Meritage Homes CORP 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Overview and Outlook Housing market conditions in the first quarter of 2021 continued to benefit from the demand created by continuing low interest rates, a limited supply of homes, and an increased desire for healthier, safer homes with indoor space to accommodate work and school from home needs. Assuming interest rates remain affordable, we believe the strong demographic trends of millennials entering the market in a meaningful way and the baby boomer generation downsizing supports a continuation of a solid homebuilding cycle, although individual market results will vary, responding to each respective market's economic factors. Our strategy to provide buyers with affordable, quick move-in homes has positioned us to take full advantage of the current market, resulting in the highest first quarter closings and orders in the Company's history and a 49.5% year-over-year increase in home closing gross profit. In addition to our strong growth in closings, orders and profitability during the first quarter of 2021, we made progress on our goals for community count growth. As of March 31, 2021, we had 203 active communities, up from 195 at December 31, 2020, although down from prior year due to accelerated orders pace throughout 2020 and into 2021. Despite a weather event in Texas and some delays in the building materials supply chain, we were able to open our expected communities on time during the first quarter of 2021, and remain on track to reach our goal of 300 communities by mid-2022. Ongoing pandemic-related supply chain disruptions combined with over a year of sustained demand have resulted in some production constraints for the homebuilding industry in general. While these constraints had minimal impact on our first quarter 2021 results, we are currently experiencing delays of two to four weeks from our typical construction cycle times. We continue to innovate and promote our energy efficiency program, and during the first quarter of 2021, we were awarded the ENERGY STAR ® Partner of the Year for Sustained Excellence by the Environmental Protection Agency, making us an eight-time recipient of this award since 2013. Summary Company Results Total home closing revenue was $1.1 billion on 2,890 homes closed for the three months ended March 31, 2021 compared to $890.4 million on 2,316 homes closed for the first quarter of 2020, increases of 21.3% and 24.8%, respectively. In addition to higher home closing revenue, first quarter results benefited from a 470 basis point increase in home closing gross margin that resulted in an $88.3 million year-over-year increase in home closing gross profit to $266.7 million compared to $178.4 million in the first quarter of 2020. We attribute this improvement to the increased leverage on higher closing volumes and our pricing power in all of our geographies due to the strength of the new home market, which more than offset the rising costs of lumber and other commodities. Our consolidated average sales price ("ASP") is down slightly year-over-year, and the 2.8% decrease is reflective of a higher percentage of lower-priced entry-level homes in our closing mix. We also realized significant savings in sales and marketing spending as we continue to leverage the digital platforms that we introduced in 2020. Earnings before income taxes improved by $79.1 million, or 91.1%, year over year to $166.0 million for the first quarter of 2021. These improved year-over-year results combined with our effective income tax rate of 20.6% as compared to 18.1% in 2020, led to net earnings of $131.8 million in the first quarter of 2021 versus $71.2 million in the first quarter of 2020. In addition to the positive trends in our home closings and financial results, orders for the three months ended March 31, 2021 were up as well. Home orders and home order value increased 11.5% and 14.3% higher, respectively, over the prior year, and our order cancellation rate dropped to 11% for the first quarter of 2021 compared to 13% for the prior year period. We ended the first quarter of 2021 with 5,240 homes in backlog valued at $2.1 billion, a 46.9% increase in units and a 50.0% increase in value over March 31, 2020. 22 Company Positioning We believe that our ongoing investments in new communities designed for the entry-level and first move-up homebuyer, our commitment to an all-spec strategy for our entry-level homes, our simplified first move-up design studio process, industry-leading innovation in our energy-efficient product offerings, automation, and transformative customer buying experience, create a differentiated strategy that has aided us in our success in the highly-competitive new home market and will continue to do so in the long-term. Our focus includes the following strategies: • Expanding our community count and market share; • Continuously improving the overall home buying and home ownership experience through simplification of the customer home purchase and option selection process for move-up buyers at Studio M. Providing flexible online scheduling for in-person model home