Overview and Outlook
Favorable demand in the housing market continued in the first quarter of 2022 due to the low supply of new and existing housing inventory and homebuying trends for entry-level and first move-up homes from millennials and baby boomers. The supply chain constraints and labor shortages that presented themselves in 2021, caused by COVID-19 and other economic-related disruptions and exacerbated by the war inUkraine , have impacted our production costs and cycle times and the homebuilding industry as a whole and have continued throughout the first quarter of 2022. We have been successful, to date, in offsetting the higher costs with sales price increases thanks to the elevated buyer demand in this current environment. We continue to carefully navigate this constrained operating environment by expanding our trade base and strengthening critical relationships. While we believe that the demographics support a continuing increased need for housing, we also recognize the impact that increased home prices have had on both the buyer psychology and reality of tighter affordability. To help alleviate concerns for our customers surrounding their purchase and future monthly payments, inMarch 2022 , we purchased fixed interest rate locks on all eligible floating-rate loans for homes in our backlog scheduled to close in the second half of 2022. In this rising price and interest rate environment, we believe that our strategy centered on affordable entry-level and first move-up homes and delivering homes that offer surprisingly more value to our homebuyers provides us with an opportunity to expand our customer base to include buyers that will become priced out of move-up communities.
Summary Company Results
Total home closing revenue was$1.2 billion on 2,858 homes closed for the three months endedMarch 31, 2022 compared to$1.1 billion on 2,890 homes closed for the first quarter of 2021. This 15.3% increase in home closing revenue year-over-year was entirely driven by the 16.6% increase in average sales price ("ASP") on closings due to pricing power resulting from strong buyer demand, with flat volume of closings due to production delays. In addition to higher home closing revenue, first quarter home closing gross margin improved 560 basis points, up$111.0 million year-over-year increase for home closing gross profit of$377.6 million compared to$266.7 million in the first quarter of 2021. The margin improvement is primarily due to the benefit of rising ASPs which more than offset higher commodity costs and lower amortization of previously capitalized interest due to a lower interest cost achieved over the past several years through multiple debt refinancing transactions. Land closing gross profit was$10.8 million in the three months endedMarch 31, 2022 compared to$0.5 million in the same prior year period, as we sold several parcels of land that did not fit our strategy. Earnings before income taxes improved by$119.9 million , or 72.2%, year over year to$285.9 million for the first quarter of 2022. These improved year-over-year results were partially offset with a higher effective income tax rate of 24.0% as compared to 20.6% in 2021, and led to net earnings of$217.3 million in the first quarter of 2022 versus$131.8 million in the first quarter of 2021. In addition to growth in home closing revenue and improved profitability, we had another record breaking quarter in home orders, with the highest quarterly orders in Company history of 3,874 for the three months endedMarch 31, 2022 , a 12.0% increase over 3,458 in the same period of 2021. The growth in orders was attributable to a 32.4% increase in average active communities partially offset by slower orders pace as we metered orders to align starts with production capacity. Home order value increased 31.0% year-over-year, to$1.8 billion during the three months endedMarch 31, 2022 , versus$1.3 billion in the same period of 2021. The increase in order value is due to the higher volume and a 17.0% increase in ASP on orders. Order cancellation rates remained stable at 10% for the first quarter of 2022, compared to 11% for the prior year period. We ended the first quarter of 2022 with 6,695 homes in backlog valued at$3.0 billion , a 27.8% increase in units and a 45.9% increase in value overMarch 31, 2021 . We remained steadfast in reaching our goals for community count growth, opening 32 new communities during the three months endedMarch 31, 2022 and ending the quarter with 268 active communities, up from 203 atMarch 31, 2021 and sequentially from 259 atDecember 31, 2021 . In addition, we purchased approximately 4,400 lots for$149.4 million , spent$222.1 million on land development and started construction on 4,020 homes during the three months endedMarch 31, 2022 . 22 --------------------------------------------------------------------------------
Company Positioning
We believe that the investments in our new communities designed for the first-time and first move-up homebuyer, our commitment to an all-spec strategy for our entry-level homes, our simplified first move-up design studio process, and industry-leading innovation in energy-efficient product offerings and automation create a differentiated strategy that has aided us in our growth in the highly competitive new home market.
Our focus includes the following strategies:
•Expanding our community count and market share;
•Continuously improving the overall home buying experience through simplification and innovation;
•Simplifying our production process to allow us to more efficiently build our homes and reduce our construction costs, which in turn allows us to competitively price our homes and deliver them on a shorter timeline;
•Improving our home closing gross profit by growing closing volume, allowing us to better leverage our overhead;
•Leveraging and expanding on technological solutions through digital offerings to our customers, such as our virtual home tours, interactive maps, digital financial services offerings and online warranty portal; and
•Increasing homeowner satisfaction by setting industry standards for energy-efficiency and offering healthier, safer homes that come equipped with standard features such as multi-speed HVAC systems to save energy and improve air quality and enhanced security features.
