Nvr Inc 10-Q for FY2021 Q1
Nvr Inc (NVR)
10-Q
2021-05-04
For: 2021-03-31
View Original
Added on
April 03, 2026
About this 10-Q
Nvr Inc filed this 10-Q on May 4, 2021, covering the quarter ended March 31, 2021 (FY2021 Q1).
Headline figures
Quarter ended March 31, 2021, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $2.04B
- up 29.0% from $1.58B a year earlier
- Net income
- $248.76M
- up 41.6% from net income of $175.7M a year earlier
- Diluted EPS
- $63.21
- up 40.6% from $44.96 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 March 31, 2021
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: 1-12378
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||
(703 ) 956-4000
(Address, including zip code, and telephone number, including area code, of registrant's principal executive offices)
Not Applicable
(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 check mark whether the registrant has submitted electronically every Interactive Data 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, 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.
| ☒ | 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 check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of April 30, 2021 there were 3,636,606 total shares of common stock outstanding.
NVR, Inc.
FORM 10-Q
TABLE OF CONTENTS
| Page | ||||||||
PART I | ||||||||
Item 1. | ||||||||
Item 2. | ||||||||
PART II | ||||||||
Item 1A. | ||||||||
Item 2. | ||||||||
Item 6. | ||||||||
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
| NVR, Inc. | ||||||||||||||
| Condensed Consolidated Balance Sheets | ||||||||||||||
| (in thousands, except share and per share data) | ||||||||||||||
| (unaudited) | ||||||||||||||
| March 31, 2021 | December 31, 2020 | |||||||||||||
| ASSETS | ||||||||||||||
| Homebuilding: | ||||||||||||||
| Cash and cash equivalents | $ | $ | ||||||||||||
| Restricted cash | ||||||||||||||
| Receivables | ||||||||||||||
| Inventory: | ||||||||||||||
| Lots and housing units, covered under sales agreements with customers | ||||||||||||||
| Unsold lots and housing units | ||||||||||||||
| Land under development | ||||||||||||||
| Building materials and other | ||||||||||||||
| Contract land deposits, net | ||||||||||||||
| Property, plant and equipment, net | ||||||||||||||
| Operating lease right-of-use assets | ||||||||||||||
| Reorganization value in excess of amounts allocable to identifiable assets, net | ||||||||||||||
| Other assets | ||||||||||||||
| Mortgage Banking: | ||||||||||||||
| Cash and cash equivalents | ||||||||||||||
| Restricted cash | ||||||||||||||
| Mortgage loans held for sale, net | ||||||||||||||
| Property and equipment, net | ||||||||||||||
| Operating lease right-of-use assets | ||||||||||||||
| Reorganization value in excess of amounts allocable to identifiable assets, net | ||||||||||||||
| Other assets | ||||||||||||||
| Total assets | $ | $ | ||||||||||||
See notes to condensed consolidated financial statements.
1
| NVR, Inc. | ||||||||||||||
| Condensed Consolidated Balance Sheets (Continued) | ||||||||||||||
| (in thousands, except share and per share data) | ||||||||||||||
| (unaudited) | ||||||||||||||
| March 31, 2021 | December 31, 2020 | |||||||||||||
| LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||||||||||
| Homebuilding: | ||||||||||||||
| Accounts payable | $ | $ | ||||||||||||
| Accrued expenses and other liabilities | ||||||||||||||
| Customer deposits | ||||||||||||||
| Operating lease liabilities | ||||||||||||||
| Senior notes | ||||||||||||||
| Mortgage Banking: | ||||||||||||||
| Accounts payable and other liabilities | ||||||||||||||
| Operating lease liabilities | ||||||||||||||
| Total liabilities | ||||||||||||||
| Commitments and contingencies | ||||||||||||||
| Shareholders' equity: | ||||||||||||||
Common stock, $ | ||||||||||||||
| Additional paid-in capital | ||||||||||||||
Deferred compensation trust – | ( | ( | ||||||||||||
| Deferred compensation liability | ||||||||||||||
| Retained earnings | ||||||||||||||
Less treasury stock at cost – | ( | ( | ||||||||||||
| Total shareholders' equity | ||||||||||||||
| Total liabilities and shareholders' equity | $ | $ | ||||||||||||
See notes to condensed consolidated financial statements.
2
NVR, Inc.
Condensed Consolidated Statements of Income
(in thousands, except per share data)
(unaudited)
| Three Months Ended March 31, | ||||||||||||||||||||||||||
| 2021 | 2020 | |||||||||||||||||||||||||
| Homebuilding: | ||||||||||||||||||||||||||
| Revenues | $ | $ | ||||||||||||||||||||||||
| Other income | ||||||||||||||||||||||||||
| Cost of sales | ( | ( | ||||||||||||||||||||||||
| Selling, general and administrative | ( | ( | ||||||||||||||||||||||||
| Operating income | ||||||||||||||||||||||||||
| Interest expense | ( | ( | ||||||||||||||||||||||||
| Homebuilding income | ||||||||||||||||||||||||||
| Mortgage Banking: | ||||||||||||||||||||||||||
| Mortgage banking fees | ||||||||||||||||||||||||||
| Interest income | ||||||||||||||||||||||||||
| Other income | ||||||||||||||||||||||||||
| General and administrative | ( | ( | ||||||||||||||||||||||||
| Interest expense | ( | ( | ||||||||||||||||||||||||
| Mortgage banking income | ||||||||||||||||||||||||||
| Income before taxes | ||||||||||||||||||||||||||
| Income tax benefit (expense) | ( | |||||||||||||||||||||||||
| Net income | $ | $ | ||||||||||||||||||||||||
| Basic earnings per share | $ | $ | ||||||||||||||||||||||||
| Diluted earnings per share | $ | $ | ||||||||||||||||||||||||
| Basic weighted average shares outstanding | ||||||||||||||||||||||||||
| Diluted weighted average shares outstanding | ||||||||||||||||||||||||||
See notes to condensed consolidated financial statements.
3
NVR, Inc.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
| Three Months Ended March 31, | ||||||||||||||
| 2021 | 2020 | |||||||||||||
| Cash flows from operating activities: | ||||||||||||||
| Net income | $ | $ | ||||||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||||
| Depreciation and amortization | ||||||||||||||
| Equity-based compensation expense | ||||||||||||||
| Contract land deposit and other (recoveries) impairments, net | ( | |||||||||||||
| Gain on sale of loans, net | ( | ( | ||||||||||||
| Mortgage loans closed | ( | ( | ||||||||||||
| Mortgage loans sold and principal payments on mortgage loans held for sale | ||||||||||||||
| Net change in assets and liabilities: | ||||||||||||||
| Increase in inventory | ( | ( | ||||||||||||
| (Increase) decrease in contract land deposits | ( | |||||||||||||
| Increase in receivables | ( | ( | ||||||||||||
| Increase (decrease) in accounts payable and accrued expenses | ( | |||||||||||||
| Increase in customer deposits | ||||||||||||||
| Other, net | ( | ( | ||||||||||||
| Net cash provided by operating activities | ||||||||||||||
| Cash flows from investing activities: | ||||||||||||||
| Investments in and advances to unconsolidated joint ventures | ( | |||||||||||||
| Purchase of property, plant and equipment | ( | ( | ||||||||||||
| Proceeds from the sale of property, plant and equipment | ||||||||||||||
| Net cash used in investing activities | ( | ( | ||||||||||||
| Cash flows from financing activities: | ||||||||||||||
| Purchase of treasury stock | ( | ( | ||||||||||||
| Principal payments on finance lease liabilities | ( | ( | ||||||||||||
| Proceeds from the exercise of stock options | ||||||||||||||
| Net cash used in financing activities | ( | ( | ||||||||||||
| Net increase (decrease) in cash, restricted cash, and cash equivalents | ( | |||||||||||||
| Cash, restricted cash, and cash equivalents, beginning of the period | ||||||||||||||
| Cash, restricted cash, and cash equivalents, end of the period | $ | $ | ||||||||||||
| Supplemental disclosures of cash flow information: | ||||||||||||||
| Interest paid during the period, net of interest capitalized | $ | $ | ||||||||||||
| Income taxes paid during the period, net of refunds | $ | $ | ||||||||||||
See notes to condensed consolidated financial statements.
4
NVR, Inc.
Notes to Condensed Consolidated Financial Statements
(dollars and shares in thousands, except per share data)
(unaudited)
1. Significant Accounting Policies
Basis of Presentation
The accompanying unaudited, condensed consolidated financial statements include the accounts of NVR, Inc. (“NVR”, the “Company”, "we", "us" or "our") and its subsidiaries and certain other entities in which the Company is deemed to be the primary beneficiary (see Notes 2 and 3 to the accompanying condensed consolidated financial statements). Intercompany accounts and transactions have been eliminated in consolidation. The statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. Because the accompanying condensed consolidated financial statements do not include all of the information and footnotes required by GAAP, they should be read in conjunction with the financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2020. In the opinion of management, all adjustments (consisting only of normal recurring accruals except as otherwise noted herein) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021.
For the three months ended March 31, 2021 and 2020, comprehensive income equaled net income; therefore, a separate statement of comprehensive income is not included in the accompanying condensed consolidated financial statements.
Cash and Cash Equivalents
The beginning-of-period and end-of-period cash, restricted cash, and cash equivalent balances presented on the accompanying condensed consolidated statements of cash flows includes cash related to a consolidated joint venture which is included in homebuilding "Other assets" on the accompanying condensed consolidated balance sheets. The cash related to this consolidated joint venture as of March 31, 2021 and December 31, 2020 was $273 and $269 , respectively, and as of March 31, 2020 and December 31, 2019 was $274 and $281 , respectively.
2. Variable Interest Entities ("VIEs")
Fixed Price Finished Lot Purchase Agreements (“LPAs”)
We generally do not engage in the land development business. Instead, we typically acquire finished building lots at market prices from various development entities under LPAs. The LPAs require deposits that may be forfeited if we fail to perform under the LPAs. The deposits required under the LPAs are in the form of cash or letters of credit in varying amounts, and typically range up to 10 % of the aggregate purchase price of the finished lots.
5
NVR, Inc.
Notes to Condensed Consolidated Financial Statements
(dollars and shares in thousands, except per share data)
(unaudited)
The deposit placed by us pursuant to the LPA is deemed to be a variable interest in the respective development entities. Those development entities are deemed to be VIEs. Therefore, the development entities with which we enter into LPAs, including the joint venture limited liability corporations discussed below, are evaluated for possible consolidation by us. We have concluded that we are not the primary beneficiary of the development entities with which we enter into LPAs, and therefore, we do not consolidate any of these VIEs.
