M.D.C. HOLDINGS, INC. The following discussion should be read in conjunction with, and is qualified in its entirety by, the Unaudited Consolidated Financial Statements and Notes thereto included elsewhere in this Quarterly Report on Form 10-Q. This item contains forward-looking statements that involve risks and uncertainties. The forward-looking statements are based upon management's experiences, observations, and analyses. Actual results may differ materially from those indicated in such forward-looking statements. Factors that may cause such a difference include, but are not limited to, those discussed in "Item 1A. Risk Factors" of our Annual Report on Form 10-K for the year endedDecember 31, 2022 and this Quarterly Report on Form 10-Q. Three Months EndedMarch 31, 2023 2022
(Dollars in thousands, except per
share amounts)
Homebuilding:
Home sale revenues $ 1,020,016 $ 1,240,520
Home cost of sales (840,747) (921,378)
Inventory impairments (7,800) (660)
Total cost of sales (848,547) (922,038)
Gross profit 171,469 318,482
Gross margin 16.8 % 25.7 %
Selling, general and administrative expenses (94,988) (129,314)
Interest and other income 13,459 755
Other expense 1,059 (1,424)
Homebuilding pretax income 90,999 188,499
Financial Services:
Revenues 29,486 29,131
Expenses (15,250) (16,935)
Other income, net 3,734 1,187
Financial services pretax income 17,970 13,383
Income before income taxes 108,969 201,882
Provision for income taxes (28,269) (53,461)
Net income $ 80,700 $ 148,421
Earnings per share:
Basic $ 1.10 $ 2.09
Diluted $ 1.08 $ 2.02
Weighted average common shares outstanding:
Basic 72,647,659 70,766,146
Diluted 74,021,989 72,938,414
Dividends declared per share$ 0.50 $ 0.50 Cash provided by (used in): Operating Activities$ 426,164 $ 118,055 Investing Activities$ (244,760) $ (6,884) Financing Activities$ (93,508) $ (126,280) -24-
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Industry Conditions and Outlook for MDC*
The housing market in the first quarter of 2023 presented more challenging conditions compared to the same period in the prior year, as the historically strong demand experienced in the prior year quarter began to weaken beginning in mid-2022 due to the sharp increases in interest rates, inflation concerns, and various other economic uncertainties. As a result, our net orders and net order value decreased 44% and 48%, respectively, in the first quarter of 2023 as compared to the first quarter of 2022. While our 2023 first quarter monthly absorption rate of 2.6 homes per community per month remained below our pre-pandemic levels, we experienced sequential increases in our monthly absorption rate as the quarter progressed. On a gross basis (excluding cancellations) our monthly absorption rate was 3.7 homes per community per month for the first quarter of 2023. We were pleased with our ability to sell and close our quick move-in inventory during the quarter, which allowed us to turn our inventories quicker than expected. We remain focused on balancing our pace of sales and pricing and incentive levels to maximize profitability while continuing to turn our inventory. As a result, we delivered strong top and bottom line results and generated positive cash flow from operations in the first quarter of 2023 despite the volatile market conditions that continue to impact the homebuilding industry. We remain confident in the long-term growth prospects for the industry given the underproduction of new homes over the past decade and the softening supply of re-sale home inventory due to homeowners holding on to extremely low mortgage rates. With that said, the current demand for new homes is subject to continued uncertainty due to many factors, including ongoing inflation concerns, theFederal Reserve's quantitative tightening and the resulting impact on mortgage interest rates, consumer confidence, the current geopolitical environment and other factors. The potential effect of these factors is highly uncertain and could adversely and materially impact our operations and financial results in future periods. We believe that we are uniquely equipped to navigate these uncertainties and any continued market volatility given our seasoned leadership team, strong financial position and distinct operating strategy. We remain focused on maximizing risk-adjusted returns while minimizing the risks of excess leverage and land ownership. We ended the quarter with total cash and cash equivalents and marketable securities of$1.61 billion , total liquidity of$2.79 billion , a debt-to-capital ratio of 32.3% and no senior note maturities until 2030.
