Meritage Homes CORP 10-Q for FY2023 Q3
Meritage Homes CORP (MTH)
10-Q
2023-11-01
For: 2023-09-30
View Original
Added on
April 09, 2026
About this 10-Q
Meritage Homes CORP filed this 10-Q on November 1, 2023, covering the quarter ended September 30, 2023 (FY2023 Q3).
Headline figures
Quarter ended September 30, 2023, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Net income
- $221.76M
- down 15.5% from net income of $262.49M a year earlier
- Diluted EPS
- $5.98
- down 15.8% from $7.10 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the quarterly period ended September 30, 2023
OR
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the transition period from to
Commission File Number 1-9977
(Exact Name of Registrant as Specified in its Charter)
| (State or Other Jurisdiction of Incorporation or Organization) | (IRS Employer Identification No.) | ||||||||||||||||
(Address of Principal Executive Offices) (Zip Code)
(480 ) 515-8100
(Registrant’s telephone number, including area code)
N/A
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
| Securities registered pursuant to Section 12(b) of the Act: | |||||||||||
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | |||||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by a checkmark whether the registrant has submitted electronically every Interactive Date File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| ý | Accelerated filer | ☐ | |||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | |||||||||
| Emerging growth company | |||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨ | |||||||||||
Indicate by a checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Common shares outstanding as of October 27, 2023: 36,449,906
MERITAGE HOMES CORPORATION
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2023
TABLE OF CONTENTS
| Items 3-4. Not Applicable | |||||
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
MERITAGE HOMES CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
| September 30, 2023 | December 31, 2022 | |||||||||||||
| Assets | ||||||||||||||
| Cash and cash equivalents | $ | $ | ||||||||||||
| Other receivables | ||||||||||||||
| Real estate | ||||||||||||||
| Deposits on real estate under option or contract | ||||||||||||||
| Investments in unconsolidated entities | ||||||||||||||
| Property and equipment, net | ||||||||||||||
| Deferred tax assets, net | ||||||||||||||
| Prepaids, other assets and goodwill | ||||||||||||||
| Total assets | $ | $ | ||||||||||||
| Liabilities | ||||||||||||||
| Accounts payable | $ | $ | ||||||||||||
| Accrued liabilities | ||||||||||||||
| Home sale deposits | ||||||||||||||
| Loans payable and other borrowings | ||||||||||||||
| Senior notes, net | ||||||||||||||
| Total liabilities | ||||||||||||||
| Stockholders’ Equity | ||||||||||||||
Preferred stock, par value $ | ||||||||||||||
Common stock, par value $ | ||||||||||||||
| Additional paid-in capital | ||||||||||||||
| Retained earnings | ||||||||||||||
| Total stockholders’ equity | ||||||||||||||
| Total liabilities and stockholders’ equity | $ | $ | ||||||||||||
See accompanying notes to unaudited consolidated financial statements
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MERITAGE HOMES CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED INCOME STATEMENTS
(in thousands, except per share amounts)
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||
| Homebuilding: | ||||||||||||||||||||||||||
| Home closing revenue | $ | $ | $ | $ | ||||||||||||||||||||||
| Land closing revenue | ||||||||||||||||||||||||||
| Total closing revenue | ||||||||||||||||||||||||||
| Cost of home closings | ( | ( | ( | ( | ||||||||||||||||||||||
| Cost of land closings | ( | ( | ( | ( | ||||||||||||||||||||||
| Total cost of closings | ( | ( | ( | ( | ||||||||||||||||||||||
| Home closing gross profit | ||||||||||||||||||||||||||
| Land closing gross profit | ||||||||||||||||||||||||||
| Total closing gross profit | ||||||||||||||||||||||||||
| Financial Services: | ||||||||||||||||||||||||||
| Revenue | ||||||||||||||||||||||||||
| Expense | ( | ( | ( | ( | ||||||||||||||||||||||
| Earnings/(loss) from financial services unconsolidated entities and other, net | ( | |||||||||||||||||||||||||
| Financial services profit | ||||||||||||||||||||||||||
| Commissions and other sales costs | ( | ( | ( | ( | ||||||||||||||||||||||
| General and administrative expenses | ( | ( | ( | ( | ||||||||||||||||||||||
| Interest expense | ( | |||||||||||||||||||||||||
| Other income/(expense), net | ( | ( | ||||||||||||||||||||||||
| Loss on early extinguishment of debt | ( | ( | ||||||||||||||||||||||||
| Earnings before income taxes | ||||||||||||||||||||||||||
| Provision for income taxes | ( | ( | ( | ( | ||||||||||||||||||||||
| Net earnings | $ | $ | $ | $ | ||||||||||||||||||||||
| Earnings per common share: | ||||||||||||||||||||||||||
| Basic | $ | $ | $ | $ | ||||||||||||||||||||||
| Diluted | $ | $ | $ | $ | ||||||||||||||||||||||
| Weighted average number of shares: | ||||||||||||||||||||||||||
| Basic | ||||||||||||||||||||||||||
| Diluted | ||||||||||||||||||||||||||
See accompanying notes to unaudited consolidated financial statements
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MERITAGE HOMES CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
| Nine Months Ended September 30, | ||||||||||||||
| 2023 | 2022 | |||||||||||||
| Cash flows from operating activities: | ||||||||||||||
| Net earnings | $ | $ | ||||||||||||
| Adjustments to reconcile net earnings to net cash provided by/(used in) operating activities: | ||||||||||||||
| Depreciation and amortization | ||||||||||||||
| Stock-based compensation | ||||||||||||||
| Loss on early extinguishment of debt | ||||||||||||||
| Equity in earnings from unconsolidated entities | ( | ( | ||||||||||||
| Distributions of earnings from unconsolidated entities | ||||||||||||||
| Other | ||||||||||||||
| Changes in assets and liabilities: | ||||||||||||||
| Increase in real estate | ( | ( | ||||||||||||
| (Increase)/decrease in deposits on real estate under option or contract | ( | |||||||||||||
| Increase in other receivables, prepaids and other assets | ( | ( | ||||||||||||
| Increase in accounts payable and accrued liabilities | ||||||||||||||
| Increase in home sale deposits | ||||||||||||||
| Net cash provided by/(used in) operating activities | ( | |||||||||||||
| Cash flows from investing activities: | ||||||||||||||
| Investments in unconsolidated entities | ( | ( | ||||||||||||
| Distributions of capital from unconsolidated entities | ||||||||||||||
| Purchases of property and equipment | ( | ( | ||||||||||||
| Proceeds from sales of property and equipment | ||||||||||||||
| Maturities/sales of investments and securities | ||||||||||||||
| Payments to purchase investments and securities | ( | ( | ||||||||||||
| Net cash used in investing activities | ( | ( | ||||||||||||
| Cash flows from financing activities: | ||||||||||||||
| Repayment of loans payable and other borrowings | ( | ( | ||||||||||||
| Repayment of senior notes | ( | |||||||||||||
| Dividends paid | ( | |||||||||||||
| Repurchase of shares | ( | ( | ||||||||||||
| Net cash used in financing activities | ( | ( | ||||||||||||
| Net increase/(decrease) in cash and cash equivalents | ( | |||||||||||||
| Cash and cash equivalents, beginning of period | ||||||||||||||
| Cash and cash equivalents, end of period | $ | $ | ||||||||||||
See Supplemental Disclosure of Cash Flow Information in Note 13.
See accompanying notes to unaudited consolidated financial statements
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MERITAGE HOMES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 — ORGANIZATION AND BASIS OF PRESENTATION
Organization. Meritage Homes Corporation ("Meritage Homes") is a leading designer and builder of single-family attached and detached homes. We primarily build in historically high-growth regions of the United States and offer a variety of entry-level and first move-up homes. We have operations in three regions: West, Central and East, which are comprised of ten states: Arizona, California, Colorado, Utah, Texas, Florida, Georgia, North Carolina, South Carolina, and Tennessee. We also operate a financial services reporting segment. In this segment, we offer title and escrow, mortgage, and insurance services. Carefree Title Agency, Inc. ("Carefree Title"), our wholly-owned title company, provides title insurance and closing/settlement services to our homebuyers in certain states. Managing our own title operations allows us greater control over the entire escrow and closing cycles in addition to generating additional revenue. Meritage Homes Insurance Agency, Inc. (“Meritage Insurance”), our wholly-owned insurance broker, works in collaboration with insurance companies nationwide to offer homeowners insurance and other insurance products to our homebuyers. Our financial services operation also provides mortgage services to our homebuyers through an unconsolidated joint venture.
We commenced our homebuilding operations in 1985 through our predecessor company, Monterey Homes. Meritage Homes Corporation was incorporated in the state of Maryland in 1988 under the name of Homeplex Mortgage Investments Corporation and merged with Monterey Homes in 1996, at which time our name was changed to Monterey Homes Corporation and later ultimately to Meritage Homes Corporation. Since that time, we have engaged in homebuilding and related activities. Meritage Homes Corporation operates as a holding company and has no independent assets or operations. Its homebuilding construction, development and sales activities are conducted through its subsidiaries. Our homebuilding activities are conducted under the name of Meritage Homes in each of our homebuilding markets. At September 30, 2023, we were actively selling homes in 272 communities, with base prices ranging from approximately $231,000 to $1,054,000 .
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We capitalize qualifying interest to inventory during the development and construction periods. Capitalized interest is included in Cost of closings when the related inventory is closed. Included within our Real estate inventory is land held for development and land held for sale. Land held for development primarily represents land and land development costs related to land where development activity is not currently underway but is expected to begin in the future. For these parcels, we have chosen not to currently develop certain land holdings as they typically represent a portion or phases of a larger land parcel that we plan to build out over several years. We do not capitalize interest for these inactive assets, and all ongoing costs of land ownership (i.e. property taxes, homeowner association dues, etc.) are expensed as incurred.
We rely on certain estimates to determine our construction and land development costs. Construction and land costs are comprised of direct and allocated costs, including estimated future costs. In determining these costs, we compile project budgets that are based on a variety of assumptions, including future construction schedules and costs to be incurred. Actual results can differ from budgeted amounts for various reasons, including construction delays, labor or material shortages, sales orders absorptions that differ from our expectations, increases in costs that have not yet been contracted, changes in governmental requirements, or other unanticipated issues encountered during construction and development and other factors beyond our control, including weather. To address uncertainty in these budgets, we assess, update and revise project budgets on a regular basis, utilizing the most current information available to estimate home construction and land development costs.
Typically, a community's life cycle ranges from to five years , commencing with the acquisition of the land, continuing through the land development phase, if applicable, and concluding with the construction, sale and closing of the homes. Actual community lives will vary based on the size of the community, the sales orders absorption rates and whether the land purchased was raw, partially-developed or in finished status. Master-planned communities encompassing several phases and super-block land parcels may have significantly longer lives and projects involving smaller finished lot purchases may be significantly shorter.
All of our land inventory and related real estate assets are periodically reviewed for recoverability when certain criteria are met, but at least annually, as our inventory is considered “long-lived” in accordance with GAAP. Community-level reviews are performed quarterly to determine if indicators of potential impairment exist. If indicators of potential impairment exist and the undiscounted cash flows expected to be generated by an asset are lower than its carrying amount, impairment charges are recorded to write down the asset to its estimated fair value. The impairment of a community is allocated to each remaining unstarted lot in the community on a straight-line basis and is recognized in Cost of home closings in the period in which the impairment is determined. Our determination of fair value is based on projections and estimates. Changes in these expectations may lead to a change in the outcome of our impairment analysis, and actual results may also differ from our assumptions, although if financial metrics improve, we do not reverse impairments once recorded. See Note 2 for additional information related to real estate.