In order to maintain focus on growing our business, we also remain committed to the following:
•Managing construction efficiencies and costs through national and regional vendor relationships with a focus on quality construction and warranty management;
•Carefully managing our liquidity and a strong balance sheet; we ended the quarter with a 26.9% debt-to-capital ratio and a 16.9% net debt-to-capital ratio;
•Maximizing returns to our shareholders, most recently through our improved financial performance and share repurchase program;
•Achieving or maintaining a position of at least 5% market share in all of our markets;
•Promoting a positive environment for our employees through our commitment to foster diversity, equity and inclusion ("DE&I") and providing market-competitive benefits in order to develop and motivate our employees and to minimize turnover and to maximize recruitment efforts;
•Maintaining a healthy orders pace through the use of our consumer and market research to ensure that we build homes that offer our buyers their desired features and amenities, although currently our sales metering due to supply chain constraints is impacting our pace; and
•Continuing to innovate and promote our energy efficiency program and our
M.Connected® Automation Suite to create differentiation for the
Critical Accounting Estimates
The critical accounting estimates that we deem to involve the most difficult, subjective or complex judgments include valuation of real estate and cost of home closings, warranty reserves and valuation of deferred tax assets. There have been no significant changes to our critical accounting estimates during the three months endedMarch 31, 2022 compared to those disclosed in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations, included in our 2021 Annual Report on Form 10-K. 23 --------------------------------------------------------------------------------
Home Closing Revenue, Home Orders and Order Backlog
The composition of our closings, home orders and backlog is constantly changing and is based on a changing mix of communities with various price points between periods as new projects open and existing projects wind down and close-out. Further, individual homes within a community can range significantly in price due to differing square footage, option selections, lot sizes and quality and location of lots (e.g. cul-de-sac, view lots, greenbelt lots). These variations result in a lack of meaningful comparability between our home orders, closings and backlog due to the changing mix between periods. The tables on the following pages present operating and financial data that we consider most critical to managing our operations (dollars in thousands): Three Months Ended March 31, Quarter over Quarter 2022 2021 Change $ Change % Home Closing Revenue Total Dollars$ 1,245,456 $ 1,079,982 $ 165,474 15.3 % Homes closed 2,858 2,890 (32) (1.1) % Average sales price $ 435.8$ 373.7 $ 62.1 16.6 % West Region Arizona Dollars$ 198,095 $ 137,268 $ 60,827 44.3 % Homes closed 458 410 48 11.7 % Average sales price $ 432.5$ 334.8 $ 97.7 29.2 % California Dollars$ 187,410 $ 171,899 $ 15,511 9.0 % Homes closed 275 277 (2) (0.7) % Average sales price $ 681.5$ 620.6 $ 60.9 9.8 % Colorado Dollars$ 77,919 $ 84,263 $ (6,344) (7.5) % Homes closed 131 175 (44) (25.1) % Average sales price $ 594.8$ 481.5 $ 113.3 23.5 % West Region Totals Dollars$ 463,424 $ 393,430 $ 69,994 17.8 % Homes closed 864 862 2 0.2 % Average sales price $ 536.4$ 456.4 $ 80.0 17.5 %Central Region -Texas Central Region Totals Dollars$ 347,828 $ 318,385 $ 29,443 9.2 % Homes closed 873 963 (90) (9.3) % Average sales price $ 398.4$ 330.6 $ 67.8 20.5 % East Region Florida Dollars$ 168,075 $ 140,828 $ 27,247 19.3 % Homes closed 438 417 21 5.0 % Average sales price $ 383.7$ 337.7 $ 46.0 13.6 % Georgia Dollars$ 56,434 $ 55,139 $ 