tours and self-guided tours in select locations, a shortened construction timeline, and providing a warranty portal for our homeowners to submit and track warranty-related matters; • Demonstrating our commitment to innovation by extending our digital offerings, including virtual tours in all of our communities for both prospective buyers and home closing walkthroughs, 3-D tours and dynamic floor plans, partial or fully virtual closings in states where such services are permitted. On our website, we also offer a fully-automated and secured digital loan pre-approval process and on-demand homeowner's insurance quotes; • Enhancing our website and sales offices through investments in technology. All of our LiVE.NOW ® communities feature interactive technology tools offering homebuyers the ability to electronically search for available homes with their desired home features and based on their preferred availability or move-in dates; • Simplifying our production process to allow us to more efficiently build our homes and reduce our construction costs, which in turn allows us to competitively price our homes; and • Improving our home closing gross profit by growing closing volume while streamlining our operations, allowing us to better leverage our overhead; In order to maintain focus on growing our business, we remain committed to the following: • Increasing orders and maintaining a healthy order pace through the use of our consumer and market research to ensure that we build homes that offer our buyers their desired features and amenities; • Achieving or maintaining a position of at least 5% market share in all of our markets; • Continuing to innovate and promote our energy efficiency program and our M.Connected® Automation Suite to create differentiation for the Meritage brand; • Managing construction efficiencies and costs through national and regional vendor relationships with a focus on quality construction and warranty management; • Carefully managing our liquidity and a strong balance sheet; we ended the quarter with a 29.2% debt-to-capital ratio and a 10.9% net debt-to-capital ratio; • Maximizing returns to our shareholders, most recently through our improved financial performance and share repurchase program; and • Promoting a positive environment for our employees through our commitment to drive diversity, equity, and inclusion and providing market-competitive benefits in order to develop and motivate our employees and to minimize turnover and to maximize recruitment efforts. 23 Critical Accounting Policies The accounting policies we deem most critical to us and that involve the most difficult, subjective or complex judgments include revenue recognition, valuation of real estate, warranty reserves and valuation of deferred tax assets. There have been no significant changes to our critical accounting policies during the three months ended March 31, 2021 compared to those disclosed in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, included in our 2020 Annual Report on Form 10-K. 24 Home Closing Revenue, Home Orders and Order Backlog The composition of our closings, home orders and backlog is constantly changing and is based on a changing mix of communities with various price points between periods as new projects open and existing projects wind down and close-out. Further, individual homes within a community can range significantly in price due to differing square footage, option selections, lot sizes and quality and location of lots (e.g. cul-de-sac, view lots, greenbelt lots). These variations result in a lack of meaningful comparability between our home orders, closings and backlog due to the changing mix between periods. The tables on the following pages present operating and financial data that we consider most critical to managing our operations (dollars in thousands): Three Months Ended March 31, Quarter over Quarter 2021 2020 Change $ Change % Home Closing Revenue Total Dollars $ 1,079,982 $ 890,417 $ 189,565 21.3 % Homes closed 2,890 2,316 574 24.8 % Average sales price $ 373.7 $ 384.5 $ (10.8) (2.8) % West Region Arizona Dollars $ 137,268 $ 151,244 $ (13,976) (9.2) % Homes closed 410 459 (49) (10.7) % Average sales price $ 334.8 $ 329.5 $ 5.3 1.6 % California Dollars $ 171,899 $ 134,802 $ 37,097 27.5 % Homes closed 277 208 69 33.2 % Average sales price $ 620.6 $ 648.1 $ (27.5) (4.2) % Colorado Dollars $ 84,263 $ 91,684 $ (7,421) (8.1) % Homes closed 175 186 (11) (5.9) % Average sales price $ 481.5 $ 492.9 $ (11.4) (2.3) % West Region Totals Dollars $ 393,430 $ 377,730 $ 15,700 4.2 % Homes closed 862 853 9 1.1 % Average sales price $ 456.4 $ 442.8 $ 13.6 3.1 % Central Region - Texas Central Region Totals Dollars $ 318,385 $ 255,909 $ 62,476 24.4 % Homes closed 963 774 189 24.4 % Average sales price $ 330.6 $ 330.6 $ — — % East Region Florida Dollars $ 140,828 $ 93,789 $ 47,039 50.2 % Homes closed 417 236 181 76.7 % Average sales price $ 337.7 $ 397.4 $ (59.7) (15.0) % Georgia Dollars $ 55,139 $ 41,998 $ 13,141 31.3 % Homes closed 146 115 31 27.0 % Average sales price $ 377.7 $ 365.2 $ 12.5 3.4 % North Carolina Dollars $ 107,013 $ 79,417 $ 27,596 