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| As of | ||||||||||||||
| September 30, 2023 | December 31, 2022 | |||||||||||||
| ROU assets | $ | $ | ||||||||||||
| Lease liabilities | ||||||||||||||
Off-Balance Sheet Arrangements - Joint Ventures. We may participate in land development joint ventures as a means of accessing larger parcels of land, expanding our market opportunities, managing our risk profile, optimizing deal structure for the impacted parties and leveraging our capital, although our participation in such ventures is currently limited. See Note 4 for additional discussion of our investments in unconsolidated entities.
Off-Balance Sheet Arrangements - Other. In the normal course of business, we may acquire lots from various development entities pursuant to purchase and option agreements. The purchase price generally approximates the market price at the date the contract is executed (with possible future escalators) and the acquisition of the land is typically staggered. See Note 3 for additional information on these off-balance sheet arrangements.
Surety Bonds and Letters of Credit. We provide surety bonds and letters of credit in support of our obligations relating to the development of our projects and other corporate purposes in lieu of cash deposits. The amount of these obligations outstanding at any time varies depending on the stage and level of our development activities. Surety bonds are generally not wholly released until all development activities under the bond are complete. In the event a bond or letter of credit is drawn upon, we would be obligated to reimburse the issuer for any amounts advanced under the bond or letter of credit. We believe it is unlikely that any significant amounts of these bonds or letters of credit will be drawn upon.
| As of | |||||||||||||||||||||||
| September 30, 2023 | December 31, 2022 | ||||||||||||||||||||||
| Outstanding | Estimated work remaining to complete | Outstanding | Estimated work remaining to complete | ||||||||||||||||||||
| Sureties: | |||||||||||||||||||||||
| Sureties related to owned projects and lots under contract | $ | $ | $ | $ | |||||||||||||||||||
| Total Sureties | $ | $ | $ | $ | |||||||||||||||||||
| Letters of Credit (“LOCs”): | |||||||||||||||||||||||
| LOCs for land development | N/A | N/A | |||||||||||||||||||||
| LOCs for general corporate operations | N/A | N/A | |||||||||||||||||||||
| Total LOCs | $ | N/A | $ | N/A | |||||||||||||||||||
Accrued Liabilities. Accrued liabilities at September 30, 2023 and December 31, 2022 consisted of the following (in thousands):
| As of | ||||||||||||||
| September 30, 2023 | December 31, 2022 | |||||||||||||
| Accruals related to real estate development and construction activities | $ | $ | ||||||||||||
| Payroll and other benefits | ||||||||||||||
| Accrued interest | ||||||||||||||
| Accrued taxes | ||||||||||||||
| Warranty reserves | ||||||||||||||
| Lease liabilities | ||||||||||||||
| Other accruals | ||||||||||||||
| Total | $ | $ | ||||||||||||
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| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||
| Balance, beginning of period | $ | $ | $ | $ | ||||||||||||||||||||||
| Additions to reserve from new home deliveries | ||||||||||||||||||||||||||
| Warranty claims and recoveries | ( | ( | ( | ( | (1) | |||||||||||||||||||||
| Adjustments to pre-existing reserves | ||||||||||||||||||||||||||
| Balance, end of period | $ | $ | $ | $ | ||||||||||||||||||||||
Revenue Recognition. In accordance with ASC 606, Revenue from Contracts with Customers, we apply the following steps in determining the timing and amount of revenue to recognize: (1) identify the contract with our customer; (2) identify the performance obligation(s) in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract, if applicable; and (5) recognize revenue when (or as) we satisfy the performance obligations. The performance obligations and subsequent revenue recognition for our three sources of revenue are outlined below:
•Revenue from home closings is recognized when closings have occurred, the risks and rewards of ownership are transferred to the buyer, and we have no continuing involvement with the property, which is generally upon the close of escrow. Revenue is reported net of any discounts and incentives.
•Revenue from land closings is recognized when a significant down payment is received, title passes, and collectability of the receivable, if any, is reasonably assured, and we have no continuing involvement with the property, which is generally upon the close of escrow.
•Revenue from financial services is recognized when closings have occurred and all financial services have been rendered, which is generally upon the close of escrow.
Home closing and land closing revenue expected to be recognized in any future year related to remaining performance obligations (if any) and the associated contract liabilities expected to be recognized as revenue, excluding revenue pertaining to contracts that have an original expected duration of one year or less, is not material. Revenue from financial services includes estimated future insurance policy renewal commissions as our performance obligations are satisfied upon issuance of the initial policy with a third party broker. The related contract assets for these estimated future renewal commissions are no
9
Recent Accounting Pronouncements.
There are no recent accounting pronouncements that are expected to have a material impact on our financial statements or financial statement disclosures.
NOTE 2 — REAL ESTATE AND CAPITALIZED INTEREST
Real estate consists of the following (in thousands):
| As of | ||||||||||||||
| September 30, 2023 | December 31, 2022 | |||||||||||||
Homes under contract under construction (1) | $ | $ | ||||||||||||
Unsold homes, completed and under construction (1) | ||||||||||||||
Model homes (1) | ||||||||||||||
Finished home sites and home sites under development (2) (3) | ||||||||||||||
| Total | $ | $ | ||||||||||||
(1)Includes the allocated land and land development costs associated with each lot for these homes.
(2)Includes raw land, land held for development and land held for sale, less impairments, if any. We do not capitalize interest for inactive assets, and all ongoing costs of land ownership (i.e. property taxes, homeowner association dues, etc.) are expensed as incurred.
(3)Includes land held for sale of $7.1 million and $66.8 million as of September 30, 2023 and December 31, 2022, respectively .
Subject to sufficient qualifying assets, we capitalize our development period interest costs incurred to applicable qualifying assets in connection with our real estate development and construction activities. Capitalized interest is allocated to active real estate when incurred and charged to Cost of closings when the related property is delivered. A summary of our capitalized interest is as follows (in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Capitalized interest, beginning of period | $ | $ | $ | $ | |||||||||||||||||||
| Interest incurred | |||||||||||||||||||||||
| Interest expensed | ( | ||||||||||||||||||||||
| Interest amortized to cost of home and land closings | ( | ( | ( | ( | |||||||||||||||||||
| Capitalized interest, end of period | $ | $ | $ | $ | |||||||||||||||||||
NOTE 3 — VARIABLE INTEREST ENTITIES AND CONSOLIDATED REAL ESTATE NOT OWNED
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The table below presents a summary of our lots under option at September 30, 2023 (dollars in thousands):
Projected Number of Lots | Purchase Price | Option/ Earnest Money Deposits–Cash | |||||||||||||||||||||
| Purchase and option contracts recorded on balance sheet as Real estate not owned | $ | $ | |||||||||||||||||||||
Option contracts — non-refundable deposits, committed (1) | |||||||||||||||||||||||
Purchase contracts — non-refundable deposits, committed (1) | |||||||||||||||||||||||
| Purchase and option contracts —refundable deposits, committed | |||||||||||||||||||||||
| Total committed | |||||||||||||||||||||||
Purchase and option contracts — refundable deposits, uncommitted (2) | |||||||||||||||||||||||
| Total lots under contract or option | $ | $ | |||||||||||||||||||||
Total purchase and option contracts not recorded on balance sheet (3) | $ | $ | (4) | ||||||||||||||||||||
(1)Deposits are non-refundable except if certain contractual conditions are not performed by the selling party.
(2)Deposits are refundable at our sole discretion. We have not completed our acquisition evaluation process and we have not internally committed to purchase these lots.
(3)Except for our specific performance contracts recorded on the accompanying unaudited consolidated balance sheets as Real estate not owned (if any), none of our purchase or option contracts require us to purchase lots.
(4)Amount is reflected on the accompanying unaudited consolidated balance sheets in Deposits on real estate under option or contract as of September 30, 2023.
Generally, our options to purchase lots remain effective so long as we purchase a pre-established minimum number of lots on a pre-determined schedule in accordance with each respective agreement. Although the pre-established number is typically structured to approximate our expected rate of home construction starts, during a weakened homebuilding market, we may purchase lots at an absorption level that exceeds our expected orders and home starts pace to meet the pre-established minimum number of lots or restructure our original contract to terms that more accurately reflect our revised orders pace expectations. During a strong homebuilding market, we may accelerate our pre-established minimum purchases if allowed by the contract.
NOTE 4 - INVESTMENTS IN UNCONSOLIDATED ENTITIES
11
Summarized condensed combined financial information related to unconsolidated joint ventures that are accounted for using the equity method was as follows (in thousands):
| As of | |||||||||||
| September 30, 2023 | December 31, 2022 | ||||||||||
| Assets: | |||||||||||
Cash | $ | $ | |||||||||
Real estate | |||||||||||
Other assets | |||||||||||
| Total assets | $ | $ | |||||||||
| Liabilities and equity: | |||||||||||
| Accounts payable and other liabilities | $ | $ | |||||||||
| Equity of: | |||||||||||
Meritage (1) | |||||||||||
| Other | |||||||||||
| Total liabilities and equity | $ | $ | |||||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Revenue | $ | $ | $ | $ | |||||||||||||||||||
| Costs and expenses | ( | ( | ( | ( | |||||||||||||||||||
| Net earnings of unconsolidated entities | $ | $ | $ | $ | |||||||||||||||||||
Meritage’s share of pre-tax earnings (1) (2) | $ | $ | $ | $ | |||||||||||||||||||
(1)Balance represents Meritage’s interest, as reflected in the financial records of the respective joint ventures. This balance may differ from the balance reported in the accompanying unaudited consolidated financial statements due to the following reconciling items: (i) timing differences for revenue and distributions recognition; (ii) step-up basis and corresponding amortization; (iii) capitalization of interest on qualified assets; (iv) income deferrals as discussed in Note (2) below; and (v) the cessation of allocation of losses from joint ventures in which we have previously written down our investment balance to zero and where we have no commitment to fund additional losses.
(2)Our share of pre-tax earnings/(loss) from our mortgage joint venture is recorded in Earnings/(loss) from financial services unconsolidated entities and other, net on the accompanying unaudited consolidated income statements. Our share of pre-tax earnings/(loss) from all other joint ventures is recorded in Other income/(expense), net on the accompanying unaudited consolidated income statements and excludes joint venture profit related to lots we purchased from the joint ventures, if any. Such profit is deferred until homes are delivered by us and title passes to a homebuyer.
NOTE 5 — LOANS PAYABLE AND OTHER BORROWINGS
Loans payable and other borrowings consist of the following (in thousands):
| As of | ||||||||||||||
| September 30, 2023 | December 31, 2022 | |||||||||||||
Other borrowings, real estate notes payable (1) | $ | $ | ||||||||||||
$ | ||||||||||||||
| Total | $ | $ | ||||||||||||
(1)Reflects balance of non-recourse notes payable in connection with land purchases .