1,295 2.3 % Homes closed 127 146 (19) (13.0) % Average sales price $ 444.4$ 377.7 $ 66.7 17.7 % North Carolina Dollars$ 119,004 $ 107,013 $ 11,991 11.2 % Homes closed 297 299 (2) (0.7) % Average sales price $ 400.7$ 357.9 $ 42.8 12.0 % South Carolina Dollars$ 39,713 $ 27,846 $ 11,867 42.6 % Homes closed 121 85 36 42.4 % Average sales price $ 328.2$ 327.6 $ 0.6 0.2 % Tennessee Dollars$ 50,978 $ 37,341 $ 13,637 36.5 % Homes closed 138 118 20 16.9 % Average sales price $ 369.4$ 316.4 $ 53.0 16.8 % East Region Totals Dollars$ 434,204 $ 368,167 $ 66,037 17.9 % Homes closed 1,121 1,065 56 5.3 % Average sales price $ 387.3$ 345.7 $ 41.6 12.0 % 24
-------------------------------------------------------------------------------- Three Months Ended March 31, Quarter over Quarter 2022 2021 Change $ Change % Home Orders (1) Total Dollars$ 1,767,710 $ 1,349,130 $ 418,580 31.0 % Homes ordered 3,874 3,458 416 12.0 % Average sales price $ 456.3$ 390.1 $ 66.2 17.0 % West Region Arizona Dollars$ 240,007 $ 222,435 $ 17,572 7.9 % Homes ordered 550 602 (52) (8.6) % Average sales price $ 436.4$ 369.5 $ 66.9 18.1 % California Dollars$ 247,343 $ 173,391 $ 73,952 42.7 % Homes ordered 346 286 60 21.0 % Average sales price $ 714.9$ 606.3 $ 108.6 17.9 % Colorado Dollars$ 125,999 $ 89,779 $ 36,220 40.3 % Homes ordered 209 169 40 23.7 % Average sales price $ 602.9$ 531.2 $ 71.7 13.5 % West Region Totals Dollars$ 613,349 $ 485,605 $ 127,744 26.3 % Homes ordered 1,105 1,057 48 4.5 % Average sales price $ 555.1$ 459.4 $ 95.7 20.8 %Central Region -Texas Central Region Totals Dollars$ 548,567 $ 391,968 $ 156,599 40.0 % Homes ordered 1,296 1,115 181 16.2 % Average sales price $ 423.3$ 351.5 $ 71.8 20.4 % East Region Florida Dollars$ 226,914 $ 179,109 $ 47,805 26.7 % Homes ordered 572 479 93 19.4 % Average sales price $ 396.7$ 373.9 $ 22.8 6.1 % Georgia Dollars$ 100,891 $ 61,557 $ 39,334 63.9 % Homes ordered 220 164 56 34.1 % Average sales price $ 458.6$ 375.3 $ 83.3 22.2 % North Carolina Dollars$ 163,008 $ 157,687 $ 5,321 3.4 % Homes ordered 373 419 (46) (11.0) % Average sales price $ 437.0$ 376.3 $ 60.7 16.1 % South Carolina Dollars$ 52,656 $ 26,402 $ 26,254 99.4 % Homes ordered 154 76 78 102.6 % Average sales price $ 341.9$ 347.4 $ (5.5) (1.6) % Tennessee Dollars$ 62,325 $ 46,802 $ 15,523 33.2 % Homes ordered 154 148 6 4.1 % Average sales price $ 404.7$ 316.2 $ 88.5 28.0 % East Region Totals Dollars$ 605,794 $ 471,557 $ 134,237 28.5 % Homes ordered 1,473 1,286 187 14.5 % Average sales price $ 411.3$ 366.7 $ 44.6 12.2 % (1)Home orders for any period represent the aggregate sales price of all homes ordered, net of cancellations. We do not include orders contingent upon the sale of a customer's existing home or a mortgage pre-approval as a sales contract until the contingency is removed. 25 -------------------------------------------------------------------------------- Three Months Ended March 31, 2022 2021 Ending Average Ending Average Active Communities Total 268 263.5 203 199.0West Region Arizona 40 39.5 33 33.0 California 23 22.5 19 17.5 Colorado 18 17.5 12 11.5 West Region Totals 81 79.5 64 62.0Central Region -Texas Central Region Totals 75 74.0 59 61.0East Region Florida 41 41.0 30 30.5 Georgia 15 15.0 12 9.5 North Carolina 29 27.5 24 22.5 South Carolina 13 13.5 6 6.0 Tennessee 14 13.0 8 7.5 East Region Totals 112 110.0 80 76.0 Three Months Ended March 31, 2022 2021 Cancellation Rates (1) Total 10 % 11 % West Region Arizona 12 % 10 % California 12 % 13 % Colorado 9 % 11 % West Region Totals 12 % 11 % Central Region - Texas Central Region Totals 11 % 11 % East Region Florida 4 % 11 % Georgia 12 % 14 % North Carolina 7 % 8 % South Carolina 11 % 17 % Tennessee 4 % 9 % East Region Totals 7 % 10 %
(1)Cancellation rates are computed as the number of canceled units for the period divided by the gross sales units for the same period.