34.7 % Homes closed 299 222 77 34.7 % Average sales price $ 357.9 $ 357.7 $ 0.2 0.1 % South Carolina Dollars $ 27,846 $ 17,405 $ 10,441 60.0 % Homes closed 85 53 32 60.4 % Average sales price $ 327.6 $ 328.4 $ (0.8) (0.2) % Tennessee Dollars $ 37,341 $ 24,169 $ 13,172 54.5 % Homes closed 118 63 55 87.3 % Average sales price $ 316.4 $ 383.6 $ (67.2) (17.5) % East Region Totals Dollars $ 368,167 $ 256,778 $ 111,389 43.4 % Homes closed 1,065 689 376 54.6 % Average sales price $ 345.7 $ 372.7 $ (27.0) (7.2) % 25 Three Months Ended March 31, Quarter over Quarter 2021 2020 Change $ Change % Home Orders (1) Total Dollars $ 1,349,130 $ 1,179,938 $ 169,192 14.3 % Homes ordered 3,458 3,102 356 11.5 % Average sales price $ 390.1 $ 380.4 $ 9.7 2.5 % West Region Arizona Dollars $ 222,435 $ 183,371 $ 39,064 21.3 % Homes ordered 602 570 32 5.6 % Average sales price $ 369.5 $ 321.7 $ 47.8 14.9 % California Dollars $ 173,391 $ 224,930 $ (51,539) (22.9) % Homes ordered 286 352 (66) (18.8) % Average sales price $ 606.3 $ 639.0 $ (32.7) (5.1) % Colorado Dollars $ 89,779 $ 98,466 $ (8,687) (8.8) % Homes ordered 169 199 (30) (15.1) % Average sales price $ 531.2 $ 494.8 $ 36.4 7.4 % West Region Totals Dollars $ 485,605 $ 506,767 $ (21,162) (4.2) % Homes ordered 1,057 1,121 (64) (5.7) % Average sales price $ 459.4 $ 452.1 $ 7.3 1.6 % Central Region - Texas Central Region Totals Dollars $ 391,968 $ 342,990 $ 48,978 14.3 % Homes ordered 1,115 1,059 56 5.3 % Average sales price $ 351.5 $ 323.9 $ 27.6 8.5 % East Region Florida Dollars $ 179,109 $ 119,443 $ 59,666 50.0 % Homes ordered 479 317 162 51.1 % Average sales price $ 373.9 $ 376.8 $ (2.9) (0.8) % Georgia Dollars $ 61,557 $ 54,984 $ 6,573 12.0 % Homes ordered 164 156 8 5.1 % Average sales price $ 375.3 $ 352.5 $ 22.8 6.5 % North Carolina Dollars $ 157,687 $ 101,255 $ 56,432 55.7 % Homes ordered 419 287 132 46.0 % Average sales price $ 376.3 $ 352.8 $ 23.5 6.7 % South Carolina Dollars $ 26,402 $ 27,914 $ (1,512) (5.4) % Homes ordered 76 87 (11) (12.6) % Average sales price $ 347.4 $ 320.9 $ 26.5 8.3 % Tennessee Dollars $ 46,802 $ 26,585 $ 20,217 76.0 % Homes ordered 148 75 73 97.3 % Average sales price $ 316.2 $ 354.5 $ (38.3) (10.8) % East Region Totals Dollars $ 471,557 $ 330,181 $ 141,376 42.8 % Homes ordered 1,286 922 364 39.5 % Average sales price $ 366.7 $ 358.1 $ 8.6 2.4 % (1) Home orders for any period represent the aggregate sales price of all homes ordered, net of cancellations. We do not include orders contingent upon the sale of a customer’s existing home or a mortgage pre-approval as a sales contract until the contingency is removed. 26 Three Months Ended March 31, 2021 2020 Ending Average Ending Average Active Communities Total 203 199.0 241 242.5 West Region Arizona 33 33.0 33 32.0 California 19 17.5 29 26.5 Colorado 12 11.5 13 15.5 West Region Totals 64 62.0 75 74.0 Central Region - Texas Central Region Totals 59 61.0 78 77.5 East Region Florida 30 30.5 34 33.5 Georgia 12 9.5 15 16.5 North Carolina 24 22.5 20 22.5 South Carolina 6 6.0 7 8.0 Tennessee 8 7.5 12 10.5 East Region Totals 80 76.0 88 91.0 Three Months Ended March 31, 2021 2020 Cancellation Rates (1) Total 11 % 13 % West Region Arizona 10 % 12 % California 13 % 13 % Colorado 11 % 10 % West Region Totals 11 % 13 % Central Region - Texas Central Region Totals 11 % 13 % East Region Florida 11 % 13 % Georgia 14 % 14 % North Carolina 8 % 6 % South Carolina 17 % 13 % Tennessee 9 % 27 % East Region Totals 10 % 13 % (1) Cancellation rates are computed as the number of canceled units for the period divided by the gross sales units for the same period. 27 At March 31, Quarter over Quarter 2021 2020 Change $ Change % Order Backlog (1) Total Dollars $ 2,082,259 $ 1,388,517 $ 693,742 50.0 % Homes in backlog 5,240 3,568 1,672 46.9 % Average sales price $ 397.4 $ 389.2 $ 8.2 2.1 % West Region Arizona Dollars $ 429,171 $ 218,497 $ 210,674 96.4 % Homes in backlog 1,185 622 563 90.5 % Average sales price $ 362.2 $ 351.3 $ 10.9 3.1 % California Dollars $ 276,202 $ 182,361 $ 93,841 51.5 % Homes in backlog 453 289 164 56.7 % Average sales price $ 609.7 $ 631.0 $ (21.3) (3.4) % Colorado Dollars $ 110,279 $ 104,335 $ 5,944 5.7 % Homes in backlog 202 209 (7) (3.3) % Average sales price $ 545.9 $ 499.2 $ 46.7 9.4 % West Region Totals Dollars $ 815,652 $ 505,193 $ 310,459 61.5 % Homes in backlog 1,840 1,120 720 64.3 % Average sales price $ 443.3 $ 451.1 $ (7.8) (1.7) % Central Region - Texas Central Region Totals Dollars $ 645,959 $ 459,888 $ 186,071 40.5 % Homes in backlog 1,782 1,333 449 33.7 % Average sales price $ 362.5 $ 345.0 $ 17.5 5.1 % East Region Florida Dollars $ 253,188 $ 189,193 $ 63,995 33.8 % Homes in backlog 612 452 160 35.4 % Average sales price $ 413.7 $ 418.6 $ (4.9) (1.2) % Georgia Dollars $ 64,355 $ 62,777 $ 1,578 2.5 % Homes in backlog 174 174 — — % Average sales price $ 369.9 $ 360.8 $ 9.1 2.5 % North Carolina Dollars $ 214,079 $ 101,305 $ 112,774 111.3 % Homes in backlog 574 284 290 102.1 % Average sales price $ 373.0 $ 356.7 $ 16.3 4.6 % South Carolina Dollars $ 39,785 $ 34,963 $ 4,822 13.8 % Homes in backlog 111 105 6 5.7 % Average sales price $ 358.4 $ 333.0 $ 25.4 7.6 % Tennessee Dollars $ 49,241 $ 35,198 $ 14,043 39.9 % Homes in backlog 147 100 47 47.0 % Average sales price $ 335.0 $ 352.0 $ (17.0) (4.8) % East Region Totals Dollars $ 620,648 $ 423,436 $ 197,212 46.6 % Homes in backlog 1,618 1,115 503 45.1 % Average sales price $ 383.6 $ 379.8 $ 3.8 1.0 % (1) Our backlog represents net sales that have not closed. 