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, 2021 and this Quarterly Report on Form 10-Q. Three Months Ended Six Months Ended June 30, June 30, 2022 2021 2022 2021 (Dollars in thousands, except per share amounts) Homebuilding: Home sale revenues$ 1,450,823 $
1,367,773
(1,062,016) (1,051,181) (1,983,394) (1,865,069) Inventory impairments
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Total cost of sales (1,062,016) (1,051,181) (1,984,054) (1,865,069)
Gross profit 388,807 316,592 707,289 544,562
Gross margin 26.8 % 23.1 % 26.3 % 22.6 %
Selling, general and administrative expenses (133,849) (128,861) (263,163) (243,854)
Interest and other income 822 868 1,577 1,835
Other expense (15,509) (1,090) (16,933) (1,527)
Homebuilding pretax income 240,271 187,509 428,770 301,016
Financial Services:
Revenues 36,229 33,318 65,360 78,341
Expenses (18,801) (16,440) (35,736) (31,545)
Other income, net 1,264 1,155 2,451 2,042
Financial services pretax income 18,692 18,033 32,075 48,838
Income before income taxes 258,963 205,542 460,845 349,854
Provision for income taxes (69,421) (51,190) (122,882) (84,812)
Net income $ 189,542 $
154,352
Earnings per share: Basic$ 2.66 $ 2.19 $ 4.75 $ 3.76 Diluted$ 2.59 $ 2.11 $ 4.61 $ 3.62 Weighted average common shares outstanding: Basic 70,841,476 70,291,057 70,804,019 70,044,326 Diluted 72,881,012 72,715,273 72,945,748 72,754,141
Dividends declared per share$ 0.50 $ 0.40 $ 1.00 $ 0.77 Cash provided by (used in): Operating Activities$ 53,005 $ 70,041 $ 171,060 $ 12,084 Investing Activities$ (6,814) $ (7,698) $ (13,698) $ (13,447) Financing Activities$ (38,304) $ (97,592) $ (164,584) $ 238,750 -23-
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Industry Conditions and Outlook for MDC*
The strong demand experienced in the housing market over the last two years slowed during the second quarter of 2022 as the average 30-year fixed mortgage rate approached 6.0% in June, representing its largest year-over-year basis point increase in over 40 years. The magnitude and speed of these recent rate increases has caused many buyers to pause and reconsider a home purchase, resulting in lower gross demand and higher cancellations during the second quarter. Longer-term, after buyers acclimate to higher interest rates, we believe that a more normalized level of housing activity should continue to be supported by low levels of existing home inventory, a continued focus on suburban home ownership and interest rates that remain low by historical standards. However, we also believe that there is increasing risk that housing activity could be negatively impacted by broader economic factors such as declining consumer confidence or higher inflation. Throughout the homebuilding industry we have continued to see production challenges due to supply chain disruptions, labor market tightness, and shortages of certain building materials. These disruptions have caused our cycle times to extend year-over-year compared to the three and six months endedJune 30, 2021 . However, during the second quarter we began to see signs that the pressure on our cycle times may be abating. We continue to work with our suppliers and trade partners to address ongoing issues, but it remains uncertain whether or not conditions will improve in the near term. Continued supply chain disruptions and labor and material shortages could further extend delivery times and increase cost pressures. We believe we are well-positioned to navigate the ever evolving market conditions given our strong financial position. We ended the quarter with total cash and cash equivalents of$590.2 million , total liquidity of$1.74 billion and no senior note maturities until 2030. We remain focused on cash flow as we continue to build through our homes in backlog, and as a result have slowed our pace of land acquisition and approval activity during the second quarter of 2022. We ended the quarter with 33,130 lots controlled, which represents a decrease of 4% from the prior year. While we remain confident in the long-term growth prospects for the industry given the underproduction of new homes over the past decade, the current demand for new homes is subject to continued and increasing uncertainty due to many factors. These include the current geopolitical environment, theFederal Reserve's continued quantitative tightening, the sharp rise in mortgage interest rates, ongoing inflation concerns, the impact of the COVID-19 pandemic and other factors. The potential effect of these factors is highly uncertain and could adversely and materially impact our operations and financial results in future periods.