The Company entered into an amended and restated unsecured revolving credit facility agreement ("Credit Facility") in 2014 that has been amended from time to time. In June 2023, the Credit Facility was amended to increase the facility size to $835.0 million, extend the maturity date to June 2, 2028, amend the accordion feature to permit the facility to increase by up to fifty percent of the facility size, increase the letter of credit sublimit up to the maximum size of the facility, eliminate the
12
liquidity and interest coverage covenant and adjust certain covenant basket amounts. The Credit Facility's aggregate commitment is $835.0 million with an accordion feature permitting the size of the facility to increase to a maximum of $1.3 billion, subject to certain conditions, including the availability of additional bank commitments. Borrowings under the Credit Facility bear interest at the Company's option, at either (1) term SOFR (based on 1, 3, or 6 month interest periods, as selected by the Company) plus a 10 basis point adjustment plus an applicable margin (ranging from 125 basis points to 175 basis points (the "applicable margin")) based on the Company's leverage ratio as determined in accordance with a pricing grid, (2) the higher of (i) the prime lending rate ("Prime"), (ii) an overnight bank rate plus 50 basis points and (iii) term SOFR (based on a 1 month interest period) plus a 10 basis point adjustment plus 1 %, in each case plus a margin ranging from 25 basis points to 75 basis points based on the Company's leverage in accordance with a pricing grid, or (3) daily simple SOFR plus a 10 basis point adjustment plus the applicable margin. At September 30, 2023, the interest rate on outstanding borrowings under the Credit Facility would have been 6.670 % per annum, calculated in accordance with option (1) noted above and using the 1-month term SOFR. We are obligated to pay a fee on the undrawn portion of the Credit Facility at a rate determined by a tiered fee matrix based on our leverage ratio.
The Credit Facility also contains certain financial covenants, including (a) a minimum tangible net worth requirement of $2.8 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 %. We were in compliance with all Credit Facility covenants as of September 30, 2023.
We had no no 40.0 40.6 million, leaving $794.4 million available under the Credit Facility to be drawn.
NOTE 6 — SENIOR NOTES, NET
| As of | ||||||||||||||
| September 30, 2023 | December 31, 2022 | |||||||||||||
| Net debt issuance costs | ( | ( | ||||||||||||
| Total | $ | $ | ||||||||||||
The indentures for all of our senior notes contain non-financial covenants including, among others, limitations on the amount of secured debt we may incur, and limitations on sale and leaseback transactions and mergers. We were in compliance with all such covenants as of September 30, 2023.
Obligations to pay principal and interest on the senior notes are guaranteed by substantially all of our wholly-owned subsidiaries (each a “Guarantor” and, collectively, the “Guarantor Subsidiaries”), each of which is directly or indirectly 100% owned by Meritage Homes Corporation. Such guarantees are full and unconditional, and joint and several. In the event of a sale or other disposition of all of the assets of any Guarantor, by way of merger, consolidation or otherwise, or a sale or other disposition of all of the equity interests of any Guarantor then held by Meritage and its subsidiaries, then that Guarantor may be released and relieved of any obligations under its note guarantee. There are no significant restrictions on our ability or the ability of any Guarantor to obtain funds from their respective subsidiaries, as applicable, by dividend or loan. We do not provide separate financial statements of the Guarantor Subsidiaries because Meritage (the parent company) has no independent assets or operations and the guarantees are full and unconditional and joint and several. Subsidiaries of Meritage Homes Corporation that are non-guarantor subsidiaries are, individually and in the aggregate, minor.
In September 2023, we partially redeemed $150.0 million of our 6.00 % Senior Notes due 2025 (the "2025 Notes"), incurring $0.9 250.0 million in remaining principal outstanding.
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NOTE 7 — FAIR VALUE DISCLOSURES
ASC 820-10, Fair Value Measurement ("ASC 820"), defines fair value, establishes a framework for measuring fair value and addresses required disclosures about fair value measurements. This standard establishes a three-level hierarchy for fair value measurements based upon the significant inputs used to determine fair value. Observable inputs are those which are obtained from market participants external to the Company while unobservable inputs are generally developed internally, utilizing management’s estimates, assumptions and specific knowledge of the assets/liabilities and related markets. The three levels are defined as follows:
•Level 1 — Valuation is based on quoted prices in active markets for identical assets and liabilities.
•Level 2 — Valuation is determined from quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar instruments in markets that are not active, or by model-based techniques in which all significant inputs are observable in the market.
•Level 3 — Valuation is derived from model-based techniques in which at least one significant input is unobservable and based on the company’s own estimates about the assumptions that market participants would use to value the asset or liability.
If the only observable inputs are from inactive markets or for transactions which the Company evaluates as “distressed”, the use of Level 1 inputs should be modified by the Company to properly address these factors, or the reliance of such inputs may be limited, with a greater weight attributed to Level 3 inputs.
Financial Instruments: The fair value of our fixed-rate debt is derived from quoted market prices by independent dealers (Level 2 inputs as per the discussion above) and is as follows (in thousands):
| As of | ||||||||||||||||||||||||||
| September 30, 2023 | December 31, 2022 | |||||||||||||||||||||||||
| Aggregate Principal | Estimated Fair Value | Aggregate Principal | Estimated Fair Value | |||||||||||||||||||||||
| $ | $ | $ | $ | |||||||||||||||||||||||
| $ | $ | $ | $ | |||||||||||||||||||||||
| $ | $ | $ | $ | |||||||||||||||||||||||
Due to the short-term nature of other financial assets and liabilities, including our Loans payable and other borrowings, we consider the carrying amounts of our other short-term financial instruments to approximate fair value.
Non-Financial Instruments: Our Real estate assets are Level 3 instruments that are required to be recorded at fair value on non-recurring basis when events and circumstances indicate that the carrying value may not be recoverable. Refer to Note 1 for information regarding the valuation of these assets.
NOTE 8 — EARNINGS PER SHARE
Basic and diluted earnings per common share were calculated as follows (in thousands, except per share amounts):
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Basic weighted average number of shares outstanding | |||||||||||||||||||||||
| Effect of dilutive securities: | |||||||||||||||||||||||
| Unvested restricted stock | |||||||||||||||||||||||
| Diluted average shares outstanding | |||||||||||||||||||||||
| Net earnings | $ | $ | $ | $ | |||||||||||||||||||
| Basic earnings per share | $ | $ | $ | $ | |||||||||||||||||||
| Diluted earnings per share | $ | $ | $ | $ | |||||||||||||||||||
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NOTE 9 — ACQUISITIONS AND GOODWILL
Goodwill. In prior years, we have entered new markets through the acquisition of the homebuilding assets and operations of local/regional homebuilders in Georgia, South Carolina and Tennessee. As a result of these transactions, we recorded approximately $33.0 million of goodwill. Goodwill represents the excess purchase price of our acquisitions over the fair value of the net assets acquired. Our acquisitions were recorded in accordance with ASC 805, Business Combinations, and ASC 820, using the acquisition method of accounting. The purchase price for acquisitions was allocated based on estimated fair value of the assets and liabilities at the date of the acquisition. The combined excess purchase price of our acquisitions over the fair value of the net assets is classified as goodwill and is included in our unaudited consolidated balance sheets in Prepaids, other assets and goodwill. In accordance with ASC 350, we assess the recoverability of goodwill annually, or more frequently, if impairment indicators are present.
| West | Central | East | Financial Services | Corporate | Total | ||||||||||||||||||||||||||||||
| Balance at December 31, 2022 | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Additions | |||||||||||||||||||||||||||||||||||
| Balance at September 30, 2023 | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
NOTE 10 — STOCKHOLDERS’ EQUITY
A summary of changes in stockholders’ equity is presented below (in thousands):
| Nine Months Ended September 30, 2023 | |||||||||||||||||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||||||||||||||
| Number of Shares | Common Stock | Additional Paid-In Capital | Retained Earnings | Total | |||||||||||||||||||||||||||||||
| Balance at December 31, 2022 | $ | $ | $ | $ | |||||||||||||||||||||||||||||||
| Net earnings | — | — | — | ||||||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | — | ||||||||||||||||||||||||||||||||
| Issuance of stock | ( | — | |||||||||||||||||||||||||||||||||
| Dividends declared | — | — | — | ( | ( | ||||||||||||||||||||||||||||||
| Share repurchases | ( | ( | ( | — | ( | ||||||||||||||||||||||||||||||
| Balance at March 31, 2023 | $ | $ | $ | $ | |||||||||||||||||||||||||||||||
| Net earnings | — | — | — | ||||||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | — | ||||||||||||||||||||||||||||||||
| Dividends declared | — | — | — | ( | ( | ||||||||||||||||||||||||||||||
| Balance at June 30, 2023 | $ | $ | $ | $ | |||||||||||||||||||||||||||||||
| Net earnings | — | — | — | ||||||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | — | ||||||||||||||||||||||||||||||||
| Dividends declared | — | — | — | ( | ( | ||||||||||||||||||||||||||||||
| Issuance of stock | — | — | — | ||||||||||||||||||||||||||||||||
| Share repurchases | ( | ( | ( | — | ( | ||||||||||||||||||||||||||||||
| Balance at September 30, 2023 | $ | $ | $ | $ | |||||||||||||||||||||||||||||||
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| Nine Months Ended September 30, 2022 | ||||||||||||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||||||||||
| Number of Shares | Common Stock | Additional Paid-In Capital | Retained Earnings | Total | ||||||||||||||||||||||||||||
| Balance at December 31, 2021 | $ | $ | $ | $ | ||||||||||||||||||||||||||||
| Net earnings | — | — | — | |||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | — | |||||||||||||||||||||||||||||
| Issuance of stock | ( | — | ||||||||||||||||||||||||||||||
| Share repurchases | ( | ( | ( | — | ( | |||||||||||||||||||||||||||
| Balance at March 31, 2022 | $ | $ | $ | $ | ||||||||||||||||||||||||||||
| Net earnings | — | — | — | |||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | — | |||||||||||||||||||||||||||||
| Share repurchases | ( | ( | ( | — | ( | |||||||||||||||||||||||||||
| Balance at June 30, 2022 | $ | $ | $ | $ | ||||||||||||||||||||||||||||
| Net earnings | — | — | — | |||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | — | |||||||||||||||||||||||||||||
| Issuance of stock | — | |||||||||||||||||||||||||||||||
| Balance at September 30, 2022 | $ | $ | $ | $ | ||||||||||||||||||||||||||||
During the three months ended September 30, 2023, our Board of Directors approved, and we paid, a quarterly cash dividend on common stock of $0.27 per share. Quarterly dividends declared and paid during the nine months ended September 30, 2023 totaled $0.81 per share. There were no
NOTE 11 — STOCK BASED AND DEFERRED COMPENSATION
We have a stock compensation plan, the Meritage Homes Corporation 2018 Stock Incentive Plan (the “2018 Plan"), that was approved by our Board of Directors and our stockholders and adopted in May 2018. In May 2023, the Board of Directors and stockholders approved an amendment to the Plan to increase the number of shares available for issuance by 800,000 . The 2018 Plan is administered by our Board of Directors and allows for the grant of stock appreciation rights, restricted stock awards, restricted stock units, performance share awards and performance-based awards in addition to non-qualified and incentive stock options. All available shares from expired, terminated, or forfeited awards that remained under prior plans were merged into and became available for grant under the 2018 Plan. The 2018 Plan authorizes awards to officers, key employees, non-employee directors and consultants. The 2018 Plan authorizes 7,400,000 shares of stock to be awarded, of which 1,340,233 shares remain available for grant at September 30, 2023. We believe that such awards provide a means of long-term compensation to attract and retain qualified employees and better align the interests of our employees with those of our stockholders. Non-vested stock awards are usually granted with a five-year ratable vesting period for employees, a three-year cliff vesting for both restricted stock and performance-based awards granted to senior executive officers and either a three-year cliff vesting or one-year vesting for non-employee directors, dependent on their start date.
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| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Stock-based compensation expense | $ | $ | $ | $ | |||||||||||||||||||
| Non-vested shares granted | |||||||||||||||||||||||
| Performance-based non-vested shares granted | |||||||||||||||||||||||
Performance-based shares issued in excess of target shares granted (1) | |||||||||||||||||||||||
| Restricted stock awards vested (includes performance-based awards) | |||||||||||||||||||||||
The following table includes additional information regarding our stock compensation plan (dollars in thousands):
| As of | ||||||||||||||
| September 30, 2023 | December 31, 2022 | |||||||||||||
| Unrecognized stock-based compensation cost | $ | $ | ||||||||||||
| Weighted average years expense recognition period | ||||||||||||||
Total equity awards outstanding (1) | ||||||||||||||
(1)Includes unvested restricted stock awards, restricted stock units and performance-based awards (assuming 100 % target payout).