26 -------------------------------------------------------------------------------- At March 31, Quarter over Quarter 2022 2021 Change $ Change % Order Backlog (1) Total Dollars$ 3,038,927 $ 2,082,259 $ 956,668 45.9 % Homes in backlog 6,695 5,240 1,455 27.8 % Average sales price$ 453.9 $ 397.4 $ 56.5 14.2 % West Region Arizona Dollars$ 535,586 $ 429,171 $ 106,415 24.8 % Homes in backlog 1,237 1,185 52 4.4 % Average sales price$ 433.0 $ 362.2 $ 70.8 19.5 % California Dollars$ 331,321 $ 276,202 $ 55,119 20.0 % Homes in backlog 464 453 11 2.4 % Average sales price$ 714.1 $ 609.7 $ 104.4 17.1 % Colorado Dollars$ 246,932 $ 110,279 $ 136,653 123.9 % Homes in backlog 406 202 204 101.0 % Average sales price$ 608.2 $ 545.9 $ 62.3 11.4 % West Region Totals Dollars$ 1,113,839 $ 815,652 $ 298,187 36.6 % Homes in backlog 2,107 1,840 267 14.5 % Average sales price$ 528.6 $ 443.3 $ 85.3 19.2 %Central Region -Texas Central Region Totals Dollars$ 973,828 $ 645,959 $ 327,869 50.8 % Homes in backlog 2,301 1,782 519 29.1 % Average sales price$ 423.2 $ 362.5 $ 60.7 16.7 % East Region Florida Dollars$ 411,478 $ 253,188 $ 158,290 62.5 % Homes in backlog 1,002 612 390 63.7 % Average sales price$ 410.7 $ 413.7 $ (3.0) (0.7) % Georgia Dollars$ 136,266 $ 64,355 $ 71,911 111.7 % Homes in backlog 296 174 122 70.1 % Average sales price$ 460.4 $ 369.9 $ 90.5 24.5 % North Carolina Dollars$ 269,898 $ 214,079 $ 55,819 26.1 % Homes in backlog 641 574 67 11.7 % Average sales price$ 421.1 $ 373.0 $ 48.1 12.9 % South Carolina Dollars$ 57,643 $ 39,785 $ 17,858 44.9 % Homes in backlog 166 111 55 49.5 % Average sales price$ 347.2 $ 358.4 $ (11.2) (3.1) % Tennessee Dollars$ 75,975 $ 49,241 $ 26,734 54.3 % Homes in backlog 182 147 35 23.8 % Average sales price$ 417.4 $ 335.0 $ 82.4 24.6 % East Region Totals Dollars$ 951,260 $ 620,648 $ 330,612 53.3 % Homes in backlog 2,287 1,618 669 41.3 % Average sales price$ 415.9 $ 383.6 $ 32.3 8.4 %
(1)Our backlog represents net sales that have not closed.
27 --------------------------------------------------------------------------------
Operating Results
Companywide. In the first quarter of 2022, home closing revenue improved 15.3% to$1.2 billion on 2,858 closings compared to$1.1 billion on 2,890 closings in the first quarter of 2021. The increase in home closing revenue year-over-year was driven entirely by the 16.6% increase in ASP on closings, as closing volume declined marginally by 1.1% due to elongated construction cycle times. We achieved our highest quarterly home orders of 3,874 homes valued at$1.8 billion in the first quarter of 2022 as compared to 3,458 homes valued at$1.3 billion in the first quarter of 2021. The higher order volume is due to a 32.4% increase in average active communities, while orders pace declined 15.5% to 4.9 per month, down from 5.8 in the first quarter of 2021 which was one of the highest quarterly orders paces in Company history. As a result of the increased construction cycle time caused by supply-chain and labor constraints, we continued to meter orders in the first quarter of 2022 to align our orders and starts with production capacity. Home order value increased 31.0% year-over-year, the combined result of higher volumes and rising ASP as we experienced pricing power driven by buyer demand. We ended the quarter with 268 actively selling communities, up from 203 atMarch 31, 2021 . We ended the first quarter of 2022 with 6,695 homes in backlog valued at$3.0 billion , up from 5,240 homes valued at$2.1 billion atMarch 31, 2021 . The year-over-year increases in backlog are the direct result of the favorable order volumes and pricing. Order cancellations were relatively flat at 10% for the first three months of 2022, as compared to 11% during the three month period in 2021, a further indication of strong demand in the market. West.The West Region closed 864 homes in the first quarter of 2022, relatively flat with the 862 homes closed in 2021. Despite the flat volume, the Region improved home closing revenue 17.8% to$463.4 million resulting from an$80,000 increase in ASP due to sustained increases over the past few quarters from strong market demand. Orders and order value in the first quarter of 2022 of 1,105 homes valued at$613.3 million were up from 1,057 homes valued at$485.6 million in the 2021 period. The 4.5% higher order volume was due to a 28.2% increase in average community count, partially offset by an 19.3% decrease in orders pace year-over-year. As a result of our intentional choice to meter orders as previously discussed, orders pace decreased to 4.6 per month in the first quarter of 2022, versus 5.7 in 2021.The West Region had the Company's highest increase in ASP on orders of$95,700 , or 20.8%, combined with the increase in volume resulted in a 26.3% increase in order value.The West Region ended the first quarter