Three Months Ended
For the three months endedMarch 31, 2023 , our net income was$80.7 million , or$1.08 per diluted share, a 46% decrease compared to net income of$148.4 million , or$2.02 per diluted share, for the same period in the prior year. Our homebuilding business was the primary driver of the decrease, as pretax income decreased$97.5 million , or 52% year-over-year. This decrease was partially offset by our financial services business, as pretax income increased$4.6 million , or 34%, compared to the same period in the prior year. The decrease in homebuilding pretax income was primarily due to an 18% decrease in home sale revenues and an 890 basis point decrease in gross margin from home sales. The decrease in gross margin from home sales was driven largely by an increase in both incentives and construction costs year-over-year, and to a lesser extent by$7.8 million of inventory impairments recognized during the current year period. These items were partially offset by a 110 basis point decrease in our selling, general and administrative expenses as a percentage of revenue. The increase in financial services pretax income was due to both our mortgage and other financial services operations. The increase in pretax income for our mortgage operations was due to a decrease in salary related expenses driven by lower headcount, an increase in capture rate and the allocation of revenue from our homebuilding business associated with our financing incentives. Our other financial services operations and homebuilding business each saw an increase in interest income due to increases in both interest rates and our cash and short-term investments year-over-year.
* See "Forward-Looking Statements" below.
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Homebuilding
Pretax Income (Loss):
Three Months Ended
March 31, Change
2023 2022 Amount %
(Dollars in thousands)
West $ 43,200 $ 130,526 $ (87,326) (67) %
Mountain 25,036 50,506 (25,470) (50) %
East 15,309 31,394 (16,085) (51) %
Corporate 7,454 (23,927) 31,381
131 %
Total Homebuilding pretax income
For the three months endedMarch 31, 2023 , we recorded homebuilding pretax income of$91.0 million , a decrease of 52% from$188.5 million for the same period in the prior year. The decrease was due to an 18% decrease in home sale revenues and an 890 basis point decrease in gross margin from home sales. This was partially offset by a 110 basis point decrease in our selling, general and administrative expenses as a percentage of home sale revenues. Our West segment experienced an$87.3 million year-over-year decrease in pretax income, due to a decrease in gross margin from home sales, an 18% decrease in home sale revenues and an increase in selling, general and administrative expenses as a percentage of home sale revenues. Our Mountain segment experienced a$25.5 million decrease in pretax income from the prior year, as a result of a 10% decrease in home sale revenues and a decrease in gross margin from home sales, partially offset by a decrease in selling, general and administrative expenses as a percentage of home sale revenues. Our East segment experienced a$16.1 million decrease in pretax income from the prior year, due primarily to a 29% decrease in home sale revenues, a decrease in gross margin from home sales, and an increase in selling, general and administrative expenses as a percentage of home sale revenues. Our Corporate segment experienced a$31.4 million increase in pretax income, due to decreased compensation related costs associated with a decrease in headcount, decreased stock-based and deferred compensation expenses and an increase in interest income. Assets: March 31, December 31, Change 2023 2022 Amount % (Dollars in thousands) West$ 2,098,329 $ 2,275,144 $ (176,815) (8) % Mountain 898,227 1,005,622 (107,395) (11) % East 407,046 427,926 (20,880) (5) % Corporate 1,574,847 1,249,370 325,477 26 % Total homebuilding assets$ 4,978,449 $ 4,958,062 $ 20,387 0 % Total homebuilding assets remained relatively flat fromDecember 31, 2022 toMarch 31, 2023 . The increase in the Corporate segment assets was driven by an increase to cash and cash equivalents as well as marketable securities. The decrease in the West and Mountain segments assets was driven by a decrease in home sale receivables, land and land under development and housing completed or under construction. -26-
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New Home Deliveries & Home Sale Revenues:
Changes in home sale revenues are impacted by changes in the number of new homes
delivered and the average selling price of those delivered homes. Commentary for
each of our segments on significant changes in these two metrics is provided
below.
Three Months Ended March 31,
2023 2022 % Change
Home
Home Sale Average Home Sale Average Sale
Homes Revenues Price Homes Revenues Price Homes Revenues Average Price
(Dollars in thousands)
West 1,064 $ 577,933 $ 543.2 1,243 $ 707,311 $ 569.0 (14) % (18) % (5) %
Mountain 487 301,155 618.4 548 335,128 611.5 (11) % (10) % 1 %
East 300 140,928 469.8 442 198,081 448.1 (32) % (29) % 5 %
Total 1,851 $ 1,020,016 $ 551.1 2,233 $ 1,240,520 $ 555.5 (17) % (18) % (1) %
For the three months ended March 31, 2023 , the decrease in the number of new
homes delivered in each of our segments was the result of a decrease in the
number of homes in backlog to begin the period. This decrease was partially
offset within each segment by an increase in backlog conversion rates due to an
increase in the number of homes both sold and closed during the quarter. This
increase was a result of the year-over-year increase in the number of unsold
started homes to begin the period as a result of the above average cancellation
rates experienced in the second half of 2022 and our recent pivot to focus more
on speculative construction starts.