We also offer a non-qualified deferred compensation plan ("deferred compensation plan") to highly compensated employees in order to allow them additional pre-tax income deferrals above and beyond the limits that qualified plans, such as 401(k) plans, impose on highly compensated employees. We do not currently offer a contribution match on the deferred compensation plan. All contributions to the plan to date have been funded by the employees and, therefore, we have no associated expense related to the deferred compensation plan for the three and nine months ended September 30, 2023 or 2022, other than minor administrative costs.
NOTE 12 — INCOME TAXES
Components of the income tax provision are as follows (in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Federal | $ | $ | $ | $ | |||||||||||||||||||
| State | |||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||
The effective tax rate for the three and nine months ended September 30, 2023 was 22.4 % and 21.8 %, and for the three and nine months ended September 30, 2022 was 20.3 % and 22.9 %, respectively. The higher tax rate for the three months ended September 30, 2023 compared to the 2022 period is due to the retroactive extension of the §45L energy-efficient homes federal tax credit on qualifying homes under the Internal Revenue Code ("IRC") enacted in the IRA in third quarter of 2022, which includes a nine-month catch up in the third quarter of 2022. The lower effective tax rate for the nine months ended September 30, 2023 compared to the 2022 period reflects the increased per-home energy-efficiency credit amount starting in 2023.
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At September 30, 2023 and December 31, 2022, we have no
At September 30, 2023, we have $16.1 million in income taxes payable and no income taxes receivable. The income taxes payable primarily consists of current federal and state tax accruals, net of current energy tax credits and estimated tax payments and is recorded in Accrued liabilities on the accompanying unaudited consolidated balance sheets at September 30, 2023. We conduct business and are subject to tax in the U.S. both federally and in several states. With few exceptions, we are no longer subject to U.S. federal, state, or local income tax examinations by taxing authorities for years prior to 2018. We have one state income tax examination covering various years pending resolution at this time.
NOTE 13 — SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
| Nine Months Ended September 30, | ||||||||||||||
| 2023 | 2022 | |||||||||||||
| Cash paid during the year for: | ||||||||||||||
| Interest, net of interest capitalized | $ | ( | $ | ( | ||||||||||
| Income taxes paid | $ | $ | ||||||||||||
| Non-cash operating activities: | ||||||||||||||
| Real estate acquired through notes payable | $ | $ | ||||||||||||
| ROU assets obtained in exchange for new operating lease obligations | $ | $ | ||||||||||||
NOTE 14 — OPERATING AND REPORTING SEGMENTS
West: | Arizona, California, Colorado and Utah | ||||||||||
Central: | Texas | ||||||||||
East: | Florida, Georgia, North Carolina, South Carolina and Tennessee | ||||||||||
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The following segment information is in thousands:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
Homebuilding revenue (1): | |||||||||||||||||||||||
| West | $ | $ | $ | $ | |||||||||||||||||||
| Central | |||||||||||||||||||||||
| East | |||||||||||||||||||||||
| Consolidated total | $ | $ | $ | $ | |||||||||||||||||||
| Homebuilding segment operating income: | |||||||||||||||||||||||
| West | $ | $ | $ | $ | |||||||||||||||||||
| Central | |||||||||||||||||||||||
| East | |||||||||||||||||||||||
| Total homebuilding segment operating income | |||||||||||||||||||||||
| Financial services segment profit | |||||||||||||||||||||||
Corporate and unallocated costs (2) | ( | ( | ( | ( | |||||||||||||||||||
| Interest expense | ( | ||||||||||||||||||||||
| Other income/(expense), net | ( | ( | |||||||||||||||||||||
| Loss on early extinguishment of debt | ( | ( | |||||||||||||||||||||
| Earnings before income taxes | $ | $ | $ | $ | |||||||||||||||||||
(1)Homebuilding revenue includes the following land closing revenue, by segment:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Land closing revenue: | |||||||||||||||||||||||
| West | $ | $ | $ | $ | |||||||||||||||||||
| Central | |||||||||||||||||||||||
| East | |||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||
(2)Balance consists primarily of corporate costs and shared service functions such as finance and treasury that are not allocated to the homebuilding or financial services reporting segments.
| At September 30, 2023 | ||||||||||||||||||||||||||||||||||||||
| West | Central | East | Financial Services | Corporate and Unallocated | Total | |||||||||||||||||||||||||||||||||
| Deposits on real estate under option or contract | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||
| Real estate | ||||||||||||||||||||||||||||||||||||||
| Investments in unconsolidated entities | ||||||||||||||||||||||||||||||||||||||
| Other assets | (1) | (2) | (3) | (4) | ||||||||||||||||||||||||||||||||||
| Total assets | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||
(1)Balance consists primarily of cash and cash equivalents, other receivables and property and equipment, net.
(2)Balance consists primarily of cash and cash equivalents, development reimbursements from local municipalities and prepaids and other assets.
(3)Balance consists primarily of cash and cash equivalents, goodwill (see Note 9), prepaids and other assets and property and equipment, net.
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(4)Balance consists primarily of cash and cash equivalents, deferred tax assets and prepaids and other assets.
| At December 31, 2022 | ||||||||||||||||||||||||||||||||||||||
| West | Central | East | Financial Services | Corporate and Unallocated | Total | |||||||||||||||||||||||||||||||||
| Deposits on real estate under option or contract | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||
| Real estate | ||||||||||||||||||||||||||||||||||||||
| Investments in unconsolidated entities | ||||||||||||||||||||||||||||||||||||||
| Other assets | (1) | (2) | (3) | (4) | ||||||||||||||||||||||||||||||||||
| Total assets | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||
(1)Balance consists primarily of cash and cash equivalents, development reimbursements from local municipalities and property and equipment, net.
(2)Balance consists primarily of cash and cash equivalents, development reimbursements from local municipalities and prepaids and other assets.
(3)Balance consists primarily of cash and cash equivalents, goodwill, prepaids and other assets and property and equipment, net.
(4)Balance consists primarily of cash and cash equivalents, deferred tax assets and prepaids and other assets.
NOTE 15 — COMMITMENTS AND CONTINGENCIES
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Special Note of Caution Regarding Forward-Looking Statements
In passing the Private Securities Litigation Reform Act of 1995 (“PSLRA”), Congress encouraged public companies to make “forward-looking statements” by creating a safe-harbor to protect companies from securities law liability in connection with forward-looking statements. We intend to qualify both our written and oral forward-looking statements for protection under the PSLRA.
The words “believe,” “expect,” “anticipate,” “forecast,” “plan,” “intend,” “may,” “will,” “should,” “could,” “estimate,” "target," and “project” and similar expressions identify forward-looking statements, which speak only as of the date the statement was made. All statements we make other than statements of historical fact are forward-looking statements within the meaning of that term in Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934 (the "Exchange Act"). Forward-looking statements in this Annual Report include statements concerning our belief that we have ample liquidity; our goals, strategies and strategic initiatives including our all-spec strategy and the anticipated benefits relating thereto; our intentions and the expected benefits and advantages of our product and land positioning strategies, including with respect to our focus on the first-time and first move-up home buyer and housing demand for affordable homes; the benefits of and our intentions to use options to acquire land; our positions and our expected outcome relating to litigation and regulatory proceedings in general; our intentions to pay quarterly dividends; the sustainability of our tax positions; that we may repurchase our debt and equity securities; our non-use of derivative financial instruments; expectations regarding our industry and our business for the remainder of 2023 and beyond; the demand for and the pricing of our homes; our land and lot acquisition strategy (including that we will redeploy cash to acquire well-positioned finished lots and that we may participate in joint ventures or opportunities outside of our existing markets if opportunities arise and the benefits relating thereto); that we may expand into new markets; the availability of labor and materials for our operations; that we may seek additional debt or equity capital; our expectation that existing guarantees, letters of credit and performance and surety bonds will not be drawn on; the sufficiency of our insurance coverage and legal and warranty reserves; the outcome of pending litigation; the sources and sufficiency of our capital resources to support our business strategy; the sufficiency of our land pipeline; the impact of new accounting standards and changes in accounting estimates; trends and expectations concerning future demand for homes, home construction cycle times, sales prices, sales orders, cancellations, construction and materials costs and availability, gross margins, land costs, inflation, community counts and profitability and future home supply and inventories; our future cash needs and sources, and the impact of seasonality.
Important factors that could cause actual results to differ materially from those in forward-looking statements, and that could negatively affect our business include, but are not limited to, the following: increases in mortgage interest rates and the availability and pricing of residential mortgages; inflation in the cost of materials used to develop communities and construct homes; cancellation rates; supply chain and labor constraints; the ability of our potential buyers to sell their existing homes; our ability to acquire and develop lots may be negatively impacted if we are unable to obtain performance and surety bonds; the adverse effect of slow absorption rates; legislation related to tariffs; impairments of our real estate inventory; competition; home warranty and construction defect claims; failures in health and safety performance; fluctuations in quarterly operating results; our level of indebtedness; our ability to obtain financing if our credit ratings are downgraded; our potential exposure to and impacts from natural disasters or severe weather conditions; the availability and cost of finished lots and undeveloped land; the success of our strategy to offer and market entry-level and first move-up homes; a change to the feasibility of projects under option or contract that could result in the write-down or write-off of earnest money or option deposits; our limited geographic diversification; the replication of our energy-efficient technologies by our competitors; shortages in the availability and cost of subcontract labor; our exposure to information technology failures and security breaches and the impact thereof; the loss of key personnel; changes in tax laws that adversely impact us or our homebuyers; our inability to prevail on contested tax positions; failure of our employees and representatives to comply with laws and regulations; our compliance with government regulations related to our financial services operations; negative publicity that affects our reputation; potential disruptions to our business by an epidemic or pandemic (such as COVID-19), and measures that federal, state and local governments and/or health authorities implement to address it; and other factors identified in documents filed by the Company with the Securities and Exchange Commission, including those set forth in our Form 10-K for the year ended December 31, 2022 under the caption "Risk Factors."
Forward-looking statements express expectations of future events. All forward-looking statements are inherently uncertain, as they are based on various expectations and assumptions concerning future events and they are subject to numerous known and unknown risks and uncertainties that could cause actual events or results to differ materially from those projected. Due to these inherent uncertainties, the investment community is urged not to place undue reliance on forward-looking statements. In addition, we disclaim and undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to projections over time, except as required by law.
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| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | ||||
Overview and Outlook
Demand for new homes in the third quarter of 2023 held steady with that experienced in first half of the year, despite the persistence of elevated interest rates and high inflation. This environment has homebuyers looking for assistance with monthly mortgage affordability, requiring greater use of financing incentives, including interest rate locks and buy-downs. Millennial and baby boomer generations are seeking affordable, move-in ready homes that meet their changing lifestyle needs, which has created elevated demand for new inventory, as existing homeowners with lower mortgage rates are not listing their homes, resulting in a short supply of total inventory. We believe our all-spec strategy with a commitment to affordability will meet the persisting demographic demand, providing us with ample opportunity to capture and grow our market share.
While we have experienced some limited relief in material costs, primarily due to the retraction in lumber commodities, most other home costs have held relatively steady at their elevated levels. Our cost savings year over year were primarily generated by improvements in our construction cycle time. During the third quarter of 2023, we further reduced our construction cycle time by over two weeks as supply chain and labor constraints have continuously lessened throughout the year. We continue to rebid all of our construction inputs and expect costs to begin to trend down to historical levels as the economy resets into stabilizing inflation rates. Higher land development costs have also begun to impact margins for newer communities and will continue to do so in the near-to-mid term.