28 Operating Results Companywide . In the first quarter of 2021, home closing volume improved by 24.8% to 2,890 closings valued at $1.1 billion compared to 2,316 closings valued at $890.4 million in the first quarter of 2020. The increase in closings year-over-year was driven primarily by entering the quarter with a higher backlog as compared to prior year. Home closing revenue increased by 21.3% over the first quarter of 2020 due entirely to the increase in closing volume as our ASP declined 2.8%, reflective of a higher percentage of lower-priced entry-level homes in our closing mix. A 34.9% higher orders pace year-over-year demonstrates the demand present in the current market for available, new and healthier single-family homes at affordable price points. This customer demand is aligned with our focus on the entry level and first move-up buyers, as our entry-level communities offer only spec homes for sale, and in both our entry-level and first move-up communities we have achieved shorter construction cycle times than for our higher-end product, allowing quicker move-ins for our customers. Home order volume improved by 11.5% to 3,458 homes valued at $1.3 billion in the first quarter of 2021 as compared to 3,102 homes valued at $1.2 billion in the first quarter of 2020, despite a decrease in active communities. The higher orders were due to the increase in orders pace year-over-year to 5.8 homes ordered per average active community per month, up from 4.3 in the first quarter of 2020. The improved order value year-over-year was primarily a reflection of the higher volume, but rising ASP on orders also contributed as we experienced pricing power due to high buyer demand. We ended the quarter with 203 actively selling communities, a 15.8% decline from the prior year as the strong demand in 2020 caused communities to sell and close out faster than we were able to open replacement communities. Community count improved during the first quarter of 2021, as we saw a net increase in active community count to 203 at March 31, 2021, up from 195 at December 31, 2020. We ended the first quarter of 2021 with 5,240 homes in backlog valued at $2.1 billion, up from 3,568 homes valued at $1.4 billion at March 31, 2020. The year-over-year increase in backlog value was positively impacted by rising ASP on orders as discussed above. Order cancellation rate improved to 11% for the first three months of 2021, as compared to 13% during the three month period in 2020, a further indication of strong demand in the market. West . The West Region closed 862 homes and generated $393.4 million in home closing revenue in the first quarter of 2021, compared to 853 homes and $377.7 million in home closing revenue in the comparable 2020 period. Orders and order value in the first quarter of 2021 were 1,057 homes valued at $485.6 million, down from 1,121 homes valued at $506.8 million in the 2020 period. The 5.7% decrease in order volume was due entirely to a 16.2% decrease in average community count, which was partially offset by a 12.6% increase in orders pace year-over-year. As discussed previously, the drop in community count is due to an accelerated close-out of communities in 2020. The 4.2% decrease in order value was the result of the decrease in volume, partially offset by an increase in ASP. ASP for the Region increased 1.6% due to pricing power, although it was muted by California's drop in ASP as the product mix has shifted to more entry-level and first move-up product. The West Region ended the first quarter of 2021 with 1,840 homes in backlog valued at $815.7 million, up from 1,120 units valued at $505.2 million at March 31, 2020. Despite the decrease in order volume, backlog increased year-over-year due to entering the period with a higher backlog and some closing delays caused by production constraints. Central . In the first quarter of 2021, the Central Region, made up of our Texas markets, closed 963 homes and generated $318.4 million in home closing revenue, up 24.4% in both volume and value, from prior year comparable period results of 774 homes and $255.9 million of home closing revenue. A 33.6% increase in orders pace more than offset the 21.3% decrease in average community count compared to the prior year period, providing orders of 1,115 homes valued at $392.0 million in the first quarter of 2021, compared to 1,059 homes valued at $343.0 million in 2020. ASP increased 8.5% as we leveraged pricing power in nearly all of our communities. The Central Region ended the first quarter of 2021 with 1,782 homes in backlog valued at $646.0 million, up from 1,333 units valued at $459.9 million at March 31, 2020. East . The East Region experienced the largest year over year increases in closings and orders during the three months