West Segment Commentary
For the three months ended March 31, 2023 , the decrease in new home deliveries,
as discussed above, was further impacted by an increase in construction cycle
times year-over-year in our Phoenix division. The average selling price of homes
delivered decreased as a result of a shift in mix from our California divisions
to our Arizona divisions.
Mountain Segment Commentary
For the three months ended
East Segment Commentary
For the three months ended March 31, 2023 , the decrease in new home deliveries,
as discussed above, was partially offset by a decrease in cycle times. For the
three months ended March 31, 2023 , the average selling price of homes delivered
increased driven by our Florida markets, due to a shift in mix to higher priced
communities.
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Gross Margin from Home Sales:
Our gross margin from home sales for the three months ended March 31, 2023 ,
decreased 890 basis points year-over-year from 25.7% to 16.8%. The decrease in
gross margin from home sales was driven largely by increases in both incentives
and construction costs year-over-year, and to a lesser extent by $7.8 million of
inventory impairments recognized during the current year period compared to $0.6
million in the prior year period. These decreases were partially offset by price
increases implemented during 2021 and the first quarter of 2022.
Inventory Impairments:
Inventory impairments recognized by segment for the three months ended
Three Months Ended March 31,
2023 2022
(Dollars in thousands)
Housing Completed or Under Construction :
West $ - $ 660
Mountain 664 -
East - -
Subtotal 664 660
Land and Land Under Development :
West - -
Mountain 7,136 -
East - -
Subtotal 7,136 -
Total Inventory Impairments $ 7,800 $ 660 The table below provides quantitative data, for the periods presented, where applicable, used in determining the fair value of the impaired inventory.
Impairment Data Quantitative Data
Fair Value of
Number of Inventory Inventory After
Three Months Ended Subdivisions Impaired Impairments Impairments Discount Rate
(Dollars in thousands)
March 31, 2023 1 $ 7,800 $ 13,016 18%
Total $ 7,800
March 31, 2022 1 $ 660 $ 1,728 N/A
Total $ 660
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Selling, General and Administrative Expenses:
Three Months Ended
2023 2022 Change
(Dollars in thousands)
General and administrative expenses $ 42,776
4.2 % 5.8 % -160 bps
Marketing expenses $ 23,096 $ 25,632 $ (2,536)
Marketing expenses as a percentage of home sale revenues 2.3 % 2.1 % 20 bps
Commissions expenses $ 29,116 $ 31,699 $ (2,583)
Commissions expenses as a percentage of home sale revenues 2.9 % 2.6 % 30 bps
Total selling, general and administrative expenses $ 94,988
9.3 % 10.4 % -110 bps
General and administrative expenses decreased for the three months ended
March 31, 2023 due to decreased compensation related costs associated with a
decrease in headcount as well as decreased stock-based and deferred compensation
expenses.
Marketing expenses decreased for the three months ended March 31, 2023 compared
to the previous period, as decreased compensation related expenses, amortization
of deferred selling cost, and model home expenses were partially offset by
increased product advertising expenses.
Commissions expenses decreased for the three months ended March 31, 2023 due to
decreases in home sale revenues, partially offset by changes in our commission
structure.
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Other Homebuilding Operating Data
Changes in the dollar value of net new orders are impacted by changes in the
number of net new orders and the average selling price of those homes.
Commentary for each of our segments on significant changes in these two metrics
is provided below.
Three Months Ended March 31,
2023 2022 % Change
Monthly Monthly
Dollar Average Absorption Average Monthly Dollar Absorption
Homes Value Price Rate * Homes Dollar Value Price Absorption Rate * Homes Value Average Price Rate
(Dollars in thousands)
West 1,012 $ 566,909 $ 560.2 2.47 1,704 $ 1,000,954 $ 587.4 5.54 (41) % (43) % (5) % (55) %
Mountain 410 237,546 579.4 2.47 920 581,971 632.6 5.63 (55) % (59) % (8) % (56) %
East 345 152,809 442.9 3.03 527 253,850 481.7 4.78 (35) % (40) % (8) % (37) %
Total 1,767 $ 957,264 $ 541.7 2.56 3,151 $ 1,836,775 $ 582.9 5.42 (44) % (48) % (7) % (53) %
*Calculated as total net new orders (gross orders less cancellations) in period ÷ average active communities during period ÷ number of months in period.