Summary Company Results
We achieved record third quarter home closing revenue and units volume of 3,638 homes valued at $1.6 billion in the third quarter of 2023, improving 4.3% and 2.6%, respectively, year over year. The increase in home closing revenue was driven by the higher volume as the average sales price ("ASP") on closings decreased 1.6% due to higher incentives. Third quarter home closing gross margin of 26.7% for home closing gross profit of $429.6 million compared to 28.7% and $450.6 million, respectively, in the third quarter of 2022. The 200 basis point margin deterioration is due primarily to increased incentives and higher land development costs, while direct costs held relatively steady. Commissions and other sales costs of $99.1 million in the three months ended September 30, 2023 increased $21.2 million due to the combined effect of higher home closing volume and increased commissions offered in response to the current sales environment. General and administrative expenses of $63.1 million were 3.9% of home closing revenue for the three months ended September 30, 2023, compared to $48.4 million, or 3.1% of home closing revenue, for the same period in 2022. The increase in General and administrative expenses is due to higher compensation, inclusive of newer market operations and competitive market adjustments. Other income, net of $13.3 million increased from a net other expense of $0.1 million in the prior year primarily due to higher interest rates earned on a larger cash balance. In September 2023 we partially redeemed $150.0 million of our 2025 Notes, resulting in charges of $0.9 million reflected in Loss on early extinguishment of debt, with no similar charges in 2022. Earnings before income taxes for the third quarter of 2023 of $285.7 million decreased $43.8 million year over year from $329.5 million in 2022. The effective income tax rate for the third quarter of 2023 was 22.4%, compared to 20.3% in 2022. The 2022 effective tax rate reflects the catch-up of tax credits for energy efficient homes closed in the first nine months of 2022 for the extension of the §45L energy-efficient homes federal tax credit enacted by the IRA in third quarter of 2022. The decrease in year-over-year profitability and a higher tax rate, resulted in net earnings of $221.8 million in the third quarter of 2023 versus $262.5 million in the third quarter of 2022.
For the nine months ended September 30, 2023, home closing volume of 10,025 units increased 4.8% from 2022, leading to a 4.5% increase in home closing revenue to $4.4 billion. Home closing gross margin of 24.7% decreased 540 basis points, resulting in a $184.0 million decrease in home closing gross profit. Lower gross margin and profitability, partially offset by a lower effective tax rate of 21.8%, led to net income of $539.9 million for the nine months ended September 30, 2023, compared to $729.8 million for the 2022 period.
Home orders of 3,474 for the quarter ended September 30, 2023 were 50.4% higher than the third quarter of 2022, as market conditions stabilized over the last twelve months, increasing consumer confidence and buyer demand, and our cancellation rate in the third quarter of 2023 of 11% improved significantly from the elevated 30% in the third quarter of 2022. Our average active community count decrease of 2.6% for the third quarter of 2023 was overshadowed by a 51.9% increase in orders pace to 4.1 per month compared to 2.7 in the 2022 third quarter. Home order value increased 53.5% year-over-year, to $1.5 billion during the three months ended September 30, 2023, versus $1.0 billion in the same period of 2022, due to the
22
higher volume and a 2.1% increase in ASP on orders. The higher ASP on orders year over year is due to geographic mix, with a greater proportion of orders in higher ASP markets in the third quarter of 2023 as compared to 2022.
For the nine months ended September 30, 2023, home orders increased 3.5% and home order value decreased 1.6% over the prior year, with a cancellation rate of 13% compared to 16% for the prior year period. We ended the third quarter of 2023 with 3,608 homes in backlog valued at $1.6 billion, decreases of 40.5% and 44.9%, respectively, from September 30, 2022. The decrease in backlog units is due to a 96.4% backlog conversion rate during the third quarter of 2023.
We ended the third quarter of 2023 with 272 active communities, down from 275 at September 30, 2022 as our accelerated orders pace resulted in early community close outs. We purchased approximately 9,100 lots for $486.0 million, spent $769.7 million on land development and started construction on 10,547 homes during the nine months ended September 30, 2023.
Company Positioning
We believe that the investments in our new communities designed for the first-time and first move-up homebuyer, our commitment to being primarily an all-spec builder, 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 on growing our community count and market share includes the following strategic initiatives:
•Achieving or maintaining a position of at least 5% market share in all of our markets;
•Delivering affordable homes on a shorter timeline through simplification of production processes and maintaining market-appropriate levels of spec inventory;
•Continuously improving the overall home buying experience through simplification and innovation;
•Maintaining 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 offering healthier, energy-efficient homes that come equipped with a suite of home automation standard features.
In addition to these strategic initiatives, we also remain committed to the following:
•Carefully managing our liquidity and a strong balance sheet, including a $150.0 million early redemption of debt this quarter; we ended the third quarter with an 18.5% debt-to-capital ratio and a (1.0)% net debt-to-capital ratio;
•Maximizing returns to our shareholders through improved financial performance, dividend payments and share repurchases;
•Managing construction efficiencies and costs through national and regional vendor relationships with a focus on timely, quality construction and warranty management;
•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;
•Targeting a strong yet sustainable 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; and
•Continuing to innovate and promote our energy efficiency program and our M.Connected® Automation Suite to create differentiation from existing available inventory.
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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 nine months ended September 30, 2023 compared to those disclosed in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, included in our 2022 Annual Report on Form 10-K.
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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):
| Home Closing Revenue | Three Months Ended September 30, | Quarter over Quarter | ||||||||||||||||||||||||
| 2023 | 2022 | Change $ | Change % | |||||||||||||||||||||||
| Total | ||||||||||||||||||||||||||
| Dollars | $ | 1,610,317 | $ | 1,569,032 | $ | 41,285 | 2.6 | % | ||||||||||||||||||
| Homes closed | 3,638 | 3,487 | 151 | 4.3 | % | |||||||||||||||||||||
| Average sales price | $ | 442.6 | $ | 450.0 | $ | (7.4) | (1.6) | % | ||||||||||||||||||
| West Region | ||||||||||||||||||||||||||
| Dollars | $ | 606,833 | $ | 590,027 | $ | 16,806 | 2.8 | % | ||||||||||||||||||
| Homes closed | 1,172 | 1,086 | 86 | 7.9 | % | |||||||||||||||||||||
| Average sales price | $ | 517.8 | $ | 543.3 | $ | (25.5) | (4.7) | % | ||||||||||||||||||
| Central Region | ||||||||||||||||||||||||||
| Dollars | $ | 452,687 | $ | 499,713 | $ | (47,026) | (9.4) | % | ||||||||||||||||||
| Homes closed | 1,102 | 1,218 | (116) | (9.5) | % | |||||||||||||||||||||
| Average sales price | $ | 410.8 | $ | 410.3 | $ | 0.5 | 0.1 | % | ||||||||||||||||||
| East Region | ||||||||||||||||||||||||||
| Dollars | $ | 550,797 | $ | 479,292 | $ | 71,505 | 14.9 | % | ||||||||||||||||||
| Homes closed | 1,364 | 1,183 | 181 | 15.3 | % | |||||||||||||||||||||
| Average sales price | $ | 403.8 | $ | 405.1 | $ | (1.3) | (0.3) | % | ||||||||||||||||||
| Nine Months Ended September 30, | Quarter over Quarter | |||||||||||||||||||||||||
| 2023 | 2022 | Change $ | Change % | |||||||||||||||||||||||
| Total | ||||||||||||||||||||||||||
| Dollars | $ | 4,415,261 | $ | 4,223,435 | $ | 191,826 | 4.5 | % | ||||||||||||||||||
| Homes closed | 10,025 | 9,566 | 459 | 4.8 | % | |||||||||||||||||||||
| Average sales price | $ | 440.4 | $ | 441.5 | $ | (1.1) | (0.2) | % | ||||||||||||||||||
| West Region | ||||||||||||||||||||||||||
| Dollars | $ | 1,543,372 | $ | 1,539,529 | $ | 3,843 | 0.2 | % | ||||||||||||||||||
| Homes closed | 2,954 | 2,875 | 79 | 2.7 | % | |||||||||||||||||||||
| Average sales price | $ | 522.5 | $ | 535.5 | $ | (13.0) | (2.4) | % | ||||||||||||||||||
| Central Region | ||||||||||||||||||||||||||
| Dollars | $ | 1,334,368 | $ | 1,269,868 | $ | 64,500 | 5.1 | % | ||||||||||||||||||
| Homes closed | 3,244 | 3,139 | 105 | 3.3 | % | |||||||||||||||||||||
| Average sales price | $ | 411.3 | $ | 404.5 | $ | 6.8 | 1.7 | % | ||||||||||||||||||
| East Region | ||||||||||||||||||||||||||
| Dollars | $ | 1,537,521 | $ | 1,414,038 | $ | 123,483 | 8.7 | % | ||||||||||||||||||
| Homes closed | 3,827 | 3,552 | 275 | 7.7 | % | |||||||||||||||||||||
| Average sales price | $ | 401.8 | $ | 398.1 | $ | 3.7 | 0.9 | % | ||||||||||||||||||
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| Home Orders (1) | Three Months Ended September 30, | Quarter over Quarter | ||||||||||||||||||||||||
| 2023 | 2022 | Change $ | Change % | |||||||||||||||||||||||
| Total | ||||||||||||||||||||||||||
| Dollars | $ | 1,495,542 | $ | 974,314 | $ | 521,228 | 53.5 | % | ||||||||||||||||||
| Homes ordered | 3,474 | 2,310 | 1,164 | 50.4 | % | |||||||||||||||||||||
| Average sales price | $ | 430.5 | $ | 421.8 | $ | 8.7 | 2.1 | % | ||||||||||||||||||
| West Region | ||||||||||||||||||||||||||
| Dollars | $ | 521,049 | $ | 241,098 | $ | 279,951 | 116.1 | % | ||||||||||||||||||
| Homes ordered | 985 | 456 | 529 | 116.0 | % | |||||||||||||||||||||
| Average sales price | $ | 529.0 | $ | 528.7 | $ | 0.3 | 0.1 | % | ||||||||||||||||||
| Central Region | ||||||||||||||||||||||||||
| Dollars | $ | 425,165 | $ | 253,321 | $ | 171,844 | 67.8 | % | ||||||||||||||||||
| Homes ordered | 1,099 | 635 | 464 | 73.1 | % | |||||||||||||||||||||
| Average sales price | $ | 386.9 | $ | 398.9 | $ | (12.0) | (3.0) | % | ||||||||||||||||||
| East Region | ||||||||||||||||||||||||||
| Dollars | $ | 549,328 | $ | 479,895 | $ | 69,433 | 14.5 | % | ||||||||||||||||||
| Homes ordered | 1,390 | 1,219 | 171 | 14.0 | % | |||||||||||||||||||||
| Average sales price | $ | 395.2 | $ | 393.7 | $ | 1.5 | 0.4 | % | ||||||||||||||||||
| Nine Months Ended September 30, | Quarter over Quarter | |||||||||||||||||||||||||
| 2023 | 2022 | Change $ | Change % | |||||||||||||||||||||||
| Total | ||||||||||||||||||||||||||
| Dollars | $ | 4,477,148 | $ | 4,551,894 | $ | (74,746) | (1.6) | % | ||||||||||||||||||
| Homes ordered | 10,301 | 9,951 | 350 | 3.5 | % | |||||||||||||||||||||
| Average sales price | $ | 434.6 | $ | 457.4 | $ | (22.8) | (5.0) | % | ||||||||||||||||||
| West Region | ||||||||||||||||||||||||||
| Dollars | $ | 1,672,310 | $ | 1,486,674 | $ | 185,636 | 12.5 | % | ||||||||||||||||||
| Homes ordered | 3,261 | 2,636 | 625 | 23.7 | % | |||||||||||||||||||||
| Average sales price | $ | 512.8 | $ | 564.0 | $ | (51.2) | (9.1) | % | ||||||||||||||||||
| Central Region | ||||||||||||||||||||||||||
| Dollars | $ | 1,286,063 | $ | 1,293,282 | $ | (7,219) | (0.6) | % | ||||||||||||||||||
| Homes ordered | 3,237 | 3,027 | 210 | 6.9 | % | |||||||||||||||||||||
| Average sales price | $ | 397.3 | $ | 427.2 | $ | (29.9) | (7.0) | % | ||||||||||||||||||
| East Region | ||||||||||||||||||||||||||
| Dollars | $ | 1,518,775 | $ | 1,771,938 | $ | (253,163) | (14.3) | % | ||||||||||||||||||
| Homes ordered | 3,803 | 4,288 | (485) | (11.3) | % | |||||||||||||||||||||
| Average sales price | $ | 399.4 | $ | 413.2 | $ | (13.8) | (3.3) | % | ||||||||||||||||||
(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.