Three Months Ended
For the three months endedJune 30, 2022 , our net income was$189.5 million , or$2.59 per diluted share, a 23% increase compared to net income of$154.4 million , or$2.11 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$52.8 million , or 28%, and our financial services pretax income increased$0.7 million , or 4%, compared to the same period in the prior year. The increase in homebuilding pretax income was the result of a 6% increase in home sale revenues and an increase in gross margin from home sales of 370 basis points. This was partially offset by project abandonment expense of$15.5 million , as we intentionally slowed land approval and acquisition activity during the quarter as noted above. The increase in financial services pretax income was primarily due to our insurance operations, which benefited from increased premium revenue within our captive insurance companies. This was partly offset by our mortgage operations business, as we have seen profitability per loan locked, sold and closed return to more historical levels during the period endedJune 30, 2022 as competition in the primary mortgage market has increased. The decrease in mortgage operations was partly offset by an increase in interest rate lock volume as well as an increase in mortgage servicing revenue, as additions to our mortgage servicing portfolio increased year-over-year. The dollar value of our net new home orders decreased 40% from the prior year period, due to a 48% decrease in the number of net new orders, which was slightly offset by a 16% increase in the average selling price of net new orders. The decrease in the number of net new orders was due to a decrease in the monthly sales absorption rate, which was partially offset by an increase in average active communities year-over-year from 188 to 203 communities. The increase in the average selling price was the result of price increases implemented in the second half of 2021 and the first quarter of 2022.
Six Months Ended
For the six months endedJune 30, 2022 , our net income was$338.0 million , or$4.61 per diluted share, a 28% increase compared to net income of$265.0 million , or$3.62 per diluted share, for the same period in the prior year. Our homebuilding business was the driver of the increase, as pretax income from our homebuilding operations increased$127.8 million , or 42%. This was slightly offset by our financial services pretax income, which decreased$16.8 million , or 34%. The main drivers of the -24-
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increase in homebuilding pretax income are consistent with the second quarter commentary discussed above. The decrease in financial services pretax income was primarily due to our mortgage operations, which was slightly offset by our insurance operations. The main drivers of the decrease in mortgage operations and increase in insurance operations are consistent with the second quarter commentary discussed above.
* See "Forward-Looking Statements" below.
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Homebuilding
Pretax Income (Loss):
Three Months Ended Six Months Ended
June 30, Change June 30, Change
2022 2021 Amount % 2022 2021 Amount %
(Dollars in thousands)
West $ 148,508 $ 132,919 $ 15,589 12 % $ 279,034 $ 210,106 $ 68,928 33 %
Mountain 79,135 64,052 15,083 24 % 129,641 109,910 19,731 18 %
East 34,407 10,846 23,561 217 % 65,801 18,681 47,120 252 %
Corporate (21,779) (20,308) (1,471) (7) % (45,706) (37,681) (8,025) (21) %
Total Homebuilding pretax
income $ 240,271 $ 187,509 $ 52,762 28 % $ 428,770 $ 301,016 $ 127,754 42 %
For the three months ended June 30, 2022 , we recorded homebuilding pretax income
of $240.3 million , an increase of 28% from $187.5 million for the same period in
the prior year. The increase was due to a 6% increase in home sale revenues, a
370 basis point increase in our gross margin from home sales and a 20 basis
point decrease in our selling, general and administrative expenses as a
percentage of revenue.
Our West segment experienced a $15.6 million year-over-year increase in pretax
income, due to an improved gross margin, slightly offset by a 7% decrease in
home sale revenues. Our Mountain segment experienced a $15.1 million increase in
pretax income from the prior year, as a result of a 9% increase in home sale
revenues and an improved gross margin. Our East segment experienced a $23.6
million increase in pretax income from the prior year, due primarily to a 89%
increase in home sale revenues as well as an improved gross margin. Our Mountain
and East 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 $1.5 million decrease in
pretax income, due primarily to increased stock-based and deferred compensation
expense. This was partially offset by an increase in the amount of corporate
cost allocated to our homebuilding and financial services segments.