Average Active Subdivisions
Active Subdivisions Three Months Ended
March 31, % March 31, %
2023 2022 Change 2023 2022 Change
West 141 112 26 % 137 103 33 %
Mountain 56 53 6 % 55 55 - %
East 39 35 11 % 38 37 3 %
Total 236 200 18 % 230 195 18 %
For the three months ended March 31, 2023 , the decrease in the number of net new
orders in each of our segments was the result of a decrease in the monthly sales
absorption pace. This was driven by a lower pace of gross orders (before
cancellations) as well as an increase in cancellations as both a percentage of
homes in beginning backlog to start the quarter and a percentage of gross sales
during the quarter ("cancellation rates"). Gross orders in the prior year
quarter benefited from historically strong demand, which began to weaken
beginning in mid-2022 due to the sharp increases in interest rates, inflation
concerns, and various other economic uncertainties. See the "Cancellation Rate"
section below for commentary on the increase in our cancellation rates. The
decrease in the monthly sales absorption pace in our West and East segments was
partially offset by an increase in average active subdivisions year-over-year.
For the three months ended March 31, 2023 , the decrease in the average selling
price in each of our segments was due to decreases in base pricing during the
second half of 2022 in most communities and to a lesser extent increased
incentives.
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Cancellation Rate:
Cancellations as a Percentage of Homes in
Beginning Backlog
2023 2022
Three Months Ended
March 31, March 31,
West 26 % 8 %
Mountain 25 % 8 %
East 24 % 9 %
Total 25 % 8 %
Cancellations as a Percentage of Gross Sales
2023 2022
Three Months Ended
March 31, March 31,
West 32 % 17 %
Mountain 31 % 16 %
East 21 % 18 %
Total 30 % 17 %
In light of our recent pivot to focus more on speculative construction starts,
we believe it is appropriate to view our cancellations as a product of both our
beginning backlog as well as our gross sales during the period. While our
cancellation rate as a percentage of homes in beginning backlog increased
year-over-year in each of our segments, this increase was less significant when
viewed as a percentage of gross sales. These increases were a result of the
recent softening in housing market demand, homebuyer sentiment, as well as the
strong demand levels we experienced in the first quarter of the prior year.
Backlog:
March 31,
2023 2022 % Change
Dollar Average Dollar Average Dollar Average
Homes Value Price Homes Value Price Homes Value Price
(Dollars in thousands)
West 1,839 $ 1,020,206 $ 554.8 4,677 $ 2,651,123 $ 566.8 (61) % (62) % (2) %
Mountain 638 444,681 697.0 2,546 1,668,048 655.2 (75) % (73) % 6 %
East 413 197,034 477.1 1,335 628,631 470.9 (69) % (69) % 1 %
Total 2,890 $ 1,661,921 $ 575.1 8,558 $ 4,947,802 $ 578.1 (66) % (66) % (1) %
At March 31, 2023 , we had 2,890 homes in backlog with a total value of
$1.66 billion . This represented a 66% decrease in both the number of homes in
backlog and the dollar value of those homes in backlog from March 31, 2022 . The
decrease in the number of homes in backlog was primarily a result of a decrease
in the level of net new orders during the second half of 2022, which continued
to a lesser degree into the first quarter of 2023, as well as a shift in
consumer preference to quick move-in homes and our associated pivot to focus on
more speculative construction starts to supplement build-to-order construction
activity. This was partially offset by an increase in cycle times
year-over-year. The increase in average selling price in our Mountain segment
was driven by a change in mix to higher priced communities. Our ability to
convert backlog into closings could be negatively impacted in future periods by
ongoing inflation concerns, the Federal Reserve's quantitative tightening and
the resulting impact on mortgage interest rates, consumer confidence, the
current geopolitical environment and other factors, the extent to which is
highly uncertain and depends on future developments.
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Homes Completed or
March 31, %
2023 2022 Change
Unsold:
Completed 255 19 1,242 %
Under construction 1,277 313 308 %
Total unsold started homes 1,532 332 361 %
Sold homes under construction or completed 2,493 7,445 (67) %
Model homes under construction or completed 560 513 9 %
Total homes completed or under construction 4,585 8,290 (45) %
The increase in total unsold started homes is due to an increase in our cancellation rates during the second half of 2022, which continued to a lesser extent into the first quarter of 2023, as well as our recent pivot to focus more on speculative construction starts.