As of March 31, 2021, we controlled approximately 106,100 lots under LPAs with third parties through deposits in cash and letters of credit totaling approximately $436,000 and $7,300 , respectively. Our sole legal obligation and economic loss for failure to perform under these LPAs is limited to the amount of the deposit pursuant to the liquidated damage provisions contained in the LPAs. For the three month period ended March 31, 2021, we recorded a net reversal of approximately $6,200 related to previously impaired lot deposits as market conditions have improved. For the three months ended March 31, 2020, we recorded pre-tax charges of approximately $36,400 related to impairments of lot deposits due to deteriorating market conditions in certain of our markets related to the onset of the COVID-19 pandemic. Our contract land deposit is shown net of a $46,008 and $52,205 impairment reserve at March 31, 2021 and December 31, 2020, respectively.
In addition, we have certain properties under contract with land owners that are expected to yield approximately 9,000 lots, which are not included in the number of total lots controlled. Some of these properties may require rezoning or other approvals to achieve the expected yield. These properties are controlled with deposits in cash and letters of credit totaling approximately $7,000 and $100 , respectively, as of March 31, 2021, of which approximately $2,000 is refundable if certain contractual conditions are not met. We generally expect to assign the raw land contracts to a land developer and simultaneously enter into an LPA with the assignee if the project is determined to be feasible.
Our total risk of loss related to contract land deposits is limited to the amount of the deposits pursuant to the liquidated damages provision of the LPAs. As of March 31, 2021 and December 31, 2020, our total risk of loss was as follows:
| March 31, 2021 | December 31, 2020 | |||||||||||||
| Contract land deposits | $ | $ | ||||||||||||
| Loss reserve on contract land deposits | ( | ( | ||||||||||||
| Contract land deposits, net | ||||||||||||||
| Contingent obligations in the form of letters of credit | ||||||||||||||
| Total risk of loss | $ | $ | ||||||||||||
3. Joint Ventures
On a limited basis, we obtain finished lots using joint venture limited liability corporations (“JVs”). The JVs are typically structured such that we are a non-controlling member and are at risk only for the amount we have invested, or have committed to invest, in addition to any deposits placed under LPAs with the joint venture. We are not a borrower, guarantor or obligor on any debt of the JVs, as applicable. We enter into LPAs to purchase lots from these JVs, and as a result have a variable interest in these JVs.
At March 31, 2021, we had an aggregate investment totaling approximately $25,900 in four JVs that are expected to produce approximately 5,050 finished lots, of which approximately 2,100 lots were controlled by us and the remaining approximately 2,950 lots were either under contract with unrelated parties or not currently under contract. We had additional funding commitments totaling approximately $3,100 to one of the JVs at March 31, 2021. We have determined that we are not the primary beneficiary of three of the JVs because we either share power with the other JV partner or the other JV partner has the controlling financial interest. The aggregate investment in unconsolidated JVs was approximately $25,900 and $23,600 at March 31, 2021 and December 31, 2020, respectively, and is reported in the “Other assets” line item on the accompanying condensed consolidated
6
NVR, Inc.
Notes to Condensed Consolidated Financial Statements
(dollars and shares in thousands, except per share data)
(unaudited)
balance sheets. None of the unconsolidated JVs had any indicators of impairment as of March 31, 2021. For the remaining JV, we have concluded that we are the primary beneficiary because we have the controlling financial interest in the JV. As of December 31, 2019, all activities under the consolidated JV had been completed. As of March 31, 2021, we had no investment remaining in the JV and the JV had remaining balances of $273 in cash and $252 in accrued expenses, which are included in homebuilding "Other assets" and "Accrued expenses and other liabilities," respectively, in the accompanying condensed consolidated balance sheets.
We recognize income from the JVs as a reduction to the lot cost of the lots purchased from the respective JVs when the homes are settled, based on the expected total profitability and the total number of lots expected to be produced by the respective JVs.
We classify distributions received from unconsolidated JVs using the cumulative earnings approach. As a result, distributions received up to the amount of cumulative earnings recognized by us are reported as distributions of earnings and those in excess of that amount are reported as a distribution of capital. These distributions are classified within the accompanying condensed consolidated statements of cash flows as cash flows from operating activities and investing activities, respectively.
4. Land Under Development
5. Capitalized Interest
We capitalize interest costs to land under development during the active development of finished lots. In addition, we capitalize interest costs on our JV investments while the investments are considered qualified assets pursuant to ASC Topic 835-20 - Interest. Capitalized interest is transferred to sold or unsold inventory as the development of finished lots is completed, then charged to cost of sales upon our settlement of homes and the respective lots. Interest incurred in excess of the interest capitalizable based on the level of qualified assets is expensed in the period incurred.
The following table reflects the changes in our capitalized interest during the three months ended March 31, 2021 and 2020:
| Three Months Ended March 31, | ||||||||||||||||||||||||||
| 2021 | 2020 | |||||||||||||||||||||||||
| Interest capitalized, beginning of period | $ | $ | ||||||||||||||||||||||||
| Interest incurred | ||||||||||||||||||||||||||
| Interest charged to interest expense | ( | ( | ||||||||||||||||||||||||
| Interest charged to cost of sales | ( | ( | ||||||||||||||||||||||||
| Interest capitalized, end of period | $ | $ | ||||||||||||||||||||||||
7
NVR, Inc.
Notes to Condensed Consolidated Financial Statements
(dollars and shares in thousands, except per share data)
(unaudited)
6. Earnings per Share
The following weighted average shares and share equivalents were used to calculate basic and diluted earnings per share ("EPS") for the three months ended March 31, 2021 and 2020:
| Three Months Ended March 31, | ||||||||||||||||||||||||||
| 2021 | 2020 | |||||||||||||||||||||||||
| Weighted average number of shares outstanding used to calculate basic EPS | ||||||||||||||||||||||||||
| Dilutive securities: | ||||||||||||||||||||||||||
| Stock options and restricted share units | ||||||||||||||||||||||||||
| Weighted average number of shares and share equivalents outstanding used to calculate diluted EPS | ||||||||||||||||||||||||||
The following non-qualified stock options ("Options") issued under equity incentive plans were outstanding during the three months ended March 31, 2021 and 2020, but were not included in the computation of diluted earnings per share because the effect would have been anti-dilutive.
| Three Months Ended March 31, | ||||||||||||||||||||||||||
| 2021 | 2020 | |||||||||||||||||||||||||
| Anti-dilutive securities | ||||||||||||||||||||||||||
7. Shareholders’ Equity
A summary of changes in shareholders’ equity for the three months ended March 31, 2021 is presented below:
| Common Stock | Additional Paid-In Capital | Retained Earnings | Treasury Stock | Deferred Compensation Trust | Deferred Compensation Liability | Total | ||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2020 | $ | $ | $ | $ | ( | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Purchase of common stock for treasury | — | — | — | ( | — | — | ( | |||||||||||||||||||||||||||||||||||||
| Equity-based compensation | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Proceeds from Options exercised | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Treasury stock issued upon option exercise and restricted share vesting | — | ( | — | — | — | — | ||||||||||||||||||||||||||||||||||||||
| Balance, March 31, 2021 | $ | $ | $ | $ | ( | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||||
8
NVR, Inc.
Notes to Condensed Consolidated Financial Statements
(dollars and shares in thousands, except per share data)
(unaudited)
A summary of changes in shareholders’ equity for the three months ended March 31, 2020 is presented below:
| Common Stock | Additional Paid-In Capital | Retained Earnings | Treasury Stock | Deferred Compensation Trust | Deferred Compensation Liability | Total | ||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2019 | $ | $ | $ | $ | ( | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Purchase of common stock for treasury | — | — | — | ( | — | — | ( | |||||||||||||||||||||||||||||||||||||
| Equity-based compensation | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Proceeds from Options exercised | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Treasury stock issued upon option exercise and restricted share vesting | — | ( | — | — | — | — | ||||||||||||||||||||||||||||||||||||||
| Balance, March 31, 2020 | $ | $ | $ | $ | ( | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||||
We repurchased approximately 87 and 58 shares of our common stock during the three months ended March 31, 2021 and 2020, respectively. We settle Option exercises and vesting of RSUs by issuing shares of treasury stock. Approximately 31 and 99 shares were issued from the treasury account during the three months ended March 31, 2021 and 2020, respectively, in settlement of Option exercises and vesting of RSUs. Shares are relieved from the treasury account based on the weighted average cost basis of treasury shares.
8. Product Warranties
We establish warranty and product liability reserves (“Warranty Reserve”) to provide for estimated future expenses as a result of construction and product defects, product recalls and litigation incidental to our homebuilding business. Liability estimates are determined based on management’s judgment, considering such factors as historical experience, the estimated current cost of corrective action, manufacturers’ and subcontractors’ participation in sharing the cost of corrective action, consultations with third party experts such as engineers, and discussions with our general counsel and outside counsel retained to handle specific product liability cases.
The following table reflects the changes in our Warranty Reserve during the three months ended March 31, 2021 and 2020:
| Three Months Ended March 31, | ||||||||||||||||||||||||||
| 2021 | 2020 | |||||||||||||||||||||||||
| Warranty reserve, beginning of period | $ | $ | ||||||||||||||||||||||||
| Provision | ||||||||||||||||||||||||||
| Payments | ( | ( | ||||||||||||||||||||||||
| Warranty reserve, end of period | $ | $ | ||||||||||||||||||||||||
9
NVR, Inc.
Notes to Condensed Consolidated Financial Statements
(dollars and shares in thousands, except per share data)
(unaudited)
9. Segment Disclosures
We disclose four homebuilding reportable segments that aggregate geographically our homebuilding operating segments, and our mortgage banking operations presented as one reportable segment. The homebuilding reportable segments are comprised of operating divisions in the following geographic areas:
| Mid Atlantic: | Maryland, Virginia, West Virginia, Delaware and Washington, D.C. | |||||||
| North East: | New Jersey and Eastern Pennsylvania | |||||||
| Mid East: | New York, Ohio, Western Pennsylvania, Indiana and Illinois | |||||||
| South East: | North Carolina, South Carolina, Florida and Tennessee | |||||||
Homebuilding profit before tax includes all revenues and income generated from the sale of homes, less the cost of homes sold, selling, general and administrative expenses and a corporate capital allocation charge. The corporate capital allocation charge is eliminated in consolidation and is based on the segment’s average net assets employed. The corporate capital allocation charged to the operating segment allows the Chief Operating Decision Maker (“CODM”) to determine whether the operating segment’s results are providing the desired rate of return after covering our cost of capital.