For the six months ended June 30, 2022 , we recorded homebuilding pretax income
of $428.8 million , an increase of 42% from $301.0 million for the same period in
the prior year. The increase was due to a 12% increase in home sale revenues, a
370 basis point increase in our gross margin from home sales and a 30 basis
point decrease in our selling, general and administrative expenses as a
percentage of revenue. Our West segment experienced a $68.9 million increase in
pretax income, due to an improved gross margin, a 2% increase in home sale
revenue, and a decrease in selling, general and administrative expenses as a
percentage of revenue. Commentary on the drivers of the increase in pretax
income in our Mountain and East homebuilding segments is consistent with the
2022 second quarter discussion above.
Assets:
June 30, December 31, Change
2022 2021 Amount %
(Dollars in thousands)
West $ 2,653,052 $ 2,472,378 $ 180,674 7 %
Mountain 1,169,938 1,072,717 97,221 9 %
East 508,690 450,675 58,015 13 %
Corporate 547,620 547,364 256 0 %
Total homebuilding assets $ 4,879,300 $ 4,543,134 $ 336,166 7 %
Total homebuilding assets increased 7% from December 31, 2021 to June 30, 2022 .
Homebuilding assets increased in each of our operating segments largely due to a
greater number of homes completed or under construction as of period-end.
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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 June 30,
2022 2021 % Change
Home
Home Sale Average Home Sale Average Sale
Homes Revenues Price Homes Revenues Price Homes Revenues Average Price
(Dollars in thousands)
West 1,371 $ 788,279 $ 575.0 1,672 $ 847,683 $ 507.0 (18) % (7) % 13 %
Mountain 665 437,001 657.1 711 400,633 563.5 (6) % 9 % 17 %
East 500 225,543 451.1 339 119,457 352.4 47 % 89 % 28 %
Total 2,536 $ 1,450,823 $ 572.1 2,722 $ 1,367,773 $ 502.5 (7) % 6 % 14 %
Six Months Ended June 30,
2022 2021 % Change
Home
Home Sale Average Home Sale Average Sale
Homes Revenues Price Homes Revenues Price Homes Revenues Average Price
(Dollars in thousands)
West 2,614 $ 1,495,590 $ 572.1 2,948 $ 1,464,294 $ 496.7 (11) % 2 % 15 %
Mountain 1,213 772,129 636.5 1,323 725,350 548.3 (8) % 6 % 16 %
East 942 423,624 449.7 629 219,987 349.7 50 % 93 % 29 %
Total 4,769 $ 2,691,343 $ 564.3 4,900 $ 2,409,631 $ 491.8 (3) % 12 % 15 %
For the three and six months ended June 30, 2022 , the number of new homes
delivered in each of our segments was negatively impacted by an increase in
construction cycle times year-over-year. This increase was primarily the result
of extended permitting times, supply chain disruptions and labor shortages as a
result of the pandemic as well as the strong demand for new homes experienced in
recent periods.
West Segment Commentary
For the three and six months ended June 30, 2022 , the decrease in new home
deliveries was the result of 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. This decrease was partially offset by an increase in the
number of homes in backlog to begin the respective periods. The average selling
price of homes delivered increased as a result of price increases implemented
over the past two years. These increases were slightly offset by a shift in mix
to lower priced communities.
Mountain Segment Commentary
For the three and six months ended June 30, 2022 , the decrease in new home
deliveries was the result of 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. This decrease was partially offset by an increase in the
number of homes in backlog to begin the period. The average selling price of
homes delivered increased as a result of price increases implemented over the
past two years.