Lots Owned and Optioned (including homes completed or under construction):
March 31, 2023 March 31, 2022
Total
Lots Lots Lots Lots %
Owned Optioned Total Owned Optioned Total Change
West 11,766 422 12,188 15,548 4,237 19,785 (38) %
Mountain 4,944 1,034 5,978 6,741 4,240 10,981 (46) %
East 3,281 1,495 4,776 4,318 2,728 7,046 (32) %
Total 19,991 2,951 22,942 26,607 11,205 37,812 (39) %
Our total owned and optioned lots at March 31, 2023 were 22,942, which
represented a 39% decrease year-over-year. This decrease is a result of our
intentional slowdown in land acquisition and approval activity due to current
market uncertainty. We believe that our total lot supply is sufficient to meet
our operating needs, consistent with our philosophy of maintaining a two to
three year supply of land. See "Forward-Looking Statements" below.
Financial Services
Three Months Ended
March 31, Change
2023 2022 Amount %
(Dollars in thousands)
Financial services revenues
Mortgage operations $ 18,419 $ 17,601 $ 818 5 %
Other 11,067 11,530 (463) (4) %
Total financial services revenues $ 29,486 $ 29,131 $ 355 1 %
Financial services pretax income
Mortgage operations $ 9,726 $ 7,433 $ 2,293 31 %
Other 8,244 5,950
2,294 39 %
Total financial services pretax income
For the three months endedMarch 31, 2023 , our financial services pretax income increased to$18.0 million compared to$13.4 million in the first quarter of 2022. The increase in financial services pretax income was due to both our mortgage and our other financial services operations. The increase in pretax income for our mortgage operations was due to a decrease in salary related expenses driven by lower headcount, an increase in capture rate and the allocation of revenue from our homebuilding business associated with our financing incentives. The increase in other financial services was driven by our insurance operations which saw an increase in interest income due to increases in both interest rates and our cash and short-term investments year-over-year. -32-
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The following table sets forth information for our mortgage operations segment relating to mortgage loans originated and capture rate.
Three Months Ended % or
March 31, Percentage
2023 2022 Change
(Dollars in thousands)
Total Originations (including transfer loans):
Loans 1,221 1,314 (7) %
Principal $ 555,608 $ 605,800 (8) %
Capture Rate Data:
Capture rate as % of all homes delivered 66 % 59 % 7 %
Capture rate as % of all homes delivered (excludes cash sales) 72 % 62 % 10 %
Mortgage Loan Origination Product Mix:
FHA loans 17 % 12 % 5 %
Other government loans (VA & USDA) 19 % 20 % (1) %
Total government loans 36 % 32 % 4 %
Conventional loans 64 % 68 % (4) %
100 % 100 % - %
Loan Type:
Fixed rate 99 % 99 % - %
ARM 1 % 1 % - %
Credit Quality:
Average FICO Score 740 742 - %
Other Data: `
Average Combined LTV ratio 82 % 82 % - %
Full documentation loans 100 % 100 % - %
Loans Sold to Third Parties:
Loans 1,354 1,527 (11) %
Principal $ 620,329 $ 691,358 (10) %
Income Taxes
Our overall effective income tax rates were 25.9% and 26.5% for the three months
ended March 31, 2023 and 2022, respectively. The rates for the three months
ended March 31, 2023 and 2022 resulted in income tax expense of $28.3 million
and $53.5 million , respectively. The year-over-year decrease in our effective
tax rate for the three months ended March 31, 2023 was primarily due to energy
tax credits benefiting 2023, which had not been extended into 2022 as of March
31, 2022 . This decrease was partially offset by the tax impact of non-deductible
executive compensation under Internal Revenue Code Section 162(m).
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CRITICAL ACCOUNTING ESTIMATES AND POLICIES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the consolidated financial statements and the
reported amounts of revenue and expenses during the reporting period. Management
bases its estimates and judgments on historical experience and on various other
factors that are believed to be reasonable under the circumstances, the results
of which form the basis for making judgments about the carrying value of assets
and liabilities that are not readily apparent from other sources. Management
evaluates such estimates and judgments on an on-going basis and makes
adjustments as deemed necessary. Actual results could differ from these
estimates if conditions are significantly different in the future. See
"Forward-Looking Statements" below.
Our critical accounting estimates and policies have not changed from those
reported in Management's Discussion and Analysis of Financial Condition and
Results of Operations in our Annual Report on Form 10-K for the year ended
LIQUIDITY AND CAPITAL RESOURCES
We use our liquidity and capital resources to (1) support our operations,
including the purchase of land, land development and construction of homes; (2)
provide working capital; and (3) provide mortgage loans for our homebuyers. Our
liquidity includes our cash and cash equivalents, marketable securities,
Revolving Credit Facility (as defined below) and Mortgage Repurchase Facility
(as defined below). Additionally, we have an existing effective shelf
registration statement that allows us to issue equity, debt or hybrid securities
up to $5.0 billion , of which $5.0 billion remains.