of 2022 with 2,107 homes in backlog valued at$1.1 billion , up from 1,840 units valued at$815.7 million atMarch 31, 2021 , increases of 14.5% and 36.6%, respectively. Central. In the first quarter of 2022, theCentral Region closed 873 homes and generated$347.8 million in home closing revenue, as compared to 963 homes at$318.4 million in the first quarter of 2021. The 9.3% decrease in closings was more than offset by 20.5% higher ASP to achieve a 9.2% increase in home closing revenue. Both orders and order value improved year-over-year, with 1,296 homes ordered at$548.6 million in the first quarter of 2022, compared to 1,115 homes valued at$392.0 million in 2021. Order volume grew 16.2% due to the Region's 21.3% increase in average active communities, partially offset by a 4.9% decrease in orders pace to 5.8 per month in the first quarter of 2022, down slightly from 6.1 in 2021. With the Company's largest Regional increase in order volume of 16.2% and pricing power that drove ASP up by 20.4%, home order value improved 40.0% in the first quarter of 2022.The Central Region ended the first quarter of 2022 with 2,301 homes in backlog valued at$973.8 million , up from 1,782 units valued at$646.0 million atMarch 31, 2021 . East.The East Region delivered 1,121 closings and$434.2 million in home closing revenue during the first quarter of 2022, compared to 1,065 closings and$368.2 million in home closing revenue in the comparable prior year period, improvements of 5.3% and 17.9%, respectively. Orders and order value in theEast Region grew by 14.5% and 28.5%, respectively, for the first quarter of 2022 with 1,473 units valued at$605.8 million compared to 1,286 units valued at$471.6 million in the prior year period. The higher orders is due to a 44.7% increase in average active communities, the largest Regional increase in the Company, which more than offset a 19.6% year-over-year decrease in orders pace to 4.5 per month compared to the prior year order pace of 5.6.The East Region ended the first quarter of 2022 with 2,287 homes in backlog valued at$951.3 million , up from 1,618 units valued at$620.6 million atMarch 31, 2021 .
Land Closing Revenue and Gross Profit
From time to time, we may sell certain lots or land parcels to other homebuilders, developers or investors if we feel the sale will provide a greater economic benefit to us than continuing home construction or where we are looking to diversify our land positions in a specific geography, particularly with assets that no longer align with our strategy. As a result of such sales, we recognized land closing revenue of$41.5 million and$3.8 million for the three months endingMarch 31, 2022 and 2021, respectively, and profits of$10.8 million and$0.5 million for the three months endedMarch 31, 2022 and 2021, respectively. 28 --------------------------------------------------------------------------------
Other Operating Information (dollars in thousands)
Three Months Ended
2022 2021 Percent of Percent of Home Closing Home Closing Dollars Revenue Dollars Revenue Home Closing Gross Profit (1) Total$ 377,649 30.3 %$ 266,655 24.7 % West$ 143,759 31.0 %$ 97,057 24.7 % Central$ 104,405 30.0 %$ 85,373 26.8 % East$ 129,485 29.8 %$ 84,225 22.9 % (1)Home closing gross profit represents home closing revenue less cost of home closings, including impairments, if any. Cost of home closings includes land and lot development costs, direct home construction costs, an allocation of common community costs (such as architectural, legal and zoning costs), interest, sales tax, impact fees, warranty, construction overhead and closing costs. Companywide. Home closing gross margin for the first quarter of 2022 improved 560 basis points to 30.3% compared to 24.7% in the first quarter of 2021. The improvement in home closing gross margin is largely attributable to pricing power fueled by the sustained strong buyer demand and low supply of available homes, allowing ASPs on home closings to accelerate at a greater pace than both direct costs and lot costs. In addition, cost of home closings in the first three months of 2022 benefited from lower interest cost, the result of the lower interest rates from our debt refinancing transactions in recent years. Higher home closing revenue combined with the margin improvement led to a$111.0 million increase in home closing gross profit of$377.6 million for the three months endedMarch 31, 2022 , compared to$266.7 million for the three months endedMarch 31, 2021 . West.The West Region had the highest home closing gross margin in the Company of 31.0% for the first quarter of 2022, a 630 basis point improvement over 24.7% in the first quarter of 2021. The improvement in home closing margin is mainly due to the favorable pricing environment where ASP increases have outpaced rising commodity and labor costs.