Assets not allocated to the operating segments are not included in either the operating segment’s corporate capital allocation charge or the CODM’s evaluation of the operating segment’s performance. We record charges on contract land deposits when it is determined that it is probable that recovery of the deposit is impaired. For segment reporting purposes, impairments on contract land deposits are generally charged to the operating segment upon the termination of an LPA with the developer, or the restructuring of an LPA resulting in the forfeiture of the deposit. Mortgage banking profit before tax consists of revenues generated from mortgage financing, title insurance and closing services, less the costs of such services and general and administrative costs. Mortgage banking operations are not charged a corporate capital allocation charge.
In addition to the corporate capital allocation and contract land deposit impairments discussed above, the other reconciling items between segment profit and consolidated profit before tax include unallocated corporate overhead (including all management incentive compensation), equity-based compensation expense, consolidation adjustments and external corporate interest expense. Our overhead functions such as accounting, treasury and human resources are centrally performed and these costs are not allocated to our operating segments. Consolidation adjustments consist of such items necessary to convert the reportable segments’ results, which are predominantly maintained on a cash basis, to a full accrual basis for external financial statement presentation purposes, and are not allocated to our operating segments. External corporate interest expense primarily consists of interest charges on our 3.95 % Senior Notes due 2022 and 3.00 % Senior Notes due 2030 (the “Senior Notes”), which are not charged to the operating segments because the charges are included in the corporate capital allocation discussed above.
The following tables present segment revenues, profit and assets with reconciliations to the amounts reported for the consolidated enterprise, where applicable:
| Three Months Ended March 31, | ||||||||||||||||||||||||||
| 2021 | 2020 | |||||||||||||||||||||||||
| Revenues: | ||||||||||||||||||||||||||
| Homebuilding Mid Atlantic | $ | $ | ||||||||||||||||||||||||
| Homebuilding North East | ||||||||||||||||||||||||||
| Homebuilding Mid East | ||||||||||||||||||||||||||
| Homebuilding South East | ||||||||||||||||||||||||||
| Mortgage Banking | ||||||||||||||||||||||||||
| Total consolidated revenues | $ | $ | ||||||||||||||||||||||||
10
NVR, Inc.
Notes to Condensed Consolidated Financial Statements
(dollars and shares in thousands, except per share data)
(unaudited)
| Three Months Ended March 31, | ||||||||||||||||||||||||||
| 2021 | 2020 | |||||||||||||||||||||||||
| Income before taxes: | ||||||||||||||||||||||||||
| Homebuilding Mid Atlantic | $ | $ | ||||||||||||||||||||||||
| Homebuilding North East | ||||||||||||||||||||||||||
| Homebuilding Mid East | ||||||||||||||||||||||||||
| Homebuilding South East | ||||||||||||||||||||||||||
| Mortgage Banking | ||||||||||||||||||||||||||
| Total segment profit before taxes | ||||||||||||||||||||||||||
| Reconciling items: | ||||||||||||||||||||||||||
| Contract land deposit recoveries/(impairments) (1) | ( | |||||||||||||||||||||||||
| Equity-based compensation expense (2) | ( | ( | ||||||||||||||||||||||||
| Corporate capital allocation (3) | ||||||||||||||||||||||||||
| Unallocated corporate overhead | ( | ( | ||||||||||||||||||||||||
| Consolidation adjustments and other | ||||||||||||||||||||||||||
| Corporate interest expense | ( | ( | ||||||||||||||||||||||||
| Reconciling items sub-total | ( | |||||||||||||||||||||||||
| Consolidated income before taxes | $ | $ | ||||||||||||||||||||||||
(1)This item represents changes to the contract land deposit impairment reserve, which are not allocated to the reportable segments. See further discussion of lot deposit impairment charges in Note 2.
(2)The increase in equity-based compensation expense for the three-month period ended March 31, 2021 was primarily attributable to the reversal of approximately $7,200 in equity based compensation during the first quarter of 2020 related to stock option forfeitures.
(3)This item represents the elimination of the corporate capital allocation charge included in the respective homebuilding reportable segments. The corporate capital allocation charge is based on the segment’s monthly average asset balance, and was as follows for the periods presented:
| Three Months Ended March 31, | ||||||||||||||||||||||||||
| 2021 | 2020 | |||||||||||||||||||||||||
| Corporate capital allocation charge: | ||||||||||||||||||||||||||
| Homebuilding Mid Atlantic | $ | $ | ||||||||||||||||||||||||
| Homebuilding North East | ||||||||||||||||||||||||||
| Homebuilding Mid East | ||||||||||||||||||||||||||
| Homebuilding South East | ||||||||||||||||||||||||||
| Total | $ | $ | ||||||||||||||||||||||||
11
NVR, Inc.
Notes to Condensed Consolidated Financial Statements
(dollars and shares in thousands, except per share data)
(unaudited)
| March 31, 2021 | December 31, 2020 | |||||||||||||
| Assets: | ||||||||||||||
| Homebuilding Mid Atlantic | $ | $ | ||||||||||||
| Homebuilding North East | ||||||||||||||
| Homebuilding Mid East | ||||||||||||||
| Homebuilding South East | ||||||||||||||
| Mortgage Banking | ||||||||||||||
| Total segment assets | ||||||||||||||
| Reconciling items: | ||||||||||||||
| Cash and cash equivalents | ||||||||||||||
| Deferred taxes | ||||||||||||||
| Intangible assets and goodwill | ||||||||||||||
| Operating lease right-of-use assets | ||||||||||||||
| Finance lease right-of-use assets | ||||||||||||||
| Contract land deposit reserve | ( | ( | ||||||||||||
| Consolidation adjustments and other | ||||||||||||||
| Reconciling items sub-total | ||||||||||||||
| Consolidated assets | $ | $ | ||||||||||||
10. Fair Value
GAAP assigns a fair value hierarchy to the inputs used to measure fair value. Level 1 inputs are quoted prices in active markets for identical assets and liabilities. Level 2 inputs are inputs other than quoted market prices that are observable for the asset or liability, either directly or indirectly. Level 3 inputs are unobservable inputs.
Financial Instruments
The following table presents the estimated fair values and carrying values of our Senior Notes as of March 31, 2021 and December 31, 2020. The estimated fair value is based on recent market prices of similar transactions, which is classified as Level 2 within the fair value hierarchy.
| March 31, 2021 | December 31, 2020 | |||||||||||||
| Estimated Fair Values: | ||||||||||||||
| 3.95% Senior Notes due 2022 | $ | $ | ||||||||||||
| 3.00% Senior Notes due 2030 | ||||||||||||||
| Total | $ | $ | ||||||||||||
| Carrying Values: | ||||||||||||||
| 3.95% Senior Notes due 2022 | $ | $ | ||||||||||||
| 3.00% Senior Notes due 2030 | ||||||||||||||
| Total | $ | $ | ||||||||||||
12
NVR, Inc.
Notes to Condensed Consolidated Financial Statements
(dollars and shares in thousands, except per share data)
(unaudited)
Except as otherwise noted below, we believe that insignificant differences exist between the carrying value and the fair value of our financial instruments, which consist primarily of cash equivalents, due to their short term nature.
Derivative Instruments and Mortgage Loans Held for Sale
In the normal course of business, our wholly-owned mortgage subsidiary, NVR Mortgage Finance, Inc. (“NVRM”), enters into contractual commitments to extend credit to our homebuyers with fixed expiration dates. The commitments become effective when the borrowers "lock-in" a specified interest rate within time frames established by NVRM. All mortgagors are evaluated for credit worthiness prior to the extension of the commitment. Market risk arises if interest rates move adversely between the time of the "lock-in" of rates by the borrower and the sale date of the loan to a broker/dealer. To mitigate the effect of the interest rate risk inherent in providing rate lock commitments to borrowers, NVRM enters into optional or mandatory delivery forward sale contracts to sell whole loans and mortgage-backed securities to broker/dealers. The forward sales contracts lock in an interest rate and price for the sale of loans similar to the specific rate lock commitments. NVRM does not engage in speculative or trading derivative activities. Both the rate lock commitments to borrowers and the forward sale contracts to broker/dealers are undesignated derivatives and, accordingly, are marked to fair value through earnings. At March 31, 2021, there were rate lock commitments to extend credit to borrowers aggregating $1,239,365 and open forward delivery contracts aggregating $1,392,437 , which hedge both the rate lock commitments and closed loans held for sale.
The fair value of NVRM’s rate lock commitments to borrowers and the related input levels include, as applicable:
i)the assumed gain/loss of the expected resultant loan sale (Level 2);
ii)the effects of interest rate movements between the date of the rate lock and the balance sheet date (Level 2); and
iii)the value of the servicing rights associated with the loan (Level 2).
The assumed gain/loss considers the excess servicing to be received or buydown fees to be paid upon securitization of the loan. The excess servicing and buydown fees are calculated pursuant to contractual terms with investors. To calculate the effects of interest rate movements, NVRM utilizes applicable published mortgage-backed security prices, and multiplies the price movement between the rate lock date and the balance sheet date by the notional loan commitment amount. NVRM sells all of its loans on a servicing released basis, and receives a servicing released premium upon sale. Thus, the value of the servicing rights is included in the fair value measurement and is based upon contractual terms with investors and varies depending on the loan type. NVRM assumes a fallout rate when measuring the fair value of rate lock commitments. Fallout is defined as locked loan commitments for which NVRM does not close a mortgage loan and is based on historical experience.
The fair value of NVRM’s forward sales contracts to broker/dealers solely considers the market price movement of the same type of security between the trade date and the balance sheet date (Level 2). The market price changes are multiplied by the notional amount of the forward sales contracts to measure the fair value.
Mortgage loans held for sale are recorded at fair value when closed, and thereafter are carried at the lower of cost or fair value, net of deferred origination costs, until sold. Fair value is measured using Level 2 inputs. As of March 31, 2021, the fair value of loans held for sale of $334,782 included on the accompanying condensed consolidated balance sheet has been decreased by $2,226 from the aggregate principal balance of $337,008 . As of December 31, 2020, the fair value of loans held for sale of $449,760 were increased by $10,042 from the aggregate principal balance of $439,718 .
13
NVR, Inc.