ended March 31, 2021. The Region delivered 1,065 closings and $368.2 million in home closing revenue compared to 689 closings and $256.8 million in home closing revenue in the comparable prior year period, improvements of 54.6% and 43.4%, respectively, largely due to entering the period with 58.4% more homes in backlog than the prior period. Orders and order value in the East Region improved by 39.5% and 42.8%, respectively, for the first quarter of 2021 with 1,286 units valued at $471.6 million compared to 922 units valued at $330.2 million in the prior year period. The improvement in orders is due to a 67.3% increase in orders pace, which more than offset the 16.5% decrease in average active communities. All states in the Region saw significant increases in orders pace, and Tennessee experienced the highest orders pace in the Company at 6.6 homes sold per month per community. The East Region ended the first quarter of 2021 with 1,618 homes in backlog valued at $620.6 million, up from 1,115 units valued at $423.4 million at March 31, 2020. 29 Land Closing Revenue and Gross Profit From time to time, we may sell certain lots or land parcels to other homebuilders, developers or investors if we feel the sale will provide a greater economic benefit to us than continuing home construction or where we are looking to diversify our land positions in a specific geography. As a result of such sales, we recognized land closing revenue of $3.8 million and $10.6 million for the three months ending March 31, 2021 and 2020, respectively, and profits of $0.5 million and $0.4 million for the first quarter of 2021 and 2020, respectively. Other Operating Information (dollars in thousands) Three Months Ended March 31, 2021 2020 Dollars Percent of Home Closing Revenue Dollars Percent of Home Closing Revenue Home Closing Gross Profit (1) Total $ 266,655 24.7 % $ 178,360 20.0 % West $ 97,057 24.7 % $ 74,431 19.7 % Central $ 85,373 26.8 % $ 54,191 21.2 % East $ 84,225 22.9 % $ 49,738 19.4 % (1) Home closing gross profit represents home closing revenue less cost of home closings, including impairments. Cost of home closings includes land and lot development costs, direct home construction costs, an allocation of common community costs (such as model complex costs and architectural, legal and zoning costs), interest, sales tax, impact fees, warranty, construction overhead and closing costs. Companywide . Home closing gross margin for the first quarter of 2021 improved 470 basis points to 24.7% compared to 20.0% in the first quarter of 2020. The higher margin combined with higher revenue contributed to an $88.3 million improvement in home closing gross profit to end the quarter with $266.7 million compared to $178.4 million in 2020. With growing buyer demand, pricing power was a major driver in our gross margin improvement as we have experienced pricing power in all of our markets, which more than offset the impact of rising material costs, particularly lumber . As our shift to entry-level and first-move up product offerings is complete, we continue to benefit from national purchasing savings on materials, construction efficiencies and leverage of overhead costs, all of which are contributing to higher gross margin. West . Home closing gross margin for the West Region improved by 500 basis points to 24.7% for the first quarter of 2021 versus 19.7% in the first quarter of 2020. The year-over-year improvement is due to pricing power, as demand has been very strong in both our entry-level and first move-up communities. In addition, greater leverage of our overhead costs on higher revenue combined with construction efficiencies driven by our simplified product offerings have favorably impacted margins across the West Region. Central . The Central Region provided the highest home closing gross margin in the company, which at 26.8% for the first quarter of 2021 was our most notable improvement, up 560 basis points from 21.2% in the prior year quarter. Construction efficiencies driven by our simplified product offerings and pricing power combined with higher closing volume have expanded our leverage of overhead costs to improve gross margin. East . Home closing gross margin in the East Region was up 350 basis points year-over-year to 22.9% in the first quarter of 2021 versus 19.4% for the comparable 2020 period. Similar to the other regions, the year-over-year improvement in gross margin is the result of pricing power resulting from high demand combined with construction efficiencies and greater leverage of overhead costs on higher closing volume as compared to the prior quarter period. 