Central. Home closing gross margin in the
East.The East Region saw the greatest improvement in home closing gross margin at 690 basis points year-over-year to 29.8% in the first quarter of 2022 versus 22.9% for the comparable 2021 period. High demand in theEast Region has created opportunity to lift selling prices which have more than offset the steadily increasing commodity costs.
Financial Services Profit (in thousands)
Three Months Ended March 31, 2022 2021 Financial services profit$ 3,334 $ 3,760 Financial services profit represents the net profit of our financial services operations, including the operating profit generated by our wholly-owned title and insurance companies,Carefree Title and Meritage Insurance , as well as our portion of earnings from a mortgage joint venture. Financial services profit decreased$0.4 million in the first quarter of 2022 to$3.3 million versus$3.8 million in 2021 due to a change in mix of financial services closing volume in markets where we provide financial services, as Carefree Title does not provide title and escrow services in all of the markets in which we have homebuilding operations. 29 --------------------------------------------------------------------------------
Selling, General and Administrative Expenses and Other Expenses (dollars in thousands)
Three Months EndedMarch 31, 2022
2021
Commissions and other sales costs$ (65,540) $
(67,744)
Percent of home closing revenue 5.3 % 6.3 % General and administrative expenses$ (39,995) $
(37,949)
Percent of home closing revenue 3.2 % 3.5 % Interest expense $ (41)$ (90) Other (expense)/income, net $ (317)$ 798 Provision for income taxes$ (68,629) $ (34,134) Commissions and Other Sales Costs. Commissions and other sales costs are comprised of internal and external commissions and related sales and marketing expenses such as advertising and sales office costs. These costs were$65.5 million , or 5.3% of home closing revenue, for the three months endedMarch 31, 2022 ,$2.2 million , or 100 basis points, lower than the prior year comparable period, resulting from a decrease in commissions paid to third party brokers that bring prospective buyers to our communities. General and Administrative Expenses. General and administrative expenses represent corporate and divisional overhead expenses such as salaries and bonuses, occupancy, insurance and travel expenses. For the three months endedMarch 31, 2022 , general and administrative expenses increased$2.0 million to$40.0 million , up from$37.9 million for the 2021 period. As a percentage of home closing revenue, these expenses decreased by 30 basis points to 3.2%. The increase in general administrative expenses year-over-year is due primarily to a higher employee headcount. Interest Expense. Interest expense is comprised of interest incurred, but not capitalized, on our senior notes, other borrowings, and our amended and restated unsecured revolving credit facility ("Credit Facility"). Interest expense totaled$41,000 and$90,000 for the three months endedMarch 31, 2022 and 2021, respectively. Other (Expense)/Income, Net. Other (expense)/income, net, primarily consists of (i) sublease income, (ii) interest earned on our cash and cash equivalents, (iii) payments and awards related to legal settlements and (iv) our portion of pre-tax income or loss from non-financial services joint ventures. For the three months endedMarch 31, 2022 , Other (expense)/income, net was expense of$0.3 million , compared to income of$0.8 million in the 2021 comparable period. Income Taxes. Our effective tax rate was 24.0% and 20.6% for the three months endedMarch 31, 2022 and 2021, respectively. The higher tax rate for the three months endedMarch 31, 2022 is due to the expiration of the Internal Revenue Code §45L new energy efficient homes credits onDecember 31, 2021 .
Liquidity and Capital Resources
We have historically generated cash and funded our operations primarily from cash flows from operating activities. Additional sources of funds may include additional debt or equity financing and borrowing capacity under our Credit Facility. We exercise strict controls and believe we have a prudent strategy for Company-wide cash management, including those related to cash outlays for land and inventory acquisition and development. Our principal uses of cash include acquisition and development of new and previously controlled land and lot positions, home construction, operating expenses, and the payment of interest and routine liabilities. From time to time, we opportunistically repurchase our common stock and senior notes. Cash flows for each of our communities depend on their stage of the development cycle, and can differ substantially from reported earnings. Early stages of development or expansion require significant cash outlays for land acquisitions, zoning plat and other approvals, community and lot development, and construction of model homes, roads, utilities, landscape and other amenities. Because these costs are a component of our inventory and are not recognized in our income statement until a home closes, we incur significant cash outlays prior to recognition of earnings. In the later stages of a community, cash inflows may significantly exceed earnings reported for financial statement purposes, as the cash outflow associated with home and land construction was previously incurred.