Notes to Condensed Consolidated Financial Statements
(dollars and shares in thousands, except per share data)
(unaudited)
The fair value measurement of NVRM's undesignated derivative instruments was as follows:
| March 31, 2021 | December 31, 2020 | |||||||||||||
| Rate lock commitments: | ||||||||||||||
| Gross assets | $ | $ | ||||||||||||
| Gross liabilities | ||||||||||||||
| Net rate lock commitments | $ | $ | ||||||||||||
| Forward sales contracts: | ||||||||||||||
| Gross assets | $ | $ | ||||||||||||
| Gross liabilities | ||||||||||||||
| Net forward sales contracts | $ | $ | ( | |||||||||||
As of March 31, 2021, both the net rate lock commitments and the net forward sales contracts are reported in mortgage banking "Other assets" on the accompanying condensed consolidated balance sheets. As of December 31, 2020, the net rate lock commitments are reported in mortgage banking "Other assets" and the net forward sales contracts are reported in mortgage banking "Accrued expenses and other liabilities".
The fair value measurement adjustment as of March 31, 2021 was as follows:
| Notional or Principal Amount | Assumed Gain/(Loss) From Loan Sale | Interest Rate Movement Effect | Servicing Rights Value | Security Price Change | Total Fair Value Measurement Gain/(Loss) | |||||||||||||||||||||||||||||||||
| Rate lock commitments | $ | $ | $ | ( | $ | $ | — | $ | ||||||||||||||||||||||||||||||
| Forward sales contracts | $ | — | — | — | ||||||||||||||||||||||||||||||||||
| Mortgages held for sale | $ | ( | — | ( | ||||||||||||||||||||||||||||||||||
| Total fair value measurement | $ | $ | ( | $ | $ | $ | ||||||||||||||||||||||||||||||||
The total fair value measurement adjustment as of December 31, 2020 was $15,583 . NVRM recorded a fair value adjustment to income of $548 for the three months ended March 31, 2021. NVRM recorded a fair value adjustment to expense of $10,721 for the three months ended March 31, 2020. Unrealized gains/losses from the change in the fair value measurements are included in earnings as a component of mortgage banking fees in the accompanying condensed consolidated statements of income. The fair value measurement will be impacted in the future by the change in the value of the servicing rights, interest rate movements, security price fluctuations, and the volume and product mix of NVRM’s closed loans and locked loan commitments.
11. Debt
As of March 31, 2021, we had the following debt instruments outstanding:
3.95% Senior Notes due 2022 ("2022 Senior Notes")
The 2022 Senior Notes have a principal balance of $600,000 . The 2022 Senior Notes mature on September 15, 2022 and bear interest at 3.95 %, payable semi-annually in arrears on March 15 and September 15 . The 2022 Senior Notes were issued at a discount to yield 3.97 % and have been reflected net of the unamortized discount and unamortized debt issuance costs in the accompanying condensed consolidated balance sheet.
3.00% Senior Notes due 2030 ("2030 Senior Notes")
The 2030 Senior Notes have an aggregate principal balance of $900,000 and mature on May 15, 2030. The 2030 Senior Notes bear interest at 3.00 %, payable semi-annually in arrears on May 15 and November 15 . The 2030 Senior Notes were issued in three separate issuances, $600,000 issued at a discount to yield 3.02 %, and the two additional issuances totaling $300,000 issued at a premium to yield 2.00 %. The 2030 Senior Notes have been
14
NVR, Inc.
Notes to Condensed Consolidated Financial Statements
(dollars and shares in thousands, except per share data)
(unaudited)
reflected net of the unamortized discount or premium, as applicable, and the unamortized debt issuance costs in the accompanying condensed consolidated balance sheet.
Credit Agreement
We have an unsecured Credit Agreement (the “Credit Agreement”), which provides for aggregate revolving loan commitments of $300,000 (the “Facility”). Under the Credit Agreement, we may request increases of up to $300,000 to the Facility in the form of revolving loan commitments or term loans to the extent that new or existing lenders agree to provide additional revolving loan or term loan commitments. The Credit Agreement provides for a $100,000 sublimit for the issuance of letters of credit, of which approximately $12,250 was outstanding at March 31, 2021. The Credit Agreement termination date is February 12, 2026. There was no debt outstanding under the Facility at March 31, 2021.
Repurchase Agreement
NVRM provides for its mortgage origination and other operating activities using cash generated from its operations, borrowings from its parent company, NVR, as well as a revolving mortgage repurchase agreement (the “Repurchase Agreement”), which is non-recourse to NVR. The Repurchase Agreement provides for loan purchases up to $150,000 , subject to certain sub-limits. Amounts outstanding under the Repurchase Agreement are collateralized by the Company’s mortgage loans held for sale.
The Repurchase Agreement expires on July 21, 2021. At March 31, 2021, there were no borrowing base limitations reducing the amount available under the Repurchase Agreement. There was no debt outstanding under the Repurchase Agreement at March 31, 2021.
12. Commitments and Contingencies
13. Leases
We have operating leases for our corporate and division offices, production facilities, model homes, and certain office and production equipment. Additionally, we have finance leases for certain plant equipment and one of our production facilities which are recorded in homebuilding "Property, plant and equipment, net" and "Accrued expenses and other liabilities" on the accompanying condensed consolidated balance sheets. Our finance lease ROU assets and finance lease liabilities were $15,419 and $15,933 , respectively, as of March 31, 2021, and $15,772 and $16,173 , respectively, as of December 31, 2020. Our leases have remaining lease terms of up to 19.4 years, some of which include options to extend the leases for up to 20 years, and some of which include options to terminate the lease.
We recognize operating lease expense on a straight-line basis over the lease term. We have elected to use the portfolio approach for certain equipment leases which have similar lease terms and payment schedules. Additionally, for certain equipment we account for the lease and non-lease components as a single lease component. Our sublease income is de minimis.
We have certain leases, primarily the leases of model homes, which have initial lease terms of twelve months or less ("Short-term leases"). We elected to exclude these leases from the recognition requirements under Topic 842, and these leases have not been included in our recognized ROU assets and lease liabilities.
15
NVR, Inc.
Notes to Condensed Consolidated Financial Statements
(dollars and shares in thousands, except per share data)
(unaudited)
The components of lease expense were as follows:
| Three Months Ended March 31, | ||||||||||||||
| 2021 | 2020 | |||||||||||||
| Lease expense | ||||||||||||||
| Operating lease expense | $ | $ | ||||||||||||
| Finance lease expense: | ||||||||||||||
| Amortization of ROU assets | ||||||||||||||
| Interest on lease liabilities | ||||||||||||||
| Short-term lease expense | ||||||||||||||
| Total lease expense | $ | $ | ||||||||||||
Other information related to leases was as follows:
| Three Months Ended March 31, | ||||||||||||||
| 2021 | 2020 | |||||||||||||
| Supplemental Cash Flows Information: | ||||||||||||||
| Cash paid for amounts included in the measurement of lease liabilities: | ||||||||||||||
| Operating cash flows from operating leases | $ | $ | ||||||||||||
| Operating cash flows from finance leases | ||||||||||||||
| Financing cash flows from finance leases | ||||||||||||||
| ROU assets obtained in exchange for lease obligations: | ||||||||||||||
| Operating leases | $ | $ | ||||||||||||
| Finance leases | $ | $ | ||||||||||||
| March 31, 2021 | December 31, 2020 | |||||||||||||
| Weighted-average remaining lease term (in years): | ||||||||||||||
| Operating leases | ||||||||||||||
| Finance leases | ||||||||||||||
| Weighted-average discount rate: | ||||||||||||||
| Operating leases | % | % | ||||||||||||
| Finance leases | % | % | ||||||||||||
16
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
(dollars in thousands, except per share data)
Forward-Looking Statements
Some of the statements in this Quarterly Report on Form 10-Q, as well as statements made by us in periodic press releases or other public communications, constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Certain, but not necessarily all, of such forward-looking statements can be identified by the use of forward-looking terminology, such as “believes,” “expects,” “may,” “will,” “should,” or “anticipates” or the negative thereof or other comparable terminology. All statements other than of historical facts are forward-looking statements. Forward-looking statements contained in this document may include those regarding market trends, our financial position and financial results, business strategy, the outcome of pending litigation, investigations or similar contingencies, projected plans and objectives of management for future operations. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results or performance to be materially different from future results, performance or achievements expressed or implied by the forward-looking statements. Such risk factors include, but are not limited to the following: the impact of COVID-19 on us and the economy generally; general economic and business conditions (on both a national and regional level); interest rate changes; access to suitable financing by us and our customers; increased regulation in the mortgage banking industry; the ability of our mortgage banking subsidiary to sell loans it originates into the secondary market; competition; the availability and cost of land and other raw materials used by us in our homebuilding operations; shortages of labor; weather related slow-downs; building moratoriums; governmental regulation; fluctuation and volatility of stock and other financial markets; mortgage financing availability; and other factors over which we have little or no control. We undertake no obligation to update such forward-looking statements except as required by law. For additional information regarding risk factors, see Part II, Item 1A of this Quarterly Report on Form 10-Q and Part I, Item 1A of NVR’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020.
Unless the context otherwise requires, references to “NVR,” “we,” “us,” or “our” include NVR and its consolidated subsidiaries.
Results of Operations for the Three Months Ended March 31, 2021 and 2020
Overview
Impact of COVID-19
The COVID-19 pandemic has had a significant impact on all facets of our business. Our primary focus as we face this challenge is to do everything we can to ensure the safety and well-being of our employees, customers and trade partners. Residential construction has been deemed an essential business in each of our markets throughout the pandemic. In each of our markets, we continue to operate in accordance with the guidelines issued by the Centers for Disease Control and Prevention as well as state and local guidelines, which have resulted in significant changes to the way we conduct business.
Although current demand for new homes is strong, there remains uncertainty regarding the extent and timing of disruption to our business that may result from COVID-19 and related governmental actions. There is also uncertainty as to the effects of economic relief efforts on the U.S. economy, unemployment, consumer confidence, demand for our homes and the mortgage market, including lending standards and secondary mortgage markets. We are unable to predict the extent to which this will impact our operational and financial performance, including the impact of future developments such as the duration and spread of COVID-19, corresponding governmental actions, and the impact of such on our employees, customers and trade partners.
17
Outlook
Strong demand for new homes continued through the first quarter of 2021, driven by historically low mortgage interest rates and low housing supply. This has led to strong sales absorptions and rising home prices, as well as increased construction activity and demand for building materials. During the first quarter, we experienced higher prices for lumber, certain other commodities and labor, along with some supply chain disruptions. We expect these issues to continue over the next several quarters as suppliers continue to work through COVID-19 restrictions to meet the increased demand.