East Segment Commentary
For the three and six months ended June 30, 2022 , the increase in new home
deliveries was due to an increase in the number of homes in backlog to begin the
period as well as an increase in backlog conversion rates as a result of the
construction status of those homes in beginning backlog. The average selling
price of homes delivered increased as a result of price increases implemented
over the past two years as well as a shift in mix within several markets to
higher priced communities.
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Gross Margin from Home Sales:
Our gross margin from home sales for the three months ended June 30, 2022 ,
increased 370 basis points year-over-year from 23.1% to 26.8%. Gross margin from
home sales increased across each of our segments on both build-to-order and
speculative home deliveries driven by price increases implemented in the second
half of 2021 and the first quarter of 2022. This increase was partially offset
by an increase in building costs year-over-year.
Our gross margin from home sales for the six months ended June 30, 2022 ,
increased 370 basis points year-over-year from 22.6% to 26.3%. The increase in
gross margin from home sales are consistent with the second quarter discussed
above. This increase was partially offset by an increase in building costs
year-over-year, a $0.7 million inventory impairment and a $2.4 million warranty
accrual adjustment recognized during the six months ended June 30, 2022 .
Selling, General and Administrative Expenses:
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 Change 2022 2021 Change
(Dollars in thousands)
General and administrative expenses $ 72,894 $ 61,958
5.0 % 4.5 % 50 bps 5.4 % 4.9 % 50 bps
Marketing expenses $ 26,035 $ 26,832
1.8 % 2.0 % -20 bps 1.9 % 2.2 % -30 bps
Commissions expenses $ 34,920 $ 40,071
2.4 % 2.9 % -50 bps 2.5 % 3.0 % -50 bps
Total selling, general and administrative
expenses $ 133,849 $ 128,861 $ 4,988 $ 263,163 $ 243,854 $ 19,309
Total selling, general and administrative
expenses as a percentage of home sale
revenues 9.2 % 9.4 % -20 bps 9.8 % 10.1 % -30 bps
General and administrative expenses increased for the three and six months ended
June 30, 2022 due to increased stock-based and deferred compensation expenses as
well as increased salary related expenses due to higher average headcount. For
the six months ended June 30, 2022 , the increase was also due to increased bonus
expenses.
Marketing expenses were consistent for the three and six months ended June 30,
2022 compared to the previous period, as increased salary related expenses were
offset by decreased amortization of deferred selling cost.
Commissions expenses decreased for the three and six months ended
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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.
Three Months Ended June 30,
2022 2021 % 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 857 $ 543,584 $ 634.3 2.45 1,602 $ 850,742 $ 531.0 5.67 (47) % (36) % 19 % (57) %
Mountain 277 196,340 708.8 1.79 706 433,793 614.4 4.18 (61) % (55) % 15 % (57) %
East 270 142,221 526.7 2.63 406 180,205 443.9 3.56 (33) % (21) % 19 % (26) %
Total 1,404 $ 882,145 $ 628.3 2.31 2,714 $ 1,464,740 $ 539.7 4.80 (48) % (40) % 16 % (52) %
Six Months Ended June 30,
2022 2021 % 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 2,561 $ 1,574,372 $ 614.7 3.91 3,377 $ 1,791,809 $ 530.6 5.73 (24) % (12) % 16 % (32) %
Mountain 1,197 799,482 667.9 3.76 1,717 1,017,585 592.7 5.03 (30) % (21) % 13 % (25) %
East 797 399,780 501.6 3.73 829 354,950 428.2 4.03 (4) % 13 % 17 % (7) %
Total 4,555 $ 2,773,634 $ 608.9 3.83 5,923 $ 3,164,344 $ 534.2 5.21 (23) % (12) % 14 % (26) %
*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 Six Months Ended
June 30, % June 30, % June 30, %
2022 2021 Change 2022 2021 Change 2022 2021 Change
West 122 91 34 % 117 94 24 % 109 98 11 %
Mountain 51 55 (7) % 52 56 (7) % 53 57 (7) %
East 34 41 (17) % 34 38 (11) % 36 34 6 %
Total 207 187 11 % 203 188 8 % 198 189 5 %
For the three and six months ended June 30, 2022 , the number of net new orders
in each of our segments was negatively impacted by a decrease in the monthly
sales absorption pace. This was driven by a lower pace of gross sales (before
cancellations) as well as an increase in cancellations as a percentage of homes
in beginning backlog to start the quarter ("cancellation rate"). The lower pace
of gross sales experienced during the respective periods was the result of the
sharp rise in mortgage interest rates during the first half of 2022 and to a
lesser extent the return of more seasonal sale patterns during the second
quarter of 2022. See the "Cancellation Rate" section below for commentary on the
increase in our cancellation rate. The increase in average selling price for the
three and six months ended June 30, 2022 was due to price increases implemented
in the second half of 2021 and the first quarter of 2022.