30 Financial Services Profit (in thousands) Three Months Ended March 31, 2021 2020 Financial services profit $ 3,760 $ 2,838 Financial services profit represents the net profit of our financial services operations, including the operating profit generated by our wholly-owned title and insurance companies, Carefree Title and Meritage Insurance, as well as our portion of earnings from a mortgage joint venture. Financial services profit increased $1.0 million in the first quarter of 2021 to $3.8 million versus $2.8 million in 2020, due to the year-over-year higher closing volume. Selling, General and Administrative Expenses and Other Expenses (dollars in thousands) Three Months Ended March 31, 2021 2020 Commissions and other sales costs $ (67,744) $ (61,173) Percent of home closing revenue 6.3 % 6.9 % General and administrative expenses $ (37,949) $ (34,170) Percent of home closing revenue 3.5 % 3.8 % Interest expense $ (90) $ (16) Other income, net $ 798 $ 611 Provision for income taxes $ (34,134) $ (15,681) Commissions and Other Sales Costs. Commissions and other sales costs are comprised of internal and external commissions and related sales and marketing expenses such as advertising and sales office costs. These costs were $67.7 million for the three months ended March 31, 2021, $6.6 million higher than the prior year comparable period, although as a percentage of home closing revenue, decreased 60 basis points to 6.3% for the first quarter of 2021 compared to the prior year period. The increase in commissions and other sales costs in dollars compared to prior year is due to higher home closing volume, partially offset by savings in advertising as we continue to leverage more digital technologies, and incurred fewer expenses associated with active communities, such as sales office and model home maintenance expenses. The decline as a percentage of home closing revenue is due to the due to the combination of leverage from higher closing volume, the efficiencies integrated into our sales and marketing structure, and the decrease in costs associated with a lower number of active communities. General and Administrative Expenses. General and administrative expenses represent corporate and divisional overhead expenses such as salaries and bonuses, occupancy, insurance and travel expenses. For the three months ended March 31, 2021, general and administrative expenses were $37.9 million, $3.8 million higher than $34.2 million for the 2020 period, although as a percentage of home closing revenue, these expenses decreased by 30 basis points. The increased leveraging of costs against higher revenue and the continued pull-back on certain corporate expenditures, including those due to COVID-19 precautions, aided in the improvement. We continually strive to optimize overhead leverage through cost control efforts and expect some long-term improvements to result from our on-going technological enhancements. Interest Expense. Interest expense is comprised of interest incurred, but not capitalized, on our senior notes, other borrowings, and our amended and restated unsecured revolving credit facility ("Credit Facility"). Interest expense for the three months ended March 31, 2021 totaled $90,000, relatively flat compared to $16,000 in the corresponding prior year period. Other Income, Net. Other income, net, primarily consists of (i) sublease income, (ii) interest earned on our cash and cash equivalents, (iii) payments and awards related to legal settlements and (iv) our portion of pre-tax income or loss from non-financial services joint ventures. For the three months ended March 31, 2021, Other income, net was $0.8 million, relatively flat compared to $0.6 million in the 2020 comparable period. Income Taxes. Our effective tax rate was 20.6% and 18.1% for the three months ended March 31, 2021 and 2020, respectively. The tax rate for the three months ended March 31, 2021 and March 31, 2020 reflects credits earned under Internal Revenue Code §45L new energy efficient homes credit. The tax rate at March 31, 2021 also reflects higher non-deductible senior executive officer stock-based compensation. 31 Liquidity and Capital Resources Overview Our principal uses of capital in the first three months of 2021 were acquisition and development of new lot positions, home construction, operating expenses, the payment of routine liabilities, and repurchases of our common stock. We used funds generated by operations to meet our short-term working capital requirements. We remain focused long-term on acquiring desirable land positions, generating favorable margins in our homebuilding operations and maintaining a strong balance sheet to support future needs and growth, while leveraging land options where possible. Operating Cash Flow Activities During the three months ended March 31, 2021, net cash used in operating activities totaled $13.9 million versus net cash provided by operations of $43.9 million during the three months ended March 31, 2020. Operating cash flows in 2021 and 2020 benefited from cash generated by net earnings of $131.8 million and $71.2 million, respectively. For the three months ended March 31, 2021, cash flows generated by net earnings also benefited from an increase in accounts payable and accrued liabilities of $38.7 million due to timing of payments for routine transactions, offset by an increase of $193.4 million in real estate assets. For the three months ended March 31, 2020, operating cash flows were primarily offset by an increase in real estate of $45.2 million. Investing Cash Flow Activities During the three months ended March 31, 2021, net cash used in investing activities