Short-term Liquidity and Capital Resources
Over the course of the next twelve months, we expect that our primary demand for funds will be for the construction of homes, as well as acquisition and development of both new and existing lots, operating expenses, including general and administrative expenses, interest payments and opportunistic common stock repurchases. We expect to meet these short-term liquidity requirements primarily through our cash and cash equivalents on hand and our net cash flows provided by operations. 30 -------------------------------------------------------------------------------- Between our cash and cash equivalents on hand combined with the availability of funds in our Credit Facility, we believe that we currently have sufficient liquidity. Nevertheless, we may seek additional capital to strengthen our liquidity position, enable us to acquire additional land inventory in anticipation of improving market conditions, and/or strengthen our long-term capital structure.
Long-term Liquidity and Capital Resources
Beyond the next twelve months, our principal demands for funds will be for the construction of homes, land acquisition and development activities needed to grow our lot supply and active community count, payments of principal and interest on our senior notes as they become due or mature and common stock repurchases. We expect our existing and generated cash will be adequate to fund our ongoing operating activities as well as providing capital for investment in future land purchases and related development activities. To the extent the sources of capital described above are insufficient to meet our long-term cash needs, we may also conduct additional public offerings of our securities, refinance or secure new debt or dispose of certain assets to fund our operating activities. There can be no assurances that we would be able to obtain such additional capital on terms acceptable to us, if at all, and such additional equity or debt financing could dilute the interests of our existing stockholders or increase our interest costs.
Material Cash Requirements
We are a party to many contractual obligations involving commitments to make payments to third parties. These obligations impact both short-term and long-term liquidity and capital resource needs. Certain contractual obligations are reflected on our unaudited consolidated balance sheets as ofMarch 31, 2022 , while others are considered future commitments for materials or services not yet provided. Our contractual obligations primarily consist of principal and interest payments on our senior notes, loans payable and other borrowings, including our Credit Agreement, letters of credit and surety bonds and operating leases. We have no debt maturities until 2025. We also have certain short-term lease commitments, commitments to fund our existing unconsolidated joint ventures and other purchase obligations in the normal course of business. Other material cash requirements include land acquisition and development costs, home construction costs and operating expenses, including our selling, general and administrative expenses. We plan to fund these commitments primarily with cash flows generated by operations, but may also utilize additional debt or equity financing and borrowing capacity under our Credit Facility. Our maximum exposure to loss on our purchase and option agreements is generally limited to non-refundable deposits and capitalized pre-acquisition costs. For information about our loans payable and other borrowings, including our Credit Facility, and senior notes, reference is made to Notes 5 and 6 in the accompanying notes to the unaudited consolidated financial statements included in this Quarterly Report on Form 10-Q and are incorporated by reference herein. For information about our lease obligations, reference is made to Note 4 in the consolidated financial statements included in the Annual Report on Form 10-K for the year endedDecember 31, 2021 and are incorporated by reference herein. Reference is made to Notes 1, 3, 4, and 15 in the accompanying notes to the unaudited consolidated financial statements included in this Quarterly Report on Form 10-Q and are incorporated by reference herein. These Notes discuss our off-balance sheet arrangements with respect to land acquisition contracts and option agreements, and land development joint ventures, including the nature and amounts of financial obligations relating to these items. In addition, these Notes discuss the nature and amounts of certain types of commitments that arise in connection with the ordinary course of our land development and homebuilding operations, including commitments of land development joint ventures for which we might be obligated, if any.