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West Segment Commentary
For the three and six months ended June 30, 2022 , the decrease in net new orders
was due to a decrease in the monthly sales absorption rate as discussed above.
This was partially offset by an increase in average active subdivisions
year-over-year. The increase in average selling price was partially offset by a
shift in mix to our more affordable communities.
Mountain Segment Commentary
For the three and six months ended June 30, 2022 , the decrease in net new orders
was due to a decrease in the monthly sales absorption rates as discussed above,
as well as a decrease in average active subdivisions within our Utah market.
East Segment Commentary
For the three and six months ended June 30, 2022 , the decrease in net new orders
was due to a decrease in the monthly sales absorption rate as discussed above.
For the three months ended June 30, 2022 , the decrease in net new orders was
also due to a decrease in average active subdivisions year-over-year. For the
six months ended June 30, 2022 , the decrease in net new orders was partially
offset by an increase in average active subdivisions year-over-year.
Cancellation Rate:
Cancellations as a Percentage of Homes in Beginning Backlog
2022 2021
Three Months Ended
March 31, June 30, March 31, June 30,
West 8 % 10 % 7 % 5 %
Mountain 8 % 9 % 8 % 5 %
East 9 % 11 % 13 % 9 %
Total 8 % 10 % 8 % 6 %
Our cancellation rate increased year-over-year in each of our segments during
the three months ended June 30, 2022 . The increase in cancellation rates was a
result of the sharp increase in mortgage interest rates during the first half of
2022 and its impact on our homebuyers in backlog who where unable to lock their
interest rate prior to these increases.
Backlog:
June 30,
2022 2021 % Change
Dollar Average Dollar Average Dollar Average
Homes Value Price Homes Value Price Homes Value Price
(Dollars in thousands)
West 4,163
549,721 497.5 1,127
482,736 428.3 (2) % 14 % 16 %
Total 7,426
AtJune 30, 2022 , we had 7,426 homes in backlog with a total value of$4.44 billion . This represented a 3% decrease in the number of homes in backlog and an 8% increase in the dollar value of homes in backlog fromJune 30, 2021 . The decrease in the number of homes in backlog is primarily a result of increased cancellations and a decrease in the pace of gross sales during the second quarter of 2022. This was partially offset by an increase in cycle times year-over-year within nearly all of our markets. The increase in the average selling price of homes in backlog was due to price increases implemented in the second half of 2021 and the first quarter of 2022. These increases were slightly offset by a shift in mix to lower priced communities, most notably in our West segment, consistent with our ongoing strategy of offering more affordable home plans. Our ability to convert backlog into closings could be negatively impacted in future periods by the pandemic, rising mortgage interest rates and other factors, the extent to which is highly uncertain and depends on future developments. -30-
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Homes Completed or
June 30, %
2022 2021 Change
Unsold:
Completed 46 19 142 %
Under construction 607 214 184 %
Total unsold started homes 653 233 180 %
Sold homes under construction or completed 7,007 6,655 5 %
Model homes under construction or completed 524 502 4 %
Total homes completed or under construction 8,184 7,390 11 %
The increase in total unsold started homes is due to an increase in the
cancellation rate during the three months ended
Lots Owned and Optioned (including homes completed or under construction):
June 30, 2022 June 30, 2021
Total
Lots Lots Lots Lots %
Owned Optioned Total Owned Optioned Total Change
West 15,027 1,963 16,990 13,265 4,729 17,994 (6) %
Mountain 6,696 2,961 9,657 6,599 4,174 10,773 (10) %
East 4,111 2,372 6,483 3,636 1,997 5,633 15 %
Total 25,834 7,296 33,130 23,500 10,900 34,400 (4) %
Our total owned and optioned lots at June 30, 2022 were 33,130, which
represented a 4% decrease year-over-year. This decrease is a result of our
intentional slowdown in land acquisition and approval activity due to current
market uncertainty. We believe that our total lot supply is sufficient to meet
our operating needs for several years, consistent with our philosophy of
maintaining a two to three year supply of land. See "Forward-Looking Statements"
below.