Business
Our primary business is the construction and sale of single-family detached homes, townhomes and condominiums, all of which are primarily constructed on a pre-sold basis. To fully serve customers of our homebuilding operations, we also operate a mortgage banking and title services business. We primarily conduct our operations in mature markets. Additionally, we generally grow our business through market share gains in our existing markets and by expanding into markets contiguous to our current active markets. Our four homebuilding reportable segments consist of the following regions:
| Mid Atlantic: | Maryland, Virginia, West Virginia, Delaware and Washington, D.C. | |||||||
| North East: | New Jersey and Eastern Pennsylvania | |||||||
| Mid East: | New York, Ohio, Western Pennsylvania, Indiana and Illinois | |||||||
| South East: | North Carolina, South Carolina, Florida and Tennessee | |||||||
Our lot acquisition strategy is predicated upon avoiding the financial requirements and risks associated with direct land ownership and development. We generally do not engage in land development (see discussion below of our land development activities). Instead, we typically acquire finished building lots from various third party land developers pursuant to fixed price finished lot purchase agreements (“LPAs”). These LPAs require deposits, typically ranging up to 10% of the aggregate purchase price of the finished lots, in the form of cash or letters of credit that may be forfeited if we fail to perform under the LPA. This strategy has allowed us to maximize inventory turnover, which we believe enables us to minimize market risk and to operate with less capital, thereby enhancing rates of return on equity and total capital.
In addition to constructing homes primarily on a pre-sold basis and utilizing what we believe is a conservative lot acquisition strategy, we focus on obtaining and maintaining a leading market position in each market we serve. This strategy allows us to gain valuable efficiencies and competitive advantages in our markets, which we believe contributes to minimizing the adverse effects of regional economic cycles and provides growth opportunities within these markets. Our continued success is contingent upon our ability to control an adequate supply of finished lots on which to build.
In certain specific strategic circumstances, we deviate from our historical lot acquisition strategy and engage in joint venture arrangements with land developers or directly acquire raw ground already zoned for its intended use for development. Once we acquire control of raw ground, we determine whether to sell the raw parcel to a developer and enter into an LPA with the developer to purchase the finished lots or to hire a developer to develop the land on our behalf. While joint venture arrangements and direct land development activity are not our preferred method of acquiring finished building lots, we may enter into additional transactions in the future on a limited basis where there exists a compelling strategic or prudent financial reason to do so. We expect, however, to continue to acquire substantially all our finished lot inventory using LPAs with forfeitable deposits.
As of March 31, 2021, we controlled approximately 108,700 lots as described below.
Lot Purchase Agreements
We controlled approximately 106,100 lots under LPAs with third parties through deposits in cash and letters of credit totaling approximately $436,000 and $7,300, respectively. Included in the number of controlled lots are approximately 7,100 lots for which we have recorded a contract land deposit impairment reserve of approximately $46,000 as of March 31, 2021.
Joint Venture Limited Liability Corporations (“JVs”)
18
We had an aggregate investment totaling approximately $25,900 in four JVs, expected to produce approximately 5,050 lots. Of the lots to be produced by the JVs, approximately 2,100 lots were controlled by us and approximately 2,950 were either under contract with unrelated parties or currently not under contract. We had additional funding commitments totaling approximately $3,100 to one of the JVs at March 31, 2021.
Land Under Development
We directly owned three separate raw land parcels, zoned for their intended use, with a cost basis, including development costs, of approximately $63,200 that we intend to develop into approximately 500 finished lots. In April 2021, we sold one of the land parcels to a developer for approximately $45,750, which approximated our carrying value of the property as of the sale date. In conjunction with the sale, we entered into an LPA with the developer for the option to purchase the finished lots expected to be developed from the parcel. We had additional funding commitments of approximately $5,100 under a joint development agreement related to one parcel, a portion of which we expect will be offset by development credits of approximately $2,800.
See Notes 2, 3 and 4 to the condensed consolidated financial statements included herein for additional information regarding LPAs, JVs and land under development, respectively.
Raw Land Purchase Agreements
In addition, we have certain properties under contract with land owners that are expected to yield approximately 9,000 lots, which are not included in the number of total lots controlled. Some of these properties may require rezoning or other approvals to achieve the expected yield. These properties are controlled with deposits in cash and letters of credit totaling approximately $7,000 and $100, respectively, as of March 31, 2021, of which approximately $2,000 is refundable if certain contractual conditions are not met. We generally expect to assign the raw land contracts to a land developer and simultaneously enter into an LPA with the assignee if the project is determined to be feasible.
Key Financial Results
Our consolidated revenues for the first quarter of 2021 totaled $2,041,446, a 29% increase from the first quarter of 2020. Net income for the first quarter ended March 31, 2021 was $248,762, or $63.21 per diluted share, increases of 42% and 41% when compared to net income and diluted earnings per share in the first quarter of 2020, respectively. Our homebuilding gross profit margin percentage increased to 19.7% in the first quarter of 2021 from 16.8% in the first quarter of 2020. The increase in gross profit margin was attributable primarily to gross profit margin in the first quarter of 2020 being negatively impacted by contract land deposit impairment charges of approximately $36,400, or 234 basis points of revenue. New orders, net of cancellations (“New Orders”) increased by 26% in the first quarter of 2021 compared to the first quarter of 2020. The average sales price for New Orders in the first quarter of 2021 increased by 10% to $410.5 compared to the first quarter of 2020.
19
Homebuilding Operations
The following table summarizes the results of operations and other data for the consolidated homebuilding operations:
| Three Months Ended March 31, | ||||||||||||||||||||||||||
| 2021 | 2020 | |||||||||||||||||||||||||
| Financial Data: | ||||||||||||||||||||||||||
| Revenues | $ | 1,963,711 | $ | 1,555,707 | ||||||||||||||||||||||
| Cost of sales | $ | 1,577,453 | $ | 1,294,743 | ||||||||||||||||||||||
| Gross profit margin percentage | 19.7 | % | 16.8 | % | ||||||||||||||||||||||
| Selling, general and administrative expenses | $ | 121,419 | $ | 110,167 | ||||||||||||||||||||||
| Operating Data: | ||||||||||||||||||||||||||
| New orders (units) | 6,314 | 5,015 | ||||||||||||||||||||||||
| Average new order price | $ | 410.5 | $ | 372.3 | ||||||||||||||||||||||
| Settlements (units) | 5,072 | 4,230 | ||||||||||||||||||||||||
| Average settlement price | $ | 387.2 | $ | 367.8 | ||||||||||||||||||||||
| Backlog (units) | 12,791 | 9,018 | ||||||||||||||||||||||||
| Average backlog price | $ | 406.9 | $ | 381.6 | ||||||||||||||||||||||
| New order cancellation rate | 9.6 | % | 20.8 | % | ||||||||||||||||||||||
Consolidated Homebuilding - Three Months Ended March 31, 2021 and 2020
Homebuilding revenues increased 26% in the first quarter of 2021 compared to the same period in 2020, as a result of a 20% increase in the number of units settled and a 5% increase in the average settlement price. The increase in the number of units settled was attributable to a 40% higher backlog unit balance entering 2021 compared to the backlog unit balance entering 2020, offset partially by a lower backlog turnover rate quarter over quarter. The increase in the average settlement price was primarily attributable to a 4% higher average sales price of units in backlog entering 2021 compared to backlog entering 2020.
Gross profit margin percentage in the first quarter of 2021 increased to 19.7%, from 16.8% in the first quarter of 2020. The increase in gross profit margin was attributable primarily to gross profit margin in the first quarter of 2020 being negatively impacted by contract land deposit impairment charges of approximately $36,400, or 234 basis points of revenue.
The number of New Orders and the average sales price of New Orders increased 26% and 10%, respectively, in the first quarter of 2021 compared to the first quarter of 2020. New Orders were higher in each of our market segments quarter over quarter due to favorable market conditions driven by historically low mortgage interest rates coupled with low resale inventory levels, which drove demand and provided us pricing power. Additionally, New Orders were favorably impacted by a lower cancellation rate in the first quarter of 2021, as sale cancellations increased significantly in March 2020 due to the impact of the onset of the COVID-19 pandemic on consumer demand.
Selling, general and administrative (“SG&A”) expense in the first quarter of 2021 increased by approximately $11,300, but as a percentage of revenue decreased to 6.2% from 7.1% quarter over quarter. The increase in SG&A expense quarter over quarter was higher primarily due to a $6,500 reversal of expense in the first quarter of 2020 from stock option forfeitures and $6,100 of increased personnel costs from higher headcount.
Our backlog represents homes sold but not yet settled with our customers. As of March 31, 2021, our backlog increased on a unit basis by 42% to 12,791 units and increased on a dollar basis by 51% to $5,204,091 when compared to 9,018 units and $3,441,151, respectively, as of March 31, 2020. The increase in backlog units was primarily attributable to a 25% increase in New Orders during the six-month period ended March 31, 2021 compared to the same period in 2020, coupled with a lower backlog turnover rate quarter over quarter. Our backlog turnover rate was negatively impacted by a longer production cycle attributable to both internal production and
20
external subcontractor capacity constraints as we work to expand production to meet our increased sales pace. Backlog dollars were higher due to the increase in backlog units and an 8% increase in the average sales price of New Orders during the six-month period ended March 31, 2021 compared to the same period in 2020.
In addition to the potential impact of the ongoing COVID-19 pandemic, our backlog may be impacted by customer cancellations for various reasons that are beyond our control, such as failure to obtain mortgage financing, inability to sell an existing home, job loss, or a variety of other reasons. In any period, a portion of the cancellations that we experience are related to new sales that occurred during the same period, and a portion are related to sales that occurred in prior periods and therefore appeared in the opening backlog for the current period. Expressed as the total of all cancellations during the period as a percentage of gross sales during the period, our cancellation rate was approximately 10% and 21% in the first three months of 2021 and 2020, respectively. During the most recent four quarters, approximately 5% of a reporting quarter’s opening backlog cancelled during the fiscal quarter. We can provide no assurance that our historical cancellation rates are indicative of the actual cancellation rate that may occur during the remainder of 2021 or future years. Other than those units that are cancelled, and subject to potential construction delays resulting from COVID-19 related restrictions, we expect to settle substantially all of our March 31, 2021 backlog within the next twelve months.
The backlog turnover rate is impacted by various factors, including, but not limited to, changes in New Order activity, internal production capacity, external subcontractor capacity, material supply chain disruptions and other external factors over which we do not exercise control, such as the impact of governmental orders to cease or limit construction activities as a result of COVID-19.