Material Cash Requirements
We are a party to many contractual obligations involving commitments to make payments to third parties. These obligations impact our short-term and long-term liquidity and capital resource needs. Certain contractual obligations are reflected on the Consolidated Balance Sheet as ofMarch 31, 2023 , while others are considered future commitments. Our contractual obligations primarily consist of long-term debt and related interest payments, payments due on our Mortgage Repurchase Facility, purchase obligations related to expected acquisition of land under purchase agreements and land development agreements (many of which are secured by letters of credit or surety bonds) and operating leases. Other material cash requirements include land acquisition and development costs not yet contracted for, home construction costs, operating expenses, including our selling, general and administrative expenses, investments and funding of capital improvements and dividend payments. AtMarch 31, 2023 , we had outstanding senior notes with varying maturities totaling an aggregate principal amount of$1.5 billion , with none payable within 12 months. Future interest payments associated with the notes total$1.3 billion , with$64.2 million payable within 12 months. As ofMarch 31, 2023 , we had$28.5 million of required operating lease future minimum payments.
At
AtMarch 31, 2023 , we had outstanding surety bonds and letters of credit totaling$359.1 million and$116.0 million , respectively, including$68.9 million in letters of credit issued by HomeAmerican. The estimated cost to complete obligations related to these bonds and letters of credit was approximately$157.3 million and$75.1 million , respectively. We expect that the obligations secured by these performance bonds and letters of credit generally will be performed in the ordinary course of business and in accordance with the applicable contractual terms. To the extent that the obligations are performed, the related performance bonds and letters of credit should be released and we should not have any continuing obligations. However, in the event any such performance bonds or letters of credit are called, our indemnity obligations could require us to reimburse the issuer of the performance bond or letter of credit. We have made no material guarantees with respect to third-party obligations.
Capital Resources
Our capital structure is primarily a combination of (1) permanent financing,
represented by stockholders' equity; (2) long-term financing, represented by our
3.850% senior notes due 2030, 2.500% senior notes due 2031, 6.000% senior notes
due 2043, and 3.966% senior notes due 2061; (3) our Revolving Credit Facility
and (4) our Mortgage Repurchase Facility. Because of our current balance of
cash, cash equivalents, marketable securities, ability to access the capital
markets, and available capacity under both our Revolving Credit Facility and
Mortgage Repurchase Facility, we believe that our capital resources are
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adequate to satisfy our short and long-term capital requirements, including meeting future payments on our senior notes as they become due. See "Forward-Looking Statements" below.
We may from time to time seek to retire or purchase our outstanding senior notes through cash purchases, whether through open market purchases, privately negotiated transactions or otherwise. Such repurchases, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material.
Senior Notes, Revolving Credit Facility and Mortgage Repurchase Facility
Senior Notes. Our senior notes are not secured and, while the senior note
indentures contain some restrictions on secured debt and other transactions,
they do not contain financial covenants. Our senior notes are fully and
unconditionally guaranteed on an unsecured basis, jointly and severally, by most
of our homebuilding segment subsidiaries. We believe that we are in compliance
with the representations, warranties and covenants in the senior note
indentures.
Revolving Credit Facility. We have an unsecured revolving credit agreement
("Revolving Credit Facility") with a group of lenders, which may be used for
general corporate purposes. This agreement was amended on December 28, 2020 to
(1) increase the aggregate commitment from $1.0 billion to $1.2 billion (the
"Commitment"), (2) extend the Revolving Credit Facility maturity of $1.125
billion of the Commitments to December 18, 2025 with the remaining Commitment
continuing to terminate on December 18, 2023 and (3) provide that the aggregate
amount of the commitments may increase to an amount not to exceed $1.7 billion
upon our request, subject to receipt of additional commitments from existing or
additional lenders and, in the case of additional lenders, the consent of the
co-administrative agents.