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Financial Services
Three Months Ended Six Months Ended
June 30, Change June 30, Change
2022 2021 Amount % 2022 2021 Amount %
(Dollars in thousands)
Financial services
revenues
Mortgage operations $ 22,077 $ 23,321 $ (1,244) (5) % $ 39,678 $ 58,486 $ (18,808) (32) %
Other 14,152 9,997 4,155 42 % 25,682 19,855 5,827 29 %
Total financial
services revenues $ 36,229 $ 33,318 $ 2,911 9 % $ 65,360 $ 78,341 $ (12,981) (17) %
Financial services
pretax income
Mortgage operations $ 10,673 $ 14,088 $ (3,415) (24) % $ 18,106 $ 40,127 $ (22,022) (55) %
Other 8,019 3,945 4,074 103 % 13,969 8,711 $ 5,258 60 %
Total financial
services pretax income $ 18,692 $ 18,033 $ 659 4 %
(34) %
For the three months endedJune 30, 2022 , our financial services pretax income increased to$18.7 million compared to$18.0 million in the second quarter of 2021. The increase in financial services pretax income was primarily due to our insurance operations, which benefited from increased premium revenue within our captive insurance companies. This was mostly offset by our mortgage operations business, due to decreased profitability per loan locked and sold during the period endedJune 30, 2022 driven by increased competition in the primary mortgage market, as well as an increase to compensation expense due to higher headcount. The decrease in mortgage operations was partly offset by an increase in mortgage servicing revenue due to an increase in additions to the servicing portfolio year-over-year, as well as an increase in interest rate lock commitments as many homebuyers elected to take advantage of long-term lock opportunities during the quarter. The accounting treatment for these rate lock commitments had a favorable pull-forward effect on pre-tax income in the second quarter of 2022. For the six months endedJune 30, 2022 , our financial services pretax income decreased to$32.1 million compared to$48.8 million in the prior year period. The decrease in financial services pretax income was primarily due to our mortgage operations, as a result of decreased profitability per loan locked and sold as well as compensation expense, partially offset by an increase in mortgage servicing revenue and interest rate lock commitments. The decrease was also partly offset by an increase in premium revenue within our captive insurance companies. The main drivers of the decrease in mortgage operations and increase related to our captive insurance companies are consistent with the second quarter commentary discussed above. -32-
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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 Six Months Ended
June 30, Percentage June 30, % or
2022 2021 Change 2022 2021 Percentage Change
(Dollars in thousands)
Total Originations (including transfer
loans):
Loans 1,517 1,564 (3) % 2,831 3,132 (10) %
Principal $ 703,325 $ 643,129 9 % $ 1,309,125 $ 1,259,134 4 %
Capture Rate Data:
Capture rate as % of all homes delivered 60 % 57 % 3 % 59 % 64 % (5) %
Capture rate as % of all homes delivered
(excludes cash sales) 63 % 60 % 3 % 63 % 66 % (3) %
Mortgage Loan Origination Product Mix:
FHA loans 14 % 18 % (4) % 13 % 19 % (6) %
Other government loans (VA & USDA) 22 % 18 % 4 % 21 % 18 % 3 %
Total government loans 36 % 36 % - % 34 % 37 % (3) %
Conventional loans 64 % 64 % - % 66 % 63 % 3 %
100 % 100 % - % 100 % 100 % - %
Loan Type:
Fixed rate 97 % 100 % (3) % 98 % 100 % (2) %
ARM 3 % - % 3 % 2 % - % 2 %
Credit Quality:
Average FICO Score 744 740 1 % 743 739 1 %
Other Data: ` `
Average Combined LTV ratio 81 % 84 % (3) % 82 % 85 % (3) %
Full documentation loans 100 % 100 % - % 100 % 100 % - %
Loans Sold to Third Parties:
Loans 1,502 1,701 (12) % 3,029 3,287 (8) %
Principal $ 700,058 $ 689,530 2 % $ 1,391,416 $ 1,300,428 7 %
Income Taxes