totaled $4.9 million as compared to $4.2 million for the same period in 2020. Cash used in investing activities in the first three months of 2021 and 2020 is mainly attributable to the purchases of property and equipment of $5.0 million and $5.3 million for the 2021 and 2020 periods, respectively. Financing Cash Flow Activities During the three months ended March 31, 2021, net cash used in financing activities totaled $10.3 million as compared to net cash provided by financing activities of $438.2 million for the same period in 2020. The net cash used in financing activities in 2021 primarily reflects $8.4 million in share repurchases. The activity in 2020 is the result of $500.0 million in proceeds from our Credit Facility offset by $60.8 million in share repurchases. Overview of Cash Management Cash flows for each of our communities depend on their stage of the development cycle and can differ substantially from reported earnings. Early stages of development or expansion require significant cash outlays for land acquisitions, zoning plat and other approvals, community and lot development, and construction of model homes, roads, utilities, landscape and other amenities. Because these costs are a component of our inventory and not recognized in our income statement until a home closes, we incur significant cash outlays prior to recognition of earnings. In the later stages of a community, cash inflows may significantly exceed earnings reported for financial statement purposes, as the cash outflow associated with home and land construction was previously incurred. From a liquidity standpoint, we are currently acquiring and developing lots in our markets to grow our lot supply and active community count. We intend to increase our land and development spending over the next several years, consistent with our growth initiatives. We are also using our cash on hand to fund operations. During the three months ended March 31, 2021, we closed 2,890 homes, purchased approximately 5,700 lots for $202.6 million, spent $167.2 million on land development and started construction on 3,317 homes. We primarily purchase undeveloped land or partially-finished lots requiring development spend in order to bring them to a finished status ready for home construction. We exercise strict controls and believe we have a prudent strategy for Company-wide cash management, including those related to cash outlays for land and inventory acquisition and development. We ended the first quarter of 2021 with $716.4 million of cash and cash equivalents, a decrease of $29.2 million from December 31, 2020, with no outstanding borrowings on our Credit Facility. We expect to generate cash from the sale of our inventory, but we intend to redeploy that cash primarily to acquire and develop strategic and well-positioned lots to grow our business. 32 Between our available cash and liquidity in our Credit Facility, we believe that we currently have sufficient liquidity to manage through our strategic growth goals. Nevertheless, we may seek additional capital to strengthen our liquidity position. Such additional capital may be in the form of equity or debt financing and may be from a variety of sources. There can be no assurances that we would be able to obtain such additional capital on terms acceptable to us, if at all, and such additional equity or debt financing could dilute the interests of our existing stockholders or increase our interest costs. We may also from time to time engage in opportunistic repurchases of our common stock in open market or privately-negotiated transactions as well as repurchase or redeem our outstanding senior notes. In April 2021, we completed an offering of $450.0 million aggregate principal amount of 3.875% senior notes due 2029. The proceeds were used to redeem all $300.0 million aggregate principal amount outstanding of our 7.00% senior notes due 2022. See Note 16 in the accompanying unaudited consolidated financial statements for more information related to the early redemption of our 7.00% senior notes due 2022. On February 13, 2019, the Board of Directors authorized a new stock repurchase program, authorizing the expenditure of up to $100.0 million to repurchase shares of our common stock. On November 13, 2020, the Board of Directors authorized the expenditure of an additional $100.0 million to repurchase shares of our common stock under this program. There is no stated expiration for this program. The repurchases of the Company's shares may be made in the open market, in privately negotiated transactions, or otherwise. The timing and amount of repurchases, if any, will be determined by the Company's management at its discretion and be based on a variety of factors such as market price of the Company's common stock, corporate and contractual requirements, prevailing market and economic conditions and legal requirements. The share repurchase program may be modified, suspended or discontinued at any time. The Company intends to retire any shares repurchased. In the three months ended March 31, 2021, we purchased and retired 100,000 shares of our common stock at an aggregate