Reportable Segments
Homebuilding segment profit includes all revenues and income generated from the sale of homes, less the cost of homes sold, SG&A expenses, and a corporate capital allocation charge determined by corporate management. The corporate capital allocation charge eliminates in consolidation and is based on the segment’s average net assets employed. The corporate capital allocation charged to the operating segment allows the Chief Operating Decision Maker to determine whether the operating segment is providing the desired rate of return after covering our cost of capital.
We record charges on contract land deposits when we determine that it is probable that recovery of the deposit is impaired. For segment reporting purposes, impairments on contract land deposits are generally charged to the operating segment upon the termination of an LPA with the developer, or the restructuring of an LPA resulting in the forfeiture of the deposit. We evaluate our entire net contract land deposit portfolio for impairment each quarter. For presentation purposes below, the contract land deposit reserve at March 31, 2021 and December 31, 2020 has been allocated to the respective year’s reportable segments to show contract land deposits on a net basis. The net contract land deposit balances below also include approximately $7,300 and $8,100 at March 31, 2021 and December 31, 2020, respectively, of letters of credit issued as deposits in lieu of cash.
The following tables summarize certain homebuilding operating activity by reportable segment for the three months ended March 31, 2021 and 2020.
Selected Segment Financial Data:
| Three Months Ended March 31, | ||||||||||||||||||||||||||
| 2021 | 2020 | |||||||||||||||||||||||||
| Revenues: | ||||||||||||||||||||||||||
| Mid Atlantic | $ | 936,141 | $ | 774,058 | ||||||||||||||||||||||
| North East | 162,193 | 106,136 | ||||||||||||||||||||||||
| Mid East | 424,952 | 320,695 | ||||||||||||||||||||||||
| South East | 440,425 | 354,818 | ||||||||||||||||||||||||
21
| Three Months Ended March 31, | ||||||||||||||||||||||||||
| 2021 | 2020 | |||||||||||||||||||||||||
| Gross profit margin: | ||||||||||||||||||||||||||
| Mid Atlantic | $ | 191,302 | $ | 144,328 | ||||||||||||||||||||||
| North East | 28,946 | 22,743 | ||||||||||||||||||||||||
| Mid East | 77,504 | 58,288 | ||||||||||||||||||||||||
| South East | 89,730 | 74,975 | ||||||||||||||||||||||||
| Three Months Ended March 31, | ||||||||||||||||||||||||||
| 2021 | 2020 | |||||||||||||||||||||||||
| Gross profit margin percentage: | ||||||||||||||||||||||||||
| Mid Atlantic | 20.4 | % | 18.6 | % | ||||||||||||||||||||||
| North East | 17.8 | % | 21.4 | % | ||||||||||||||||||||||
| Mid East | 18.2 | % | 18.2 | % | ||||||||||||||||||||||
| South East | 20.4 | % | 21.1 | % | ||||||||||||||||||||||
| Three Months Ended March 31, | ||||||||||||||||||||||||||
| 2021 | 2020 | |||||||||||||||||||||||||
| Segment profit: | ||||||||||||||||||||||||||
| Mid Atlantic | $ | 129,067 | $ | 81,673 | ||||||||||||||||||||||
| North East | 15,227 | 10,151 | ||||||||||||||||||||||||
| Mid East | 48,941 | 31,164 | ||||||||||||||||||||||||
| South East | 56,665 | 47,144 | ||||||||||||||||||||||||
Operating Activity:
| Three Months Ended March 31, | ||||||||||||||||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Units | Average Price | Units | Average Price | |||||||||||||||||||||||||||||||||||||||||||||||
| New orders, net of cancellations: | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Mid Atlantic | 2,291 | $ | 502.2 | 2,061 | $ | 442.2 | ||||||||||||||||||||||||||||||||||||||||||||
| North East | 440 | $ | 474.7 | 358 | $ | 382.2 | ||||||||||||||||||||||||||||||||||||||||||||
| Mid East | 1,795 | $ | 350.4 | 1,225 | $ | 326.2 | ||||||||||||||||||||||||||||||||||||||||||||
| South East | 1,788 | $ | 337.6 | 1,371 | $ | 305.6 | ||||||||||||||||||||||||||||||||||||||||||||
| Total | 6,314 | $ | 410.5 | 5,015 | $ | 372.3 | ||||||||||||||||||||||||||||||||||||||||||||
| Three Months Ended March 31, | ||||||||||||||||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Units | Average Price | Units | Average Price | |||||||||||||||||||||||||||||||||||||||||||||||
| Settlements: | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Mid Atlantic | 2,010 | $ | 465.7 | 1,795 | $ | 431.2 | ||||||||||||||||||||||||||||||||||||||||||||
| North East | 372 | $ | 436.0 | 281 | $ | 377.7 | ||||||||||||||||||||||||||||||||||||||||||||
| Mid East | 1,263 | $ | 336.4 | 985 | $ | 325.6 | ||||||||||||||||||||||||||||||||||||||||||||
| South East | 1,427 | $ | 308.6 | 1,169 | $ | 303.5 | ||||||||||||||||||||||||||||||||||||||||||||
| Total | 5,072 | $ | 387.2 | 4,230 | $ | 367.8 | ||||||||||||||||||||||||||||||||||||||||||||
22
| As of March 31, | ||||||||||||||||||||||||||
| 2021 | 2020 | |||||||||||||||||||||||||
| Units | Average Price | Units | Average Price | |||||||||||||||||||||||
| Backlog: | ||||||||||||||||||||||||||
| Mid Atlantic | 4,760 | $ | 488.2 | 3,878 | $ | 445.3 | ||||||||||||||||||||
| North East | 1,018 | $ | 463.7 | 664 | $ | 407.6 | ||||||||||||||||||||
| Mid East | 3,406 | $ | 350.6 | 2,053 | $ | 331.5 | ||||||||||||||||||||
| South East | 3,607 | $ | 336.6 | 2,423 | $ | 314.9 | ||||||||||||||||||||
| Total | 12,791 | $ | 406.9 | 9,018 | $ | 381.6 | ||||||||||||||||||||
| Three Months Ended March 31, | ||||||||||||||||||||||||||
| 2021 | 2020 | |||||||||||||||||||||||||
| New order cancellation rate: | ||||||||||||||||||||||||||
| Mid Atlantic | 9.5 | % | 21.8 | % | ||||||||||||||||||||||
| North East | 10.8 | % | 21.7 | % | ||||||||||||||||||||||
| Mid East | 8.4 | % | 20.8 | % | ||||||||||||||||||||||
| South East | 10.7 | % | 19.1 | % | ||||||||||||||||||||||
| Three Months Ended March 31, | ||||||||||||||||||||||||||
| 2021 | 2020 | |||||||||||||||||||||||||
| Average active communities: | ||||||||||||||||||||||||||
| Mid Atlantic | 159 | 189 | ||||||||||||||||||||||||
| North East | 35 | 40 | ||||||||||||||||||||||||
| Mid East | 140 | 138 | ||||||||||||||||||||||||
| South East | 111 | 108 | ||||||||||||||||||||||||
| Total | 445 | 475 | ||||||||||||||||||||||||
Homebuilding Inventory:
| March 31, 2021 | December 31, 2020 | |||||||||||||
| Sold inventory: | ||||||||||||||
| Mid Atlantic | $ | 735,512 | $ | 704,595 | ||||||||||
| North East | 159,346 | 140,461 | ||||||||||||
| Mid East | 301,321 | 278,510 | ||||||||||||
| South East | 373,167 | 336,902 | ||||||||||||
| Total (1) | $ | 1,569,346 | $ | 1,460,468 | ||||||||||
23
| March 31, 2021 | December 31, 2020 | |||||||||||||
| Unsold lots and housing units inventory: | ||||||||||||||
| Mid Atlantic | $ | 72,217 | $ | 76,690 | ||||||||||
| North East | 10,690 | 7,941 | ||||||||||||
| Mid East | 12,087 | 13,252 | ||||||||||||
| South East | 17,287 | 23,220 | ||||||||||||
| Total (1) | $ | 112,281 | $ | 121,103 | ||||||||||
(1) The reconciling items between segment inventory and consolidated inventory include certain consolidation adjustments necessary to convert the reportable segments’ results, which are predominantly maintained on a cash basis, to a full accrual basis for external financial statement presentation purposes. These consolidation adjustments are not allocated to our operating segments.
Lots Controlled and Land Deposits:
| March 31, 2021 | December 31, 2020 | |||||||||||||
| Total lots controlled: | ||||||||||||||
| Mid Atlantic | 43,800 | 42,100 | ||||||||||||
| North East | 10,500 | 10,500 | ||||||||||||
| Mid East | 22,100 | 22,000 | ||||||||||||
| South East | 32,300 | 31,100 | ||||||||||||
| Total | 108,700 | 105,700 | ||||||||||||
| March 31, 2021 | December 31, 2020 | |||||||||||||
| Contract land deposits, net: | ||||||||||||||
| Mid Atlantic | $ | 217,122 | $ | 212,742 | ||||||||||
| North East | 37,515 | 32,949 | ||||||||||||
| Mid East | 49,235 | 49,222 | ||||||||||||
| South East | 100,345 | 100,864 | ||||||||||||
| Total | $ | 404,217 | $ | 395,777 | ||||||||||
| Three Months Ended March 31, | ||||||||||||||||||||||||||
| 2021 | 2020 | |||||||||||||||||||||||||
| Contract land deposit impairments (recoveries), net: | ||||||||||||||||||||||||||
| Mid Atlantic | $ | 8 | $ | — | ||||||||||||||||||||||
| North East | — | — | ||||||||||||||||||||||||
| Mid East | 6 | 266 | ||||||||||||||||||||||||
| South East | — | 454 | ||||||||||||||||||||||||
| Total | $ | 14 | $ | 720 | ||||||||||||||||||||||
Mid Atlantic
Three Months Ended March 31, 2021 and 2020
The Mid Atlantic segment had an approximate $47,400, or 58%, increase in segment profit in the first quarter of 2021 compared to the first quarter of 2020. The increase in segment profit was driven by an increase in segment revenues of approximately $162,100, or 21%, quarter over quarter. Segment revenues increased due to increases in
24
the number of units settled and the average settlement price of 12% and 8%, respectively, quarter over quarter. The increase in the number of units settled was attributable to a 24% higher backlog unit balance entering 2021 compared to the backlog unit balance entering 2020, offset partially by a lower backlog turnover rate quarter over quarter. The increase in the average settlement price was primarily attributable to a 7% higher average sales price of units in backlog entering 2021 compared to backlog entering 2020. The Mid Atlantic segment’s gross profit margin percentage increased to 20.4% in the first quarter of 2021 from 18.6% in the first quarter of 2020. Gross profit margins were favorably impacted by the increase in revenues attributable in part to improved pricing power in prior quarters and improved leveraging of certain operating costs attributable to the increase in settlement activity quarter over quarter. These favorable factors were partially offset by higher prices for lumber, certain other commodities and labor quarter over quarter.