Our overall effective income tax rates were 26.8% and 26.7% for the three and
six months ended June 30, 2022 and 24.9% and 24.2% for the three and six months
ended June 30, 2021 . The rates for the three and six months ended June 30, 2022
resulted in income tax expense of $69.4 million and $122.9 million ,
respectively, compared to income tax expense of $51.2 million and $84.8 million
for the three and six months ended June 30, 2021 , respectively. The
year-over-year increase in the effective tax rate for the three and six months
ended June 30, 2022 , was primarily due to energy tax credits not being extended
into 2022 and a decrease in the windfall on non-qualifying stock options
exercised and lapsed restricted stock during the respective periods.
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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
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 (as
defined below) and Mortgage Repurchase Facility (as defined below).
Additionally, we have an existing effective shelf registration statement that
allows us to issue equity, debt or hybrid securities up to $5.0 billion , of
which $5.0 billion remains.
Material Cash Requirements
We are a party to many contractual obligations involving commitments to make payments to third parties. These obligations impact our short-term and long-term liquidity and capital resource needs. Certain contractual obligations are reflected on the Consolidated Balance Sheet as ofJune 30, 2022 , while others are considered future commitments. Our contractual obligations primarily consist of long-term debt and related interest payments, payments due on our Mortgage Repurchase Facility, purchase obligations related to expected acquisition of land under purchase agreements and land development agreements (many of which are secured by letters of credit or surety bonds) and operating leases. Other material cash requirements include land acquisition and development costs not yet contracted for, home construction costs, operating expenses, including our selling, general and administrative expenses, investments and funding of capital improvements and dividend payments. AtJune 30, 2022 , we had outstanding senior notes with varying maturities totaling an aggregate principal amount of$1.5 billion , with none payable within 12 months. Future interest payments associated with the notes total$1.3 billion , with$64.2 million payable within 12 months. As ofJune 30, 2022 , we had$30.2 million of required operating lease future minimum payments.
At
AtJune 30, 2022 , we had outstanding surety bonds and letters of credit totaling$379.6 million and$211.0 million , respectively, including$159.8 million in letters of credit issued by HomeAmerican. The estimated cost to complete obligations related to these bonds and letters of credit was approximately$186.7 million and$167.3 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.
Capital Resources
Our capital structure is primarily a combination of (1) permanent financing,
represented by stockholders' equity; (2) long-term financing, represented by our
3.850% senior notes due 2030, 2.500% senior notes due 2031, 6.000% senior notes
due 2043, and 3.966% senior notes due 2061; (3) our Revolving Credit Facility
and (4) our Mortgage Repurchase Facility. 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
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short and long-term capital requirements, including meeting future payments on our senior notes as they become due. See "Forward-Looking Statements" above.
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 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 terminate 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 provides for a transition from the eurocurrency rate to a benchmark replacement upon the occurrence of certain events.
