING ESTIMATES AND POLICIES
The preparation of financial statements in conformity with accounting principles
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, 2020 .
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, 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 $350
million of 3.966% senior notes on August 6, 2021 , $1.00 billion remains on our
effective shelf registration statement.
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, 2.500% senior notes
due 2031, 6.000% senior notes due 2043 and our 3.966% senior notes due 2061; (3)
our Revolving Credit Facility (defined below); and (4) our Mortgage Repurchase
Facility (defined below). Because of our current balance of cash, cash
equivalents, 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.
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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 December 28, 2020 to
(1) increase the aggregate commitment from $1.0 billion to $1.2 billion (the
"Commitment"), (2) extend the Revolving Credit Facility maturity of $1.125
billion of the Commitments to December 18, 2025 with the remaining Commitment
continuing to termination on December 18, 2023 and (3) provide that the
aggregate amount of the commitments may increase to an amount not to exceed $1.7
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 September 30, 2021 .
We incur costs associated with unused commitment fees pursuant to the terms of
the Revolving Credit Facility. At September 30, 2021 and December 31, 2020 ,
there were $39.7 million and $25.1 million , respectively, in letters of credit
outstanding, which reduced the amounts available to be borrowed under the
Revolving Credit Facility. At September 30, 2021 and December 31, 2020 , we had
$10.0 million and $10.0 million , respectively, outstanding under the Revolving
Credit Facility. As of September 30, 2021 , availability under the Revolving
Credit Facility was approximately $1.15 billion .
Mortgage Repurchase Facility. HomeAmerican has a Master Repurchase Agreement
(the "Mortgage Repurchase Facility") with U.S. Bank National Association
("USBNA"). 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 Mortgage Repurchase Facility was amended on
September 24, 2020 , March 25, 2021 and May 20, 2021 to adjust the commitments to
purchase for specific time periods. As part of the amendments, the commitments
to purchase (subject to increase by up to $75 million under certain conditions)
were increased as follows: (1) $200 million for the periods December 22, 2020
through February 4, 2021 and December 21, 2021 through February 3, 2022 , (2)
$175 million for the periods March 25, 2021 through April 22, 2021 , June 23,
2021 through July 22, 2021 and September 22, 2021 through October 21, 2021 and
(3) $150 million for the period March 23, 2022 through April 21, 2022 . The
Mortgage Repurchase Facility terminates on May 19, 2022 .
The maximum aggregate commitment of the Mortgage Repurchase Facility was
temporarily increased by $75 million on September 27, 2021 effective through
October 21, 2021 . The maximum aggregate commitment of the Mortgage Repurchase
Facility was temporarily increased by $50 million on December 28, 2020 effective
through January 27, 2021 . At September 30, 2021 and December 31, 2020 ,
HomeAmerican had $215.8 million and $202.4 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 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, 2021 .
Dividends
During the three months ended September 30, 2021 and 2020, we paid cash
dividends of $0.40 per share and $0.31 per share, respectively.
MDC Common Stock Repurchase Program
At September 30, 2021 , we were authorized to repurchase up to 4,000,000 shares
of our common stock. We did not repurchase any shares of our common stock during
the three months ended September 30, 2021 .
Consolidated Cash Flow
During the nine months ended September 30, 2021 , net cash used in operating
activities was $86.5 million compared with net cash generated by operating
activities of $29.4 million in the prior year period. Cash used to increase
housing completed or under construction for the nine months ended September 30,
2021 and 2020 was $461.1 million and $387.3 million , respectively, as homes in
inventory increased significantly during both periods. Cash used to increase
land and land under development for the nine months ended September 30, 2021 was
$118.8 million driven by the acquisition of 10,131 lots during the period. Cash
provided by the decrease in land and land under development was $108.7 million
for the nine months ended September 30, 2020 , as home starts outnumbered lot
acquisitions during the period. Cash used to increase trade and other
receivables for the nine months ended September 30, 2021 and 2020 was $55.5
million and $17.5 million , respectively, due to the year-over-year increases in
home deliveries during both periods. The most significant source of cash
provided by operating activities in both periods was net income. Cash provided
by the change in accounts payable and accrued liabilities for the nine months
ended September 30, 2021 and 2020 was $88.3 million and $35.0 million ,
respectively, due to the increased construction spend during both periods as a
result of the year-over-year increases in home deliveries as well as the
increase in homes in inventory at both period ends.
During the nine months ended September 30, 2021 , net cash used in investing
activities was $21.0 million compared with net cash provided by investing
activities of $27.6 million in the prior year period. This difference primarily
relates to $48.5 million in net cash provided by the sale of marketable
securities during the nine months ended September 30, 2020 . Cash used to
purchase property and equipment remained consistent year-over-year.
During the nine months ended September 30, 2021 , net cash provided by financing
activities was $471.2 million compared with cash use of $8.8 million in the
prior year period. The primary driver of this increase in cash provided by
financing activities was the proceeds from the issuance of senior notes of
$694.7 million during the nine months ended September 30, 2021 , which was
partially offset by $136.4 million used to accelerate the retirement of a
portion of our unsecured notes scheduled to mature in January 2024 through a
cash tender offer. Net proceeds from the issuance of senior notes was $48.1
million during the nine months ended September 30, 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. At September 30, 2021 , we had deposits of $47.2
million in the form of cash and $17.1 million in the form of letters of credit
that secured option contracts to purchase 12,375 lots for a total estimated
purchase price of $1.00 billion .
Surety Bonds and Letters of Credit. At September 30, 2021 , we had outstanding
surety bonds and letters of credit totaling $330.9 million and $169.7 million ,
respectively, including $130.0 million in letters of credit issued by
HomeAmerican. The estimated cost to complete obligations related to these bonds
and letters of credit was approximately $159.0 million and $113.9 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
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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.
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, 2020 and
Item 1A of Part II of this Quarterly Report on Form 10-Q.
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