Segment New Orders and the average sales price of New Orders increased 11% and 14%, respectively, in the first quarter of 2021 compared to the first quarter of 2020. New Orders were higher due to favorable market conditions driven by historically low mortgage interest rates coupled with low resale inventory levels, which drove demand and provided us pricing power. Additionally, New Orders were favorably impacted by a lower cancellation rate in the first quarter of 2021, as sale cancellations increased significantly in March 2020 due to the impact of the onset of the COVID-19 pandemic on consumer demand.
North East
Three Months Ended March 31, 2021 and 2020
The North East segment had an approximate $5,100, or 50%, increase in segment profit in the first quarter of 2021 compared to the first quarter of 2020, due primarily to an increase in segment revenues of approximately $56,100, or 53%, quarter over quarter. Segment revenues increased due to increases in the number of units settled and the average settlement price of 32% and 15%, respectively, quarter over quarter. The increase in the number of units settled was attributable to a 62% higher backlog unit balance entering 2021 compared to the backlog unit balance entering 2020, offset partially by a lower backlog turnover rate quarter over quarter. The increase in the average settlement price was primarily attributable to a 10% higher average sales price of units in backlog entering 2021 compared to backlog entering 2020. The segment’s gross profit margin percentage decreased to 17.8% in the first quarter of 2021 from 21.4% in the first quarter of 2020, primarily due to higher prices for lumber, certain other commodities and labor quarter over quarter.
Segment New Orders and the average sales price of New Orders increased 23% and 24%, respectively, in the first quarter of 2021 compared to the first quarter of 2020. New Orders and the average sales price of New Orders were higher due to favorable market conditions driven by historically low mortgage interest rates coupled with low resale inventory levels, which drove demand and provided us pricing power. Additionally, New Orders were favorably impacted by a lower cancellation rate in the first quarter of 2021, as sale cancellations increased significantly in March 2020 due to the impact of the onset of the COVID-19 pandemic on consumer demand.
Mid East
Three Months Ended March 31, 2021 and 2020
The Mid East segment had an approximate $17,800, or 57%, increase in segment profit in the first quarter of 2021 compared to the first quarter of 2020, due primarily to an increase in segment revenues of approximately $104,300, or 33%, quarter over quarter. Segment revenues increased primarily due to a 28% increase in the number of units settled and a 3% increase in the average settlement price quarter over quarter. The increase in the number of units settled was attributable to a 59% higher backlog unit balance entering 2021 compared to the backlog unit balance entering 2020, offset partially by a lower backlog turnover rate quarter over quarter. The increase in the average settlement price was primarily attributable to a 4% higher average sales price of units in backlog entering 2021 compared to backlog entering 2020. The segment's gross profit margin percentage was flat quarter over quarter as higher prices for lumber, certain other commodities and labor were offset by improved leveraging of certain operating costs attributable to the increase in settlement activity quarter over quarter.
Segment New Orders and the average sales price of New Orders increased 47% and 7%, respectively, in the first quarter of 2021 compared to the first quarter of 2020. New Orders were higher due to favorable market conditions driven by historically low mortgage interest rates coupled with low resale inventory levels, which drove
25
demand and provided us pricing power. Additionally, New Orders were favorably impacted by a lower cancellation rate in the first quarter of 2021, as sale cancellations increased significantly in March 2020 due to the impact of the onset of the COVID-19 pandemic on consumer demand.
South East
Three Months Ended March 31, 2021 and 2020
The South East segment had an approximate $9,500, or 20%, increase in segment profit in the first quarter of 2021 compared to the first quarter of 2020. The increase in segment profit was primarily driven by an increase in segment revenues of approximately $85,600, or 24%, quarter over quarter. The increase in revenues is attributable to a 22% increase in the number of units settled and a 2% increase in the average settlement price quarter over quarter. The increase in the number of units settled was attributable to a 46% higher backlog unit balance entering 2021 compared to the backlog unit balance entering 2020, offset partially by a lower backlog turnover rate quarter over quarter. The increase in the average settlement price was primarily attributable to a 3% higher average sales price of units in backlog entering 2021 compared to backlog entering 2020. The segment’s gross profit margin percentage decreased to 20.4% in the first quarter of 2021 from 21.1% in the first quarter of 2020, primarily due to higher prices for lumber, certain other commodities and labor quarter over quarter.
Segment New Orders and the average sales price of New Orders increased 30% and 10%, respectively, in the first quarter of 2021 compared to the first quarter of 2020. New Orders were higher due to favorable market conditions driven by historically low mortgage interest rates coupled with low resale inventory levels, which drove demand and provided us pricing power. Additionally, New Orders were favorably impacted by a lower cancellation rate in the first quarter of 2021, as sale cancellations increased significantly in March 2020 due to the impact of the onset of the COVID-19 pandemic on consumer demand.
Homebuilding Segment Reconciliations to Consolidated Homebuilding Operations
In addition to the corporate capital allocation and contract land deposit impairments discussed above, the other reconciling items between homebuilding segment profit and homebuilding consolidated income before tax include unallocated corporate overhead (which includes all management incentive compensation), equity-based compensation expense, consolidation adjustments and external corporate interest expense. Our overhead functions, such as accounting, treasury and human resources, are centrally performed and the costs are not allocated to our operating segments. Consolidation adjustments consist of such items to convert the reportable segments’ results, which are predominantly maintained on a cash basis, to a full accrual basis for external financial statement presentation purposes, and are not allocated to our operating segments. External corporate interest expense primarily consists of interest charges on our Senior Notes, and is not charged to the operating segments because the charges are included in the corporate capital allocation discussed above.
| Three Months Ended March 31, | ||||||||||||||||||||||||||
| 2021 | 2020 | |||||||||||||||||||||||||
| Homebuilding consolidated gross profit: | ||||||||||||||||||||||||||
| Mid Atlantic | $ | 191,302 | $ | 144,328 | ||||||||||||||||||||||
| North East | 28,946 | 22,743 | ||||||||||||||||||||||||
| Mid East | 77,504 | 58,288 | ||||||||||||||||||||||||
| South East | 89,730 | 74,975 | ||||||||||||||||||||||||
| Consolidation adjustments and other | (1,224) | (39,370) | ||||||||||||||||||||||||
| Homebuilding consolidated gross profit | $ | 386,258 | $ | 260,964 | ||||||||||||||||||||||
26
| Three Months Ended March 31, | ||||||||||||||||||||||||||
| 2021 | 2020 | |||||||||||||||||||||||||
| Homebuilding consolidated income before taxes: | ||||||||||||||||||||||||||
| Mid Atlantic | $ | 129,067 | $ | 81,673 | ||||||||||||||||||||||
| North East | 15,227 | 10,151 | ||||||||||||||||||||||||
| Mid East | 48,941 | 31,164 | ||||||||||||||||||||||||
| South East | 56,665 | 47,144 | ||||||||||||||||||||||||
| Reconciling items: | ||||||||||||||||||||||||||
| Contract land deposit recoveries/(impairments) (1) | 6,196 | (35,615) | ||||||||||||||||||||||||
| Equity-based compensation expense (2) | (13,496) | (7,069) | ||||||||||||||||||||||||
| Corporate capital allocation (3) | 61,551 | 56,650 | ||||||||||||||||||||||||
| Unallocated corporate overhead | (39,717) | (37,639) | ||||||||||||||||||||||||
| Consolidation adjustments and other | 1,967 | 9,654 | ||||||||||||||||||||||||
| Corporate interest expense | (12,982) | (6,194) | ||||||||||||||||||||||||
| Reconciling items sub-total | 3,519 | (20,213) | ||||||||||||||||||||||||
| Homebuilding consolidated income before taxes | $ | 253,419 | $ | 149,919 | ||||||||||||||||||||||
(1)This item represents changes to the contract land deposit impairment reserve, which are not allocated to the reportable segments. See further discussion of lot deposit impairment charges in Note 2 in the accompanying condensed consolidated financial statements.
(2)The increase in equity-based compensation expense for the three-month period ended March 31, 2021 was primarily attributable to the reversal of approximately $6,500 in equity-based compensation in the first quarter of 2020 related to stock option forfeitures.
(3)This item represents the elimination of the corporate capital allocation charge included in the respective homebuilding reportable segments. The corporate capital allocation charge is based on the segment’s monthly average asset balance, and is as follows for the periods presented:
| Three Months Ended March 31, | ||||||||||||||||||||||||||
| 2021 | 2020 | |||||||||||||||||||||||||
| Corporate capital allocation charge: | ||||||||||||||||||||||||||
| Mid Atlantic | $ | 30,596 | $ | 29,755 | ||||||||||||||||||||||
| North East | 6,038 | 5,558 | ||||||||||||||||||||||||
| Mid East | 10,624 | 9,363 | ||||||||||||||||||||||||
| South East | 14,293 | 11,974 | ||||||||||||||||||||||||
| Total | $ | 61,551 | $ | 56,650 | ||||||||||||||||||||||
27
Mortgage Banking Segment
Three Months Ended March 31, 2021 and 2020
We conduct our mortgage banking activity through NVR Mortgage Finance, Inc. (“NVRM”), a wholly owned subsidiary. NVRM focuses exclusively on serving the homebuilding segment customer base. NVRM sells all of the mortgage loans it closes to investors in the secondary markets on a servicing-released basis, typically within 30 days from the loan closing. The following table summarizes the results of our mortgage banking operations and certain statistical data for the three months ended March 31, 2021 and 2020:
| Three Months Ended March 31, | ||||||||||||||||||||||||||
| 2021 | 2020 | |||||||||||||||||||||||||
| Loan closing volume: | ||||||||||||||||||||||||||
| Total principal | $ | 1,412,879 | $ | 1,132,104 | ||||||||||||||||||||||
| Loan volume mix: | ||||||||||||||||||||||||||
| Adjustable rate mortgages | 1 | % | 2 | % | ||||||||||||||||||||||
| Fixed-rate mortgages | 99 | % | 98 | % | ||||||||||||||||||||||
| Operating profit: | ||||||||||||||||||||||||||
| Segment profit | $ | 59,562 | $ | 11,879 | ||||||||||||||||||||||
| Equity-based compensation expense | (975) | (423) | ||||||||||||||||||||||||
| Mortgage banking income before tax | $ | 58,587 | $ | 11,456 | ||||||||||||||||||||||
| Capture rate: | 89 | % | 91 | % | ||||||||||||||||||||||
| Mortgage banking fees: | ||||||||||||||||||||||||||
| Net gain on sale of loans | $ | 67,550 | $ | 18,400 | ||||||||||||||||||||||
| Title services | 9,997 | 8,253 | ||||||||||||||||||||||||
| Servicing fees | 188 | 168 | ||||||||||||||||||||||||
| $ | 77,735 | $ | 26,821 | |||||||||||||||||||||||
Loan closing volume for the three months ended March 31, 2021 increased by approximately $280,800, or 25%, from the same period in 2020. The increase in loan closing volume during the three months ended March 31, 2021 was primarily attributable to the 20% increase in the homebuilding segment’s number of units settled during the three months ended March 31, 2021, compared to the same period in 2020.