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 ofJune 30, 2022 . We incur costs associated with unused commitment fees pursuant to the terms of the Revolving Credit Facility. AtJune 30, 2022 andDecember 31, 2021 , there were$51.1 million and$40.1 million , respectively, in letters of credit outstanding, which reduced the amounts available to be borrowed under the Revolving Credit Facility. AtJune 30, 2022 andDecember 31, 2021 , we had$10.0 million and$10.0 million , respectively, outstanding under the Revolving Credit Facility. As ofJune 30, 2022 , availability under the Revolving Credit Facility was approximately$1.14 billion . -35-
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Mortgage Repurchase Facility. HomeAmerican has a Master Repurchase Agreement (the "Mortgage Repurchase Facility") withU.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 ofNovember 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 onSeptember 24, 2020 ,March 25, 2021 ,May 20, 2021 ,December 21, 2021 andMay 19, 2022 to adjust the commitments to purchase for specific time periods. The total capacity of the facility atJune 30, 2022 was$225 million . TheMay 19, 2022 amendment extended the termination date of the Repurchase Agreement toMay 18, 2023 . AtJune 30, 2022 andDecember 31, 2021 , HomeAmerican had$175.6 million and$256.3 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. TheDecember 21, 2021 amendment also provides for a transition from a pricing rate based on theLondon Interbank Offered Rate (LIBOR) to one based on the Secured Overnight Financing Rate (SOFR). 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 ofJune 30, 2022 .
Dividends
During the three months endedJune 30, 2022 and 2021, we paid cash dividends of$0.50 per share and$0.40 per share, respectively. During the six months endedJune 30, 2022 and 2021, we paid cash dividends of$1.00 per share and$0.77 per share, respectively. Additionally, during the six months endedJune 30, 2021 , we distributed an 8% stock dividend.
MDC Common Stock Repurchase Program
AtJune 30, 2022 , we were authorized to repurchase up to 4.0 million shares of our common stock. We did not repurchase any shares of our common stock during the three and six months endedJune 30, 2022 . -36-
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Consolidated Cash Flow
During the six months endedJune 30, 2022 , net cash provided by operating activities was$171.1 million compared with$12.1 million in the prior year period. Cash used to increase housing completed or under construction for the six months endedJune 30, 2022 and 2021 was$468.3 million and$385.7 million , respectively, as homes in inventory increased during both periods. During the six months endedJune 30, 2022 and 2021, the most significant source of cash provided by operating activities was net income of$338.0 million and$265.0 million , respectively. Cash provided by the decrease in mortgage loans held-for-sale was$92.5 million and$46.5 million in the six months endedJune 30, 2022 and 2021, respectively, as a result of the above average level of originations that occur during the fourth quarter. Cash provided by the decrease in land and land under development for the six months endedJune 30, 2022 and 2021 was$126.3 million and$36.4 million , respectively, as home starts outnumbered lot acquisitions during the respective periods. Cash used to increase trade and other receivables for the six months endedJune 30, 2022 and 2021 was$22.3 million and$57.1 million , respectively, due to the year-over-year increases in the dollar amount of home deliveries during both periods. Cash provided by the change in accounts payable and accrued liabilities for the three months endedJune 30, 2022 and 2021 was$70.2 million and$70.6 million , respectively, due to the increased construction spend during both periods as a result of the increase in homes in inventory at both period ends. During the six months endedJune 30, 2022 and 2021, net cash used in investing activities was$13.7 million and$13.4 million , respectively. This primarily relates to cash used to purchase property and equipment, which was consistent year-over-year. During the six months endedJune 30, 2022 , net cash used in financing activities was$164.6 million compared with net cash provided by financing activities of$238.8 million in the prior year period. The primary driver of this decrease in net cash provided by financing activities was the proceeds from the issuance of senior notes of$347.7 million during the six months endedJune 30, 2021 . Cash used to decrease the mortgage repurchase facility was$80.7 million and$37.7 million for the six months endedJune 30, 2022 and 2021, respectively, driven by the increased proceeds from the sale of mortgage loans. -37-
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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, 2021 and
Item 1A of Part II of this Quarterly Report on Form 10-Q.
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