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Order Backlog (1) | At September 30, | Quarter over Quarter | ||||||||||||||||||||||||
| 2023 | 2022 | Change $ | Change % | |||||||||||||||||||||||
| Total | ||||||||||||||||||||||||||
| Dollars | $ | 1,558,637 | $ | 2,826,759 | $ | (1,268,122) | (44.9) | % | ||||||||||||||||||
| Homes in backlog | 3,608 | 6,064 | (2,456) | (40.5) | % | |||||||||||||||||||||
| Average sales price | $ | 432.0 | $ | 466.2 | $ | (34.2) | (7.3) | % | ||||||||||||||||||
| West Region | ||||||||||||||||||||||||||
| Dollars | $ | 579,787 | $ | 905,080 | $ | (325,293) | (35.9) | % | ||||||||||||||||||
| Homes in backlog | 1,179 | 1,627 | (448) | (27.5) | % | |||||||||||||||||||||
| Average sales price | $ | 491.8 | $ | 556.3 | $ | (64.5) | (11.6) | % | ||||||||||||||||||
| Central Region | ||||||||||||||||||||||||||
| Dollars | $ | 370,279 | $ | 790,227 | $ | (419,948) | (53.1) | % | ||||||||||||||||||
| Homes in backlog | 956 | 1,766 | (810) | (45.9) | % | |||||||||||||||||||||
| Average sales price | $ | 387.3 | $ | 447.5 | $ | (60.2) | (13.5) | % | ||||||||||||||||||
| East Region | ||||||||||||||||||||||||||
| Dollars | $ | 608,571 | $ | 1,131,452 | $ | (522,881) | (46.2) | % | ||||||||||||||||||
| Homes in backlog | 1,473 | 2,671 | (1,198) | (44.9) | % | |||||||||||||||||||||
| Average sales price | $ | 413.2 | $ | 423.6 | $ | (10.4) | (2.5) | % | ||||||||||||||||||
(1)Our backlog represents net home orders that have not closed.
Active Communities and Cancellation Rates
| Active Communities | Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||||||||||||||||||||||||||
| Ending | Average | Ending | Average | Ending | Average | Ending | Average | ||||||||||||||||||||||||||||||||||||||||
| Total | 272 | 281.5 | 275 | 289.0 | 272 | 278.4 | 275 | 276.7 | |||||||||||||||||||||||||||||||||||||||
| West Region | 84 | 91.0 | 102 | 104.5 | 84 | 93.1 | 102 | 92.1 | |||||||||||||||||||||||||||||||||||||||
| Central Region | 82 | 82.0 | 74 | 77.0 | 82 | 81.8 | 74 | 75.6 | |||||||||||||||||||||||||||||||||||||||
| East Region | 106 | 108.5 | 99 | 107.5 | 106 | 103.5 | 99 | 109.0 | |||||||||||||||||||||||||||||||||||||||
Cancellation Rates (2) | Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||
| Total | 11 | % | 30 | % | 13 | % | 16 | % | ||||||||||||||||||
| West Region | 14 | % | 43 | % | 14 | % | 21 | % | ||||||||||||||||||
| Central Region | 13 | % | 37 | % | 14 | % | 20 | % | ||||||||||||||||||
| East Region | 8 | % | 18 | % | 11 | % | 10 | % | ||||||||||||||||||
(2)Cancellation rates are computed as the number of canceled units for the period divided by the gross sales units for the same period.
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Operating Results
Companywide. We had our highest third quarter home closing revenue and volume in Company history, improving 2.6% and 4.3%, respectively, over prior year, with 3,638 closings valued at $1.6 billion for the three months ended September 30, 2023, compared to 3,487 closings valued at $1.6 billion in 2022. Despite entering the 2023 third quarter with lower backlog than prior year, home closing volume increased over the third quarter of 2022 due to a backlog conversion rate of 96.4% versus 48.2% in the prior year. The improvement in backlog conversion was bolstered by reduced cycle times combined with 31.6% of our third quarter 2023 home closings also being sold within the same quarter. Order cancellations of 11% for the third quarter of 2023 improved greatly from 30% in the third quarter of 2022, resulting in a 50.4% increase in home order volume of 3,474 homes, compared to 2,310 homes in the third quarter of 2022, and our orders pace improved 51.9% to 4.1 per month from 2.7 per month. ASP on orders increased 2.1% due to geographic mix, which combined with the higher order volume for a 53.5% increase in home order value of $1.5 billion.
For the nine months ended September 30, 2023, home closing revenue of $4.4 billion increased 4.5% from $4.2 billion, due to a 4.8% increase in home closing volume to 10,025, up from 9,566 homes in the prior year period, as ASP on closings was relatively flat. Home order volume of 10,301 increased 3.5% from prior year due primarily to a 2.5% increase in orders pace of 4.1 homes per month, up from 4.0 in 2022, on a relatively consistent average active community count. Despite the increase in order volume, home order value decreased 1.6% from prior year due to increased incentives that caused ASP on orders to decline 5.0%. We ended the third quarter of 2023 with 272 actively selling communities, down from 275 at September 30, 2022. At September 30, 2023, we had 3,608 homes in backlog valued at $1.6 billion, down from 6,064 units valued at $2.8 billion at September 30, 2022, due to a higher backlog conversion rate and improved cycle times.
West. The West Region generated $606.8 million in home closing revenue on 1,172 homes in the third quarter of 2023, up from $590.0 million on 1,086 homes in the prior year period. The 7.9% increase in volume resulted in a 2.8% increase in home closing revenue, as ASP on closings decreased 4.7% due to higher incentives. Home orders in the third quarter of 2023 of 985 were up 116.0% from 456 in the prior year, as the buyer hesitancy and elevated cancellations in the third quarter of 2022 have dramatically lessened as the economy stabilizes coupled with increased incentives to alleviate affordability concerns. The West Region cancellation rate of 14% in the third quarter of 2023 improved from 43% in the prior year, resulting in a 140.0% higher orders pace of 3.6 homes per month in the third quarter of 2023 compared 1.5 per month in 2022. This accelerated orders pace contributed to a 12.9% decrease in average active communities due to early close outs. Home order value of $521.0 million for the third quarter of 2023 increased proportionately with order volume, as ASP on orders remained consistent.
For the nine months ended September 30, 2023, home closing revenue of $1.5 billion was consistent with prior year, as a 2.7% increase in home closing volume was offset by a 2.4% decrease in ASP on closings. Order volume in the West Region increased 23.7% year-to-date driven by a return to more normalized demand. With just a 1.1% increase in average active communities, year-to-date orders pace of 3.9 homes per month improved 21.9% compared to 2022, although last year's orders pace was negatively impacted by elevated cancellations. Home order value of $1.7 billion was up 12.5% from 2022 due to higher volume, offset by a 9.1% decrease in ASP on orders caused by increased buyer financing incentives. The year-to-date cancellation rate of 14% was down from 21% in the prior year period. The West Region ended the third quarter of 2023 with 1,179 homes in backlog valued at $579.8 million, compared to 1,627 units valued at $905.1 million at September 30, 2022, decreases of 27.5% and 35.9%, respectively.
Central. The Central Region closed 1,102 homes in the three months ended September 30, 2023, down 9.5% from 1,218 home closings in 2022, which was the Region's highest quarterly home closings in its history. Home closing revenue of $452.7 million decreased 9.4% due to lower home closing volume as ASP on closings was flat. The Central Region cancellation rate of 13% in the third quarter of 2023 was down from 37% in the third quarter of 2022, resulting in significant improvement in home order volume and orders pace. Home order volume increased 73.1% to 1,099 homes in the third quarter of 2023 due to a 6.5% increase in average active communities coupled with a 66.7% increase in orders pace to 4.5 homes per month from 2.7 in 2022. Order value of $425.2 million in the three months ended September 30, 2023 increased 67.8% from $253.3 million in the third quarter of 2022 due to entirely to the higher order volume, as the Region experienced a 3.0% decrease in ASP on orders resulting from higher incentives year over year.
Year-to-date, Central Region home closing revenue of $1.3 billion on 3,244 home closings increased 5.1% and 3.3%, respectively, from the nine months ended September 30, 2022, and ASP on home closings increased 1.7%, buoyed by favorable results in the first half of 2023 which more than offset the difficult third quarter comparisons. Home order volume of 3,237 for the nine months ended September 30, 2023 increased 6.9% because of a higher average active community count, as orders pace of 4.4 homes per month was consistent with the same period in 2022. ASP on orders declined 7.0% year-over-year, resulting in a 0.6% decrease in order value of $1.3 billion. The year-to-date cancellation rate of 14% was down from 20% in the prior year. The Central Region ended the quarter with 956 units in backlog valued at $370.3 million, down 45.9% and 53.1%, respectively, compared to September 30, 2022.
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East. During the three months ended September 30, 2023, the East Region closed 1,364 homes for $550.8 million in home closing revenue, compared to 1,183 closings and $479.3 million in the comparable prior year period. The 15.3% increase in home closing volume resulted in a 14.9% improvement in home closing revenue while ASP on closings held steady. Home orders of 1,390 valued at $549.3 million for the third quarter of 2023 increased 14.0% and 14.5%, respectively, due to a 13.2% increase in orders pace of 4.3 homes per month coupled with a relatively flat average active community count. ASP on orders was up just slightly from 2022 due to geographic mix. The cancellation rate of 8% in the third quarter of 2023 improved from 18% in 2022.
For the nine months ended September 30, 2023, the East Region delivered 3,827 home closings for $1.5 billion in home closing revenue, up 7.7% and 8.7%, respectively, compared to the 2022 period, with a 0.9% improvement in ASP on closings. Order volume decreased 11.3% due to the combined impact of a 5.0% decrease in average active communities and a 6.8% decrease in orders pace for the nine months ended September 30, 2023. Order value of $1.5 billion decreased 14.3% year over year due to decreased volume and a 3.3% decrease in ASP on orders. Year-to-date, the East Region's cancellation rate of 11% is up slightly from 10% in the prior year, although still in line with historically normal rates. The East Region ended the third quarter of 2023 with 1,473 homes in backlog valued at $608.6 million, down 44.9% and 46.2%, respectively, from 2,671 homes valued at $1.1 billion at September 30, 2022.