Segment profit for the three months ended March 31, 2021 increased by approximately $47,700, or 401%, from the same period in 2020. This increase was primarily attributable to an increase of approximately $50,900, or 190%, in mortgage banking fees, primarily due to increased mortgage volume in the first quarter of 2021 and the recovery in the mortgage markets from the disruptions in the first quarter of 2020 related to the COVID-19 pandemic.
28
Seasonality
We generally have higher New Order activity in the first half of the year and higher home settlements, revenue and net income in the second half of the year.
Effective Tax Rate
Our effective tax rate during the three months ended March 31, 2021 was an expense of 20.3% as compared to a benefit of 8.9% for the three months ended March 31, 2020. The increase in the effective tax rate quarter over quarter is primarily attributable to recognizing a lower income tax benefit related to excess tax benefits from stock option exercises in the first quarter of 2021. For the three months ended March 31, 2021 and March 31, 2020, we recognized approximately $17,400 and $55,700, respectively, in such income tax benefits.
We expect to experience volatility in our effective tax rate in future quarters as the amount of the excess tax benefit from equity-based awards is dependent on our stock price when awards are exercised as well as on the timing of exercises, which historically has varied from quarter to quarter.
Liquidity and Capital Resources
Overview
We had a very strong liquidity position as of March 31, 2021, with approximately $2,800,000 in cash and cash equivalents, approximately $288,000 in unused committed capacity under our revolving credit facility and $150,000 in unused committed capacity under our revolving mortgage repurchase facility.
Our homebuilding business segment funds its operations from cash flows provided by operating activities, a short-term unsecured working capital revolving credit facility and capital raised in the public debt and equity markets. Our mortgage banking subsidiary, NVRM, provides for its mortgage origination and other operating activities using cash generated from its operations, borrowings from its parent company, NVR, as well as a revolving mortgage repurchase facility.
Credit Agreement
Our unsecured Credit Agreement (the “Credit Agreement”) provides for aggregate revolving loan commitments of $300,000. Under the Credit Agreement, we may request increases of up to $300,000 to the facility in the form of revolving loan commitments or term loans to the extent that new or existing lenders agree to provide additional revolving loan or term loan commitments. The Credit Agreement provides for a $100,000 sublimit for the issuance of letters of credit of which there was approximately $12,250 outstanding at March 31, 2021. The Credit Agreement termination date is February 12, 2026. There was no debt outstanding under the Credit Agreement at March 31, 2021.
Repurchase Agreement
NVRM's revolving mortgage repurchase facility (the “Repurchase Agreement”) provides for aggregate borrowings up to $150,000 and is non-recourse to NVR. The Repurchase Agreement expires on July 21, 2021. At March 31, 2021, there were no borrowing base limitations reducing the amount available under the Repurchase Agreement. There was no debt outstanding under the Repurchase Agreement at March 31, 2021.
There have been no material changes in our Credit or Repurchase Agreements during the three months ended March 31, 2021. For additional information regarding lines of credit and notes payable, see Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2020.
Cash Flows
For the three months ended March 31, 2021, cash, restricted cash, and cash equivalents increased by $4,735. Cash provided by operating activities was $328,258. Cash was provided by earnings for the three months ended March 31, 2021 and net proceeds of $169,713 from mortgage loan activity. Cash was primarily used to fund the increase in homebuilding inventory of $120,710 due to an increase in the number of units under construction at March 31, 2021 compared to December 31, 2020.
29
Net cash used in investing activities for the three months ended March 31, 2021 was $3,394, attributable primarily to cash used for purchases of property, plant and equipment of $3,104.
Net cash used in financing activities was $320,129 for the three months ended March 31, 2021. Cash was used to repurchase 86,523 shares of our common stock at an aggregate purchase price of $377,425 under our ongoing common stock repurchase program, discussed below. Cash was provided from stock option exercise proceeds totaling $57,625.
Equity Repurchases
In addition to funding growth in our homebuilding and mortgage banking operations, we historically have used a substantial portion of our excess liquidity to repurchase outstanding shares of our common stock in open market and privately negotiated transactions. This ongoing repurchase activity is conducted pursuant to publicly announced Board authorizations, and is typically executed in accordance with the safe-harbor provisions of Rule 10b-18 promulgated under the Exchange Act. In addition, the Board resolutions authorizing us to repurchase shares of our common stock specifically prohibit us from purchasing shares from our officers, directors, Profit Sharing/401(k) Plan Trust or Employee Stock Ownership Plan Trust. The repurchase program assists us in accomplishing our primary objective of creating increases in shareholder value. See Part II, Item 2, Unregistered Sales of Equity Securities and Use of Proceeds, of this Quarterly Report on Form 10-Q for further discussion of repurchase activity during the first quarter of 2021.
Critical Accounting Policies
There have been no material changes to our critical accounting policies as previously disclosed in Part II, Item 7, of our Annual Report on Form 10-K for the year ended December 31, 2020.
Item 3. Quantitative and Qualitative Disclosure about Market Risk
There have been no material changes in our market risks during the three months ended March 31, 2021. For additional information regarding our market risks, see Part II, Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2020.
Item 4. Controls and Procedures
As of the end of the period covered by this report, an evaluation was performed under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Exchange Act Rule 13a-15. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that the design and operation of these disclosure controls and procedures were effective. There have been no changes in our internal control over financial reporting in the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
30
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
We are involved in various litigation arising in the ordinary course of business. In the opinion of management, and based on advice of legal counsel, this litigation is not expected to have a material adverse effect on our financial position, results of operations or cash flows. Legal costs incurred in connection with outstanding litigation are expensed as incurred.
Item 1A. Risk Factors
There have been no material changes to the risk factors as previously disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2020.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(dollars in thousands, except per share data)
We had two share repurchase authorizations outstanding during the quarter ended March 31, 2021. On February 12, 2020 and December 14, 2020, we publicly announced that our Board of Directors authorized the repurchase of our outstanding common stock in one or more open market and/or privately negotiated transactions, up to an aggregate of $300,000 per authorization. The repurchase authorizations do not have expiration dates. We repurchased the following shares of our common stock during the first quarter of 2021:
| 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 | ||||||||||||||||||||||
| January 1 - 31, 2021 | 33,051 | $ | 3,984.68 | 33,051 | $ | 414,365 | ||||||||||||||||||||
| February 1 - 28, 2021 | 10,056 | $ | 4,689.49 | 10,056 | $ | 367,207 | ||||||||||||||||||||
| March 1 - 31, 2021 (1) | 43,416 | $ | 4,573.65 | 43,416 | $ | 168,637 | ||||||||||||||||||||
| Total | 86,523 | $ | 4,362.13 | 86,523 | ||||||||||||||||||||||
(1) Of the 43,416 shares repurchased in March 2021, 14,576 outstanding shares were repurchased under the February 12, 2020 share repurchase authorization, which fully utilized the February authorization. The remaining 28,840 outstanding shares were repurchased under the December 14, 2020 share repurchase authorization.
31
Item 6. Exhibits
| Exhibit Number | Exhibit Description | |||||||||||||||||||||||||||||||||||||||||||
| 31.1 | ||||||||||||||||||||||||||||||||||||||||||||
| 31.2 | ||||||||||||||||||||||||||||||||||||||||||||
| 32 | ||||||||||||||||||||||||||||||||||||||||||||
| 101.INS | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document | |||||||||||||||||||||||||||||||||||||||||||
| 101.SCH | XBRL Taxonomy Extension Schema Document | |||||||||||||||||||||||||||||||||||||||||||
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | |||||||||||||||||||||||||||||||||||||||||||
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | |||||||||||||||||||||||||||||||||||||||||||
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document | |||||||||||||||||||||||||||||||||||||||||||
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | |||||||||||||||||||||||||||||||||||||||||||
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | |||||||||||||||||||||||||||||||||||||||||||
32
SIGNATURE
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.
| NVR, Inc. | ||||||||
| Date: May 4, 2021 | By: | /s/ Daniel D. Malzahn | ||||||
| Daniel D. Malzahn | ||||||||
| Senior Vice President, Chief Financial Officer and Treasurer | ||||||||
33
Exhibit 31.1
SARBANES-OXLEY ACT SECTION 302 CERTIFICATIONS
I, Paul C. Saville, certify that:
1.I have reviewed this report on Form 10-Q of NVR, Inc.;
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 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 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: May 4, 2021 | By: | /s/ Paul C. Saville | ||||||
| Paul C. Saville | ||||||||
| President and Chief Executive Officer | ||||||||
Exhibit 31.2
SARBANES-OXLEY ACT SECTION 302 CERTIFICATIONS
I, Daniel D. Malzahn, certify that:
1.I have reviewed this report on Form 10-Q of NVR, Inc.;
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 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 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: May 4, 2021 | By: | /s/ Daniel D. Malzahn | ||||||
| Daniel D. Malzahn | ||||||||
| Senior Vice President, Chief Financial Officer and Treasurer | ||||||||
Exhibit 32
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 NVR, Inc. for the period ended March 31, 2021 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), each of the undersigned officers of NVR, Inc., hereby certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 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 NVR, Inc.
| Date: May 4, 2021 | By: | /s/ Paul C. Saville | ||||||
| Paul C. Saville | ||||||||
| President and Chief Executive Officer | ||||||||
| By: | /s/ Daniel D. Malzahn | |||||||
| Daniel D. Malzahn | ||||||||
| Senior Vice President, Chief Financial Officer and Treasurer | ||||||||