We do not engage in commodity trading or other similar activities. We had no
derivative financial instruments at
Operating Cash Flow Activities
During the three months endedMarch 31, 2022 , net cash provided by operating activities totaled$12.2 million versus net cash used in operating activities of$13.9 million during the three months endedMarch 31, 2021 . Operating cash flows in the first quarter of 2022 benefited from cash generated by net earnings of$217.3 million and an increase in accounts payable and accrued liabilities of$115.9 million due to timing of payments for routine transactions, offset by a$283.9 million increase in real estate assets and a$52.1 million increase in other receivables, prepaids and other assets. The increase in other receivables, prepaids and other assets was largely due to the purchase of fixed rate interest locks for eligible buyers in our backlog. During the first quarter of 2021, operating cash flows benefited from cash generated by net earnings of$131.8 million and a$38.7 million increase in accounts payable and accrued liabilities, offset by an increase in real estate assets of$193.4 million . 31 --------------------------------------------------------------------------------
Investing Cash Flow Activities
During the three months ended
Financing Cash Flow Activities
During the three months endedMarch 31, 2022 and 2021, net cash used in financing activities totaled$103.9 million and$10.3 million , respectively. The net cash used in financing activities in 2022 and 2021 primarily reflect$99.3 million and$8.4 million in share repurchases, respectively. Our Board of Directors has authorized the expenditure of up to$300.0 million to repurchase shares of our common stock under our current stock repurchase program, of which$54.1 million remained available as ofMarch 31, 2022 . There is no stated expiration for this program and repurchases may be made in the open market, privately negotiated transactions, or otherwise. We believe that our leverage ratios provide useful information to the users of our financial statements regarding our financial position and cash and debt management. Debt-to-capital and net debt-to-capital are calculated as follows (dollars in thousands): As of March 31, 2022 December 31, 2021 Senior notes, net, loans payable and other borrowings$ 1,165,323 $ 1,160,038 Stockholders' equity 3,168,315 3,044,389 Total capital$ 4,333,638 $ 4,204,427 Debt-to-capital (1) 26.9 % 27.6 % Senior notes, net, loans payable and other borrowings$ 1,165,323 $ 1,160,038 Less: cash and cash equivalents (520,395) (618,335) Net debt 644,928 541,703 Stockholders' equity 3,168,315 3,044,389 Total net capital$ 3,813,243 $ 3,586,092 Net debt-to-capital (2) 16.9 % 15.1 % (1)Debt-to-capital is computed as senior notes, net and loans payable and other borrowings divided by the aggregate of total senior notes, net, loans payable and other borrowings and stockholders' equity. (2)Net debt-to-capital is computed as net debt divided by the aggregate of net debt and stockholders' equity. Net debt is comprised of total senior notes, net and loans payable and other borrowings, less cash and cash equivalents. The most directly comparable GAAP financial measure is the ratio of debt-to-capital. We believe the ratio of net debt-to-capital is a relevant financial measure for investors to understand the leverage employed in our operations and as an indicator of our ability to obtain financing. We have never declared cash dividends. Currently, we plan to utilize our cash to manage our liquidity and to grow community count. Future cash dividends, if any, will depend upon economic and financial conditions, results of operations, capital requirements, statutory requirements, restrictions imposed by our Credit Facility, as well as other factors considered relevant by our Board of Directors. 32 --------------------------------------------------------------------------------
Credit Facility Covenants
Borrowings under the Credit Facility are unsecured, but availability is subject to, among other things, a borrowing base. The Credit Facility also contains certain financial covenants, including (a) a minimum tangible net worth requirement of$1.9 billion (which amount is subject to increase over time based on subsequent earnings and proceeds from equity offerings), and (b) a maximum leverage covenant that prohibits the leverage ratio (as defined therein) from exceeding 60%. In addition, we are required to maintain either (i) an interest coverage ratio (EBITDA to interest expense, as defined therein) of at least 1.50 to 1.00 or (ii) liquidity (as defined therein) of an amount not less than our consolidated interest incurred during the trailing 12 months. We were in compliance with all Credit Facility covenants as ofMarch 31, 2022 . Our actual financial covenant calculations as ofMarch 31, 2022 are reflected in the table below. Financial Covenant (dollars in thousands): Covenant Requirement Actual Minimum Tangible Net Worth >$2,176,919 $3,127,202 Leverage Ratio < 60% 15.1% Interest Coverage Ratio (1) > 1.50 19.40 Minimum Liquidity (1) >$61,957 $1,238,824 Investments other than defined permitted investments <$938,161 $5,631
(1)We are required to meet either the Interest Coverage Ratio or Minimum Liquidity, but not both.
Seasonality
Historically, we have experienced seasonal variations in our quarterly operating results and capital requirements. We typically sell more homes in the first half of the fiscal year than in the second half, which creates additional working capital requirements in the second and third quarters to build our inventories to satisfy the deliveries in the second half of the year. We typically benefit from the cash generated from home closings more in the third and fourth quarters than in the first and second quarters. During 2020, historical cycles were impacted by COVID-19 and since then have been further impacted by sustained increased demand. We have continued to experience these impacts in the first quarter of 2022; however, we expect our historical seasonal pattern to continue over the long term, although it will continue to be affected by short-term volatility in the homebuilding industry and in the overall economy.
Recent Issued Accounting Pronouncements
See Note 1 to our unaudited consolidated financial statements included in this report for discussion of recently issued accounting pronouncements.
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