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 or divest of assets that no longer align with our strategy. As a result of such sales, we recognized land closing revenue of $2.8 million and $9.0 million and gross profit of $0.2 million and $0.4 million for the three months ending September 30, 2023 and 2022, respectively. Year-to-date land sales resulted in profits of $1.9 million and $11.9 million for 2023 and 2022, respectively.
Other Operating Information (dollars in thousands)
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||||||||||||||||||||||||||
| Dollars | Percent of Home Closing Revenue | Dollars | Percent of Home Closing Revenue | Dollars | Percent of Home Closing Revenue | Dollars | Percent of Home Closing Revenue | ||||||||||||||||||||||||||||||||||||||||
Home Closing Gross Profit (1) | |||||||||||||||||||||||||||||||||||||||||||||||
| Total | $ | 429,575 | 26.7 | % | $ | 450,638 | 28.7 | % | $ | 1,089,016 | 24.7 | % | $ | 1,273,026 | 30.1 | % | |||||||||||||||||||||||||||||||
| West | $ | 141,632 | 23.3 | % | $ | 156,999 | 26.6 | % | $ | 311,267 | 20.2 | % | $ | 449,632 | 29.2 | % | |||||||||||||||||||||||||||||||
| Central | $ | 128,387 | 28.4 | % | $ | 150,337 | 30.1 | % | $ | 360,529 | 27.0 | % | $ | 390,281 | 30.7 | % | |||||||||||||||||||||||||||||||
| East | $ | 159,556 | 29.0 | % | $ | 143,302 | 29.9 | % | $ | 417,220 | 27.1 | % | $ | 433,113 | 30.6 | % | |||||||||||||||||||||||||||||||
(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 associated 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 profit for the third quarter of 2023 was $429.6 million with a home closing gross margin of 26.7%, down 200 basis points from 28.7% in the third quarter of 2022, due to increased buyer financing incentives and higher land development costs, partially offset by costs savings from shorter construction cycle times as direct costs were relatively flat year over year. Home closing gross margin in the third quarter of 2022 included $8.8 million in charges associated with the termination of land purchase agreements, while only $0.2 million of such charges were recorded in third quarter of 2023. For the nine months ended September 30, 2023, gross profit of $1.1 billion and gross margin of 24.7% decreased from $1.3 billion and 30.1% in 2022 due to the combined impact of higher direct costs and increased sales incentives.
West. The West Region home closing gross margin of 23.3% for the third quarter of 2023 declined 330 basis points from 26.6% in the third quarter of 2022. The West Region contains some of our most expensive markets that were most impacted by
29
the volatile economic conditions that began in the latter half of 2022, both in terms of ASP as well as land costs, and has led us to offering significant incentives to assist homebuyers with monthly affordability. The home closing gross margin for the third quarter of 2023 was impacted by these higher incentives and land development costs. For the nine months ended September 30, 2023, the West Region home closing gross margin of 20.2% declined from 29.2% in the 2022 period due to higher incentives and elevated cost of production and land development.
Central. The Central Region's third quarter 2023 home closing gross margin of 28.4% decreased from 30.1% in the prior year quarter, due to elevated incentives and increased land development costs. Year-to-date, the Central Region gross margin of 27.0% in 2023 is down from 30.7%, mostly as a result of elevated sales incentives.
East. The East Region had the highest home closing gross margin in the Company, at 29.0% in the third quarter of 2023, a 90 basis point decline from 29.9% for the comparable 2022 period. With relatively consistent direct costs, the East Region margin decline is due almost entirely to increased financing incentives. The East Region's year-to-date home closing gross margin of 27.1% is down from 30.6% in 2022 as a result of higher sales incentives.
Financial Services Profit (in thousands)
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Financial services profit | $ | 5,700 | $ | 4,842 | $ | 6,066 | $ | 12,255 | |||||||||||||||
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 Agency, Inc. and Meritage Homes Insurance Agency, respectively, as well as our portion of earnings from a mortgage joint venture. Financial services profit of $5.7 million in the three months ended September 30, 2023 increased from $4.8 million in the comparable prior year period due to higher home closing volume. Financial services profit for the nine months ended September 30, 2023 decreased $6.2 million year over year, due primarily to $7.9 million in charges in the second quarter of 2023 related to unused prepaid interest rate locks that expired.
Selling, General and Administrative Expenses and Other Expenses (dollars in thousands)
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Commissions and other sales costs | $ | (99,122) | $ | (77,884) | $ | (277,766) | $ | (212,807) | |||||||||||||||
| Percent of home closing revenue | 6.2 | % | 5.0 | % | 6.3 | % | 5.0 | % | |||||||||||||||
| General and administrative expenses | $ | (63,091) | $ | (48,443) | $ | (162,750) | $ | (136,370) | |||||||||||||||
| Percent of home closing revenue | 3.9 | % | 3.1 | % | 3.7 | % | 3.2 | % | |||||||||||||||
| Interest expense | $ | — | $ | — | $ | — | $ | (41) | |||||||||||||||
| Other income/(expense), net | $ | 13,331 | $ | (74) | $ | 35,037 | $ | (849) | |||||||||||||||
| Loss on early extinguishment of debt | $ | (907) | $ | — | $ | (907) | $ | — | |||||||||||||||
| Provision for income taxes | $ | (63,974) | $ | (67,002) | $ | (150,664) | $ | (217,242) | |||||||||||||||
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 increased $21.2 million to $99.1 million in the three months ended September 30, 2023, due to higher home closing revenue and increased broker commissions. As a percentage of home closing revenue, Commissions and other sales costs were up 120 basis points to 6.2% of home closing revenue in the third quarter of 2023 from 5.0% in 2022, due to increased commission rates reflective of the current sales environment as well as a higher external broker participation rate. For the nine months ended September 30, 2023, Commissions and other sales costs of $277.8 million were 6.3% of home closing revenue, increasing $65.0 million and 130 basis points, respectively, due to increased commissions and advertising spend.
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 ended September 30, 2023, General and administrative expenses of $63.1 million increased $14.6 million from $48.4 million in 2022, and as a percentage of home closing revenue increased 80 basis points to 3.9% from 3.1%. The increase in both dollars and as a percentage of home closing revenue is largely due to higher compensation costs, including increases as part of new and growing market operations, some of which are not yet producing offsetting earnings, as well as competitive pay adjustments to reflect current market conditions in many of our geographies. For the nine months ended September 30, 2023, General and
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administrative expenses were $162.8 million, up $26.4 million and 50 basis points from $136.4 million in the 2022 period, due primarily to higher compensation costs and increased spending on technology and insurance.
Interest Expense. Interest expense is comprised of interest incurred, but not capitalized, on our senior notes, other borrowings, and our Credit Facility. We recognized no interest expense for the three and nine months ended September 30, 2023 as all interest was capitalized to qualifying assets. We recognized no interest expense in the three months ended September 30, 2022, and interest expense of $41,000 for the nine months ended September 30, 2022.
Other Income/(Expense), Net. Other income, net, primarily consists of (i) interest earned on our cash and cash equivalents, (ii) sublease income, (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 and nine months ended September 30, 2023, Other income was $13.3 million and $35.0 million, respectively, compared to net other expense of $0.1 million and $0.8 million in the 2022 comparable periods. The increase in both quarter and year-to-date is due to higher interest earned on larger cash and cash equivalents balances.
Loss on Early Extinguishment of Debt. Loss on early extinguishment of debt of $0.9 million for the three and nine months ended September 30, 2023 is related to the $150.0 million partial redemption of our 2025 Notes. There were no similar charges for the three and nine months ended September 30, 2022. See Note 6 to the unaudited consolidated financial statements included in this report for more information related to the partial redemption of our 2025 Notes.
Income Taxes. Our effective tax rate was 22.4% and 20.3% for the three months ended September 30, 2023 and 2022, respectively, and 21.8% and 22.9% for the nine months ended September 30, 2023 and 2022, respectively. The higher effective tax rate for the three months ended September 30, 2023 is due to the catch-up of energy-efficient homes tax credits on qualifying homes under the IRC §45L energy-efficient homes federal tax credit from the IRA that was enacted in the third quarter of 2022. The lower effective tax rate for the nine months ended September 30, 2023 reflects the increased per-home energy-efficiency credit amount starting in 2023.
Liquidity and Capital Resources
Overview
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 acquisition and development and spec home construction. Our principal uses of cash include acquisition and development of land and lots, home construction, operating expenses, share repurchases and the payment of interest, routine liabilities and dividends. We also opportunistically repurchase our senior notes, as we did this quarter with a $150.0 million partial redemption of our 2025 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. Similarly, in times of community count growth, we incur significant outlays of cash through the land purchase, development and community opening stages whereas in in times of community count stability, these cash outlays are incurred in a more even-flow cadence with cash inflows from actively selling communities that are contributing closing volume and home closing revenue. Conversely, in a down turn environment, cash outlays for land and community count growth may be scaled back and we may curtail community count.
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 and dividend payments and common stock repurchases. In addition, we may opportunistically retire or redeem a portion of our senior notes. We expect to meet these short-term liquidity requirements primarily through our cash and cash equivalents on hand and the net cash flows provided by our operations.
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Between our cash and cash equivalents on hand combined with the availability of liquidity from 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 maintain our lot supply and active community count, payments of principal and interest on our senior notes as they become due or mature, common stock repurchases and payments of dividends. We expect our existing and future generated cash will be adequate to fund our ongoing operating activities as well as provide 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 of September 30, 2023, 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 Facility, letters of credit and surety bonds and operating leases. We have no debt maturities until 2025. We also have requirements for certain short-term lease commitments, funding working capital needs of 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, as previously discussed. 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 or committed 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 notes to our unaudited consolidated financial statements included in this report 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 ended December 31, 2022.
Reference is made to Notes 1, 3, 4, and 15 in the notes to our unaudited consolidated financial statements included in this report 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.
We do not engage in commodity trading or other similar activities. We had no derivative financial instruments at September 30, 2023 or December 31, 2022.
Operating Cash Flow Activities
During the nine months ended September 30, 2023, net cash provided by operating activities totaled $460.1 million, compared to net cash used in operations of $169.8 million during the nine months ended September 30, 2022. Operating cash flows in the first nine months of 2023 benefited from cash generated from net earnings of $539.9 million and were partially offset by a $137.5 million increase in real estate. Operating cash flows in the first nine months of 2022 benefited from cash generated from net earnings of $729.8 million and an increase in accounts payable and accrued liabilities of $118.6 million due to timing of payments for routine transactions, offset by a $990.1 million increase in real estate and an $89.2 million increase in other receivables, prepaids and other assets. The increase in real estate in both periods was due to construction activities on a greater number of homes under construction, land acquisition and development activities. The increase in other receivables, prepaids and other assets for the first nine months of 2022 was largely due to receivables from municipalities for land development reimbursements and the purchase of fixed rate interest locks for eligible buyers in our backlog.
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Investing Cash Flow Activities
During the nine months ended September 30, 2023 and 2022, net cash used in investing activities totaled $34.7 million and $24.9 million, respectively. Cash used in investing activities in both periods was mainly attributable to the purchases of property and equipment and investments in unconsolidated entities.
Financing Cash Flow Activities
During the nine months ended September 30, 2023 and 2022, net cash used in financing activities totaled $238.2 million and $124.3 million, respectively. The net cash used in financing activities in 2023 includes $150.0 million for the partial redemption of our 2025 Notes and associated early tender fees of $0.9 million, $55.0 million in share repurchases and $29.7 million of dividends paid. The net cash used in financing activities in 2022 primarily reflects $109.3 million in share repurchases. See 'Part II, Item 2 - Unregistered Sales of Equity Securities, Use of Proceeds and Issuer Purchases of Equity Securities' for more information about our authorized share repurchase program.