Effective April 11, 2023 , the Revolving Credit Facility was amended to
transition from a eurocurrency based interest rate to an interest rate based on
the Secured Overnight Financing Rate ("SOFR"). As defined in the Revolving
Credit Facility, interest rates on base rate borrowings are equal to the highest
of (1) 0.0%, (2) a prime rate, (3) a federal funds effective rate plus 0.50%,
and (4) the one month term SOFR screen rate plus the SOFR adjustment plus 1.00%
and, in each case, plus a margin that is determined based on our credit ratings
and leverage ratio. Interest rates on SOFR borrowings are equal to the greater
of (1) 0.0% and (2) the sum of the term SOFR screen rate for such interest
period plus the SOFR adjustment, plus a margin that is determined based on our
credit ratings and leverage ratio. At any time at which our leverage ratio, as
of the last day of the most recent calendar quarter, exceeds 55%, the aggregate
principal amount of all consolidated senior debt borrowings outstanding may not
exceed the borrowing base. There is no borrowing base requirement if our
leverage ratio, as of the last day of the most recent calendar quarter, is 55%
or less.
The Revolving Credit Facility is fully and unconditionally guaranteed, jointly
and severally, by most of our homebuilding segment subsidiaries. The facility
contains various representations, warranties and covenants that we believe are
customary for agreements of this type. The financial covenants include a
consolidated tangible net worth test and a leverage test, along with a
consolidated tangible net worth covenant, all as defined in the Revolving Credit
Facility. A failure to satisfy the foregoing tests does not constitute an event
of default, but can trigger a "term-out" of the facility. A breach of the
consolidated tangible net worth covenant (but not the consolidated tangible net
worth test) or a violation of anti-corruption or sanctions laws would result in
an event of default.
The Revolving Credit Facility is subject to acceleration upon certain specified
events of default, including breach of the consolidated tangible net worth
covenant, a violation of anti-corruption or sanctions laws, failure to make
timely payments, breaches of certain representations or covenants, failure to
pay other material indebtedness, or another person becoming beneficial owner of
50% or more of our outstanding common stock. We believe we were in compliance
with the representations, warranties and covenants included in the Revolving
Credit Facility as of March 31, 2023 .
We incur costs associated with unused commitment fees pursuant to the terms of
the Revolving Credit Facility. At March 31, 2023 and December 31, 2022 , there
were $47.1 million and $48.3 million , respectively, in letters of credit
outstanding, which reduced the amounts available to be borrowed under the
Revolving Credit Facility. At March 31, 2023 and December 31, 2022 , we had $10.0
million and $10.0 million , respectively, outstanding under the Revolving Credit
Facility. As of March 31, 2023 , availability under the Revolving Credit Facility
was approximately $1.14 billion .
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Mortgage Repurchase Facility. HomeAmerican has a Master Repurchase Agreement (the "Mortgage Repurchase Facility") withU.S. Bank National Association ("USBNA"). The Mortgage Repurchase Facility provides liquidity to HomeAmerican by providing for the sale of up to an aggregate of$75 million (subject to increase by up to$75 million under certain conditions) of eligible mortgage loans to USBNA with an agreement by HomeAmerican to repurchase the mortgage loans at a future date. Until such mortgage loans are transferred back to HomeAmerican, the documents relating to such loans are held by USBNA, as custodian, pursuant to the Custody Agreement ("Custody Agreement"), dated as ofNovember 12, 2008 , by and between HomeAmerican and USBNA. In the event that an eligible mortgage loan becomes ineligible, as defined under the Mortgage Repurchase Facility, HomeAmerican may be required to repurchase the ineligible mortgage loan immediately. The Mortgage Repurchase Facility was amended onSeptember 24, 2020 ,March 25, 2021 ,May 20, 2021 ,December 21, 2021 andMay 19, 2022 to adjust the commitments to purchase for specific time periods. The total capacity of the facility atMarch 31, 2023 was$230 million . TheMay 19, 2022 amendment extended the termination date of the Repurchase Agreement toMay 18, 2023 . We are currently in negotiations to extend the Mortgage Repurchase Facility. AtMarch 31, 2023 andDecember 31, 2022 , HomeAmerican had$130.5 million and$175.8 million , respectively, of mortgage loans that HomeAmerican was obligated to repurchase under the Mortgage Repurchase Facility. Mortgage loans that HomeAmerican is obligated to repurchase under the Mortgage Repurchase Facility are accounted for as a debt financing arrangement and are reported as mortgage repurchase facility in the consolidated balance sheets. Pricing under the Mortgage Repurchase Facility is based on the SOFR. The Mortgage Repurchase Facility contains various representations, warranties and affirmative and negative covenants that we believe are customary for agreements of this type. The negative covenants include, among others, (i) a minimum Adjusted TangibleNet Worth requirement, (ii) a maximum Adjusted TangibleNet Worth ratio, (iii) a minimum adjusted net income requirement, and (iv) a minimum Liquidity requirement. The foregoing capitalized terms are defined in the Mortgage Repurchase Facility. We believe HomeAmerican was in compliance with the representations, warranties and covenants included in the Mortgage Repurchase Facility as ofMarch 31, 2023 .