purchase price of $8.4 million and as of March 31, 2021, $106.0 million remained available under this program. We believe that our leverage ratios provide useful information to the users of our financial statements regarding our financial position and cash and debt management. Debt-to-capital and net debt-to-capital are calculated as follows (dollars in thousands): As of March 31, 2021 December 31, 2020 Senior notes, net, loans payable and other borrowings $ 1,020,556 $ 1,020,085 Stockholders’ equity 2,476,693 2,347,868 Total capital $ 3,497,249 $ 3,367,953 Debt-to-capital (1) 29.2 % 30.3 % Senior notes, net, loans payable and other borrowings $ 1,020,556 $ 1,020,085 Less: cash and cash equivalents (716,433) (745,621) Net debt 304,123 274,464 Stockholders’ equity 2,476,693 2,347,868 Total net capital $ 2,780,816 $ 2,622,332 Net debt-to-capital (2) 10.9 % 10.5 % (1) Debt-to-capital is computed as senior notes, net and loans payable and other borrowings divided by the aggregate of total senior notes, net and loans payable and other borrowings and stockholders' equity. (2) Net debt-to-capital is computed as net debt divided by the aggregate of net debt and stockholders' equity. Net debt is comprised of total senior notes, net and loans payable and other borrowings, less cash and cash equivalents. The most directly comparable GAAP financial measure is the ratio of debt-to-capital. We believe the ratio of net debt-to-capital is a relevant financial measure for investors to understand the leverage employed in our operations and as an indicator of our ability to obtain financing. We have never declared cash dividends. Currently, we plan to utilize our cash to manage our liquidity and to grow community count. Future cash dividends, if any, will depend upon economic and financial conditions, results of operations, capital requirements, statutory requirements, compliance with certain restrictive debt covenants, as well as other factors considered relevant by our Board of Directors. 33 Credit Facility Covenants Borrowings under the Credit Facility are unsecured, but availability is subject to, among other things, a borrowing base. The Credit Facility also contains certain financial covenants, including (a) a minimum tangible net worth requirement of $1.5 billion (which amount is subject to increase over time based on subsequent earnings and proceeds from equity offerings), and (b) a maximum leverage covenant that prohibits the leverage ratio (as defined therein) from exceeding 60%. In addition, we are required to maintain either (i) an interest coverage ratio (EBITDA to interest expense, as defined in the credit facility) of at least 1.50 to 1.00 or (ii) liquidity (as defined in the credit facility) of an amount not less than our consolidated interest incurred during the trailing 12 months. We were in compliance with all Credit Facility covenants as of March 31, 2021. Our actual financial covenant calculations as of March 31, 2021 are reflected in the table below. Financial Covenant (dollars in thousands): Covenant Requirement Actual Minimum Tangible Net Worth > $1,655,404 $2,436,215 Leverage Ratio < 60% 9% Interest Coverage Ratio (1) > 1.50 11.77 Minimum Liquidity (1) > $65,846 $1,307,129 Investments other than defined permitted investments < $730,865 $4,001 (1) We are required to meet either the Interest Coverage Ratio or Minimum Liquidity, but not both. Off-Balance Sheet Arrangements Reference is made to Notes 1, 3, 4 and 15 in the accompanying notes to the unaudited consolidated financial statements included in this Quarterly Report on Form 10-Q, which are incorporated by reference herein. These Notes discuss our off-balance sheet arrangements with respect to land acquisition contracts and option agreements, and land development joint ventures, including the nature and amounts of financial obligations relating to these items. In addition, these Notes discuss the nature and amounts of certain types of commitments that arise in connection with the ordinary course of our land development and homebuilding operations, including commitments of land development joint ventures for which we might be obligated. Seasonality Historically, we have experienced seasonal variations in our quarterly operating results and capital requirements. We typically sell more homes in the first half of the fiscal year than in the second half, which creates additional working capital requirements in the second and third quarters to build our inventories to satisfy the deliveries in the second half of the year. We typically benefit from the cash generated from home closings more in the third and fourth quarters than in the first and second quarters. In 2020, historical cycles were impacted by low interest rates and COVID-19. However, we expect our historical seasonal pattern to continue over the long term although it may continue to be affected by volatility in the homebuilding industry and in the overall economy. Recent Issued Accounting Pronouncements See Note 1 to our unaudited consolidated financial statements included in this report for discussion of recently issued accounting pronouncements.