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 | ||||||||||||||
| September 30, 2023 | December 31, 2022 | |||||||||||||
| Senior notes, net, loans payable and other borrowings | $ | 1,005,420 | $ | 1,150,647 | ||||||||||
| Stockholders’ equity | 4,421,042 | 3,949,611 | ||||||||||||
| Total capital | $ | 5,426,462 | $ | 5,100,258 | ||||||||||
Debt-to-capital (1) | 18.5 | % | 22.6 | % | ||||||||||
| Senior notes, net, loans payable and other borrowings | $ | 1,005,420 | $ | 1,150,647 | ||||||||||
| Less: cash and cash equivalents | (1,048,755) | (861,561) | ||||||||||||
| Net debt | (43,335) | 289,086 | ||||||||||||
| Stockholders’ equity | 4,421,042 | 3,949,611 | ||||||||||||
| Total net capital | $ | 4,377,707 | $ | 4,238,697 | ||||||||||
Net debt-to-capital (2) | (1.0) | % | 6.8 | % | ||||||||||
(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 considered a non-GAAP financial measure, and 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.
Dividends
During the three months ended September 30, 2023, our Board of Directors approved, and we paid, a quarterly cash dividend on common stock of $0.27 per share. Quarterly dividends declared and paid during the nine months ended September 30, 2023 totaled $0.81 per share. There were no such transactions in the three and nine months ended September 30, 2022.
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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 $2.8 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%. We were in compliance with all Credit Facility covenants as of September 30, 2023. Our actual financial covenant calculations as of September 30, 2023 are reflected in the table below.
| Financial Covenant (dollars in thousands): | Covenant Requirement | Actual | |||||||||
| Minimum Tangible Net Worth | > $3,021,938 | $4,376,362 | |||||||||
| Leverage Ratio | < 60% | (0.8)% | |||||||||
| Investments other than defined permitted investments | < $1,337,909 | $15,062 | |||||||||
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. Historical cycles were impacted in 2020 by unprecedented demand that continued through the middle of 2022, and were further impacted by supply chain and labor constraints and rising interest rates. Historical seasonality returned in the back half of 2022 and we expect it to continue over the long term, although it may, from time to time, 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.
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | ||||
Our fixed rate debt is made up primarily of $1.0 billion in principal of our senior notes. Except in limited circumstances, we do not have an obligation to prepay our fixed-rate debt prior to maturity and, as a result, interest rate risk and changes in fair value should not have a significant impact on our fixed rate borrowings until we would be required to repay such debt and access the capital markets to issue new debt. Our Credit Facility is subject to interest rate changes as the borrowing rates are based on SOFR or Prime (see Note 5 to our unaudited consolidated financial statements included in this report).
Our operations are interest rate sensitive. As overall housing demand is adversely affected by increases in interest rates, a significant increase in mortgage interest rates may negatively affect the ability of homebuyers to secure adequate financing or cause potential homebuyers with existing mortgages to choose to stay in their lower interest rate homes. Higher interest rates and/or rapidly increasing interest rates could adversely affect our revenue, gross margins, earnings and cancellation rates and would also increase our variable rate borrowing costs on our Credit Facility, if any. We do not enter into, or intend to enter into, derivative interest rate swap financial instruments for trading or speculative purposes.
| Item 4. | Controls and Procedures | ||||
In order to ensure that the information we must disclose in our filings with the Securities and Exchange Commission ("SEC") is recorded, processed, summarized and reported on a timely basis, we have developed and implemented disclosure controls and procedures. Our management, with the participation of our CEO and CFO, has reviewed and evaluated the effectiveness of our disclosure controls and procedures, as defined in Exchange Act Rules 13a-15(e) and 15d-15(e), as of September 30, 2023 (the “Evaluation Date”). Based on such evaluation, our management has concluded that, as of the Evaluation Date, our disclosure controls and procedures were effective at a reasonable assurance level in ensuring that information that is required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that information required to be
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disclosed in our reports filed or submitted under the Exchange Act is accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.
During the fiscal quarter covered by this Form 10-Q, there has not been any change in our internal control over financial reporting that has materially affected, or that is reasonably likely to materially affect, our internal control over financial reporting.
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PART II - OTHER INFORMATION
| Item 1. | Legal Proceedings | ||||
See Note 15 to our unaudited consolidated financial statements in this report for a discussion of our legal proceedings.
| Item 1A. | Risk Factors | ||||
In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, Item IA "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2022, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may eventually prove to materially adversely affect our business, financial condition and/or operating results. There have been no material changes in our risk factors as previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2022.
| Item 2. | Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities | ||||
Issuer Purchases of Equity Securities
On February 13, 2019, our Board of Directors authorized a new stock repurchase program, authorizing the expenditure of up to $100.0 million to repurchase shares of our common stock. On November 13, 2020, the Board of Directors authorized the expenditure of an additional $100.0 million to repurchase shares of our common stock under this program. On August 12, 2021, the Board of Directors authorized the expenditure of an additional $100.0 million to repurchase shares of our common stock under this program, which was announced on August 17, 2021. On May 19, 2022, the Board of Directors authorized the expenditure of an additional $200.0 million to repurchase shares of our common stock under this program, which was announced on May 25, 2022. There is no stated expiration for this program. The repurchases of the Company's shares may be made in the open market, in privately negotiated transactions, or otherwise. The timing and amount of repurchases, if any, will be determined by the Company's management at its discretion and be based on a variety of factors such as the market price of the Company's common stock, corporate and contractual requirements, prevailing market and economic conditions and legal requirements. The share repurchase program may be modified, suspended or discontinued at any time. As of September 30, 2023 there was $189.1 million available under this program to repurchase shares. We purchased 319,716 shares under the program during the three months ended September 30, 2023.
| Period | Total Number of Shares Purchased | Average price paid per share | Total number of shares purchased as part of publicly announced plans or programs | Approximate dollar value of shares that may yet be purchased under the plans or programs | |||||||||||||||||||
| July 1, 2023 - July 31, 2023 | — | $ | — | — | $ | 234,077,454 | |||||||||||||||||
| August 1, 2023 - August 31, 2023 | 319,716 | $ | 140.75 | 319,716 | $ | 189,077,636 | |||||||||||||||||
| September 1, 2023 - September 30, 2023 | — | $ | — | — | $ | 189,077,636 | |||||||||||||||||
| Total | 319,716 | 319,716 | |||||||||||||||||||||
| Item 5. | Other Information | ||||
Insider Trading Arrangements
During the fiscal quarter ended September 30, 2023, no director or officer adopted a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement,”
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| Item 6. | Exhibits | ||||
Exhibit Number | Description | Page or Method of Filing | ||||||
| 3.1 | Restated Articles of Incorporation of Meritage Homes Corporation | Incorporated by reference to Exhibit 3 of Form 8-K dated June 20, 2002 | ||||||
| 3.1.1 | Amendment to Articles of Incorporation of Meritage Homes Corporation | Incorporated by reference to Exhibit 3.1 of Form 10-Q for the quarter ended September 30, 1998 | ||||||
| 3.1.2 | Amendment to Articles of Incorporation of Meritage Homes Corporation | Incorporated by reference to Exhibit 3.1 of Form 8-K dated September 15, 2004 | ||||||
| 3.1.3 | Amendment to Articles of Incorporation of Meritage Homes Corporation | Incorporated by reference to Appendix A of the Definitive Proxy Statement for the 2006 Annual Meeting of Stockholders filed on April 10, 2006 | ||||||
| 3.1.4 | Amendment to Articles of Incorporation of Meritage Homes Corporation | Incorporated by reference to Appendix B of the Definitive Proxy Statement for the 2008 Annual Meeting of Stockholders filed on April 1, 2008 | ||||||
| 3.1.5 | Amendment to Articles of Incorporation of Meritage Homes Corporation | Incorporated by reference to Appendix A of the Definitive Proxy Statement filed on January 9, 2009 | ||||||
| 3.2 | Meritage Homes Corporation Amended and Restated Bylaws | Incorporated by reference to Exhibit 3.1 of Form 8-K dated June 14, 2023 | ||||||
| 22 | List of Guarantor Subsidiaries | Incorporated by reference to Exhibit 22 of Form 10-K for the year ended December 31, 2022 | ||||||
| 31.1 | Rule 13a-14(a)/15d-14(a) Certification of Phillippe Lord, Chief Executive Officer | Filed herewith | ||||||
| 31.2 | Rule 13a-14(a)/15d-14(a) Certification of Hilla Sferruzza, Chief Financial Officer | Filed herewith | ||||||
| 32.1 | Section 1350 Certification of Chief Executive Officer and Chief Financial Officer | Furnished herewith | ||||||
| 101.0 | The following information from the Meritage Homes Corporation Quarterly Report on Form 10-Q as of and for the three months and nine months ended September 30, 2023 were formatted in Inline XBRL (Extensible Business Reporting Language): (i) Unaudited Consolidated Balance Sheets, (ii) Unaudited Consolidated Income Statements, (iii) Unaudited Consolidated Statements of Cash Flows, and (iv) Notes to Unaudited Consolidated Financial Statements. | |||||||
| 104.0 | The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2023, formatted in Inline XBRL and contained in exhibit 101. | |||||||
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| MERITAGE HOMES CORPORATION, a Maryland corporation | |||||||||||
| By: | /s/ HILLA SFERRUZZA | ||||||||||
Hilla Sferruzza Executive Vice President and Chief Financial Officer (Duly Authorized Officer and Principal Financial Officer) | |||||||||||
| Date: | November 1, 2023 | ||||||||||
INDEX OF EXHIBITS
| 3.1 | ||||||||
| 3.1.1 | ||||||||
| 3.1.2 | ||||||||
| 3.1.3 | ||||||||
| 3.1.4 | ||||||||
| 3.1.5 | ||||||||
| 3.2 | ||||||||
| 22 | ||||||||
| 31.1 | ||||||||
| 31.2 | ||||||||
| 32.1 | ||||||||
| 101.0 | The following information from the Meritage Homes Corporation Quarterly Report on Form 10-Q as of and for the three months and nine months ended September 30, 2023 were formatted in Inline XBRL (Extensible Business Reporting Language): (i) Unaudited Consolidated Balance Sheets, (ii) Unaudited Consolidated Income Statements, (iii) Unaudited Consolidated Statements of Cash Flows, and (iv) Notes to Unaudited Consolidated Financial Statements. | |||||||
| 104.0 | The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2023, formatted in Inline XBRL and contained in exhibit 101. | |||||||
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EXHIBIT 31.1
RULE 13a-14(a)/15d-14(a) CERTIFICATION
I, Phillippe Lord, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Meritage Homes Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: November 1, 2023
| /s/ Phillippe Lord | ||
| Phillippe Lord Chief Executive Officer (Principal Executive Officer) | ||
EXHIBIT 31.2
RULE 13a-14(a)/15d-14(a) CERTIFICATION
I, Hilla Sferruzza, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Meritage Homes Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: November 1, 2023
| /s/ Hilla Sferruzza | ||
Hilla Sferruzza Executive Vice President and Chief Financial Officer (Principal Financial Officer) | ||
EXHIBIT 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q of Meritage Homes Corporation (the “Company”) for the period ending September 30, 2023, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), we, the undersigned, certify, to the best of our knowledge, that:
(1)The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
MERITAGE HOMES CORPORATION, a Maryland Corporation | |||||
By: | /s/ Phillippe Lord | ||||
Phillippe Lord Chief Executive Officer (Principal Executive Officer) | |||||
| November 1, 2023 | |||||
By: | /s/ Hilla Sferruzza | ||||
Hilla Sferruzza Executive Vice President and Chief Financial Officer (Principal Financial Officer) | |||||
| November 1, 2023 | |||||