Dividends
During the three months ended
MDC Common Stock Repurchase Program
AtMarch 31, 2023 , we were authorized to repurchase up to 4.0 million shares of our common stock. We did not repurchase any shares of our common stock during the three months endedMarch 31, 2023 . -36-
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Consolidated Cash Flow
During the three months endedMarch 31, 2023 , net cash provided by operating activities was$426.2 million compared with net cash provided by operating activities of$118.1 million in the prior year period. During the three months endedMarch 31, 2023 and 2022, one of the most significant sources of cash provided by operating activities was net income of$80.7 million and$148.4 million , respectively. Another significant source of cash provided by operating activities during the three months endedMarch 31, 2023 and 2022 was cash provided by the decrease in land and land under development of$115.9 million and$107.3 million , respectively. This decrease was the result of home starts outnumbering lot acquisitions during the respective periods. During the three months endedMarch 31, 2023 , cash provided by housing completed or under construction was$135.6 million compared to the three months endedMarch 31, 2022 , where cash used by housing completed or under construction was$277.2 million . This increase in cash provided in the first quarter of 2023 was due to homes in inventory decreasing during the three months endedMarch 31, 2023 compared to homes in inventory increasing during the prior year quarter. Cash provided to decrease trade and other receivables for the three months endedMarch 31, 2023 was$55.9 million compared to cash used to increase trade and other receivables for the three months endedMarch 31, 2022 of$16.7 million . This change was due to a year-over-year decrease in home deliveries in the first quarter of 2023. Cash provided to decrease prepaids and other assets for the three months endedMarch 31, 2023 was$3.5 million compared to cash used to increase prepaids and other assets for the three months endedMarch 31, 2022 of$20.5 million . Cash used by the change in accounts payable and accrued liabilities for the three months endedMarch 31, 2023 was$40.5 million compared to cash provided of$57.6 million for the three months endedMarch 31, 2022 . The changes in both prepaids and other assets and accounts payable and accrued liabilities were due to decreased construction spend during the first quarter of 2023 as a result of the year-over-year decrease in home deliveries and homes in inventory. During the three months endedMarch 31, 2023 and 2022, net cash used in investing activities was$244.8 million and$6.9 million , respectively. The increase in net cash used in investing activities was driven by$434.4 million of cash used in the purchase of marketable securities during the three months endedMarch 31, 2023 . This was partially offset by cash provided by the maturities of marketable securities of$195.0 million during the three months endedMarch 31, 2023 . During the three months endedMarch 31, 2023 and 2022, net cash used in financing activities was$93.5 million and$126.3 million respectively. The primary driver of this decrease in net cash used by financing activities was the decrease in cash used on the net payments made on the mortgage repurchase facility. The three months endedMarch 31, 2023 and 2022 saw cash used of$45.2 million and$78.1 million , respectively on the mortgage repurchase facility. This was driven by the decreased proceeds from the sale of mortgage loans. -37-
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OTHER
Forward-Looking Statements
Certain statements in this Quarterly Report on Form 10-Q, as well as statements
made by us in periodic press releases, oral statements made by our officials in
the course of presentations about the Company and conference calls in connection
with quarterly earnings releases, constitute "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. These
forward-looking statements include statements regarding our business, financial
condition, results of operations, cash flows, strategies and prospects. These
forward-looking statements may be identified by terminology such as "likely,"
"may," "will," "should," "expects," "plans," "anticipates," "believes,"
"estimates," "predicts," "potential" or "continue," or the negative of such
terms and other comparable terminology. Although we believe that the
expectations reflected in the forward-looking statements contained in this
Report are reasonable, we cannot guarantee future results. These statements
involve known and unknown risks, uncertainties and other factors that may cause
the actual results, performance or achievements of the Company to be materially
different from those expressed or implied by the forward-looking statements. We
undertake no obligation to publicly update any forward-looking statements,
whether as a result of new information, future events or otherwise. However, any
further disclosures made on related subjects in subsequent reports on Forms
10-K, 10-Q and 8-K should be considered. Additionally, information about issues
that could lead to material changes in performance and risk factors that have
the potential to affect us is contained under the caption "Risk Factors" in Item
1A of our Annual Report on Form 10-K for the year ended December 31, 2022 and
Item 1A of Part II of this Quarterly Report on Form 10-Q.
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